1
AMENDMENT NO. 1 TO
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
AT&T CORP.
--------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
2
SUBJECT TO COMPLETION; DATED JULY 3, 2001
PRELIMINARY PROXY MATERIAL
[AT&T LOGO]
[LETTERHEAD OF C. MICHAEL ARMSTRONG]
July , 2001
Dear AT&T Shareholder:
As part of our previously announced plan to restructure AT&T, our board of
directors requests your approval:
(1)to create a tracking stock that is intended to reflect the financial
performance and economic value of our Broadband business;
(2)to create a second tracking stock that is intended to reflect the
financial performance and economic value of our Consumer Services
business; and
(3)to separate and spin off a separate company owning our Business Services
and Consumer Services businesses. We refer to this separate company as
"AT&T Communications Services, Inc."
These proposals would allow us to split into two independent companies, one
holding our Broadband business and the other holding our Communications Services
businesses, and to issue the two new tracking stocks pending the separation. If
you approve the proposals, we plan to sell shares of AT&T Broadband Group
tracking stock in a public offering for cash later this year. We also plan to
distribute some or all of the shares of AT&T Consumer Services Group tracking
stock to our common shareholders as a dividend later this year. Thereafter, we
plan to complete the separation into two independent companies by distributing
shares of AT&T Communications Services, Inc. to our common shareholders. In this
step, we would also exchange shares of AT&T Consumer Services Group tracking
stock into shares of tracking stock of the consumer services business of AT&T
Communications Services, Inc.
Our board could, however, decide not to proceed with one or more of the
proposals, or could proceed at a time or in a manner different from our current
intentions. We do not plan to seek new shareholder approval for any change that
our board may approve in the timing or manner of issuing shares of either
tracking stock, in the timing of the separation into two independent companies,
or in the terms of the separation unless the change fundamentally alters the
nature of AT&T Communications Services, Inc. or the tax consequences of the
transaction to shareholders. If you do not want to give our board this authority
with respect to any of the three proposals, you should not vote for that
proposal.
We will hold a special meeting of shareholders to consider the proposals at
on September , 2001, at a.m., local time. Approval of each of these
three proposals requires the approval of the holders of a majority of the
outstanding shares of AT&T common stock. We will also ask you to approve two new
incentive plans and an amended employee stock purchase plan that will allow us
to issue options and other stock awards based on the new tracking stocks and
allow our employees to purchase shares of the new tracking stocks.
Whether or not you plan to attend the special meeting, please let us vote
your shares by returning the enclosed proxy card or following the instructions
on the proxy card for voting by telephone or via the Internet.
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH PROPOSAL.
FOR A DISCUSSION OF THE MATERIAL RISKS INVOLVED IN CONNECTION WITH THE
PROPOSALS, SEE THE DISCUSSION OF RISK FACTORS THAT BEGINS ON PAGE 14 OF THE
ACCOMPANYING PROXY STATEMENT.
I look forward to seeing you at the special meeting.
Sincerely,
C. MICHAEL ARMSTRONG
Chairman of the Board and
Chief Executive Officer
This proxy statement is dated July , 2001 and was first mailed to AT&T
shareholders on July , 2001.
3
AT&T CORP.
32 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10013-2412
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , SEPTEMBER , 2001
-------------------------
We will hold a special meeting of shareholders of AT&T Corp. at
a.m., local time, on , September , 2001, at , for
the following purposes:
- to approve and adopt an amendment to our charter to authorize the
creation of AT&T Broadband Group tracking stock,
- to approve and adopt an amendment to our charter to authorize the
creation of AT&T Consumer Services Group tracking stock,
- to approve two new incentive plans to enable us to grant incentive awards
based on shares of AT&T Broadband Group tracking stock and AT&T Consumer
Services Group tracking stock to officers and employees of AT&T and its
subsidiaries,
- to approve an amendment to our employee stock purchase plan to permit the
issuance of AT&T Broadband Group tracking stock and AT&T Consumer Services
Group tracking stock under the plan,
- to ratify and approve the separation and spin-off of AT&T Communications
Services, Inc. from AT&T (including the subsequent name changes of AT&T
Corp. to "AT&T Broadband Corp." and of AT&T Communications Services, Inc.
to "AT&T Corp."), and
- to act upon such other matters as may properly come before the special
meeting or any adjournment or postponement thereof.
We describe these items of business more fully in the accompanying proxy
statement.
Only holders of record of AT&T common stock at the close of business on
, 2001 are entitled to notice of, and to vote at, the special meeting or
any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF
DIRECTORS
MARILYN J. WASSER
Vice President -- Law and Secretary
New York, New York
July , 2001
WE URGE YOU TO VOTE BY TELEPHONE OR VIA THE INTERNET, OR TO COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE
PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. YOU
CAN WITHDRAW YOUR PROXY, OR CHANGE YOUR VOTE AT ANY TIME BEFORE IT IS VOTED. YOU
CAN DO THIS BY EXECUTING A LATER-DATED PROXY, BY VOTING BY BALLOT AT THE SPECIAL
MEETING, BY TELEPHONE OR VIA THE INTERNET, OR BY FILING AN INSTRUMENT OF
REVOCATION WITH THE INSPECTORS OF ELECTION IN CARE OF OUR VICE PRESIDENT -- LAW
AND SECRETARY AT THE ABOVE ADDRESS.
4
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q:WHAT IS THE PURPOSE OF THE PROPOSALS?
A:The proposals will allow us:
- to offer three separate investment vehicles -- our existing common stock
plus two new tracking stocks intended to track the performance of our
Broadband business and our Consumer Services business, and
- to follow this with the actual separation of AT&T into two distinct
companies, one holding our Broadband business and the other holding our
Business Services and Consumer Services businesses.
The separation will let us convert the Broadband tracking stock into a single
class of stock in the company holding our Broadband business. At the same
time, we will be able to convert the investment vehicle represented by the
Consumer Services tracking stock into an equivalent tracking stock of the
company holding our Business Services and Consumer Services businesses.
Q:WHAT STEPS DO YOU PLAN TO TAKE TO IMPLEMENT THE PROPOSALS?
A:If our shareholders approve the proposals, we plan to take the following
steps:
- We will create AT&T Broadband Group tracking stock -- a new class of AT&T
common stock intended to track the performance of our Broadband
business -- and offer a portion of the shares of this tracking stock to
the public for cash.
- We will create AT&T Consumer Services Group tracking stock -- a separate
new class of AT&T common stock intended to track the performance of our
Consumer Services business -- and distribute some or all of the shares of
this tracking stock as a dividend to our current shareholders.
- Within about a year later, we will spin off a new company -- called AT&T
Communications Services, Inc. -- that holds our Business Services and
Consumer Services businesses.
- AT&T Communications Services, Inc. will issue two classes of common
stock: one intended to track the performance of the Consumer Services
business and the other intended to track the performance of the rest of
the company -- in effect tracking the performance of the Business Services
business. We will distribute the new consumer services tracking shares in
exchange for all the AT&T Consumer Services Group tracking stock, and we
will distribute the other class of AT&T Communications Services, Inc.
shares as a dividend to holders of AT&T common stock.
- Following this spin-off, we will then change our name to AT&T Broadband
Corp. AT&T Communications Services, Inc. will assume the name AT&T Corp.
- At this point, we expect AT&T Broadband Corp. will hold only our
Broadband business. We will exchange all the AT&T Broadband Group tracking
stock for new shares of AT&T Broadband Corp. common stock. This will
complete the restructuring.
Q:WHAT IS A TRACKING STOCK AND HOW DOES IT WORK?
A:A tracking stock is a separate class or series of a company's common stock
that is intended to reflect the financial performance and economic value of a
group of assets or a specific business unit, division, subsidiary or equity
investment of the company. You should note that:
- Holders of our tracking stock are shareholders of AT&T and not of the
underlying business or subsidiary. Thus, holders of AT&T Broadband Group
tracking stock and of AT&T Consumer Services Group tracking stock will
have no direct interest in the assets, subsidiaries or businesses whose
5
performance the tracking stock is intended to reflect.
- We intend the terms of our tracking stock to link the economic value of
the tracking stock to the performance of the tracked business rather than
to the performance of AT&T as a whole. However, there may not always be a
linkage between the market value of the tracking stock and the financial
performance and economic value of the tracked business.
- The market value of the tracking stock may be adversely affected not only
by factors that adversely affect the tracked business, but also by factors
that adversely affect AT&T generally.
Q:WHO WILL RECEIVE WHAT SECURITIES IN THE RESTRUCTURING?
A:If we complete the restructuring as we plan:
- We will distribute shares of AT&T Consumer Services Group tracking stock
to holders of AT&T common stock as a dividend.
- We will sell shares of AT&T Broadband Group tracking stock to new
purchasers for cash.
- Then, following the spin-off of AT&T Communications Services, Inc., we
will issue additional shares of common stock of AT&T, which will then be
called AT&T Broadband Corp., in exchange for all the outstanding shares of
AT&T Broadband Group tracking stock. Only shareholders who own AT&T
Broadband Group tracking stock will participate in this exchange.
- Also, as part of the spin-off of AT&T Communications Services, Inc., we
will distribute shares of consumer services tracking stock of AT&T
Communications Services in exchange for all the outstanding shares of AT&T
Consumer Services Group tracking stock. Shareholders who do not own AT&T
Consumer Services Group tracking stock -- i.e., who own only AT&T
Broadband Group tracking stock and/or AT&T common stock -- will not
participate in this exchange.
- As part of the spin-off, we will also distribute the other class of
shares of AT&T Communications Services, Inc. -- that is intended to track
the performance of the rest of the company -- as a dividend to holders of
AT&T common stock. Shareholders who own only AT&T Broadband Group tracking
stock and/or AT&T Consumer Services Group tracking stock will not
participate in this distribution.
- Shareholders with AT&T common stock will keep their shares, but they will
be shares of AT&T Broadband Corp. after AT&T Corp. changes its name to
AT&T Broadband Corp.
Q:IF I CONTINUE TO HOLD ALL MY SHARES OF AT&T COMMON STOCK, WHAT WILL I RECEIVE
IN THE RESTRUCTURING?
A:If you continue to hold your shares of AT&T common stock and shares you
receive as dividends, and we complete the restructuring as we plan, you will
end up with shares of:
- Common stock of AT&T Broadband Corp. These will be your existing shares
of AT&T common stock. AT&T Broadband Corp. will simply be the new name for
AT&T Corp. after the spin-off of AT&T Communications Services, Inc.
- Common stock of AT&T Corp. As part of the spin-off, you will receive
shares of common stock of AT&T Communications Services, Inc. as a dividend
on your existing shares of AT&T common stock. Following the spin-off, AT&T
Communications Services, Inc. will change its name to AT&T Corp., and
these shares will be shares of common stock of AT&T Corp.
- Consumer services tracking stock of AT&T Corp. You will receive shares of
AT&T Consumer Services Group tracking stock as a dividend on your
ii
6
existing shares of AT&T common stock. Then, as part of the spin-off, you
will receive shares of consumer services tracking stock of AT&T
Communications Services, Inc. in exchange for all your shares of AT&T
Consumer Services Group tracking stock. After the change of name from AT&T
Communications Services, Inc. to AT&T Corp., these shares will be shares
of consumer services tracking stock of AT&T Corp.
Q:WILL THE AT&T BROADBAND GROUP TRACKING STOCK AND THE AT&T CONSUMER SERVICES
GROUP TRACKING STOCK BOTH BE INTENDED TO REFLECT 100% OF THE VALUE AND
PERFORMANCE OF THE BUSINESSES THEY TRACK?
A:We intend to reflect only a portion of the value and performance of our
Broadband business in the shares of AT&T Broadband Group tracking stock that
we plan to offer to the public for cash. The AT&T Consumer Services Group
tracking stock that we plan to distribute to our existing shareholders may be
intended to reflect some or all of the value and performance of our Consumer
Services business. To the extent that we do not intend to reflect all of the
value and performance of the tracked business in the shares of tracking stock
we issue, we intend the remaining portion of this value and performance to be
reflected in the AT&T common stock. We refer to the portion that we intend to
reflect in the AT&T common stock as AT&T's "retained portion" of the value of
the AT&T Broadband Group or the AT&T Consumer Services Group.
Q:WHY ARE YOU CREATING THE TRACKING STOCKS NOW INSTEAD OF WAITING FOR THE
SPIN-OFF OF AT&T COMMUNICATIONS SERVICES, INC.?
A:We believe the creation of the tracking stocks will accomplish several
important goals, and we do not want to wait for the separation of AT&T
Communications Services, Inc. to accomplish these goals. In particular, we
believe the tracking stocks will:
- Allow us to offer three separate investment vehicles, intended to track
separately the performance of our Broadband business, our Consumer
Services business, and our other businesses. We believe this will benefit
shareholders and investors by focusing attention on the separate values of
these businesses and giving investors a choice among the three classes of
stock.
- Allow us to raise new equity capital and repay debt with the proceeds of
the offering of AT&T Broadband Group tracking stock.
- Allow us to create better management incentive programs through the use
of options and other stock-based awards using the different classes of
stock.
Q:WHY ARE YOU SEEKING SHAREHOLDER APPROVAL FOR THE SPIN-OFF OF AT&T
COMMUNICATIONS SERVICES, INC. NOW WHEN THAT SPIN-OFF MAY NOT OCCUR FOR OVER A
YEAR?
A:We believe that it will be helpful to investors, particularly potential
purchasers of the AT&T Broadband Group tracking stock, to know that we have
satisfied the major conditions to the spin-off of AT&T Communications
Services, Inc. Two of the most significant conditions to the spin-off are
receipt of a tax ruling from the Internal Revenue Service and shareholder
approval. We received the tax ruling with respect to the spin-off on June 27,
2001.
Q:IS APPROVAL OR COMPLETION OF ANY PROPOSAL A CONDITION TO ANY OF THE OTHER
PROPOSALS?
A:No. You may vote on each proposal separately, and we may implement any
proposal that receives shareholder approval whether or not we receive approval
for or implement any other proposal.
Q:IF SHAREHOLDERS APPROVE ALL THE PROPOSALS, WILL YOU DEFINITELY IMPLEMENT THEM
ALL?
A:No. There are a number of factors that could cause our board to decide not to
iii
7
proceed with all or a portion of the restructuring plan, such as future market
conditions, financial performance or superior alternatives that may arise. Other
events or circumstances, including litigation, could occur that affect the
timing or terms of the restructuring plan or our ability to complete it.
While we describe our current plans in this proxy statement, our board could
decide not to proceed with one or more of the proposals, or could proceed in
a manner different from our current intentions.
The two charter amendment proposals give us the authority to amend our charter
to create AT&T Broadband Group tracking stock and AT&T Consumer Services Group
tracking stock. The amendments, however, do not mandate the manner in which we
may issue these shares. Rather, these shares will be new classes of common
stock that the board may issue from time to time as it determines appropriate,
up to the total number of authorized shares and subject to stock exchange
rules with respect to shareholder approval of share issuances. We do not plan
to seek new shareholder approval for any change that our board may approve in
the timing or manner of issuing shares of either tracking stock.
Similarly, approval of the spin-off proposal will give our board the authority
to spin off AT&T Communications Services, Inc. from AT&T at the time and in
the manner the board decides is appropriate. We do not plan to seek new
shareholder approval for any change in our current plans that our board may
approve in the timing of the spin-off or in the terms of the spin-off, unless
the change fundamentally alters the nature of AT&T Communications Services,
Inc. or the tax consequences of the transaction to shareholders.
Q:WHAT DO I NEED TO DO NOW?
A:To vote, just mail your signed proxy card in the enclosed return envelope as
soon as possible so that we may vote your shares at the special meeting. You
also may vote by telephone or via the Internet, as we describe in this
document and on the proxy card. Our directors unanimously recommend that you
vote in favor of each of the proposals we describe in this document. If you
sign and return your proxy card without specifying your choices, we will vote
your shares in favor of each proposal.
If you plan to join us at the special meeting of shareholders, you will need
to bring the admission ticket, which is attached to the proxy card. For your
convenience, we have printed a map of the area and directions to the special
meeting on the back of the proxy card.
Q:CAN I CHANGE MY VOTE?
A:Yes. Just deliver a later-dated, signed proxy card to our Vice
President -- Law and Secretary before the special meeting or attend the
special meeting in person and vote. You also may change your vote prior to the
special meeting by telephone, via the Internet or by filing an instrument of
revocation with the inspectors of election in care of our Vice
President -- Law and Secretary.
Q:AM I ENTITLED TO APPRAISAL RIGHTS IN CONNECTION WITH THE RESTRUCTURING?
A:Yes. Please see "Appraisal Rights" beginning on page .
Q:WHOM CAN I CALL WITH QUESTIONS?
A:If you have any questions about any of the proposals, please call us at (800)
. Information regarding AT&T is also available on the AT&T
Investor Relations Home Page on the Internet at www.att.com/ir.
If you would like copies of any of the documents we refer to or that we
incorporate by reference in this document, you should call us at (800)
.
iv
8
TABLE OF CONTENTS
Questions and Answers about the
Proposals......................... i
Summary............................. 1
Risk Factors Relating to AT&T's
Restructuring Plan................ 14
Risk Factors Relating to the
Tracking Stock Amendments......... 18
Risk Factors Relating to the
Spin-off of AT&T Communications
Services, Inc. ................... 26
Risk Factors Relating to AT&T
Broadband Group................... 29
Risk Factors Relating to AT&T
Consumer Services Group and AT&T
Business Services Group........... 38
The Special Meeting................. 44
AT&T Corp. Management's Discussion
and Analysis of Financial
Condition and Results of
Operations........................ 47
Reasons for the Restructuring
Proposals......................... 90
The Broadband Charter Amendment
Proposal.......................... 94
Description of AT&T Broadband
Group............................. 105
AT&T Broadband Group Management's
Discussion and Analysis of
Financial Condition and Results of
Operations........................ 136
The Consumer Services Charter
Amendment Proposal................ 152
Description of AT&T Consumer
Services Group.................... 161
AT&T Consumer Services Group
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 176
Relationship among AT&T Groups...... 187
The Incentive Plan Proposals........ 196
Employee Stock Purchase Plan
Proposal.......................... 201
The Spin-off Proposal............... 204
Description of AT&T Communications
Services, Inc. ................... 212
Selected Historical Financial Data
of AT&T Communications Services,
Inc. ............................. 221
AT&T Communications Services, Inc.
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 222
Description of Capital Stock of AT&T
Communications Services, Inc.
Following the Spin-off............ 249
Comparison of Rights of Holders of
AT&T Common Stock and AT&T
Communications Services, Inc.
Common Stock Following the
Spin-off.......................... 255
Appraisal Rights.................... 266
Stock Ownership of AT&T Management
and Directors..................... 270
Ownership of Voting Securities in
Excess of Five Percent by
Beneficial Owners................. 274
Board Compensation Committee Report
on Executive Compensation......... 278
AT&T Executive Compensation......... 283
Management of Groups and AT&T
Communications Services, Inc. .... 298
Other Matters to Come before the
Special Meeting................... 298
Shareholder Proposals............... 298
Other Information................... 299
Form of Certificate of Amendment of
the Certificate of Incorporation
Relating to Broadband Charter
Amendment......................... A-1
Form of Certificate of Amendment of
the Certificate of Incorporation
Relating to Consumer Services
Charter Amendment................. B-1
Form of By-Law Amendment............ C-1
Index to Financial Statements....... D-1
Section 623 and 910 of The New York
Business Corporation Law.......... E-1
v
9
The following diagrams are intended to help explain the various steps of
our restructuring proposals.
CURRENT STRUCTURE
After we complete the Liberty Media and AT&T Wireless Services split offs,
AT&T will have one class of common stock outstanding.
[Diagram of Current Structure]
AFTER ISSUANCE OF TRACKING STOCKS
If the tracking stock proposals are approved and implemented as expected,
AT&T will have three classes of common stock outstanding.
[Diagram of Structure After Issuance of Tracking Stocks]
vi
10
AFTER THE SPIN-OFF
If all the proposals are approved and implemented as expected, AT&T will be
split into two separate companies. The old AT&T will be renamed AT&T Broadband
Corp. and the new company will be renamed AT&T Corp.
[DIAGRAM OF STRUCTURE AFTER THE SPIN-OFF]
The following diagram shows what you will receive as a result of the
restructuring if you hold your shares of AT&T common stock and any shares you
receive as a dividend. In addition, if you were a holder of shares of AT&T
common stock on June 22, 2001, you will receive .3218 of a share of AT&T
Wireless Services, Inc. common stock for each share of AT&T common stock.
Holders of AT&T common stock will not receive shares of Liberty Media
Corporation common stock as a distribution on AT&T common stock.
EFFECT OF THE RESTRUCTURING ON A SHARE OF AT&T CORP. COMMON STOCK
[DIAGRAM OF THE EFFECT OF THE RESTRUCTURING ON A SHARE OF AT&T CORP. COMMON
STOCK]
vii
11
SUMMARY
THE CHARTER AMENDMENT PROPOSALS
Approval of the charter amendment proposals will authorize us to amend our
charter to create two new classes of our common stock -- AT&T Broadband Group
tracking stock and AT&T Consumer Services Group tracking stock. Each of the
charter amendment proposals requires the affirmative vote of the holders of a
majority of the outstanding shares of AT&T common stock.
AT&T Broadband Group tracking stock is intended to reflect the separate
performance of AT&T Broadband Group, which includes the assets and liabilities
shown in the combined balance sheets of AT&T Broadband Group. We will include
within AT&T Broadband Group all net income or net loss generated by the assets
that comprise AT&T Broadband Group and all net proceeds from any disposition of
these assets.
Similarly, AT&T Consumer Services Group tracking stock is intended to
reflect the separate performance of AT&T Consumer Services Group, which includes
the assets and liabilities shown in the combined balance sheets of AT&T Consumer
Services Group. We will include within AT&T Consumer Services Group all net
income or net losses generated by the assets that comprise AT&T Consumer
Services Group and all net proceeds from any disposition of these assets.
AT&T BROADBAND GROUP
AT&T Broadband Group is of one of the nation's largest broadband
communications businesses, providing cable television, high-speed cable Internet
services and communications services over one of the most extensive broadband
networks in the country. At or for the year ended December 31, 2000, AT&T
Broadband Group had:
- owned and operated cable systems aggregating approximately 16 million
analog video subscribers;
- approximately $8.4 billion in combined revenues;
- approximately $5.4 billion in net loss, and
- investments in companies, joint ventures and partnerships, including
Excite@Home, Time Warner Entertainment Company, L.P., Cablevision Systems
Corporation, Insight Midwest, L.P., and Texas Cable Partners, L.P.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group is the leading provider of domestic and
international long distance service to residential consumers in the United
States. AT&T Consumer Services Group provides a broad range of communications
services to consumers, including:
- inbound and outbound domestic and international long distance;
- a variety of transaction-based services, such as calling cards and
prepaid phone cards;
- local toll calling and in limited geographic areas local exchange
service; and
- dial-up Internet service and telephone services over the Internet through
AT&T WorldNet Service.
12
AT&T Consumer Services Group provides these services individually and in
combination with other services. At and for the year ended December 31, 2000,
AT&T Consumer Services Group had:
- approximately 60 million customers;
- approximately $18.9 billion in combined revenue; and
- approximately $4.1 billion in combined net income.
AT&T CORP.
AT&T Corp. consists primarily of AT&T Broadband Group, AT&T Consumer
Services Group and AT&T Business Services Group. AT&T formerly also included
AT&T Wireless Group, which will be split off from AT&T on July 9, 2001, and
Liberty Media Group, which will be split off from AT&T on August 10, 2001. In
the split-off of AT&T Wireless Group, each share of AT&T Wireless Group tracking
stock will be exchanged for one share of AT&T Wireless Services, Inc. common
stock, and holders of AT&T common stock will receive .3218 of a share of AT&T
Wireless common stock as a dividend for each share of AT&T common stock they
hold. In the split-off of Liberty Media Group, each share of Class A or Class B
Liberty Media Group tracking stock will be exchanged for one share of Class A or
Class B common stock of Liberty Media Corporation. The principal executive
offices of AT&T are located at 32 Avenue of the Americas, New York, New York
10013-2412. The telephone number is (212) 387-5400.
AT&T Business Services Group is one of the nation's largest business
services telecommunications businesses, providing a variety of global
communications services to large domestic and multinational businesses,
small-and medium-sized businesses, and government agencies. Business units
within AT&T Business Services Group provide regular and custom voice services
(including local, long distance, and international outbound, 800, 877, and 888
and 900 services), data and Internet Protocol, or IP, services (including
private line, frame relay, asynchronous transfer mode, or ATM, services), as
well as hosting, managed connectivity services and outsourcing. AT&T Business
Services Group operates one of the largest telecommunications networks in the
country. At or for the year ended December 31, 2000, AT&T Business Services
Group had more than 5 million customers.
AT&T Business Services Group also includes a number of joint ventures and
investments, including Concert Communications Company, AT&T Latin America Corp.,
and AT&T Canada Corp. In addition, AT&T Business Services Group will hold shares
of AT&T Wireless common stock that we are keeping in connection with the
split-off of AT&T Wireless Services Group but that we expect to sell or
otherwise dispose of within six months after the split-off.
The table below sets forth the approximate percentage of consolidated
revenue, net income, assets and indebtedness of AT&T, without giving effect to
the split-offs of AT&T Wireless Group and Liberty Media Group, that were
attributable to each of AT&T Broadband Group, AT&T Consumer Services Group and
AT&T Communications Services, Inc. at or for the year ended December 31, 2000
and at or for the three months ended March 31, 2001. In the future, these
percentages will vary with the relative performance of the different groups. In
addition, the actual debt levels of each of the groups in the future will depend
on a variety of other factors, including the progress we make on our various
debt reduction activities and the allocation of the proceeds of the public
offering of the AT&T Broadband Group tracking stock among the groups. The table
should also be read in the context of the financial and other information set
forth in this document.
2
13
AT OR FOR YEAR ENDED DECEMBER 31, 2000 AT OR FOR THREE MONTHS ENDED MARCH 31, 2001
----------------------------------------- -------------------------------------------
% OF % OF NET % OF % OF % OF % OF NET % OF % OF
AT&T AT&T AT&T AT&T AT&T AT&T AT&T AT&T
REVENUE INCOME ASSETS DEBT REVENUE LOSS ASSETS DEBT
-------- --------- ------- ----- --------- ---------- ------ ------
AT&T Broadband Group...... 12.8% (115.0)% 48.5% 43.7% 15.4% 291.0% 48.1% 51.2%
AT&T Consumer Services
Group................... 28.6% 88.1% 1.5% 6.2% 23.9% (146.1)% 1.3% 5.1%
AT&T Communications
Services, Inc.* ........ 72.0% 172.5% 23.5% 47.8% 66.4% (260.2)% 23.1% 47.3%
-------------------------
* Includes AT&T Business Services Group and AT&T Consumer Services Group
TERMS OF THE TRACKING STOCKS
The proposed charter amendments would authorize us to issue up to
billion shares of AT&T Broadband Group tracking stock and up to billion
shares of AT&T Consumer Services Group tracking stock. We describe some of the
most significant terms of the tracking stocks below, but we include a more
detailed description of the tracking stocks later in this document.
Voting Rights. Holders of AT&T Broadband Group tracking stock will
initially be entitled to of a vote per share and holders of shares of AT&T
Consumer Services Group tracking stock will initially be entitled to of a
vote per share. Except as required by law or by any special voting rights of any
other class or series of AT&T stock, holders of shares of AT&T Broadband Group
tracking stock and holders of shares of AT&T Consumer Services Group tracking
stock will vote together with all other AT&T shareholders on matters presented
to the shareholders.
Dividends. Holders of AT&T Broadband Group tracking stock and AT&T
Consumer Services Group tracking stock will only be entitled to dividends to the
extent declared by the AT&T Board of Directors. Our charter will define an
available dividend amount with respect to each tracking stock. The available
dividend amount is designed to be equivalent to the amount that would legally be
available for the payment of dividends by AT&T Broadband Group or AT&T Consumer
Services Group as if the relevant group were a separate legal entity.
Dividends on each tracking stock may only be paid up to the applicable
available dividend amount and will also be subject to the legal capacity of AT&T
as a whole to pay dividends after deducting the available dividend amount of the
other group. Subject to these limitations, and to the discretion of our board,
we currently expect to pay quarterly dividends on the AT&T Consumer Services
Group tracking stock equal in the aggregate to two-thirds of the dividend we
currently pay on the AT&T common stock, and to pay quarterly dividends on the
AT&T common stock equal to one-third of the current dividend. Regardless of the
available dividend amount, we do not expect to pay dividends on AT&T Broadband
Group tracking stock for the foreseeable future.
Redemption. We may redeem shares of AT&T Broadband Group tracking stock or
AT&T Consumer Services Group tracking stock under a number of circumstances:
- Following the anniversary of issuance or the occurrence of tax
related events, we may redeem the shares of either tracking stock for
shares of AT&T common stock having a market value equal to % of the
market value of the tracking stock.
- At any time, we may redeem shares of either tracking stock for shares of
one or more subsidiaries that hold all material assets and liabilities
allocated to the tracked group, so long as the redemption is tax-free to
shareholders. This would result in a spin-off of the applicable tracked
group.
3
14
- In the event of a disposition of all or substantially all the assets of a
tracked group, we may redeem shares of the relevant tracking stock for
cash and/or property in an amount equal to the net proceeds of the
disposition that are allocable to the tracking stock.
- If we complete the spin-off of AT&T Communications Services, Inc., we may
redeem the outstanding shares of AT&T Broadband Group tracking stock for
shares of AT&T common stock without the payment of any premium.
- At any time, we may redeem shares of either tracking stock for a
comparable tracking stock of any company that owns the assets and
liabilities allocated to the applicable tracked group.
- For example, if we complete the spin-off of AT&T Communications Services,
Inc., we may redeem the outstanding shares of AT&T Consumer Services Group
tracking stock for a comparable tracking stock of AT&T Communications
Services, Inc. without the payment of any premium.
Liquidation. In the event of a liquidation, holders of AT&T Broadband
Group tracking stock, AT&T Consumer Services Group tracking stock and AT&T
common stock will be entitled to share in the funds available for distribution
to common shareholders in proportion to the relative market capitalization of
the outstanding shares of each class of stock.
ISSUANCE OF AT&T BROADBAND GROUP TRACKING STOCK
If shareholders approve the creation of AT&T Broadband Group tracking
stock, we currently intend to issue shares of the stock for cash in an
underwritten public offering later this year. The shares we issue in this
offering will be intended to reflect only a portion of the financial performance
and economic value of AT&T Broadband Group. The remaining portion will be AT&T's
retained portion of the financial performance and economic value of AT&T
Broadband Group, which we intend to reflect in the AT&T common stock. We expect
to list AT&T Broadband Group tracking stock on a national securities exchange or
quotation system.
We will determine the amount of AT&T Broadband Group tracking stock to
issue based on the capital requirements of AT&T Broadband Group and AT&T, market
conditions at the time of the public offering and other factors. We will
allocate the proceeds of the public offering among our groups based on the
determination of our board of directors. We have not yet decided how to allocate
these proceeds because we want to wait until the offering to determine which of
our businesses has the greatest need for the proceeds at that time. Thus, some
or all of the proceeds of the offering may not go to the benefit of AT&T
Broadband Group tracking stock holders.
Our plan to complete the public offering of shares of AT&T Broadband Group
tracking stock later this year is subject to market conditions and other
factors. Our board of directors could decide to issue shares in a different
manner or at a different time, or could decide not to create or issue shares of
AT&T Broadband Group tracking stock at all, if the board decides that a change
in our plans is appropriate.
ISSUANCE OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK
If shareholders approve the creation of AT&T Consumer Services Group
tracking stock, we currently intend to distribute shares of this stock as a
dividend to holders of AT&T common stock later this year. The shares we issue as
a dividend to our existing shareholders may be intended to reflect all or a
portion of the financial performance and economic value of AT&T Consumer
Services Group. If these shares are intended to reflect only a portion, the
remaining portion will be AT&T's retained portion of the financial performance
and economic value of AT&T Consumer Services Group, which we intend to reflect
in the AT&T common stock. We expect to list AT&T Consumer Services Group
tracking stock on a national securities exchange or quotation system.
Notwithstanding our current plans, our board of directors could decide to issue
these shares in a different manner or at
4
15
a different time, or could decide not to create or issue shares of AT&T Consumer
Services Group tracking stock at all, if the board decides that a change in our
plans is appropriate.
AT&T'S RETAINED PORTION
As we describe above, we intend that only a portion of the financial
performance and economic value of AT&T Broadband Group will be reflected in the
shares of AT&T Broadband Group tracking stock that we sell in the public
offering. In addition, we may decide that we intend only a portion of the
financial performance and economic value of AT&T Consumer Services Group to be
reflected in the shares of AT&T Consumer Services Group tracking stock that we
distribute to our existing shareholders.
Whenever we intend to reflect only a portion of the financial performance
and economic value of a group in the outstanding shares of the relevant tracking
stock, we will create an allocation fraction that will represent the fraction of
the performance and value of the group that we intend to reflect in the
outstanding shares of tracking stock. In determining available dividend amounts
and entitlement to dividends, net proceeds of dispositions, liquidation payments
or any other relevant amount, we will multiply the amount attributable to the
group by the allocation fraction to determine the amount allocable to the
outstanding shares of the relevant tracking stock. We intend to reflect any
remaining portion of the financial performance and economic value of the group
in the outstanding shares of AT&T common stock. We refer to the portion that we
intend to reflect in AT&T common stock as AT&T's "retained portion of the value
of the Group."
THE SPIN-OFF PROPOSAL
Approval of the spin-off proposal will allow us to spin off AT&T
Communications Services, Inc., which consists of our Business Services and
Consumer Services businesses. Approval of the spin-off requires the affirmative
vote of the holders of a majority of the outstanding shares of AT&T common
stock.
If we obtain shareholder approval, we plan to complete the spin-off within
about one year following the public offering of AT&T Broadband Group tracking
stock. First, we would distribute shares of AT&T Communications Services, Inc.
common stock as a dividend to holders of AT&T common stock. Second, at the same
time, we would redeem all of the shares of AT&T Consumer Services Group tracking
stock for shares of an equivalent tracking stock of AT&T Communications
Services. We expect to list the shares of AT&T Communications Services common
stock and the consumer services tracking stock of AT&T Communications Services
following the spin-off on a national securities exchange or quotation system.
After the spin-off, AT&T Communications Services will consist of the assets
and liabilities of AT&T Business Services Group and AT&T Consumer Services
Group. For the year ended December 31, 2000, AT&T Communications Services had:
- approximately $47.5 billion in combined revenue, and
- approximately $8.1 billion in combined net income.
We expect that AT&T will change its name after the spin-off to "AT&T
Broadband Corp." and that AT&T Communications Services will assume the name
"AT&T Corp." In this document, we may refer to AT&T following the spin-off as
"AT&T Broadband Corp." C. Michael Armstrong is currently Chairman of the Board
and Chief Executive Officer of AT&T. David Dorman is currently President of
AT&T, with responsibilities that include the consumer, business and network
services groups, international ventures and AT&T Labs. Betsy J. Bernard is
president and chief executive officer of our Consumer Services business. Daniel
E. Somers is president and chief executive officer of our Broadband business. We
have not yet determined who will constitute the management of
5
16
AT&T Corp. or AT&T Broadband Corp. following the spin-off, but we have no
current plans to change the existing management of AT&T or our Business
Services, Consumer Services or Broadband businesses.
While we currently plan to complete the spin-off as we describe above, our
board of directors could decide to spin off AT&T Communications Services, Inc.
in a different manner or at a different time, or could decide not to go forward
with a spin-off at all, if the board decides that a change in our plans is
appropriate. We do not plan to seek new shareholder approval for any change in
our current plans that our board may approve in the timing of the spin-off or in
the terms of the spin-off, unless the change fundamentally alters the nature of
AT&T Communications Services, Inc. or the tax consequences of the transaction to
shareholders. In addition, we could decide to propose additional transactions
involving the spun-off company or the remaining AT&T following the spin-off. If
any of these additional transactions requires separate shareholder approval, we
would seek such approval at that time.
REASONS FOR THE RESTRUCTURING PROPOSALS
We believe that the overall restructuring will improve shareholder value by
enhancing the operations and funding of our businesses and by creating separate
investment vehicles. Our businesses should be better able to serve their
customers by having greater freedom, focus and flexibility to respond to
customers and to adapt to marketplace and technology changes. We expect the
restructuring plan to permit each business to set its own capital priorities, to
invest in its own growth and to target a debt and equity profile consistent with
its own needs and comparable companies in its industry. We also believe that the
separation of AT&T Communications Services, Inc. from AT&T Broadband Group in
the spin-off will more fully allow the management of each of the AT&T Business
Services Group, AT&T Consumer Services Group, and AT&T Broadband Group to focus
on and enhance the operations of their business, as well as tailor funding and
management incentives to each business.
We expect the restructuring plan to allow shareholders to view more clearly
the performance of each of our groups and to evaluate each group's results
against those of its competitors. We also expect that the restructuring plan
will enable AT&T shareholders and other investors to invest in the securities
that fit their needs and investment profiles without the requirement of
simultaneously investing in other businesses. In addition, if we complete the
planned AT&T Broadband Group tracking stock public offering, this will provide
funds to AT&T and/or AT&T Broadband Group to reduce outstanding indebtedness or
to fund operations.
We expect the issuance of each of the new tracking stocks to:
- assist its respective group by creating an additional publicly traded
equity security that it can use to raise capital for operating purposes
and/or for acquisitions and investments,
- increase market awareness of the performance and value of its respective
business by creating a separate investment vehicle intended to reflect the
performance and value of its respective business, and
- permit the creation of more effective management incentive and retention
programs, with the ability to direct business-specific options and
securities to employees of each of our groups.
For additional reasons for, and more detail on the reasons for, the
restructuring proposal, see "Reasons for the Restructuring Proposals" on page
.
6
17
U.S. FEDERAL INCOME TAX CONSIDERATIONS
We expect the issuance of AT&T Broadband Group tracking stock to be tax
free to AT&T, and we expect the distribution of AT&T Consumer Services Group
tracking stock to holders of AT&T common stock to be tax free to AT&T and to the
holders of AT&T common stock. AT&T has received a private letter ruling from the
Internal Revenue Service to the effect that, for U.S. federal income tax
purposes, the spin-off is tax free to AT&T and to stockholders to the extent
that they receive either AT&T Communications Services, Inc. common stock as a
distribution with respect to AT&T common stock or consumer services tracking
stock of AT&T Communications Services, Inc. in exchange for AT&T Consumer
Services Group tracking stock. The continued effectiveness of this ruling in all
material respects is a non-waivable condition to the spin-off.
RISK FACTORS
When evaluating the charter amendments and the spin-off, you should be
aware of the risk factors we describe under:
- "Risk Factors Relating to AT&T's Restructuring Plan" starting on page ;
- "Risk Factors Relating to the Tracking Stock Amendments" starting on page
;
- "Risk Factors Relating to the Spin-off of AT&T Communications Services,
Inc." starting on page ;
- "Risk Factors Relating to AT&T Broadband Group" starting on page ; and
- "Risk Factors Relating to AT&T Consumer Services Group and AT&T Business
Services Group" starting on page .
INCENTIVE PLANS PROPOSAL AND EMPLOYEE STOCK PURCHASE PLAN PROPOSAL
We are also asking you to vote upon a proposal to adopt two new incentive
plans and a proposal to approve an amended employee stock purchase plan. The new
incentive plans would enable us to grant incentive awards based on shares of
AT&T Broadband Group tracking stock and/or shares of AT&T Consumer Services
Group tracking stock to officers and employees of AT&T and its subsidiaries,
including AT&T Broadband Group, AT&T Consumer Services Group and AT&T Business
Services Group. The amended employee stock purchase plan would allow the
issuance of AT&T Broadband Group tracking stock and AT&T Consumer Services Group
tracking stock under the employee stock purchase plan. Approval of the proposed
incentive plans and the amended employee stock purchase plan requires the
affirmative vote of a majority of the votes cast by holders of shares of AT&T
common stock.
RECOMMENDATION OF AT&T'S BOARD OF DIRECTORS
Our board of directors has approved each of the charter amendment
proposals, the spin-off proposal, the incentive plan proposal and the employee
stock purchase plan proposal, and recommends that you vote FOR each of them.
7
18
SELECTED HISTORICAL FINANCIAL DATA
This information is only a summary and you should read it together with the
financial information we include elsewhere in this proxy statement or that we
incorporate by reference in this proxy statement. For copies of the financial
information we incorporate by reference, see "Other Information -- Where You Can
Find More Information" on page .
AT&T CORP. AND SUBSIDIARIES
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- ----------------------------------------------------
2001 2000 2000(1) 1999(2) 1998 1997 1996
-------- -------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS
Revenue................................... $ 16,763 $ 15,901 $ 65,981 $ 62,600 $ 53,223 $ 51,577 $ 50,688
Operating income.......................... 977 2,402 4,277 10,859 7,487 6,836 8,709
(Losses) income from continuing operations
before cumulative effect of accounting
change.................................. (1,248) 2,683 4,669 3,428 5,235 4,249 5,458
AT&T Common Stock Group:
(Losses) income from continuing
operations before cumulative effect of
accounting change..................... (544) 1,741 3,105 5,450 5,235 4,249 5,458
(Losses) earnings per basic share....... (0.19) 0.55 0.89 1.77 1.96 1.59 2.07
(Losses) earnings per diluted share..... (0.19) 0.54 0.88 1.74 1.94 1.59 2.07
Dividends declared per share............ 0.0375 0.22 0.6975 0.88 0.88 0.88 0.88
AT&T Wireless Group(3):
(Losses) income......................... (7) N/A 76 -- -- -- --
(Losses) earnings per basic and diluted
share................................. (0.02) N/A 0.21 -- -- -- --
Liberty Media Group(3, 4):
(Losses) income......................... (152) 942 1,488 (2,022) -- -- --
(Losses) earnings per basic and diluted
share................................. (0.06) 0.37 0.58 (0.80) -- -- --
ASSETS AND CAPITAL
Property, plant and equipment, net........ $ 52,265 $ 51,161 $ 39,618 $ 26,903 $ 24,203 $ 20,803
Total assets - continuing operations...... 242,223 169,406 59,550 59,994 55,838
Total assets.............................. 241,141 242,223 169,406 59,550 61,095 57,348
Long-term debt............................ 39,004 33,092 23,217 5,556 7,857 8,878
Total debt................................ 56,229 65,039 35,850 6,727 11,942 11,351
Mandatorily redeemable preferred
securities.............................. 2,380 2,380 1,626 -- -- --
Company-obligated convertible quarterly
income preferred securities............. 4,713 4,710 4,700 -- -- --
Shareowners' equity....................... 103,963 103,198 78,927 25,522 23,678 21,092
Debt ratio(5)............................. 39.5% 46.2% 43.0% 20.9% 33.5% 35.0%
Gross capital expenditures................ 3,289 14,566 13,511 7,981 7,714 7,084
OTHER INFORMATION
Operating income as a percent of
revenue................................. 5.8% 6.5% 17.3% 14.1% 13.3% 17.2%
Income from continuing operations
attributable to AT&T Common Stock Group
as a percent of revenue................. (2.2)% 4.8% 8.7% 9.8% 8.2% 10.8%
Return on average common equity(6,7)...... (0.5)% 6.2% 15.2% 25.3% 19.7% 27.1%
Employees - continuing operations(6)...... 162,000 165,600 147,800 107,800 130,800 128,700
Data at year end:
AT&T stock price per share.............. 21.30 17.25 50.81 50.50 40.87 27.54
AT&T Wireless Group stock price per
share................................. 19.18 17.31 -- -- -- --
Liberty Media Group A stock price per
share(4).............................. 14.00 13.56 28.41 -- -- --
Liberty Media Group B stock price per
share(4).............................. 15.00 18.75 34.38 -- -- --
8
19
-------------------------
1. On April 27, 2000, AT&T issued 15.6% of AT&T Wireless Group (AWE) tracking
stock. AT&T Common Stock Group results exclude the portion of AT&T Wireless
Group that is represented by the tracking stock and exclude Liberty Media
Group (LMG). In addition, on June 15, 2000, AT&T completed the acquisition of
MediaOne Group, Inc.
2. In connection with the March 9, 1999, merger with Tele-Communications, Inc.,
AT&T issued separate tracking stock for LMG. LMG is accounted for as an
equity investment.
3. No dividends have been declared for AWE or LMG tracking stocks.
4. LMG earnings per share amounts and stock prices have been restated to reflect
the June 2000 two-for-one stock split.
5. Debt ratio reflects debt as a percent of total capital (debt plus equity,
excluding LMG). For purposes of this calculation, equity includes convertible
quarterly trust preferred securities as well as redeemable preferred stock of
subsidiary.
6. Data provided excludes LMG.
7.Amounts for the three months ended March 31, 2001 and 2000, are based on
annualized income.
9
20
AT&T COMMUNICATIONS SERVICES, INC.
SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
----------------- ---------------------------
2001 2000 2000 1999 1998
------- ------- ------- ------- -------
RESULTS OF OPERATIONS
Revenue...................................... $11,127 $12,227 $47,521 $50,152 $47,890
Operating income(1).......................... 2,502 2,534 12,960 12,702 7,683
Income before extraordinary loss and
cumulative effect of accounting change..... 1,236 1,524 8,054 8,124 5,084
ASSETS AND CAPITAL
Property, plant and equipment, net........... $26,032 $26,083 $25,587 $21,780
Total assets................................. 55,591 57,013 49,893 40,136
Long-term notes payable to AT&T.............. 8,093 8,603 9,040 2,056
Total notes payable to AT&T.................. 26,454 30,749 16,205 3,139
Combined attributed net assets............... 8,339 4,415 12,560 15,112
Debt ratio(2)................................ 76.2% 87.5% 56.3% 17.2%
Gross capital expenditures................... 1,145 6,207 7,807 6,871
OTHER INFORMATION
Operating income as a percent of revenue..... 22.5% 27.3% 25.3% 16.0%
Return on average equity(3).................. 85.7% 94.9% 58.7% 41.2%
Employees.................................... 83,378 81,971 96,777 95,765
-------------------------
(1) Operating income includes $0.8 billion of net restructuring and other
charges for the three months ended March 31, 2000. Operating income includes
$0.8 billion, $0.3 billion and $2.5 billion of net restructuring and other
charges in 2000, 1999 and 1998, respectively.
(2) Debt ratio reflects debt as a percent of total capital (debt plus equity).
The increase in 2000 compared with 1999 and 1999 compared with 1998 was due
primarily to higher debt payable to AT&T.
(3)Amount for the three months ended March 31, 2001, is based on annualized net
income.
10
21
CONSOLIDATING CONDENSED FINANCIAL INFORMATION
In conjunction with the issuance of AT&T Wireless Group and Liberty Media
Group tracking stocks, and the proposed issuance of AT&T Broadband Group and
AT&T Consumer Services Group tracking stocks, AT&T has separated for financial
reporting purposes in all periods the AT&T Common Stock Group, Liberty Media
Group, AT&T Consumer Services Group, AT&T Broadband Group and AT&T Wireless
Group. Below is the consolidating financial information reflecting the
businesses of these individual groups, including the allocation of expenses
between the groups in accordance with our allocation policies, as well as other
related party transactions such as sales of services between groups and interest
income and expense on intercompany borrowings. The AT&T Common Stock Group
presented below excludes its retained portion of the value of AT&T groups. AT&T
does not have a controlling financial interest in Liberty Media Group for
financial accounting purposes; therefore, our ownership in Liberty Media Group
is reflected as an investment accounted for under the equity method and is
reflected as such in the consolidating financial statements below.
AT&T Wireless Group, AT&T Consumer Services Group and AT&T Broadband Group
purchase long distance and other network-related services from AT&T at
market-based prices and accordingly such amounts are eliminated. Prior to the
offering of AT&T Wireless Group tracking stock, the capital structure of AT&T
Wireless Group had been assumed based upon AT&T's historical capital ratio
adjusted for certain items. Intercompany interest rates are intended to be
substantially equivalent to the interest rate that AT&T Wireless Group would be
able to obtain or receive if it were a stand-alone entity. Debt has been
allocated to AT&T Consumer Services Group and AT&T Broadband Group, based on the
future view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T. This allocation took into account the following
factors: prospective financing requirements, desired standalone credit profile,
working capital and capital expenditure requirements and comparable company
profiles. At or before the time of the spin-off, when AT&T Communications
Services, Inc. is separated from historical AT&T, we plan to seek to transfer
the indebtedness allocated to AT&T Business Services Group and AT&T Consumer
Services Group from historical AT&T to AT&T Communications Services, Inc. We may
seek to accomplish this through a variety of measures that may result in
increased costs and additional covenants on AT&T Communications Services, Inc.
The historical interest expense on the allocated debt was calculated based on a
rate intended to be equivalent to the rate AT&T Consumer Services Group and AT&T
Broadband Group would have received if each was a stand-alone entity. General
corporate overhead related to AT&T's corporate headquarters and common support
divisions has been allocated to the groups based on the ratio of each group's
external costs and expenses to AT&T's consolidated external costs and expenses,
adjusted for any functions that any group performs on its own. The consolidated
income tax provision, related tax payments or refunds, and deferred tax balances
of AT&T have been allocated to the group based principally on the taxable income
and tax credits directly attributable to each group.
Pursuant to the Inter-Group agreement, AT&T does not allocate general
overhead expenses to Liberty Media Group and only charges Liberty Media Group
for specific services that Liberty Media Group receives from AT&T pursuant to
service agreements or similar arrangements. Additionally, as Liberty Media Group
operates independent of AT&T, there is no cash or debt allocated to them.
11
22
CONSOLIDATING SELECTED FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS AT&T CORP.
------- -------- -------- --------- ------- ----------------- ------------
AT MARCH 31, 2001
Cash and cash equivalents................ $ 36 $ 34 $ 2 $ 64 $ $ $ 136
Property, plant & equipment, net......... 25,895 10,725 137 15,508 52,265
Total assets............................. 66,893 47,039 3,036 115,985 34,072 (25,884) 241,141
Debt maturing within one year............ 14,552 103 2,570 17,225
Short-term debt due to related party..... 10,588 6,707 (17,295)
Long-term debt........................... 12,991 6,487 19,523 3 39,004
Long-term debt due to related party...... 1,800 2,871 (4,671)
Total debt............................... 38,131 8,390 2,871 28,800 (21,963) 56,229
Total shareowners' equity................ 125 30,937 (2,120) 43,866 34,072 (2,917) 103,963
AT DECEMBER 31, 2000
Cash and cash equivalents................ $ 3 $ 62 $ $ 61 $ $ $ 126
Property, plant & equipment, net......... 25,912 9,892 170 15,187 51,161
Total assets............................. 67,709 35,302 3,543 117,534 34,290 (16,155) 242,223
Debt maturing within one year............ 28,752 109 13 3,073 31,947
Short-term debt due to related party..... 638 5,830 (6,468)
Long-term debt........................... 13,572 19,517 3 33,092
Long-term debt due to related party...... 1,800 4,000 (5,800)
Total debt............................... 42,324 2,547 4,013 28,420 (12,265) 65,039
Total shareowners' equity................ 6,218 24,877 (2,541) 43,317 34,290 (2,963) 103,198
AT DECEMBER 31, 1999
Cash and cash equivalents................ $1,013 $ 5 $ 6 $ $ $ $ 1,024
Property, plant & equipment, net......... 25,454 6,349 132 7,780 (97) 39,618
Total assets............................. 55,428 23,512 4,072 58,228 38,460 (10,294) 169,406
Debt maturing within one year............ 11,511 154 36 932 12,633
Short-term debt due to related party..... 4,297 (4,297)
Long-term debt........................... 13,542 9,671 4 23,217
Long-term debt due to related party...... 3,400 900 (4,300)
Total debt............................... 25,053 3,554 936 14,900 (8,593) 35,850
Total shareowners' equity................ 11,377 13,997 1,070 14,889 38,460 (866) 78,927
FOR THE THREE MONTHS ENDED MARCH 31, 2001
Revenue.................................. $7,181 $ 3,212 $ 4,007 $ 2,587 $ $ (224) $ 16,763
Operating income (loss).................. 1,208 141 1,295 (1,667) 977
Income (loss) before cumulative effect of
accounting change...................... 481 767 (1,757) (697) (42) (1,248)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
Revenue.................................. $7,260 $ 2,198 $ 5,037 $ 1,557 $ $ (151) $ 15,901
Operating income (loss).................. 903 26 1,631 (170) 12 2,402
Net income............................... 523 26 1,006 196 942 (10) 2,683
FOR THE YEAR ENDED DECEMBER 31, 2000
Revenue.................................. $28,917 $10,448 $18,894 $ 8,445 $ $ (723) $ 65,981
Operating income (loss).................. 6,218 (38) 6,741 (8,656) 12 4,277
Net income............................... 3,908 658 4,112 (5,370) 1,488 (127) 4,669
FOR THE YEAR ENDED DECEMBER 31, 1999
Revenue.................................. $28,726 $ 7,627 $21,753 $ 5,080 $ $ (586) $ 62,600
Operating income (loss).................. 5,365 (666) 7,335 (1,177) 2 10,859
Net income............................... 3,521 (405) 4,633 (2,200) (2,022) (99) 3,428
FOR THE YEAR ENDED DECEMBER 31, 1998
Revenue.................................. $25,407 $ 5,406 $22,763 $ $ $ (353) $ 53,223
Operating income (loss).................. 1,579 (343) 6,104 147 7,487
Income from continuing operations........ 1,314 164 3,807 (50) 5,235
12
23
SELECTED PRO FORMA FINANCIAL DATA
This information is only a summary and you should read it together with the
financial information we include elsewhere in this proxy statement or that we
incorporate by reference in this proxy statement. For copies of the financial
information we incorporate by reference, see "Other Information -- Where You Can
Find More Information."
AT&T
The unaudited pro forma financial information set forth below for AT&T
gives effect to
- the AT&T Wireless Group exchange offer,
- the AT&T Wireless Group distribution,
- the Liberty Media Group distribution, and
- the AT&T Communications Services distribution
as if those events had been completed on January 1, 1998 for income statement
purposes, and on March 31, 2001 for balance sheet purposes. The unaudited pro
forma financial information set forth below for AT&T also give effect to the
March 9, 1999 Tele-Communications Inc., or TCI, merger and the June 15, 2000
MediaOne Group, Inc. acquisition as if they had been completed on January 1,
1998 for income statement purposes. The unaudited selected pro forma financial
information does not necessarily represent what AT&T's financial position or
results of operations would have been had the TCI merger, MediaOne acquisition,
the AT&T wireless events, the Liberty Media Group distribution and the AT&T
Communications Services, Inc. distribution occurred on such dates.
We have included detailed unaudited pro forma financial statements at the
end of this document.
SUMMARY PRO FORMA CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AT AND
FOR THE
THREE MONTHS ENDED AT AND FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
------------------ -----------------------------
2001 2000 1999 1998
------------------ -------- ------- ------
INCOME STATEMENT DATA:
Revenue............................... $ 2,587 $ 9,771 $ 8,715 $9,085
Operating income (loss)............... (1,666) (9,090) (2,279) (1,002)
Income (loss) from continuing
operations -- attributable to AT&T
common stock group.................. (1,961) (4,586) 840 (1,310)
Weighted average AT&T common
shares -- diluted................... 3,433 3,390 3,412 3,388
Earnings per AT&T common
share -- basic...................... (0.57) (1.35) 0.25 (0.39)
Earnings per AT&T common share --
diluted............................. (0.57) (1.35) 0.25 (0.39)
Cash dividends declared per AT&T
common share........................ $ 0.0375 $ 0.6975 $ 0.88 $ 0.88
BALANCE SHEET DATA:
Total assets.......................... $145,415
Long-term debt........................ 32,416
Total shareowners' equity............. 45,323
13
24
RISK FACTORS RELATING TO AT&T'S RESTRUCTURING PLAN
AT&T'S RESTRUCTURING PLAN IS SUBJECT TO CHANGE AND MAY NOT BE COMPLETED AS
PLANNED OR AT ALL
At the special meeting, we are seeking your approval to authorize us to
implement various steps of our restructuring plan. There are a number of factors
that could cause our board to decide not to proceed with all or a portion of the
restructuring plan, such as future market conditions, financial performance or
superior alternatives that may arise. Other events or circumstances, including
litigation, could occur that affect the timing or terms of the restructuring
plan or our ability to complete it. While we describe our current plans in this
proxy statement, our board could decide not to proceed with one or more of the
proposals, or could proceed in a manner different from our current intentions.
Even if the proposals are approved and all conditions satisfied, we will not be
required to proceed with any or all of the steps of the restructuring plan.
By way of example:
- our board of directors may decide to issue one or both of the tracking
stocks but not complete the proposed spin-off;
- our board of directors may decide to complete the proposed spin-off
without issuing any of the tracking stocks;
- our board of directors could also decide to abandon the entire
restructuring plan;
- our board of directors has the ability to alter parts of the overall
restructuring plan and to make determinations that will impact key aspects
of the overall restructuring plan;
- our board of directors can materially impact the relative capital
structures of the various groups by allocating all or a portion of the net
proceeds of the planned public offering of the AT&T Broadband Group
tracking stock to either AT&T Broadband Group or to the other Groups; or
- our board of directors could decide to propose additional transactions
involving AT&T Communications Services, Inc. or AT&T Broadband Corp.
The two charter amendment proposals give us the authority to amend our
charter to create AT&T Broadband Group tracking stock and AT&T Consumer Services
Group tracking stock. The amendments, however, do not mandate the manner in
which we may issue these shares or that we issue them at all. Rather, these
shares will be new classes of common stock that the board may issue from time to
time as it determines appropriate, up to the total number of authorized shares
and subject to stock exchange rules with respect to shareholder approval of
share issuances. We do not plan to seek new shareholder approval for any change
that our board may approve in the timing or manner of issuing shares of either
tracking stock.
Similarly, approval of the spin-off proposal will give our board the
authority to spin off AT&T Communications Services, Inc. from AT&T at the time
and in the manner the board decides is appropriate. We do not plan to seek new
shareholder approval for any change in our current plans that our board may
approve in the timing of the spin-off or in the terms of the spin-off, unless
the change fundamentally alters the nature of AT&T Communications Services, Inc.
or the tax consequences of the transaction to shareholders.
If you do not want to give our board this broad authority with respect to
any of these three proposals, you should not vote for that proposal.
IF WE DO NOT COMPLETE AT&T'S RESTRUCTURING PLAN, THERE MAY BE MATERIAL ADVERSE
CONSEQUENCES ON AT&T'S BUSINESSES AND SHARE PRICE
AT&T's restructuring plan is complicated, and involves a substantial number
of steps and transactions. The implementation of AT&T's restructuring plan will
require various approvals and be subject to various conditions.
14
25
If we are unable to complete AT&T's restructuring plan as we expect, or the
implementation of AT&T's restructuring plan is more complex than we expect, this
could have a material adverse effect on AT&T, its businesses or the trading
prices of its securities. Any or all of the elements of AT&T's restructuring
plan may not occur as we currently expect or in the time frames that we
currently contemplate, or at all. Alternative forms of restructuring, including
sales of interests in these businesses, would reduce what is available for
distribution to shareholders in the restructuring.
AT&T'S RESTRUCTURING PLAN REQUIRES FUNDAMENTAL CHANGES TO AT&T AND AT&T'S
BUSINESSES THAT MAY BE HARD TO IMPLEMENT
If we complete AT&T's restructuring plan, each of AT&T's current businesses
will need to make changes in its operations that will require substantial effort
and involve substantial risks and costs. These include risks relating to
operating as less diversified businesses compared to operating as part of a
fully integrated communications company. These changes may materially adversely
affect each business's competitive position, operations and financial condition.
If any of these businesses is unable to make this transition smoothly or is not
able to operate as effectively after the restructuring, the financial position
and results of operations of that business could suffer and cause the trading
value of securities intended to reflect the financial performance and economic
value of that business to decline materially.
THE TOTAL VALUE OF THE SECURITIES ISSUED IN AT&T'S RESTRUCTURING PLAN MIGHT BE
LESS THAN THE VALUE OF AT&T COMMON STOCK WITHOUT AT&T'S RESTRUCTURING PLAN
If we complete AT&T's restructuring plan as we currently contemplate,
holders of AT&T common stock who do not dispose of those shares of AT&T common
stock eventually will own a mix of new securities. The aggregate value of these
securities could be less than what the value of AT&T common stock would be
without AT&T's restructuring. The trading price of AT&T common stock may decline
as a result of the implementation of AT&T's restructuring plan or as a result of
other factors.
As we complete the restructuring, these new securities will begin trading
publicly for the first time. Until orderly trading markets develop for each of
these new securities, and after that time as well, there may be significant
fluctuations in price. Also, we have not yet determined many of the details of
AT&T's restructuring plan, and these details could materially adversely impact
the value of AT&T common stock, AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock and/or AT&T Communications Services, Inc.
common stock.
AT&T'S RESTRUCTURING MAY MATERIALLY ADVERSELY IMPACT THE COMPETITIVE POSITION OF
AT&T'S BUSINESS UNITS
In connection with the restructuring, there is a risk that AT&T's separated
business units may not be able to create effective intercompany agreements to
facilitate effective cost sharing or enter into mutually desirable bundling
arrangements. Competition between AT&T's business units in overlapping markets,
including consumer markets where cable telephone and digital subscriber lines,
or DSL, solutions may be available at the same time, could result in more
downward price pressure. It is expected that the different businesses and
companies will share the AT&T brand after the restructuring, which will likely
increase this level of competition. In addition, any incremental costs
associated with implementing AT&T's restructuring plan may materially adversely
affect the different businesses and companies. Additionally, synergies resulting
from cooperation and joint ownership among AT&T's groups may be lost due to the
restructuring.
AT&T'S GROUPS WILL COMPETE WITH EACH OTHER AND EACH GROUP'S RESULTS MAY BE
MATERIALLY ADVERSELY IMPACTED BY CONFUSION IN THE MARKETPLACE DUE TO MULTIPLE
USES OF THE AT&T BRAND
AT&T Broadband Group, AT&T Business Services Group and AT&T Consumer
Services Group all are in the communications business and may compete with each
other under some circumstances. None of the groups is prohibited from competing
with the other groups, although their use of the
15
26
AT&T brand in these circumstances may be restricted. All groups' use of the AT&T
brand in many of these circumstances will be subject to guidelines intended to
reduce customer confusion. Nevertheless, the multiplicity of AT&T-branded
offerings may lead to confusion in the marketplace concerning the groups,
resulting in potential competitive disadvantage and/or devaluation of the AT&T
brand.
FOLLOWING THE SPIN-OFF, AT&T BROADBAND CORP. COULD INCUR MATERIAL TAX
LIABILITIES IN CONNECTION WITH CERTAIN TRANSACTIONS
AT&T Broadband Corp. may incur material federal income tax liabilities as a
result of certain issuances of shares or change of control transactions with
respect to AT&T Broadband Corp., Liberty Media Corporation, AT&T Wireless
Services, Inc. or AT&T Communications Services, Inc. Under the Code, a
split-off/spin-off that is otherwise tax-free may be taxable to the distributing
company (i.e., AT&T Broadband Corp.) if, as a result of certain transactions
occurring generally within a two-year period after the split-off/spin-off,
non-historic shareholders acquire 50% or more of the distributing company or the
spun-off company. Transactions with respect to AT&T Broadband Corp. could cause
all three split-offs/spin-offs to be taxable to AT&T Broadband Corp. Under
separate intercompany agreements between AT&T Broadband and each of Liberty
Media Corporation, AT&T Wireless Services, Inc. and AT&T Communications
Services, Inc., AT&T Broadband Corp. generally will be entitled to
indemnification from the spun-off company for any liability that results from
the split-off/spin-off failing to qualify as a tax free transaction, unless, in
the case of AT&T Wireless Services, Inc. and AT&T Communications Services, Inc.,
such liability was caused by post split-off/spin-off transactions with respect
to the stock or assets of AT&T Broadband Corp.
If a subsequent transaction were to cause one or more of the
split-offs/spin-offs to be taxable to AT&T Broadband Corp., such tax liability
could have a material adverse effect on AT&T Broadband Corp. To the extent AT&T
Broadband Corp. is entitled to an indemnity with respect to such liability, AT&T
Broadband Corp. would be required to collect such claim on an unsecured basis.
Furthermore, these rules could effectively delay or prevent a merger, change of
control, or other strategic or capital raising transactions involving the
issuance of equity by AT&T Broadband Corp.
FOLLOWING THE SPIN-OFF, AT&T BROADBAND CORP. WILL BE LIABLE FOR HISTORICAL AT&T
LIABILITIES FROM WHICH AT&T BROADBAND CORP. IS NOT RELEASED, EVEN IF NOT
ALLOCATED TO AT&T BROADBAND GROUP
Following the spin-off, AT&T Broadband Corp., as historical AT&T, will be
burdened with any AT&T liabilities from which AT&T Broadband Corp. is not
released, even if not allocated to AT&T Broadband Group. For example, AT&T has a
number of contractual obligations and liabilities, as well as agreements
governing financial instruments, such as long-term indebtedness, guarantees and
letters of credit. To the extent these agreements do not permit the transfer and
assumption of the underlying liabilities and the release of AT&T Broadband
Corp., AT&T will have to seek the consents of the counterparties to effectuate
such transfer, assumption and release. AT&T will not be required to obtain these
consents. Also, the counterparties may be unwilling to provide such consents on
acceptable terms, in which case AT&T Broadband Corp. would remain liable for
these liabilities to third parties. AT&T Broadband Corp. will be indemnified by
AT&T Communications Services, Inc. for liabilities that are allocated to AT&T
Communications Services, Inc. but not transferred. However, to the extent AT&T
Broadband Corp. is entitled to an indemnity with respect to these liabilities,
AT&T Broadband Corp. would be required to collect these claims on an unsecured
basis.
THE FINANCIAL CONDITION AND PROSPECTS OF AT&T AND ITS GROUPS MAY BE MATERIALLY
ADVERSELY AFFECTED BY AT&T'S INCREASED OVERALL DEBT LEVELS
AT&T currently is pursuing various measures to seek to reduce its debt
level. However, AT&T's financial condition and prospects could be materially
adversely affected:
- if these efforts cannot be completed successfully or at levels, on the
terms and within the time frame contemplated,
16
27
- if AT&T's liquidity needs increase as a result of further revenue or
margin deterioration, or
- if there is an overall credit market weakening or a ratings downgrade.
AT&T's current debt level itself may materially adversely affect the
company and each of its groups by:
- impairing their respective financial flexibility,
- impairing their ability to pursue acquisitions or make capital
expenditures, and
- otherwise impacting investment decisions that could materially impair
each group's growth and ability to compete.
AT&T and its groups may not be able to obtain financing on terms that are
acceptable to it. AT&T's debt ratings have been under review by rating agencies.
As a result of this review, AT&T's ratings have been either downgraded and/or
put on credit watch with negative outlook. These actions could result in an
increased cost of future borrowings and can limit access to financing. AT&T's
failure to complete the restructuring plan as contemplated may impact its
liquidity.
At March 31, 2001, AT&T had total indebtedness of approximately $56.2
billion with the short-term portion of that at $17.2 billion. AT&T's ability to
meet these obligations depends upon its credit ratings, market conditions and
business results. AT&T continues to investigate and negotiate other financing
alternatives. In addition, AT&T plans to retire a portion of the short-term debt
with all or a part of the funds from the proposed offering of AT&T Broadband
Group tracking stock although that offering may not occur as expected.
THE FINANCIAL CONDITION AND PROSPECTS OF AT&T AND ITS GROUPS MAY BE MATERIALLY
ADVERSELY AFFECTED BY FURTHER RATINGS DOWNGRADES
AT&T's senior debt ratings and two of its short-term debt ratings were
reduced in late 2000 and remain under review for further downgrade. Further
ratings actions could occur at any time. If AT&T were to be further downgraded,
access to capital could be disrupted and the cost of capital would likely
increase. AT&T has access to the commercial paper market today which is
sufficient to satisfy its short-term borrowing needs. In the event of a further
short-term rating downgrade or downgrades, the level of issuance capacity
available to AT&T would likely contract and could be exceeded by our short-term
borrowing needs. In this case, AT&T could access its short-term bank credit
facilities. The cost of any short-term borrowing under the bank facilities would
likely be higher.
To the extent that the combined outstanding short-term borrowings under the
bank credit facilities and AT&T's commercial paper program were to exceed the
market capacity for such borrowings at the expiration of the bank credit
facilities, AT&T's continued liquidity would depend upon our ability to reduce
such short-term debt through a combination of capital market borrowings, asset
sales, operational cash generation, capital expenditure reduction and other
means. Our ability to achieve such objectives is subject to a risk of execution
and such execution could materially impact AT&T's operational results. In
addition, the cost of any capital market financing could be significantly in
excess of AT&T's historical financing costs. Also, AT&T could suffer negative
banking, investor, and public relations repercussions if we were to draw upon
the bank facilities, which are intended to serve as a back-up source of
liquidity only. Such impacts could cause further deterioration in our cost and
access to capital.
17
28
RISK FACTORS RELATING TO THE TRACKING STOCK AMENDMENTS
THE MARKET PRICE OF AT&T BROADBAND GROUP TRACKING STOCK AND/OR AT&T CONSUMER
SERVICES GROUP TRACKING STOCK MAY NOT REFLECT THE FINANCIAL PERFORMANCE AND
ECONOMIC VALUE OF THE APPLICABLE GROUP AS WE INTEND AND MAY NOT EFFECTIVELY
TRACK THE SEPARATE PERFORMANCE OF THE APPLICABLE GROUP
The market price of AT&T Broadband Group tracking stock and/or AT&T
Consumer Services Group tracking stock may not in fact reflect the financial
performance and economic value of AT&T Broadband Group or AT&T Consumer Services
Group as we intend. Holders of AT&T Broadband Group tracking stock and AT&T
Consumer Services Group tracking stock will continue to be common shareholders
of AT&T and, as such, will be subject to all risks associated with an investment
in AT&T and all of its businesses, assets and liabilities. The performance of
AT&T as a whole may affect the market price of either or both of AT&T Broadband
Group tracking stock and AT&T Consumer Services Group tracking stock or the
market price could more independently reflect the performance of the business of
AT&T Broadband Group and/or AT&T Consumer Services Group. Investors may discount
the value of AT&T Broadband Group tracking stock or AT&T Consumer Services Group
tracking stock because these groups are part of a common enterprise with the
rest of the operations of AT&T rather than stand-alone entities.
THE COMBINED MARKET PRICES OF AT&T COMMON STOCK, AT&T BROADBAND GROUP TRACKING
STOCK AND AT&T CONSUMER SERVICES GROUP TRACKING STOCK MAY NOT EQUAL OR EXCEED
THE MARKET PRICE OF AT&T COMMON STOCK BEFORE THE OFFERING OR DISTRIBUTION OF THE
TRACKING STOCKS, AND NO MARKET CURRENTLY EXISTS FOR EITHER OF THE PROPOSED
TRACKING STOCKS
Investors may not assign values to AT&T common stock, AT&T Broadband Group
tracking stock or AT&T Consumer Services Group tracking stock based on the
reported financial results and prospects of their respective groups, or the
dividend policies established by our board of directors with respect to that
class of our common shares.
Because there has been no prior market for AT&T Broadband Group tracking
stock or AT&T Consumer Services Group tracking stock, we do not know how either
tracking stock will trade or if an active market for either tracking stock will
be maintained. In addition, we cannot predict the market impact of some of the
terms of either tracking stock, such as:
- redemption for stock of AT&T Broadband Corp. in the event AT&T completes
the spin-off of AT&T Communications Services, Inc.,
- the relative voting rights of AT&T common stock and the two tracking
stocks,
- the discretion of AT&T's board of directors to make determinations
affecting the tracking stocks, and
- in the case of each tracking stock, the creation and issuance of the
other tracking stock.
THE COMPLEX NATURE OF THE TERMS OF AT&T BROADBAND GROUP TRACKING STOCK AND AT&T
CONSUMER SERVICES GROUP TRACKING STOCK, OR CONFUSION IN THE MARKETPLACE ABOUT
WHAT A TRACKING STOCK IS, COULD MATERIALLY ADVERSELY AFFECT THE MARKET PRICES OF
AT&T BROADBAND GROUP TRACKING STOCK AND AT&T CONSUMER SERVICES GROUP TRACKING
STOCK
Tracking stocks, like AT&T Broadband Group tracking stock and AT&T Consumer
Services Group tracking stock, are more complex than traditional common stock
and are not directly or entirely comparable to common stock of companies that
have been spun off by their parent companies. The complex nature of the terms of
AT&T Broadband Group tracking stock and AT&T Consumer Services Group tracking
stock, and the potential difficulties investors may have in understanding these
terms, may materially adversely affect the market price of AT&T Broadband
18
29
Group tracking stock and AT&T Consumer Services Group tracking stock. Examples
of these terms include:
- the discretion of AT&T's board of directors to make determinations
affecting AT&T Broadband Group tracking stock and AT&T Consumer Services
Group tracking stock,
- AT&T's rights in the event of a proposed spin off or disposition of
substantially all the assets of a group, or
- the ability of AT&T to convert shares of AT&T Broadband Group tracking
stock into shares of AT&T common stock.
Confusion in the marketplace about what a tracking stock is and what it is
intended to represent, and/or investors' reluctance to invest in tracking
stocks, could also materially adversely affect the market price of AT&T
Broadband Group tracking stock and AT&T Consumer Services Group tracking stock.
HOLDERS OF AT&T COMMON STOCK, AT&T BROADBAND GROUP TRACKING STOCK AND AT&T
CONSUMER SERVICES GROUP TRACKING STOCK ALL WILL BE SHAREHOLDERS OF ONE COMPANY
AND, THEREFORE, FINANCIAL IMPACTS ON ONE GROUP COULD AFFECT THE OTHER GROUPS
Holders of AT&T common stock, AT&T Broadband Group tracking stock and AT&T
Consumer Services Group tracking stock all will be common shareholders of AT&T.
As such, they will be subject to various risks associated with an investment in
a single company and all of AT&T's businesses, assets and liabilities. Financial
effects arising from one group that affect AT&T's consolidated results of
operations or financial condition could, if significant, affect the combined
results of operations or financial position of the other groups or the market
price of the class of common shares relating to the other groups.
In addition, if AT&T or any of its subsidiaries were to incur significant
indebtedness on behalf of a group, including indebtedness incurred or assumed in
connection with an acquisition or investment, it could affect the credit rating
of AT&T and its subsidiaries. This, in turn, could increase the borrowing costs
of the other groups and AT&T as a whole. Net losses of any group and dividends
or distributions on shares of any class of common or preferred stock will reduce
the funds of AT&T legally available for payment of future dividends on each of
AT&T common stock, AT&T Broadband Group tracking stock and AT&T Consumer
Services Group tracking stock. For these reasons, you should read AT&T's
consolidated financial information together with the financial information of
AT&T Broadband Group and AT&T Consumer Services Group.
HOLDERS OF EACH OF AT&T BROADBAND GROUP TRACKING STOCK AND AT&T CONSUMER
SERVICES GROUP TRACKING STOCK WILL HAVE LIMITED SEPARATE SHAREHOLDER RIGHTS, AND
WILL HAVE NO ADDITIONAL RIGHTS SPECIFIC TO THEIR GROUP, INCLUDING DIRECT VOTING
RIGHTS
Holders of AT&T Broadband Group tracking stock and AT&T Consumer Services
Group tracking stock will not have any direct voting rights in their respective
group, except to the extent required under AT&T's charter or by New York law. We
will not hold separate meetings for holders of AT&T Broadband Group tracking
stock or AT&T Consumer Services Group tracking stock. When a vote is taken on
any matter as to which all of our common shares are voting together as one
class, any class or series of our common shares that is entitled to more than
the number of votes required to approve the matter being voted upon will be in a
position to control the outcome of the vote on that matter.
Each share of AT&T common stock has one vote. Each share of AT&T Broadband
Group tracking stock will have of a vote per share and each share
of AT&T Consumer Services Group tracking stock will have of a
vote per share.
19
30
HOLDERS OF EACH OF AT&T BROADBAND GROUP TRACKING STOCK AND AT&T CONSUMER
SERVICES GROUP TRACKING STOCK MAY HAVE POTENTIALLY DIVERGING INTERESTS FROM
HOLDERS OF OTHER CLASSES OF AT&T CAPITAL STOCK
The existence of separate classes of our common stock could give rise to
occasions when the interests of the holders of AT&T common stock, AT&T Broadband
Group tracking stock and/or AT&T Consumer Services Group tracking stock diverge,
conflict or appear to diverge or conflict. Examples include determinations by
AT&T's board of directors to:
- set priorities for use of capital and debt capacity,
- pay or omit the payments of dividends on AT&T common stock, AT&T
Broadband Group tracking stock or AT&T Consumer Services Group tracking
stock,
- approve dispositions of assets attributed to any group,
- formulate public policy positions for AT&T,
- establish material commercial relationships between groups, and
- make operational and financial decisions with respect to one group that
could be considered to be detrimental to another group.
A DECISION BY OUR BOARD OF DIRECTORS TO DISPOSE OF ASSETS ATTRIBUTED TO AT&T
BROADBAND GROUP OR AT&T CONSUMER SERVICES GROUP COULD HAVE A MATERIAL ADVERSE
IMPACT ON THE TRADING PRICE OF AT&T BROADBAND GROUP TRACKING STOCK OR AT&T
CONSUMER SERVICES GROUP TRACKING STOCK
Assuming AT&T Broadband Group's assets or AT&T Consumer Services Group's
assets represent less than substantially all of the assets of AT&T as a whole,
our board of directors could, in its sole discretion and without shareholder
approval, approve sales and other dispositions of any amount of the assets of
AT&T Broadband Group or AT&T Consumer Services Group.
However, in the event of a disposition of all or substantially all of the
properties and assets attributed to either AT&T Broadband Group or AT&T Consumer
Services Group, generally defined as 80% or more of the fair value of that
group, AT&T will be required under its charter to:
- convert each outstanding share of the affected tracking stock into shares
of AT&T common stock at a % premium, or
- distribute cash and/or securities, other than AT&T common stock, or other
property equal to the fair value of the net proceeds from that
disposition allocable to the affected tracking stock, or
- take a combination of the actions described in the preceding bullet
points.
Our board of directors is not required to select the option that would
result in the distribution with the highest value to the holders of AT&T
Broadband Group tracking stock or AT&T Consumer Services Group tracking stock.
In addition, under New York law, our board of directors could decline to
dispose of AT&T Broadband Group assets or AT&T Consumer Services Group assets
even if a majority of the holders of the respective tracking stocks request such
a disposition.
AT&T MAY TAKE POSITIONS ON PUBLIC POLICY OR REGULATORY MATTERS THAT BENEFIT ONE
GROUP MORE THAN ANOTHER
Because of the nature of the different businesses of AT&T Broadband Group,
AT&T Consumer Services Group and AT&T Business Services Group, the various
groups may have diverging interests as to the position AT&T should take with
respect to various regulatory issues. For example, Federal Communications
Commission, or FCC, regulations that may advance the interests of one group may
not advance or be adverse to the interests of the other groups. Under the AT&T
Groups policy statement, we will resolve material matters involving potentially
divergent interests in a manner that
20
31
our board of directors, or the AT&T Groups capital stock committee, determines
to be in the best interests of AT&T and all of our common shareholders after
giving fair consideration to the potentially divergent interests and all other
relevant interests of the holders of the separate classes of our common shares.
Nevertheless, AT&T's board of directors could take positions on any given issue
that may benefit one group more than another or that may be adverse to another
group.
AT&T MAY MAKE OPERATIONAL AND FINANCIAL DECISIONS THAT BENEFIT ONE GROUP MORE
THAN ANOTHER
Our board of directors could, in its sole discretion, from time to time,
make operational and financial decisions or implement policies that affect
disproportionately the businesses of a group. These decisions could include:
- allocation of financing opportunities in the public markets or the
refinancing of existing indebtedness,
- allocation of business opportunities, resources and personnel, and
- transfers of services, funds or assets between groups and other
inter-group transactions
that, in each case, may be suitable for one or more groups. Any of these
decisions may benefit one group more than the other groups. For example, the
decision to obtain funds for one group may materially adversely affect the
ability of the other groups to obtain funds sufficient to implement their
respective growth strategies or may increase the cost of those funds.
In addition, AT&T Broadband Group and AT&T Consumer Services Group are
subject to AT&T's existing agreements or arrangements with third parties. These
agreements or arrangements currently may benefit those groups, as in the case of
purchasing arrangements, or may have the effect of limiting or impairing their
respective business opportunities.
All of these decisions will be made by our board of directors in its good
faith business judgment and in accordance with procedures and policies adopted
by our board of directors from time to time, including the AT&T Groups policy
statement described under "Relationship among AT&T Groups -- The AT&T Groups
Policy Statement."
AT&T'S BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CONTROL LOANS AND ASSET
TRANSFERS BETWEEN AT&T'S GROUPS
AT&T's board of directors may decide to transfer funds or other assets
between groups. Transfers of assets among the groups that AT&T's board of
directors designates as an equity contribution or repayment will result in a
change in AT&T's retained portion of the value of that group. Any change in the
retained portion of the value of a group would be determined by reference to the
then-current market value of the affected tracking stock as determined by our
board of directors. Such an increase or decrease, however, could occur at a time
when those shares are considered undervalued or overvalued.
Under the AT&T Groups policy statement, the groups may make loans to each
other at interest rates and on terms and conditions substantially equivalent to
the interest rates and terms and conditions that the groups would be able to
obtain from third parties without the benefit of support or guarantee by AT&T.
The actual rates of interest charged or paid by any of the groups in the future
is uncertain and will depend on a variety of factors including the credit
profile of the group and market conditions. As a result, future interest rates
charged or paid by any of the groups may materially exceed those reflected in
the financial statements included elsewhere in this document.
21
32
AT&T'S BOARD OF DIRECTORS MAY CHANGE THE AT&T GROUPS POLICY STATEMENT OR BY-LAW
AMENDMENT RELATED TO THE GROUPS WITHOUT SHAREHOLDER APPROVAL
Our board of directors intends to adopt the AT&T Groups policy statement
that we describe in this document to govern the relationship among AT&T groups
and to amend our by-laws to create the AT&T Groups capital stock committee that
will oversee the interaction between the groups. Our board of directors may
supplement, modify, suspend or rescind the policies set forth in the AT&T Groups
policy statement or related by-law amendment or make additions or exceptions to
them, in the sole discretion of our board of directors, without approval of our
shareholders, although there is no present intention to do so. Our board of
directors would make any of these determinations, including any decision that
would have disparate impacts upon holders of AT&T common stock, AT&T Broadband
Group tracking stock and/or AT&T Consumer Services Group tracking stock, as
applicable, in a manner consistent with its fiduciary duties to AT&T and all of
our common shareholders. See "-- The fiduciary duties of AT&T's board of
directors to more than one class of common stock are not clear under New York
law" for more information regarding our board of directors' fiduciary duties to
our shareholders. See "Relationship among AT&T Groups" for a description of the
AT&T Groups policy statement and by-law amendment.
IT WILL BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE AT&T BROADBAND GROUP OR AT&T
CONSUMER SERVICES GROUP WITHOUT AT&T'S CONSENT
If either AT&T Broadband Group or AT&T Consumer Services Group were an
independent entity, any person interested in acquiring either entity without
negotiation with our management could seek control of the outstanding stock of
that entity by means of a tender offer or proxy contest. Although the tracking
stock amendments will create new classes of our common shares that are intended
to reflect the separate financial performance and economic value of AT&T
Broadband Group and AT&T Consumer Services Group, a person interested in
acquiring only AT&T Broadband Group or AT&T Consumer Services Group without
negotiation with our management still would be required to seek control of the
voting power represented by all of the outstanding capital stock of AT&T
entitled to vote on that acquisition, including the classes of common shares
related to the other groups. As a result, this may discourage potential
interested bidders from seeking to acquire either AT&T Broadband Group or AT&T
Consumer Services Group. See "-- Holders of each of AT&T Broadband Group
tracking stock and AT&T Consumer Services Group tracking stock will have limited
separate shareholder rights, and will have no additional rights specific to
their group, including direct voting rights" for more information on the rights
of holders of tracking stocks. This inability of third parties directly to
acquire control of AT&T Broadband Group and/or AT&T Consumer Services Group may
materially adversely affect the market price of AT&T Broadband Group tracking
stock and/or AT&T Consumer Services Group tracking stock.
THERE WILL BE NO BOARD OF DIRECTORS OR COMMITTEE THAT OWES ANY SEPARATE
FIDUCIARY DUTIES TO HOLDERS OF AT&T BROADBAND GROUP TRACKING STOCK OR AT&T
CONSUMER SERVICES GROUP TRACKING STOCK, APART FROM THOSE OWED TO AT&T
SHAREHOLDERS GENERALLY
Each of AT&T's board of directors and the AT&T Groups capital stock
committee owes fiduciary duties to AT&T and its shareholders as a whole. AT&T
Broadband Group and AT&T Consumer Services Group will not have separate boards
of directors to represent solely the interests of the holders of AT&T Broadband
Group tracking stock and AT&T Consumer Services Group tracking stock.
Consequently, there is no separate board of directors or committee that owes any
separate duties to the holders of AT&T Broadband Group tracking stock or AT&T
Consumer Services Group tracking stock.
22
33
THE FIDUCIARY DUTIES OF AT&T'S BOARD OF DIRECTORS TO MORE THAN ONE CLASS OF
COMMON STOCK ARE NOT CLEAR UNDER NEW YORK LAW
Although we are not aware of any legal precedent under New York law
involving the fiduciary duties of directors of corporations having two or more
classes of common stock, or separate classes or series of capital stock,
principles of Delaware law established in cases involving differing treatment of
two classes of capital stock or two groups of holders of the same class of
capital stock provide that a board of directors owes an equal duty to all
stockholders regardless of class or series, and does not have separate or
additional duties to either group of stockholders. Under these principles of
Delaware law and the related principle known as the "business judgment rule,"
absent abuse of discretion, a good faith business decision made by a
disinterested and adequately informed board of directors, or a committee of the
board of directors, with respect to any matter having disparate impacts upon
holders of AT&T common stock, AT&T Broadband Group tracking stock or AT&T
Consumer Services Group tracking stock would be a defense to any challenge to a
determination made by or on behalf of the holders of any class of our common
shares. Nevertheless, a New York court hearing a case involving this type of a
challenge may decide to apply principles of New York law different from the
principles of Delaware law discussed above, or may develop new principles of
law, in order to decide that case. Any future shareholder litigation over the
meaning or application of the terms of AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock or our board's policies may be costly and
time consuming to AT&T, AT&T Broadband Group and AT&T Consumer Services Group.
CHANGES IN THE TAX LAW OR IN THE INTERPRETATION OF CURRENT TAX LAW MAY RESULT IN
REDEMPTION OF AT&T BROADBAND GROUP TRACKING STOCK AND/OR AT&T CONSUMER SERVICES
GROUP TRACKING STOCK, OR MAY PREVENT US FROM ISSUING FURTHER SHARES OF EITHER
STOCK
From time to time, there have been legislative and administrative proposals
that, if effective, would have resulted in the imposition of corporate level or
shareholder level tax upon the issuance of tracking stock. As of the date of
this document, no such proposals are outstanding.
If there are adverse tax consequences associated with the issuance of AT&T
Broadband Group tracking stock and/or AT&T Consumer Services Group tracking
stock, it is possible that we would cease issuing additional shares of AT&T
Broadband Group tracking stock and/or AT&T Consumer Services Group tracking
stock. This could affect the value of shares of AT&T Broadband Group tracking
stock and/or AT&T Consumer Services Group tracking stock then outstanding.
Furthermore, we are entitled to convert AT&T Broadband Group tracking stock
and AT&T Consumer Services Group tracking stock into AT&T common stock at a
premium of % if, based on the opinion of tax counsel, adverse U.S.
federal income tax law developments related to AT&T Broadband Group tracking
stock or AT&T Consumer Services Group tracking stock, respectively, occur after
the issuance of that tracking stock.
If we did convert AT&T Broadband Group tracking stock and/or AT&T Consumer
Services Group tracking stock into AT&T common stock at a premium, the interests
of holders of AT&T common stock would be diluted as a result of the redemption
premium paid for AT&T Broadband Group tracking stock and/or AT&T Consumer
Services Group tracking stock.
IN SOME INSTANCES, WE MAY OPTIONALLY REDEEM AT&T BROADBAND GROUP TRACKING STOCK
AND/OR AT&T CONSUMER SERVICES GROUP TRACKING STOCK, INCLUDING AS A RESULT OF AN
ADVERSE TAX LAW CHANGE
Our board of directors may, at any time after either the occurrence of
tax-related events, such as the ones described above, or the
anniversary of the date we initially issue shares of AT&T Broadband Group
tracking stock or AT&T Consumer Services Group tracking stock, respectively,
redeem all outstanding shares of AT&T Broadband Group tracking stock or AT&T
Consumer Services Group tracking stock, respectively, for shares of AT&T common
stock at a %
23
34
premium. We could decide to redeem the tracking stock(s) at a time when any or
all of the AT&T common stock and the tracking stocks may be considered to be
overvalued or undervalued. In addition, a redemption at any premium would
preclude holders of both AT&T common stock and the redeemed tracking stock from
retaining their investment in a security intended to reflect separately the
financial performance and economic value of the relevant group. It would also
give holders of shares of the redeemed tracking stock an amount of consideration
that may differ from the amount of consideration a third-party buyer pays or
would pay for all or substantially all of the assets of the respective group.
For further details, see "The Broadband Charter Amendment Proposal -- Broadband
Group Tracking Stock Amendment" and "The Consumer Services Charter Amendment
Proposal -- Consumer Services Group Tracking Stock Amendment."
Additionally, at any time, if the businesses, assets and liabilities of
AT&T Broadband Group are substantially equivalent to the businesses, assets and
liabilities of AT&T, our board of directors may mandatorily redeem shares of
AT&T Broadband Group tracking stock for AT&T common stock without a premium as
described under "The Broadband Charter Amendment Proposal -- Terms of the
Broadband Group Tracking Stock Amendment -- AT&T Broadband Group Allocation
Fraction." If we complete the spin-off of AT&T Communications Services, Inc. in
the manner we contemplate, our board of directors will use this redemption right
to redeem all shares of AT&T Broadband Group tracking stock for shares of AT&T
common stock.
WE HAVE THE RIGHT TO REQUIRE THE EXCHANGE OF SHARES OF AT&T BROADBAND GROUP
AND/OR AT&T CONSUMER SERVICES GROUP TRACKING STOCK FOR TRACKING STOCK OF ANOTHER
ENTITY
In the event of a disposition or other transfer by AT&T of all of the
properties and assets of AT&T Broadband Group or AT&T Consumer Services Group,
the Broadband Group charter amendment and the Consumer Services Group charter
amendment generally allow us to redeem all outstanding shares of AT&T Broadband
Group tracking stock or AT&T Consumer Services Group tracking stock in exchange
for a new tracking stock of the entity that owns materially all of the assets
and liabilities of AT&T Broadband Group or AT&T Consumer Services Group, as the
case may be. In the event of such a redemption, the voting rights of the new
tracking stock will be set based on the ratio, over a fixed measurement period,
of the initial trading prices of the new tracking stock to the trading prices of
the common stock of the entity of which the new tracking stock is a part.
This new entity may have different businesses and a different capital
structure and be subject to different risks than AT&T generally. Holders of the
new tracking stock will become equity holders of this new entity and become
subject to risks affecting this new entity generally. Additionally, adverse
fluctuations in market valuations at and after the time of issuance of the new
tracking stock could materially adversely affect the relative voting power of
the new tracking stock with respect to the voting power of this new entity as a
whole.
If we complete the spin-off of AT&T Communications Services, Inc. in the
manner we contemplate, our board of directors will use this redemption right to
redeem all shares of AT&T Consumer Services Group tracking stock for shares of a
comparable tracking stock of AT&T Communications Services, Inc. In this case,
shareholders of AT&T Consumer Services Group tracking stock no longer would be
shareholders of AT&T but would be shareholders of AT&T Communications Services,
Inc.
AT&T'S BOARD OF DIRECTORS MAY REDEEM AT&T BROADBAND GROUP TRACKING STOCK OR AT&T
CONSUMER SERVICES GROUP TRACKING STOCK IN EXCHANGE FOR STOCK OF ONE OR MORE
QUALIFYING SUBSIDIARIES OF AT&T
AT&T's charter provides that AT&T may, at any time, redeem all outstanding
shares of AT&T Broadband Group tracking stock or AT&T Consumer Services Group
tracking stock in exchange for shares of common stock of a subsidiary of AT&T
that holds all of the assets and liabilities of the applicable tracked group.
This type of redemption must be tax free to the holders of the applicable
tracking stock, except with respect to any cash in lieu of fractional shares.
For more information, see
24
35
"The Broadband Charter Amendment Proposal -- Terms of the Broadband Group
Tracking Stock Amendment -- Redemption" and "The Consumer Services Charter
Amendment Proposal -- Terms of the Consumer Services Group Tracking Stock
Amendment -- Redemption."
FUTURE SALES OF AT&T BROADBAND GROUP TRACKING STOCK, AT&T CONSUMER SERVICES
GROUP TRACKING STOCK AND AT&T COMMON STOCK COULD MATERIALLY ADVERSELY AFFECT
THEIR RESPECTIVE MARKET PRICES AND THE ABILITY TO RAISE CAPITAL IN THE FUTURE
Sales of substantial amounts of AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock and AT&T common stock in the public
market could hurt the market price of each of those classes of stock. These
sales also could hurt AT&T's ability to raise capital in the future. Virtually
all the shares that we plan to sell to the public in the public offering of AT&T
Broadband Group tracking stock and any shares of either class of tracking stock
that we distribute to holders of AT&T common stock will be freely tradable
without restriction under the Securities Act of 1933, as amended, by persons
other than "affiliates" of AT&T, as defined under the Securities Act. Any sales
of substantial amounts of AT&T Broadband Group tracking stock, AT&T Consumer
Services Group tracking stock or AT&T common stock in the public market, or the
perception that those sales might occur, could materially adversely affect the
respective market prices of AT&T Broadband Group tracking stock, AT&T Consumer
Services tracking stock or AT&T common stock, as applicable.
Shareholder approval will not be solicited by AT&T for the issuance of
authorized but unissued shares of AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock or AT&T common stock, unless these
approvals are deemed advisable by our board of directors or are required by
applicable law, regulation or stock exchange listing requirements. The issuance
of those shares could dilute the value of shares of AT&T Broadband Group
tracking stock, AT&T Consumer Services Group tracking stock or AT&T common
stock, as the case may be.
WE DO NOT EXPECT TO PAY DIVIDENDS ON AT&T BROADBAND GROUP TRACKING STOCK
Determinations as to the future dividends on AT&T Broadband Group tracking
stock primarily will be based upon the financial condition, results of
operations and business requirements of AT&T Broadband Group, and AT&T as a
whole. We currently do not expect to pay any dividends on AT&T Broadband Group
tracking stock for the foreseeable future. Following any issuance of AT&T
Consumer Services Group tracking stock, it is currently expected that one-third
of the current dividend payable on AT&T common stock will be allocated to AT&T
common stock and that two-thirds of the dividend will be allocated to AT&T
Consumer Services Group tracking stock. The declaration of dividends by AT&T and
the amount thereof will, however, be in the discretion of our board of directors
and will depend upon each of our group's financial performance, the dividend
policies and capital structures of comparable companies, each group's ongoing
capital needs, and AT&T's results of operations, financial condition, cash
requirements and future prospects and other factors deemed relevant by our board
of directors. Payment of dividends also may be restricted by loan agreements,
indentures and other transactions that AT&T enters into from time to time.
IF WE LIQUIDATE AT&T, AMOUNTS DISTRIBUTED TO HOLDERS OF EACH CLASS OF COMMON
STOCK MAY NOT REFLECT THE VALUE OF THE ASSETS ATTRIBUTED TO THE GROUPS
Under our charter, we would determine the liquidation rights of the holders
of the respective classes of stock in accordance with each group's respective
market capitalization at the time of liquidation. However, the relative market
capitalization of each group may not correctly reflect the value of the net
assets remaining and attributed to the groups after satisfaction of outstanding
liabilities.
25
36
RISK FACTORS RELATING TO THE SPIN-OFF OF AT&T COMMUNICATIONS SERVICES, INC.
THE SPIN-OFF WILL REQUIRE AT&T TO RESTRUCTURE A SUBSTANTIAL AMOUNT OF
INDEBTEDNESS, WHICH MAY INVOLVE MATERIAL COSTS AND MAY BE DIFFICULT TO COMPLETE
A substantial portion of AT&T's indebtedness, including its long-term
indebtedness, will be allocated to AT&T Business Services Group and AT&T
Consumer Services Group. This indebtedness currently is an obligation of AT&T.
At or before the time of the spin-off, when AT&T Communications Services, Inc.
is separated from historical AT&T, we plan to seek to transfer the indebtedness
allocated to AT&T Business Services Group and AT&T Consumer Services Group from
historical AT&T to AT&T Communications Services, Inc. We may seek to accomplish
this through a variety of measures that may result in increased costs and
additional covenants on AT&T Communications Services, Inc.
IF WE COMPLETE THE SPIN-OFF, EACH OF AT&T COMMUNICATIONS SERVICES, INC. AND AT&T
BROADBAND CORP. WILL NEED TO OBTAIN FINANCING ON A STAND-ALONE BASIS
Historically, all financing for AT&T Communications Services, Inc. and AT&T
Broadband Corp. was done by AT&T at the parent level. AT&T was able to use its
overall balance sheet to finance the operations of AT&T Communications Services,
Inc. and AT&T Broadband Corp. If we complete the spin-off, each company will
have to raise financing on a stand-alone basis without reference to AT&T's new
overall balance sheet. Following the spin-off, neither company may be able to
secure adequate debt or equity financing on desirable terms. If concerns
generally affecting the communications services industry or the broadband
industry arise, each company will lose the benefit of the other's current
diverse business profile to support its debt. The cost to each company of stand-
alone financing may be materially higher than the cost of financing as part of
AT&T.
The credit ratings of AT&T Communications Services, Inc. and AT&T Broadband
Corp. following the spin-off may be different than the historical ratings of
AT&T. After the spin-off, AT&T Communications Services, Inc.'s and AT&T
Broadband Corp.'s credit ratings may be different from what they will be prior
to the spin-off. Differences in credit ratings affect the interest rate charged
on financings, as well as the amounts of indebtedness, types of financing
structures and debt markets that may be available to AT&T Communications
Services, Inc. and AT&T Broadband Corp. following the spin-off. AT&T
Communications Services, Inc. and AT&T Broadband Corp. may not be able to raise
the capital they require on desirable terms following the spin-off.
IF WE COMPLETE THE SPIN-OFF, AT&T COMMUNICATIONS SERVICES, INC. AND AT&T
BROADBAND CORP. MAY BE UNABLE TO MAKE THE CHANGES NECESSARY TO OPERATE AS
INDEPENDENT ENTITIES AND MAY INCUR GREATER COSTS
If we complete the spin-off, the separation of AT&T Communications
Services, Inc. from the Broadband businesses of AT&T may materially adversely
affect both AT&T Communications Services, Inc. and AT&T Broadband Corp.
In particular, following the spin-off, AT&T Communications Services, Inc.
and AT&T Broadband Corp. will have no obligation to provide financial,
operational or organizational assistance to each other, other than limited
services. Each of AT&T Communications Services, Inc. and AT&T Broadband may not
be able to implement successfully the changes necessary to operate
independently. Each of AT&T Communications Services, Inc. and AT&T Broadband
Corp. also may incur additional costs relating to operating independently that
would cause its cash flow and results of operations to decline materially. In
addition, their supplier arrangements may not be as favorable as has
historically been the case.
26
37
Agreements to be entered into in connection with the spin-off may provide
that the businesses of AT&T Communications Services, Inc. and AT&T Broadband
Corp. will be conducted differently and that their relationship will be
different from that which has historically been the case. These differences may
have a detrimental effect on the results of operations or financial condition of
AT&T Communications Services, Inc. or AT&T Broadband Corp.
THE HISTORICAL FINANCIAL INFORMATION OF EACH OF AT&T COMMUNICATIONS SERVICES,
INC. AND AT&T BROADBAND GROUP MAY NOT BE REPRESENTATIVE OF ITS RESULTS AS AN
INDEPENDENT ENTITY, AND, THEREFORE, MAY NOT BE RELIABLE AS AN INDICATOR OF ITS
HISTORICAL OR FUTURE RESULTS
The historical financial information we have included and incorporated in
this document may not reflect what the results of operations, financial position
and cash flows of AT&T Communications Services, Inc. and AT&T Broadband Group
would have been had they been independent entities during the periods presented.
The combined financial statements reflect allocations for services provided to
AT&T Communications Services, Inc. and AT&T Broadband Group by AT&T, which
allocations may not reflect the costs AT&T Communications Services, Inc. and
AT&T Broadband Corp. will incur for similar or incremental services as
independent entities. In addition, among other things, the historical financial
information we have included does not reflect transactions that are expected to
occur in connection with the spin-off. See "Summary -- Consolidating Condensed
Financial Information" and "Selected Historical Financial Data of AT&T
Communications Services, Inc."
This historical financial information also is not reliable as an indicator
of future results.
IF WE COMPLETE THE SPIN-OFF, AT&T COMMUNICATIONS SERVICES, INC. WILL GENERALLY
BE RESPONSIBLE FOR TAX LIABILITY IF THE SPIN-OFF IS TAXABLE
Under the separation and distribution agreement to be entered into between
AT&T and AT&T Communications Services, Inc., subject to limited exceptions, AT&T
Communications Services, Inc. will be responsible for any liability that results
from the spin-off failing to qualify as a tax-free transaction. If the spin-off
fails to qualify as a tax-free transaction, this liability could have a material
adverse effect on AT&T Business Services Group and AT&T Consumer Services Group.
IF WE COMPLETE THE SPIN-OFF, VARIOUS FACTORS MAY INTERFERE WITH AT&T
COMMUNICATIONS SERVICES, INC.'S ABILITY TO ENGAGE IN DESIRABLE STRATEGIC
TRANSACTIONS AND EQUITY ISSUANCES
AT&T Communications Services, Inc. may be prevented from engaging in some
strategic transactions after the spin-off. The Code restricts the ability of a
company that has undergone a tax-free spin-off from certain issuances of shares
generally within a two-year period after the spin-off. In addition, the
separation and distribution agreement will prohibit AT&T Communications
Services, Inc., for a period of months to be agreed following the spin-off, from
entering into certain transactions that could render the spin-off taxable. This
may discourage, delay or prevent a merger, change of control, or other strategic
or capital raising transaction involving the issuance of equity by AT&T
Communications Services, Inc. Provisions of AT&T Communications Services, Inc.'s
charter and by-laws, its rights plan, if one is adopted, and applicable law also
may have the effect of discouraging, delaying or preventing change of control
transactions that its shareholders find desirable.
IF WE COMPLETE THE SPIN-OFF, EACH OF AT&T COMMUNICATIONS SERVICES, INC. AND AT&T
BROADBAND CORP. MAY LOSE RIGHTS UNDER AGREEMENTS WITH EACH OTHER IF A CHANGE OF
CONTROL OCCURS
We expect that some of the agreements that AT&T Communications Services,
Inc. and AT&T Broadband Corp. expect to enter into in connection with the
spin-off, including the brand license agreement, intellectual property
agreement, network services agreement and other commercial agreements, will
contain provisions that give one party rights in the event of a change of
control of
27
38
the other party. These provisions may deter a change of control. In the event of
a change of control, the exercise of these rights could have a material adverse
effect on AT&T Communications Services, Inc. or AT&T Broadband Corp.
THE MARKET PRICE AND TRADING VOLUME OF AT&T COMMUNICATIONS SERVICES, INC. COMMON
STOCK, THE NEW CONSUMER SERVICES GROUP TRACKING STOCK AND AT&T BROADBAND CORP.
COMMON STOCK FOLLOWING THE SPIN-OFF MAY BE VOLATILE AND MAY FACE NEGATIVE
PRESSURE
Before the spin-off, there will be no trading market for shares of AT&T
Communications Services, Inc. common stock that holders of AT&T common stock
will receive in the spin-off or shares of the new Consumer Services Group
tracking stock that holders of AT&T Consumer Services Group tracking stock will
receive in exchange for their shares in the spin-off. Investors' interest may
not lead to a liquid trading market and the market price of AT&T Communications
Services, Inc. common stock, the new Consumer Services Group tracking stock and
AT&T Broadband Corp. common stock may be volatile. Following the spin-off, there
may be confusion due to the additional shares of stock that represent interests
in AT&T Broadband Group, which could materially adversely affect the market
price of AT&T Broadband Corp. common stock.
28
39
RISK FACTORS RELATING TO AT&T BROADBAND GROUP
AT&T BROADBAND GROUP HAS A HISTORY OF NET LOSSES AND NEGATIVE CASH FLOW AND
EXPECTS TO CONTINUE TO EXPERIENCE NET LOSSES AND NEGATIVE CASH FLOW.
CONSEQUENTLY, AT&T BROADBAND GROUP MAY NOT HAVE THE ABILITY TO FINANCE FUTURE
OPERATIONS
AT&T Broadband Group (including its predecessor entities, TCI and MediaOne)
has had a history of net losses and negative cash flow and expects to continue
to report net losses and negative cash flow for the next few years. AT&T
Broadband Group reported net losses of $5.4 billion for the year ended December
31, 2000 and $1.8 billion (before cumulative effect of accounting change) for
the three months ended March 31, 2001. AT&T Broadband Group reported negative
earnings before income, taxes, depreciation and amortization, or EBITDA, of $2.3
billion for the year ended December 31, 2000 and $0.5 billion for the three
months ended March 31, 2001. Continued losses and negative cash flows may have a
materially adverse impact on AT&T Broadband Group's ability to finance
operations in the future.
AT&T BROADBAND GROUP'S PROGRAMMING COSTS ARE INCREASING AND IT MAY NOT HAVE THE
ABILITY TO PASS THESE INCREASES ON TO ITS CUSTOMERS, WHICH WOULD MATERIALLY
ADVERSELY AFFECT ITS CASH FLOW AND OPERATING MARGINS
Programming costs have been, and are expected to continue to be, AT&T
Broadband Group's largest single expense item. In recent years, the cable and
satellite video industries have experienced a rapid escalation in the cost of
programming, particularly sports programming. This escalation is expected to
continue, and AT&T Broadband Group may not be able to pass programming cost
increases on to its customers. The inability to pass these programming cost
increases on to its customers would have a material adverse impact on its cash
flow and operating margins. In addition, as AT&T Broadband Group upgrades the
channel capacity of its systems and adds programming to its basic, expanded
basic and digital programming tiers, AT&T Broadband Group may face increased
programming costs, which, in conjunction with the additional market constraints
on its ability to pass programming costs on to its customers, may tighten
operating margins.
While AT&T Broadband Group has some investments in programming companies,
unlike some of its competitors it has no meaningful participation with regard to
programming, and consequently AT&T Broadband Group's exposure to programming
costs may be greater than that of some of its competitors.
AT&T BROADBAND GROUP FACES SUBSTANTIAL COMPETITION
The broadband communications industry in which AT&T Broadband Group
operates is highly competitive. In some instances, AT&T Broadband Group competes
against companies with fewer regulatory burdens, easier access to financing,
greater personnel resources, greater brand name recognition and long-standing
relationships with regulatory authorities. The following businesses offer some
or all of the services currently offered by AT&T Broadband Group, and mergers,
joint ventures and alliances among any of the following businesses could result
in providers capable of offering a combination of cable television, Internet and
other telecommunications services in direct competition with AT&T Broadband
Group:
- cable television operators,
- direct broadcast satellite providers,
- regional telephone companies,
- long distance telephone service providers,
- utilities and municipalities,
- providers of local area telephone services and access to long distance
services to customers,
- providers of cellular and other wireless communications services,
29
40
- digital subscriber line, or DSL, resellers, and
- Internet service providers, or ISPs.
AT&T Broadband Group faces competition within the subscription television
industry. This industry includes providers of paid television service employing
technologies other than cable, but excludes broadcast companies that transmit
their signal to customers without assessing a subscription fee. AT&T Broadband
Group also faces competition from broadcast companies distributing television
broadcast signals without assessing a subscription fee and from other
communications and entertainment media, including the following:
- conventional off-air television and radio broadcasting services,
- direct broadcast satellite providers,
- newspapers,
- movie theaters,
- Internet,
- live sports events, and
- home video products.
Even if AT&T Broadband Group upgrades its broadband facilities and related
infrastructure, it may not be able to compete effectively. Additionally, AT&T
Broadband Group is subject to competition from telecommunications providers and
ISPs in connection with offerings of new and advanced services, including
telecommunications and Internet services. Additionally, evolving DSL, wireless
IP and consumer electronic technologies (such as digital video recorders) may
present an opportunity for AT&T Broadband Group subscribers alternatively to
obtain premium media content and erode anticipated digital and advanced services
revenues. This competition may materially adversely affect AT&T Broadband
Group's business and operations in the future.
AT&T BROADBAND GROUP HAS SUBSTANTIAL EXISTING DEBT, WHICH COULD MATERIALLY
ADVERSELY AFFECT ITS FINANCIAL CONDITION, COMPETITIVE POSITION AND STRATEGIC
FLEXIBILITY AND ITS ABILITY TO OBTAIN FINANCING IN THE FUTURE
AT&T Broadband Group has a significant amount of debt. As of March 31,
2001, its total debt was approximately $28.8 billion. This debt could have
important consequences to investors. For example, it could:
- make it more difficult for AT&T Broadband Group to satisfy its
obligations under its credit facilities and to its noteholders;
- increase AT&T Broadband Group's vulnerability to general adverse economic
and broadband industry conditions, including interest rate fluctuations;
- require AT&T Broadband Group to dedicate a substantial portion of its
cash flow from operations to payments on its debt, which will reduce
funds available for working capital, capital expenditures, acquisitions
of additional broadband systems and other general corporate expenses;
- limit AT&T Broadband Group's flexibility in planning for, or reacting to,
changes in its business and the broadband industry generally;
- place AT&T Broadband Group at a disadvantage compared to its competitors
that have proportionately less debt; and
- limit AT&T Broadband Group's ability to borrow additional funds in the
future, if needed.
Additionally, following the spin-off, AT&T Broadband Corp., as historical
AT&T, will be burdened with any AT&T liabilities, including indebtedness, from
which AT&T Broadband Corp. is not released, even if not allocated to AT&T
Broadband Group. See "Risk Factors Relating to
30
41
AT&T's Restructuring Plan -- Following the spin-off, AT&T Broadband Corp. will
be liable for historical AT&T liabilities from which AT&T Broadband Corp. is not
released, even if not allocated to AT&T Broadband Group."
AT&T BROADBAND GROUP MAY SUBSTANTIALLY INCREASE ITS DEBT LEVEL IN THE FUTURE,
WHICH COULD SUBJECT IT TO VARIOUS RESTRICTIONS AND HIGHER INTEREST COSTS AND
DECREASE ITS CASH FLOW AND EARNINGS
AT&T Broadband Group may substantially increase its debt level in the
future to fund the expansion, maintenance and upgrade of its systems and develop
new services, as well as to finance acquisitions. Any increase in debt could
subject it to various restrictions and higher interest costs and decrease its
cash flow and earnings. It also may be difficult for AT&T Broadband Group to
obtain all the financing it needs to fund its business and growth strategy on
desirable terms. AT&T Broadband Group may require substantial additional
financing in the future to fund capital expenditures and costs and expenses in
connection with funding its operations, investments and its growth strategy.
AT&T and AT&T Broadband Group are exploring and evaluating the relative
advantages and disadvantages of various funding mechanisms for AT&T Broadband
Group. The alternatives being considered include a long-term debt offering, a
bank credit line, commercial paper, and other forms of public and private debt
facilities. The decision on debt composition is dependent on, among other
things, the business and financial plans of AT&T Broadband Group and the market
conditions at the time of financing. The agreements governing this indebtedness
may contain financial and other covenants that could impair the flexibility of
AT&T Broadband Group and restrict its ability to pursue growth opportunities.
AT&T BROADBAND GROUP HAS SUBSTANTIAL CAPITAL REQUIREMENTS
AT&T Broadband Group intends to continue to upgrade a significant portion
of its broadband systems over the coming years and make other capital
investments, including with respect to its advanced services. AT&T Broadband
Group expects to incur substantial capital expenditures in 2001 and in future
years. The actual amount of the funds required for capital expenditures may vary
materially from management's estimate. The majority of these amounts is expected
to be used to acquire customer premises equipment (such as set-top boxes, cable
modems and telephone equipment) and to pay for installation costs for additional
video and advanced services customers. In addition, capital is expected to be
used to upgrade and rebuild most network systems to expand bandwidth capacity
and add two-way capability so that it may offer advanced services. There can be
no assurance that these amounts will be sufficient to accomplish the planned
system upgrades, customer premises equipment acquisitions and expansion.
AT&T Broadband Group also has commitments under its "Social Contract" with
the FCC and under certain of its franchise agreements with local franchising
authorities to upgrade and rebuild certain network systems. These commitments
may require capital expenditures in order to avoid default and/or penalties,
which expenditures may divert funds from other AT&T Broadband Group priorities.
AT&T Broadband Group's strategy and business plan will continue to require
substantial capital, which AT&T Broadband Group may not be able to obtain or to
obtain on favorable terms. A failure to obtain necessary capital would have a
material adverse effect on AT&T Broadband Group, and result in the delay, change
or abandonment of AT&T Broadband Group's development or expansion plans.
31
42
THE ACTUAL AMOUNT OF FUNDS NECESSARY TO IMPLEMENT AT&T BROADBAND GROUP'S
STRATEGY AND BUSINESS PLAN MAY MATERIALLY EXCEED CURRENT ESTIMATES, WHICH COULD
HAVE A MATERIAL ADVERSE EFFECT ON AT&T BROADBAND GROUP'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND ITS COMPETITIVENESS
The actual amount of funds necessary to implement AT&T Broadband Group's
strategy and business plan may materially exceed AT&T Broadband Group's current
estimates in the event of various factors including:
- departures from AT&T Broadband Group's current business plan,
- unforeseen delays,
- cost overruns,
- unanticipated expenses,
- regulatory developments,
- engineering design changes,
- unforeseen competitive developments,
- changes in labor requirements, and
- technological and other risks.
If actual costs do materially exceed AT&T Broadband Group's current
estimates for these or other reasons, this would have a material adverse effect
on AT&T Broadband Group's financial condition and results of operations and its
competitiveness.
POTENTIAL ACQUISITIONS MAY REQUIRE AT&T BROADBAND GROUP TO INCUR SUBSTANTIAL
ADDITIONAL DEBT AND INTEGRATE NEW TECHNOLOGIES, OPERATIONS AND SERVICES, WHICH
MAY BE COSTLY AND TIME CONSUMING
An element of AT&T Broadband Group's strategy is to further consolidate its
network geographically, which AT&T Broadband Group may do through the
acquisition of broadband providers or exchanges of systems with other providers.
These acquisitions may cause AT&T Broadband Group to incur substantial
additional indebtedness to finance the acquisitions or to assume indebtedness of
the entities that are acquired. In addition, AT&T Broadband Group may encounter
difficulties in integrating those acquired operations into its own operations,
including as a result of different technologies, franchising authority
requirements, systems, services or service offerings. These actions could prove
costly or time consuming or divert management's attention from other business
matters.
FAILURE TO DEVELOP FUTURE BUSINESS OPPORTUNITIES MAY HAVE A MATERIAL ADVERSE
EFFECT ON AT&T BROADBAND GROUP'S GROWTH POTENTIAL
AT&T Broadband Group intends to pursue a number of new growth opportunities
beyond its core video service, high-speed cable Internet service and telephone
services, such as video-on-demand, and interactive television. These
opportunities involve new services for which there are no proven markets. In
addition, the ability to deploy and deliver these services relies, in many
instances, on new and unproven technology. AT&T Broadband Group's existing
technology may not perform as expected and AT&T Broadband Group may not be able
to successfully develop new technology to effectively and economically deliver
these services.
In addition, these opportunities require substantial capital outlays and
network capacity availability to deploy on a large scale. This capital or
capacity may not be available to support these services.
Furthermore, these services may not be widely introduced and fully
implemented in a timely fashion or at all. These services may not be successful
when they are in place, and customers may not purchase the services offered. If
these services are not successful or costs associated with implementation and
completion of the roll-out of these services materially exceed those currently
32
43
estimated by AT&T Broadband Group, AT&T Broadband Group's financial condition
and prospects could be materially adversely affected.
AT&T BROADBAND GROUP MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL
DEVELOPMENTS OR CUSTOMERS' DEMAND FOR ADVANCED SERVICES, WHICH COULD LIMIT ITS
ABILITY TO COMPETE EFFECTIVELY
The broadband business is characterized by rapid technological change and
the introduction of advanced services. AT&T Broadband Group may not be able to
keep pace with technological developments, or successfully anticipate the demand
of customers for services requiring new technology. This type of rapid
technological change could materially adversely affect its plans to upgrade or
expand its systems and respond to competitive pressures. AT&T Broadband Group's
inability to upgrade, maintain and expand its systems and provide advanced
services in a timely manner, or to anticipate the demands of the marketplace,
could materially adversely affect its ability to compete. Consequently, growth,
results of operations and financial condition could suffer materially.
AT&T BROADBAND GROUP MAY BE UNABLE TO NEGOTIATE CONSTRUCTION CONTRACTS ON
FAVORABLE TERMS AND ITS CONSTRUCTION COSTS MAY INCREASE SIGNIFICANTLY, WHICH
COULD MATERIALLY ADVERSELY AFFECT ITS GROWTH, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The continued expansion and upgrade of AT&T Broadband Group's existing
systems will require it to hire contractors and enter into a number of
construction agreements. AT&T Broadband Group may have difficulty hiring
contractors, and the contractors AT&T Broadband Group hires may encounter cost
overruns or delays in construction. Moreover, municipalities place restrictions
and have requirements relating to the time and manner in which construction
projects may be undertaken. Construction costs may increase significantly over
the next few years as existing contracts expire and as demand for cable
construction services continues to grow. AT&T Broadband Group may not be able to
construct new systems or expand or upgrade existing or acquired systems in a
timely manner or at a reasonable cost. This may materially adversely affect its
growth, financial condition and results of operations.
ENTITIES INCLUDED IN AT&T BROADBAND GROUP ARE SUBJECT TO LONG-TERM EXCLUSIVE
AGREEMENTS THAT MAY LIMIT THEIR FUTURE OPERATING FLEXIBILITY AND MATERIALLY
ADVERSELY AFFECT AT&T BROADBAND GROUP'S FINANCIAL RESULTS
Entities attributed to AT&T Broadband Group may be subject to long-term
agreements relating to significant aspects of AT&T Broadband Group's operations,
including long-term agreements for video programming, audio programming,
electronic program guides and other services. For example, TCI Communications,
Inc. and Satellite Services, Inc., both affiliates of TCI, are parties to an
affiliation term sheet with Starz Encore Group, an affiliate of Liberty Media
Group, which extends to 2022 and provides for a fixed price payment (subject to
adjustment for various factors, including inflation) and may require AT&T
Broadband Group to pay two-thirds of Starz Encore Group's programming costs
above levels designated in the term sheet. Satellite Services, Inc. also entered
into a ten-year agreement with TV Guide in January 1999 for interactive program
guide services, which designates TV Guide Interactive as the exclusive
interactive programming guide for AT&T Broadband Group systems. The price, terms
and conditions of such term sheet may not reflect the current market and if they
continue to apply to AT&T Broadband Group, one or more of them may materially
adversely impact the financial performance of AT&T Broadband Group. By letter
dated May 29, 2001, AT&T Broadband Group indicated that in its view the Starz
Encore term sheet as a whole is unenforceable and reserved its right to
terminate the term sheet. AT&T Broadband Group indicated to Starz Encore Group
that it would not pay the excess programming costs requested to date and
disputed the enforceability of the excess programming costs pass through
provisions of the term sheet, among other provisions. The letter further
suggests that the parties meet to discuss a new
33
44
affiliation arrangement. Starz Encore Group has stated publicly that it views
AT&T Broadband Group's position on the term sheet to be without merit.
AT&T BROADBAND GROUP'S BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION
AND REGULATION, WHICH COULD MATERIALLY ADVERSELY AFFECT ITS BUSINESS BY
INCREASING ITS EXPENSES OR LIMITING ITS PRICING FLEXIBILITY
Regulation of the broadband communications industry has increased the
administrative and operational expenses and limited the revenues of cable
systems. Broadband operators are subject to, among other things:
- limited rate regulation,
- requirements that, under specified circumstances, a cable system carry a
local broadcast station or obtain consent to carry a local or distant
broadcast station,
- rules for franchise renewals and transfers, and
- other requirements covering a variety of operational areas, such as
technical standards and customer service requirements.
Additionally, many aspects of these regulations currently are the subject
of judicial proceedings and administrative or legislative proposals. There also
are ongoing efforts to amend or expand the state and local regulation of some
cable systems, which may compound the regulatory risks AT&T Broadband Group
already faces. In response to these efforts, any of the states or localities in
which AT&T Broadband Group now operates may expand regulation of its cable
systems in the future.
AT&T BROADBAND GROUP MAY BE REQUIRED TO PROVIDE ACCESS TO ITS NETWORKS TO OTHER
ISPS, WHICH COULD MATERIALLY ADVERSELY AFFECT THE UPGRADE OF ITS SYSTEMS OR ITS
ABILITY TO PROVIDE NEW PRODUCTS AND SERVICES
Although there is at present no significant federal regulation of cable
system delivery of Internet services, and the FCC recently issued several
reports finding no immediate need to impose such regulation, this situation may
change as cable systems expand their broadband delivery of Internet services. In
particular, proposals have been advanced at the FCC and Congress that would
require cable operators to provide access to unaffiliated ISP and online service
providers. Some states and local franchising authorities are considering the
imposition of mandatory Internet access requirements as part of cable franchise
renewals or transfers.
AT&T Broadband Group believes that, should specific technological solutions
and/or specific pricing mechanisms be imposed on the industry, it:
- would impair its ability to use its bandwidth in ways that would generate
maximum revenues; and
- may cause it to decide not to upgrade systems, which would prevent it
from introducing its planned new services.
In addition, AT&T Broadband Group believes that if there were governmental
imposition of mandatory Internet access requirements on the industry, it could:
- increase the expenses AT&T Broadband Group incurs to enhance and maintain
its information and network systems;
- increase the expense of upgrading and/or expanding its hybrid
fiber/coaxial and data systems;
- limit profit margins to a prescribed level; and/or
- further reduce the value of AT&T Broadband Group's investment in
Excite@Home.
34
45
AT&T BROADBAND GROUP'S CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES THAT ARE
SUBJECT TO NON-RENEWAL OR TERMINATION; THE FAILURE TO RENEW A FRANCHISE COULD
MATERIALLY ADVERSELY AFFECT ITS BUSINESS IN A KEY MARKET
AT&T Broadband Group's cable systems generally operate pursuant to
franchises, permits or licenses typically granted by a municipality or other
state or local government controlling the public rights-of-way. Many franchises
establish comprehensive facilities and service requirements, as well as specific
customer service standards and establish monetary penalties for non-compliance.
In many cases, franchises are terminable if the franchisee fails to comply with
material provisions set forth in the franchise agreement governing system
operations. Franchises generally are granted for fixed terms and must be
periodically renewed. Local franchising authorities may resist granting a
renewal if either past performance or the prospective operating proposal is
considered inadequate. More than 1,500 of AT&T Broadband Group's franchises
expire within the next three years, representing more than 35% of the franchises
held by AT&T Broadband Group and involving over 4 million basic service
customers. Local franchising authorities often demand concessions or other
commitments as a condition to renewal, which concessions or other commitments
have been and may continue to be costly to obtain. In some instances, franchises
have not been renewed at expiration, and AT&T Broadband Group has operated under
either temporary operating agreements or without a license while negotiating
renewal terms with the local franchising authorities.
AT&T Broadband Group may not be able to comply with all material provisions
of its franchise agreements and may not be able to renew its franchises in the
future. A termination of and/or a sustained failure to renew a franchise could
materially adversely affect its business in the affected geographic area.
AT&T BROADBAND GROUP OPERATES CABLE SYSTEMS UNDER FRANCHISES THAT ARE
NONEXCLUSIVE; LOCAL FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND
CREATE COMPETITION IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY
AT&T Broadband Group's cable systems are operated under franchises granted
by local franchising authorities. These franchises are nonexclusive.
Consequently, these local franchising authorities can grant additional
franchises to competitors in the same geographic area. As a result, competing
operators may build systems in areas in which AT&T Broadband Group holds
franchises. In some cases municipal utilities may legally compete with AT&T
Broadband Group without obtaining a franchise from the local franchising
authority. The existence of more than one cable system operating in the same
territory is referred to as an "overbuild." These overbuilds could materially
adversely affect AT&T Broadband Group's growth, financial condition and results
of operations by increasing competition or creating competition where no
non-satellite competition existed previously.
LOCAL FRANCHISING AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL REGULATORY
CONSTRAINTS ON AT&T BROADBAND GROUP'S BUSINESS, WHICH CAN FURTHER INCREASE
EXPENSES
In addition to the franchise document, cable authorities also have adopted
in some jurisdictions cable regulatory ordinances that further regulate the
operation of cable systems. This additional regulation increases AT&T Broadband
Group's expenses in operating its business. There can be no assurance that the
local franchising authorities will not impose new and more restrictive
requirements.
Local franchising authorities also have the power to reduce rates and order
refunds of basic service and associated equipment rates paid in the previous
12-month period determined to be in excess of the maximum permitted rates.
35
46
AT&T BROADBAND GROUP IS SUBJECT TO ADDITIONAL REGULATORY BURDENS IN CONNECTION
WITH THE PROVISION OF TELECOMMUNICATIONS SERVICE, WHICH CAUSES IT TO INCUR
ADDITIONAL COSTS
AT&T Broadband Group is required to obtain U.S. federal, state and local
licenses or other authorizations in connection with its offering
telecommunications services. AT&T Broadband Group may not be able to obtain
these authorizations in a timely manner, or at all, and conditions could be
imposed upon these licenses or authorizations that may not be favorable to it.
Specific risks are also associated with the regulatory regime established by the
Telecommunications Act of 1996. These include risks related to AT&T Broadband
Group's interconnection agreements with local exchange carriers and whether AT&T
Broadband Group will be able to obtain these agreements or obtain them on
favorable terms. Also, AT&T Broadband Group is subject to risks associated with
the regulation of its telecommunications services by the FCC and state public
utilities commissions, or PUCs. Furthermore, telecommunications companies,
including IP telephone companies, generally are subject to significant
regulation as well as higher fees for pole attachments. IP telephone companies
are companies that have the ability to offer telephone services over the
Internet, and pole attachments are cable wires that are attached to poles.
AT&T BROADBAND GROUP IS RELIANT UPON EXCITE@HOME FOR THE DEVELOPMENT,
MAINTENANCE AND DISTRIBUTION OF ITS HIGH-SPEED CABLE INTERNET SERVICE; AND THE
GROWTH OF ITS HIGH-SPEED CABLE INTERNET SERVICE IS DEPENDENT ON THE RELIABILITY,
AVAILABILITY AND STABILITY OF EXCITE@HOME'S NETWORK AND SERVICES
AT&T Broadband Group has made a significant investment and commitment to
Excite@Home. It has a contractual arrangement that allows Excite@Home to be the
exclusive provider of high speed cable Internet services to residential
subscribers in AT&T Broadband Group cable systems (other than those previously
affiliated with Road Runner LLC) through June 4, 2002. While AT&T Broadband
Group may distribute other residential Internet services after this period of
exclusivity has expired, it has committed to use Excite@Home as its provider of
platform connectivity services in its residential high-speed cable Internet
services and to make Excite@Home's content services a featured portal for AT&T
Broadband Group's residential Internet services. The impact of this agreement
cannot be accurately determined. If Excite@Home is not able to maintain its
financial viability while improving its current network and ISP performance and
scaling its network and services for anticipated growth, this could materially
adversely impact the expansion of AT&T Broadband Group's high-speed cable
Internet service and the financial performance of AT&T Broadband Group.
AT&T BROADBAND GROUP FACES RISKS RELATING TO ITS INVESTMENT IN EXCITE@HOME,
INCLUDING RISKS RELATING TO EXCITE@HOME'S LIQUIDITY
On April 17, 2001, Excite@Home issued a press release announcing that, due
to recent deterioration of the market for online advertising and marketing
services, it expected to report significantly lower revenues, greater operating
losses, and more rapid use of cash than previously forecasted for the balance of
2001. As a result, Excite@Home recorded in its first quarter results an
impairment charge associated with its media business. Because AT&T owns
approximately 23% of the outstanding shares of capital stock of Excite@Home,
AT&T recorded an impairment charge in its first quarter results of $739 million,
which had a net income impact, after minority elimination, of $279 million.
After giving effect to the charge, AT&T's carrying value of Excite@Home was
approximately $490 million.
AT&T BROADBAND GROUP HAS SUBSTANTIAL ECONOMIC INTERESTS IN JOINT VENTURES IN
WHICH IT HAS LIMITED MANAGEMENT RIGHTS
AT&T Broadband Group is a partner in several large joint ventures, such as
Time Warner Entertainment, Texas Cable Partners and Kansas City Cable Partners,
in which it has a substantial economic interest but does not have substantial
control with regard to management policies or the selection of management. These
joint ventures may be managed in a manner contrary to the best
36
47
interests of AT&T Broadband Group, and the value of AT&T Broadband Group's
investment in these joint ventures may be affected by management policies that
are determined without input from AT&T Broadband Group or over the objections of
AT&T Broadband Group.
AT&T BROADBAND GROUP OPERATIONS AND FINANCIAL RESULTS MAY BE MATERIALLY
ADVERSELY AFFECTED BY RESIDUAL LIABILITIES ASSOCIATED WITH THE RESTRUCTURING OF
THE ROAD RUNNER JOINT VENTURE AND THE RESULTING TRANSITION TO EXCITE@HOME
AT&T Broadband Group, through the MediaOne acquisition, acquired an
interest in Road Runner, a broadband cable ISP similar to Excite@Home. In
December 2000, AT&T Broadband Group and the other cable members of Road Runner
agreed to restructure this venture and distribute the assets to the cable
members. Consequently, on May 1, 2001, AT&T Broadband Group purchased the Road
Runner assets used to support the AT&T Broadband Group high-speed cable Internet
subscribers and sold its equity interest in Road Runner to subsidiaries of AOL
Time Warner Inc. However, AT&T Broadband Group and AOL Time Warner have agreed
to jointly satisfy residual liabilities associated with the restructuring of
Road Runner in proportion to their prior equity interests in Road Runner. The
extent of these residual liabilities cannot be determined at this time and
payment of AT&T Broadband Group's portion of such liabilities may have a
material adverse affect on its financial condition.
AT&T Broadband Group intends to migrate its Road Runner high-speed cable
Internet subscribers over time to the Excite@Home service. Implementation of
this transition may result in unanticipated material delays and financial
expense.
37
48
RISK FACTORS RELATING TO AT&T CONSUMER SERVICES GROUP
AND AT&T BUSINESS SERVICES GROUP
AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP EXPECT THERE TO BE
A CONTINUED DECLINE IN THE LONG DISTANCE INDUSTRY
Historically, prices for voice communications have fallen because of the
introduction of more efficient networks and advanced technology, product
substitution, excess capacity, deregulation and competition. AT&T Consumer
Services Group and AT&T Business Services Group expect these trends to continue
and each group may need to reduce its prices in the future to remain
competitive. In addition, AT&T Consumer Services Group and AT&T Business
Services Group do not expect that they will be able to achieve increased traffic
volumes in the near future to sustain their current revenue levels. The extent
to which each of AT&T Consumer Services Group's and AT&T Business Services
Group's business, financial condition, results of operations and cash flow could
be materially adversely affected will depend on the pace at which these
industry-wide changes continue and its ability to create new and innovative
services to differentiate its offerings, enhance customer retention and retain
or grow market share.
AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP FACE SUBSTANTIAL
COMPETITION THAT MAY MATERIALLY ADVERSELY IMPACT BOTH MARKET SHARE AND MARGINS
Each of AT&T Consumer Services Group and AT&T Business Services Group
currently faces significant competition and we expect the level of competition
to continue to increase. Some of the potential materially adverse consequences
of this competition include the following:
- market share loss;
- the possibility that customers shift to less profitable, lower margin
services;
- the need to initiate or respond to price cuts in order to retain market
share;
- difficulties in these groups' ability to grow new businesses, introduce
new services successfully or execute on their business plan; and
- the inability to purchase fairly priced access services.
As a result of competitive factors, AT&T Consumer Services Group and AT&T
Business Services Group believe it is unlikely that they will sustain existing
price or margin levels.
AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP FACE COMPETITION
FROM A VARIETY OF SOURCES
Competition from new entrants into long distance, including Regional Bell
Operating Companies, or RBOCs. AT&T Consumer Services Group and AT&T Business
Services Group traditionally have competed with other long distance carriers. In
recent years, AT&T Consumer Services Group and AT&T Business Services Group have
begun to compete with incumbent local exchange carriers, which historically have
dominated local telecommunications, and with other competitive local exchange
carriers for the provision of long distance services.
Some RBOC, such as Verizon Communications Inc. and SBC Communications Inc.,
already have been permitted to offer long distance services in some states
within their regions and Verizon has applications pending with the FCC for
authorization to offer long distance service in other states within their
regions. We expect that Verizon and SBC will seek to enter virtually all states
in their regions and that other RBOCs will be given permission to offer long
distance services within their regions in the next few years.
38
49
The incumbent local exchange carriers presently have numerous advantages as
a result of their historic monopoly control over local exchanges.
Competition from Facilities-Based Companies, including RBOCs. AT&T
Consumer Services Group and AT&T Business Services Group also face the risk of
increasing competition from entities that own their own access facilities,
particularly the RBOCs, which have access facilities across vast regions of the
United States with the ability to control cost, cycle time and functionality for
most end-to-end services in their regions. These entities can preserve large
market share and high margins on access services as they enter new markets,
including long distance and end-to-end services. This places them in superior
position vis-a-vis AT&T Consumer Services Group and AT&T Business Services Group
and other competitors that must purchase such high-margin access services.
Competition from lower-cost or less leveraged providers. The cost
structure of AT&T Consumer Services Group and AT&T Business Services Group also
affects their competitiveness. Each faces the risk that it will not be able to
maintain a competitive cost structure if newer technologies favor newer
competitors that do not have legacy infrastructure, and as technology
substitution continues. The ability of each of AT&T Consumer Services Group's
and AT&T Business Services Group to make critical investments to improve cost
structure also may be impaired by its current debt obligations.
Competition as a result of technological change. AT&T Consumer Services
Group and AT&T Business Services Group also may be subject to additional
competitive pressures from the development of new technologies and the increased
availability of domestic and international transmission capacity. The
telecommunications industry is in a period of rapid technological evolution,
marked by the introduction of new product and service offerings and increasing
satellite, wireless, fiber optic and coaxial cable transmission capacity for
services similar to those provided by AT&T Consumer Services Group and AT&T
Business Services Group. We cannot predict which of many possible future product
and service offerings will be important to maintain our competitive position or
what expenditures will be required to develop and provide these products and
services.
Competition as a result of excess capacity. Each of AT&T Consumer Services
Group and AT&T Business Services faces competition as a result of excess
capacity resulting from substantial network build out by competitors who had
access to inexpensive capital.
Strength of competitors. Some of AT&T Consumer Services Group's and AT&T
Business Services Group's existing and potential competitors have financial,
personnel and other resources significantly greater than those of AT&T Consumer
Services Group and AT&T Business Services Group.
THE REGULATORY AND LEGISLATIVE ENVIRONMENT CREATES CHALLENGES FOR AT&T CONSUMER
SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP
Each of AT&T Consumer Services Group and AT&T Business Services Group faces
risks relating to regulations and legislation. These risks include:
- the difficulty of effective entry into local markets due to
noncompetitive pricing and to RBOC operational issues that do not permit
rapid large-scale customer changes from RBOCs to new service providers,
- new head-on competition as RBOCs begin to enter the long distance
business, and
- the emergence of few facilities-based competitors to RBOCs and the
absence of any significant alternate source of supply for most access and
local services.
This dependency on supply materially adversely impacts each of AT&T
Business Services Group's and AT&T Consumer Services Group's cost structure and
its ability to create and market desirable and competitive end-to-end products
for customers.
39
50
In addition, RBOCs will be entering the long distance business while they
still control substantially all the access facilities in their regions. This
will likely result in an increased level of competition for long distance or
end-to-end services as the services offered by RBOCs expand.
EACH OF AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP HAS
SUBSTANTIAL EXISTING DEBT, WHICH COULD MATERIALLY ADVERSELY AFFECT THEIR
FINANCIAL CONDITION AND ABILITY TO OBTAIN FINANCING IN THE FUTURE AND REACT TO
CHANGES IN THEIR BUSINESSES; THESE DEBT LEVELS MAY INCREASE IN THE FUTURE
Each of AT&T Consumer Services Group and AT&T Business Services Group has a
significant amount of debt. As of March 31, 2001, AT&T Consumer Services Group's
total debt was approximately $2.9 billion, and AT&T Communications Services,
Inc.'s total debt was approximately $26.5 billion. Intense competitive
pressures, adverse regulatory developments or other factors could cause future
debt levels to increase materially. This significant amount of debt could:
- increase AT&T Consumer Services Group's and AT&T Business Services
Group's vulnerability to competitive pressures and general adverse
economic and industry conditions;
- reduce funds available for working capital, capital expenditures,
acquisitions of additional systems and other general corporate expenses
that are important in maintaining competitive flexibility;
- place AT&T Consumer Services Group and AT&T Business Services Group at a
disadvantage compared to their competitors that have proportionately less
debt; and
- make it more difficult for AT&T Consumer Services Group and AT&T Business
Services Group to satisfy these obligations.
EACH OF AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP MAY
SUBSTANTIALLY INCREASE ITS DEBT LEVEL IN THE FUTURE, WHICH COULD SUBJECT IT TO
VARIOUS RESTRICTIONS AND HIGHER INTEREST COSTS AND DECREASE ITS CASH FLOW AND
EARNINGS
Each of AT&T Consumer Services Group and AT&T Business Services Group may
substantially increase its debt level in the future, which could subject it to
various restrictions and higher interest costs and decrease its cash flow and
earnings. It also may be difficult for AT&T Consumer Services Group and AT&T
Business Services Group to obtain all the financing they need to fund their
businesses and growth strategies on desirable terms. The amount of debt required
in the future will depend upon the performance revenue and margin of each group,
which in turn may be materially adversely affected by competitive and other
pressures. Any agreements governing indebtedness obtained by AT&T Consumer
Services Group or AT&T Business Services Group may contain financial and other
covenants that could impair AT&T Consumer Services Group's or AT&T Business
Services Group's flexibility and restrict its ability to pursue growth
opportunities.
AT&T expects to explore and evaluate the relative advantages and
disadvantages of various funding mechanisms for AT&T Communications Services,
Inc. These alternatives may include a long-term debt offering, a bank credit
line, commercial paper, and other forms of public and private debt facilities.
The decision on debt composition is dependent on, among other things, the
business and financial plans of AT&T Communications Services, Inc. and the
market conditions at the time of financing.
THE ACTUAL AMOUNT OF FUNDS NECESSARY TO IMPLEMENT EACH OF AT&T CONSUMER SERVICES
GROUP'S AND AT&T BUSINESS SERVICES GROUP'S STRATEGY AND BUSINESS PLAN MAY
MATERIALLY EXCEED CURRENT ESTIMATES, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT
ON ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The actual amount of funds necessary to implement each of AT&T Consumer
Services Group's and AT&T Business Services Group's strategy and business plan
may materially exceed AT&T
40
51
Consumer Services Group's and AT&T Business Services Group's current estimates
in the event of various factors, including:
- competitive downward pressures on revenues and margins,
- departures from AT&T Consumer Services Group's and AT&T Business Services
Group's respective current business plans,
- regulatory developments,
- unforeseen competitive developments,
- technological and other risks,
- unanticipated expenses,
- unforeseen delays and cost overruns, and
- engineering design changes.
If actual costs do materially exceed AT&T Consumer Services Group's and/or
AT&T Business Services Group's current estimates for these or other reasons,
this would have a material adverse effect on AT&T Consumer Services Group's
and/or AT&T Business Services Group's financial condition and results of
operations.
AT&T BUSINESS SERVICES GROUP'S BUILD OUT OF ITS NEXT GENERATION IP BACKBONE
NETWORK REQUIRES SUBSTANTIAL CAPITAL REQUIREMENTS AND SUBSTANTIAL CAPITAL
EXPENDITURES
AT&T Business Services Group's business plan will require substantial
capital expenditures in connection with its build out of its end-to-end IP
connectivity network, including both the next generation IP backbone as well as
dedicated IP customer connectivity and hosting facilities. AT&T Business
Services Group may not be able to obtain sufficient capital or to obtain
sufficient capital on favorable terms. This failure to obtain capital would have
a material adverse effect on AT&T Business Services Group, and result in the
delay, change or abandonment of its development or expansion plans.
AT&T CONSUMER SERVICES GROUP'S POTENTIAL GROWTH IN DSL IS SUBJECT TO
COMMERCIALLY VIABLE ACCESS TO INCUMBENT LOCAL EXCHANGE CARRIER FACILITIES, AND
REQUIRES SUBSTANTIAL CAPITAL EXPENDITURES
AT&T Consumer Services Group's business plan will require substantial
capital expenditures in connection with its expansion into providing DSL voice
and data services. The development of DSL voice and data services involves
uncertainty relating to potential technological hurdles and unforeseen costs.
AT&T Consumer Services Group historically has not had to incur these capital
expenditures, and it may not be able to obtain sufficient capital on favorable
terms or at all. This failure to obtain capital would have a material adverse
effect on AT&T Consumer Services Group, and result in the delay, change or
abandonment of its development or expansion plans.
AT&T CONSUMER SERVICES GROUP MAY BE SUBJECT TO OBLIGATIONS IN A DEFINED
GEOGRAPHIC AREA UNTIL 2006 RELATING TO WIRELINE HIGH-SPEED INTERNET ACCESS
SERVICES
As part of the March 28, 2000, term sheets among AT&T, Excite@Home, Comcast
Corporation and Cox Communications, Inc. relating to the reorganization of the
governance and distribution arrangements of Excite@Home, AT&T agreed that until
June 4, 2006, AT&T will not provide wireline (e.g., DSL or hybrid fiber/coaxial)
high-speed Internet access services to residential customers in the territories
served by the U.S. cable systems of Cox or Comcast, as the case may be. AT&T's
obligation will terminate automatically as to either Comcast or Cox, if Comcast
or Cox, as the case may be, does not continue to use Excite@Home as its provider
of platform/connectivity services used in its residential high-speed ISP
services over cable in substantially all of its U.S. cable systems. AT&T further
agreed to use all reasonable efforts to cause its subsidiaries and affiliates to
comply with the provisions, terms and obligations of that agreement that are
applicable to them. If this agreement is interpreted to apply to the activities
of AT&T Consumer Services Group, it could
41
52
limit AT&T Consumer Services Group's ability to provide DSL and other wireline
high-speed Internet services in the geographic areas where Comcast and Cox have
cable systems and could have a material adverse effect on AT&T Consumer Services
Group's ability to expand and grow its wireline high-speed Internet business
generally or to achieve economies of scale in that business.
SUBSTANTIALLY ALL OF THE TELEPHONE CALLS MADE BY EACH OF AT&T CONSUMER SERVICES
GROUP'S AND AT&T BUSINESS SERVICES GROUP'S CUSTOMERS ARE CONNECTED USING OTHER
COMPANIES' NETWORKS, INCLUDING THOSE OF ITS COMPETITORS
AT&T Consumer Services Group principally is a long distance voice
telecommunications company. AT&T Consumer Services Group does not own or operate
any primary transmission facilities. Accordingly, it must route domestic and
international calls made by its customers over transmission facilities leased
from AT&T Business Services Group. AT&T Business Services Group provides long
distance telecommunications over its own transmission facilities. Because AT&T
Business Services Group's network does not extend to homes, both AT&T Consumer
Services Group and AT&T Business Services Group must route calls through a local
telephone company to reach AT&T Business Services Group's transmission
facilities and, ultimately, to reach their final destinations.
In the United States, the providers of local telephone service generally
are the incumbent local exchange carriers, including the RBOCs. The permitted
pricing of local transmission facilities that AT&T Consumer Services Group and
AT&T Business Services Group lease in the United States is subject to legal
uncertainties. The FCC has issued an order requiring incumbent local exchange
carriers to price those facilities that both AT&T Consumer Services Group and
AT&T Business Services Group would use to provide local exchange and exchange
access services at their total element long-run incremental cost with a major
case currently pending before the Supreme Court. Should the incumbent local
exchange carriers succeed before the Supreme Court, the result probably would be
to increase the cost of incumbent local transmission facilities obtained by AT&T
Consumer Services Group and AT&T Business Services Group. Also, AT&T Consumer
Services Group and AT&T Business Services Group expect incumbent local exchange
carriers to bring additional challenges before U.S. federal and state regulators
should incumbent local exchange carriers view the ultimate ruling unfavorably.
AT&T CONSUMER SERVICES GROUP MUST RELY ON AT&T BUSINESS SERVICES GROUP'S ABILITY
TO MAINTAIN, UPGRADE AND REDUCE COSTS ASSOCIATED WITH THE CORE NETWORK, WHICH
MAY LEAD TO ADDITIONAL COSTS
AT&T Consumer Services Group currently is dependent upon AT&T Business
Services Group for leased line capacity, data communications facilities, traffic
termination services and physical space for offices and equipment. Although AT&T
Consumer Services Group expects to enter into a services agreement with AT&T
Business Services Group for it to provide these services, if AT&T Business
Services Group becomes unwilling or unable to provide its current level of
services to AT&T Consumer Services Group during the term of the service
agreement or thereafter, AT&T Consumer Services Group may not be able to find
replacement service providers on a timely basis. If AT&T Consumer Services Group
is required to change providers, AT&T Consumer Services Group would likely
experience delays, operational difficulties and increased expenses, and its
ability to provide services to customers or expand operations may be impaired.
FAILURE TO DEVELOP FUTURE BUSINESS OPPORTUNITIES MAY HAVE A MATERIAL ADVERSE
EFFECT ON AT&T CONSUMER SERVICES GROUP'S GROWTH POTENTIAL
AT&T Consumer Services Group intends to pursue growth opportunities in
providing services over a DSL platform, which involve new services for which
there are only limited proven markets. In addition, the ability to deploy and
deliver these services relies, in many instances, on new and unproven
technology. AT&T Consumer Services Group's DSL platform may not perform as
expected
42
53
and AT&T Consumer Services Group may not be able to successfully develop new
enabling systems to effectively and economically deliver these services. In
addition, these opportunities require substantial capital outlays to deploy on a
large scale. This capital may not be available to support these services.
Furthermore, each of these opportunities entails additional operational risks.
For example, the delivery of DSL services requires AT&T Consumer Services Group
to provide installation and maintenance services, which services AT&T Consumer
Services Group has never provided previously. This will require AT&T Consumer
Services Group to hire, employ, train and equip technicians to provide
installation and repair in each market served, or rely on subcontractors to
perform these services. AT&T Consumer Services Group may not be able to hire and
train sufficient numbers of qualified employees or subcontract these services,
or do so on economically attractive terms. These services may not be successful
when they are in place, and customers may not purchase the services offered. If
these services are not successful or costs associated with implementation and
completion of the roll-out of these services materially exceed those currently
estimated by AT&T Consumer Services Group, AT&T Consumer Services Group's
financial condition and prospects could be materially adversely affected.
AT&T BUSINESS SERVICES GROUP IS ENGAGED IN STRATEGIC DISCUSSIONS WITH BT
REGARDING POTENTIAL TRANSACTIONS WHICH MAY SUBSTANTIALLY AFFECT ITS BUSINESS AND
THE CONTEMPLATED TRANSACTIONS
AT&T Business Services Group and BT are equal owners of the Concert global
joint venture, which serves the communications needs of multinational companies
and the international calling needs of businesses around the world. AT&T and BT
are discussing ways to improve the performance of the business. These
discussions include a variety of strategic alternatives to the Concert joint
venture, including an acquisition of, or a business combination of our business
services unit, upon its planned separation from the remainder of AT&T, with,
BT's business services operations. Such a transaction could include all or a
substantial portion of BT's business services operations, including BT Ignite
and BT's interest in Concert, in exchange for some mixture of cash, equity
and/or other instruments in the combined business. These discussions may or may
not lead to any acquisition or other business combination and may or may not
lead to any change in the existing alliance arrangements. As possible
alternatives to such a transaction, we have also been considering a narrowing of
Concert's business scope, as well as its termination as a joint venture. There
can be no assurances, however, that an agreement could be reached with BT with
regard to either of such alternatives. We cannot tell you whether these
discussions will continue, whether any of these transactions, or other
transactions, will be completed, or the timing or terms of any possible
transaction.
43
54
THE SPECIAL MEETING
GENERAL
We are mailing this proxy statement and the accompanying proxy card
beginning , 2001 to holders of AT&T common stock in connection with
the solicitation of proxies by our board of directors for use at the special
meeting. We solicit proxies to give all shareholders on the record date an
opportunity to vote on matters that will come before the special meeting. This
procedure is necessary because shareholders live in all states and abroad and
many may not be able to attend the special meeting. You can vote or let us vote
your shares of AT&T common stock only if you are present in person or
represented by proxy. A form of proxy is being provided to holders of AT&T
common stock with this proxy statement. Information with respect to the
execution and revocation of proxies is provided under "-- Proxies; Revocability
of Proxies; Cost of Solicitation."
Registered shareholders (those that hold shares directly or through AT&T
plans rather than through a bank or broker) can simplify their voting and save
AT&T expense by calling or voting via the Internet at .
Telephone and Internet voting information is provided on the proxy card. A
Control Number is designed to verify shareholders' identities and allow them to
vote their shares and confirm that their voting instructions have been properly
recorded. The Control Number is located above the shareholder's name and address
in the lower left section of the proxy card. If you hold your shares through a
bank or broker, you will receive separate instructions on the form you receive.
Although most banks and brokers now offer telephone and Internet voting,
availability and specific processes will depend on their voting arrangements.
At the special meeting, holders of AT&T common stock eligible to vote will
be asked to consider and vote upon approval and adoption of each of the charter
amendment proposals and the incentive plan proposals and the ratification and
approval of the spin-off proposal. For more information, see "The Broadband
Charter Amendment Proposal," "The Consumer Services Charter Amendment Proposal,"
"The Incentive Plan Proposals" and "The Spin-off Proposal."
DATE, TIME AND PLACE OF THE SPECIAL MEETING; RECORD DATE
The special meeting is scheduled to be held at a.m., local time, on
, , 2001, at . Our board of directors has fixed the
close of business on as the record date for determination of
holders of AT&T common stock and holders of entitled to notice of and
to vote at the special meeting. On July 10, 2001, there were outstanding
shares of AT&T common stock.
We expect that representatives from PricewaterhouseCoopers LLP, independent
accountants for AT&T, will be present at the special meeting, have the
opportunity to make a statement if they so desire and be available to respond to
appropriate questions.
VOTE; QUORUM
Approval of each of the charter amendment proposals and the spin-off
proposal requires the affirmative vote of a majority of the voting power of all
outstanding shares of AT&T common stock. Approval of each of the incentive plan
proposals and of the proposal to amend the employee stock purchase plan requires
the affirmative vote of majority of the votes cast by all outstanding shares of
AT&T common stock. Each share of AT&T common stock has one vote on each matter
properly brought before the special meeting.
The presence, either in person or by proxy, of holders of 40% of the shares
entitled to vote on the proposals to be presented to shareholders at the special
meeting is necessary to constitute a quorum at the special meeting. Shares of
AT&T common stock represented by a properly completed proxy will be treated as
present at the special meeting for purposes of determining a quorum, without
44
55
regard to whether the proxy is marked as casting a vote or abstaining. See
"-- Proxies; Revocability of Proxies; Cost of Solicitation" for more
information.
PROXIES; REVOCABILITY OF PROXIES; COST OF SOLICITATION
If a shareholder attends the special meeting, the shareholder may vote by
ballot. However, many shareholders may be unable to attend the special meeting.
Therefore, our board of directors is soliciting proxies so that each holder of
AT&T common stock at the close of business on the record date has the
opportunity to vote on the proposals to be considered at the special meeting.
Registered shareholders can simplify their voting and save us expense by
calling 1-800- or by voting via the Internet at . We provide
telephone and Internet voting information on the proxy card. A Control Number,
located above the shareholder's name and address on the lower left of the proxy
card, is designed to verify the shareholder's identity, allow the shareholder to
vote the shareholder's shares and confirm that we have properly recorded the
shareholder's voting instructions.
If you do not choose to vote by telephone or Internet, you still may return
your proxy card, properly signed, and we will vote the shares in accordance with
your directions. You can specify your choices by marking the appropriate boxes
on your proxy card. If you sign and return your proxy card without specifying
choices, we will vote the shares as recommended by our board of directors.
Abstentions marked on your proxy card are voted neither FOR nor AGAINST, but we
count these shares in determining a quorum for each of the proposals.
Abstentions have the effect of a vote against the charter amendment proposals
and the spin-off proposal and have no effect on the incentive plan proposals. IF
YOU DO VOTE BY TELEPHONE OR VIA THE INTERNET, IT IS NOT NECESSARY TO RETURN YOUR
PROXY CARD.
If you wish to give your proxy to someone other than the Proxy Committee,
you must cross out all three names appearing on your proxy card and insert the
name of another individual or individuals (not more than three). The individual
or individuals representing you must then present your signed proxy card at the
special meeting.
The proxy card also confers discretionary authority on the individuals
appointed by our board of directors and named on the proxy card to vote the
shares represented by the proxy card on any other matter that is properly
presented for action at the special meeting. No proxies instructing that they be
voted AGAINST or ABSTAIN from voting on the charter amendment proposals, the
incentive plan proposals or the spin-off proposal will be voted in favor of any
adjournment of the special meeting to solicit additional proxies. You may revoke
your proxy at any time before it is voted at the special meeting by executing a
later-dated proxy by telephone, via the Internet or mail, by voting by ballot at
the special meeting, or by filing an instrument of revocation with the
inspectors of election in care of the Vice President -- Law and Secretary of
AT&T.
IF YOU HOLD YOUR SHARES THROUGH A BANK OR BROKER, FOLLOW THE VOTING
INSTRUCTIONS ON THE FORM YOU RECEIVE. BROKER NON-VOTES WILL BE TREATED AS SHARES
OF AT&T COMMON STOCK THAT ARE PRESENT AND ENTITLED TO VOTE AT THE SPECIAL
MEETING FOR PURPOSES OF DETERMINING WHETHER A QUORUM EXISTS AND WILL HAVE THE
SAME EFFECT AS VOTES AGAINST APPROVAL OF EACH OF THE CHARTER AMENDMENT PROPOSALS
AND THE SPIN-OFF PROPOSAL AND WILL HAVE NO EFFECT ON THE APPROVAL OF THE
INCENTIVE PLAN PROPOSALS. THE AVAILABILITY OF TELEPHONE AND INTERNET VOTING WILL
DEPEND ON THE BANK'S OR BROKER'S VOTING PROCESSES.
YOUR VOTE IS IMPORTANT. WE URGE YOU TO VOTE BY TELEPHONE, VIA THE INTERNET,
OR BY SIGNING AND RETURNING THE ACCOMPANYING PROXY CARD, WHETHER OR NOT YOU PLAN
TO ATTEND THE SPECIAL MEETING. If you do attend the special meeting, you may
vote by ballot, thereby canceling any proxy previously given.
The cost of soliciting proxies in the accompanying form will be borne by
AT&T. In addition to solicitations by mail, a number of regular employees of
AT&T and of its subsidiaries may solicit proxies in person or by telephone. AT&T
has retained to aid in the solicitation of proxies, at an estimated
cost of $ plus reimbursement of reasonable out-of-pocket expenses. In
45
56
addition, AT&T has retained to answer telephone inquiries from
shareholders for a variable fee equal to $ per call, depending on the
type of call.
VOTING SHARES HELD IN DIVIDEND REINVESTMENT AND SAVINGS PLANS
If you are a participant in the AT&T Shareowner Dividend Reinvestment and
Stock Purchase Plan or the AT&T Employee Stock Purchase Plan, your proxy card
will represent the number of full shares in either of those accounts on the
record date as well as shares registered in your name. If you are an employee
shareholder participating in the AT&T Employee Stock Ownership Plan, 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 Plan for Management Employees, the AT&T of
Puerto Rico, Inc. Long Term Savings and Security Plan, the Liberty Media 401(k)
Savings Plan, the Liberty Media 401(k) Savings Plan of Puerto Rico, the Long
Term Savings Plan (for AT&T Broadband & Internet Services), or the Long Term
Savings Plan -- San Francisco (for AT&T Broadband & Internet Services), your
proxy card also will serve as a voting instruction for the trustees of these
plans for accounts registered in the same name. The trustees of these trust
plans will not vote shares for which they have not received proxy instructions,
except for shares in the employer shares fund in the AT&T Long Term Savings and
Security Plan, which shares the trustee will vote in its discretion.
SPECIAL MEETING ADMISSION
IF YOU ARE A REGISTERED SHAREHOLDER AND PLAN TO ATTEND THE SPECIAL MEETING
IN PERSON, PLEASE DETACH AND RETAIN THE ADMISSION TICKET AND MAP THAT WE HAVE
ATTACHED TO YOUR PROXY CARD. IF YOU CHOOSE TO VOTE BY MAIL AND ALSO PLAN TO
ATTEND THE SPECIAL MEETING, PLEASE BE SURE TO MARK THE "SPECIAL MEETING" BOX
WHEN YOU RETURN YOUR PROXY CARD. A BENEFICIAL OWNER THAT PLANS TO ATTEND THE
SPECIAL MEETING MAY OBTAIN AN ADMISSION TICKET IN ADVANCE BY SENDING A WRITTEN
REQUEST, WITH PROOF OF OWNERSHIP, SUCH AS A BANK OR BROKERAGE FIRM ACCOUNT
STATEMENT, TO: MANAGER -- PROXY, AT&T CORP., 295 NORTH MAPLE AVENUE, ROOM
1216L2, BASKING RIDGE, NEW JERSEY 07920. WE WILL BASE ADMITTANCE TO THE SPECIAL
MEETING UPON AVAILABILITY OF SEATING.
Subject to seating availability, we will admit shareholders that do not
present admission tickets at the special meeting upon verification of ownership
at the admissions counter.
is fully accessible to disabled persons, and sign interpretation
and wireless headsets will be available for our hearing-impaired shareholders.
CONFIDENTIAL VOTING
For many years, we have had a confidential voting policy. In 1998, we
formalized this policy by amending our by-laws so that all proxies and other
voting materials, including telephone and Internet voting, are kept confidential
and are not disclosed to AT&T or its officers and directors, subject to standard
exceptions. These documents are available for examination only by the inspectors
of election and certain personnel associated with processing proxy cards and
tabulating the vote. This new by-law provision cannot be amended, rescinded or
waived, except by a shareholder vote. One independent inspector of election, an
officer of The Corporation Trust Company, has been appointed.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has approved each of the charter amendment
proposals, the spin-off proposal, the incentive plan proposals and the proposal
to amend its employee stock purchase plan and recommends that shareholders vote
FOR each of these proposals.
46
57
AT&T CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The AT&T Corp. Management's Discussion and Analysis of Financial Condition
and Results of Operations set forth below was included in AT&T's Annual Report
on Form 10-K for the year ending December 31, 2000, as amended, and Quarterly
Report on Form 10-Q for the three months ending March 31, 2001, as amended. It
provides historical information through March 31, 2001 and May 15, 2001,
respectively. The groups formed in the restructuring differ in various financial
and other respects from the segments described in this section. For financial
and other information on the groups formed by the restructuring, see the
information set forth elsewhere in this document.
OVERVIEW
AT&T Corp. (AT&T or the company) is among the world's communications
leaders, providing voice, data, video and broadband telecommunications services
to large and small businesses, consumers and government agencies. We provide
domestic and international long distance; regional, local and wireless
communications services; cable television and Internet communication services.
AT&T also provides billing, directory and calling-card services to support our
communications businesses.
MERGER WITH MEDIAONE GROUP, INC.
We completed the merger with MediaOne Group, Inc. (MediaOne) on June 15,
2000, in a cash and stock transaction valued at approximately $45 billion. We
issued approximately 603 million shares, of which 60 million were treasury
shares, and made cash payments of approximately $24 billion.
The merger was recorded under the purchase method of accounting, and
accordingly, the results of MediaOne have been included with the financial
results of AT&T, within our Broadband segment, since the date of acquisition.
Periods prior to the merger were not restated to include the results of
MediaOne.
TRACKING STOCKS
On April 27, 2000, AT&T issued a new class of stock to track the
performance of AT&T Wireless Group. AT&T sold 360 million shares of AT&T
Wireless Group tracking shares at a price of $29.50 per share. The 360 million
shares track approximately 16% of the financial performance of AT&T Wireless
Group.
In addition, in connection with the 1999 acquisition of
Tele-Communications, Inc. (TCI), renamed AT&T Broadband (Broadband), AT&T issued
a separate tracking stock to reflect the financial performance of Liberty Media
Group (LMG), TCI's former programming and technology investment businesses. The
outstanding Liberty Media Group tracking stock tracks 100% of the financial
performance of LMG.
The remaining results of operations of AT&T, including approximately 84% of
the financial performance of AT&T Wireless Group, are referred to as the AT&T
Common Stock Group and are represented by AT&T common stock.
A tracking stock is designed to provide financial returns to its holders
based on the financial performance and economic value of the assets it tracks.
Ownership of shares of AT&T common stock, AT&T Wireless Group tracking stock or
Liberty Media Class A or B tracking stock does not represent a direct legal
interest in the assets and liabilities of any of the groups, but an ownership of
AT&T in total. The specific shares represent an interest in the economic
performance of the net assets of each of the groups.
47
58
The earnings attributable to AT&T Wireless Group represent approximately
16% of the earnings from April 27, 2000, through December 31, 2000, and are
excluded from the earnings available to AT&T Common Stock Group. Similarly, the
earnings and losses related to LMG are excluded from the earnings available to
AT&T Common Stock Group.
We do not have a controlling financial interest in LMG for financial
accounting purposes; therefore, our ownership in LMG is reflected as an
investment accounted for under the equity method in AT&T's consolidated
financial statements. The amounts attributable to LMG are reflected in the
accompanying consolidated financial statements as "Equity earnings (losses) from
Liberty Media Group" and "Investment in Liberty Media Group and related
receivables, net".
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. We have provided the financial statements as exhibits to this document
to provide additional disclosures to investors to allow them to assess the
financial performance of AT&T Wireless Group and Liberty Media Group. Since 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 intercompany agreement.
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 provision 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.
As part of the first phase of the restructuring plan, we are planning an
exchange offer that will give AT&T shareowners the opportunity to exchange any
portion of their AT&T common shares for shares of AT&T Wireless Group tracking
stock, subject to pro-ration. Following the exchange offer and subject to
specified conditions, AT&T plans to split-off AT&T Wireless Group from AT&T. We
intend, however, to retain up to $3 billion of shares of AT&T Wireless for
future sale, exchange or
48
59
monetization within six months following the split-off. We expect AT&T Wireless
will become an independent, publicly-held company in mid-2001, upon receipt of
appropriate tax and other approvals.
In addition to the split-off of AT&T Wireless, we intend to fully separate
or issue separate tracking stocks to reflect the financial performance and
economic value of each of our other major business units. We plan to create and
issue new classes of stock to track the financial performance and economic value
of our AT&T Broadband unit and AT&T Consumer unit. We plan to sell some
percentage of shares of the AT&T Broadband unit in the fall of 2001. Within 12
months of such sale, we intend to completely separate AT&T Broadband from AT&T,
as an asset-based stock. The AT&T Consumer tracking stock is expected to be
fully distributed to AT&T shareowners in the second half of 2001.
AT&T expects that these transactions will be tax-free to U.S. shareholders.
AT&T's restructuring plan is complicated and involves a substantial number of
steps and transactions, including obtaining various conditions, such as Internal
Revenue Service (IRS) rulings. In addition, future financial conditions,
superior alternatives or other factors may arise or occur that make it
inadvisable to proceed with part or all of AT&T's restructuring plan. Any or all
of the elements of AT&T's restructuring plan may not occur as we currently
expect or in the timeframes that we currently contemplate, or at all.
Alternative forms of restructuring, including sales of interests in these
businesses, would reduce what is available for distribution to shareowners in
the restructuring.
On November 15, 2000, we announced that our board of directors voted to
split-off LMG. A new asset-based security will be issued to holders of LMG
tracking stock in exchange for their LMG tracking shares. The split-off remains
subject to receipt of a favorable tax ruling from the IRS. We expect this
split-off to be completed in mid-2001.
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
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 2000
The comparison of first quarter 2001 results with the first quarter of 2000
was impacted by events, such as acquisitions and dispositions, that occurred
during these two years. For example, at year-end 2000, we acquired the wireless
property in Los Angeles as a result of the AB Cellular redemption of AT&T's
equity interest in AB Cellular. Prior to that date, AT&T held a 55.62% equity
interest in AB cellular with 50% voting interest and recorded the investment
under the equity method of accounting. The consolidation of the Los Angeles
property resulted in the inclusion of 100% of its results in each line item of
AT&T's Consolidated Balance Sheet on December 31, 2000 and the results were also
included in AT&T's Consolidated Income Statements starting January 2001. In
addition, in 2000, we acquired MediaOne and wireless properties in the San
Francisco Bay area, which were both included in our first quarter 2001 results,
but were not included in the first quarter 2000 results.
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 March 31,
2001, we had an approximate 23% economic interest and 74% voting interest in
Excite@Home. 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 reflected in
the March 31, 2001 and December 31, 2000 Consolidated Balance Sheets within
"Minority Interest" and as a component of "Minority interest income (expense)"
in the Consolidated Statement of Income for the three months ended March 31,
2001. For the three months ended March 31, 2000, our ownership interest in
Excite@Home was accounted for under the equity method of accounting, with
49
60
earnings or losses included as a component of "Net losses from other equity
investments" in the Consolidated Statement of Income.
Effectively July 1, 2000, the Federal Communication Commission (FCC)
eliminated Primary Interexchange Carrier Charges (PICC or per-line charges) that
AT&T pays for residential and single-line businesses. 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.
REVENUE
FOR THE
THREE MONTHS
ENDED MARCH 31,
------------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------- -------
Business services................................... $ 7,168 $ 7,252
Consumer services................................... 4,007 5,037
Wireless services................................... 3,212 2,198
Broadband........................................... 2,465 1,557
Corporate and Other................................. (89) (143)
Total revenue....................................... $16,763 $15,901
Total revenue increased 5.4%, or $0.9 billion, in the first quarter of 2001
compared with the prior year period. Approximately $1.0 billion of the increase
is due to the impact of acquisitions and the consolidation of Excite@Home
partially offset by the elimination of PICC and dispositions. Also contributing
to the revenue growth was Wireless Services, data and Internet protocol (IP)
growth within Business Services and Broadband. These increases were largely
offset by the accelerating declines in long distance voice revenue. We expect
long distance revenue to continue to be negatively impacted by ongoing
competition and product substitution.
Revenue by segment is discussed in more detail in the segment results
section.
OPERATING EXPENSES
FOR THE
THREE MONTHS
ENDED MARCH 31,
------------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Costs of services and products...................... $4,837 $3,915
Costs of services and products increased $0.9 billion, or 23.6%, in the
first quarter of 2001 compared with the first quarter of 2000. Approximately
$0.7 billion of the increase was due to acquisitions, primarily MediaOne, net of
dispositions, and the impact of consolidating Excite@Home. The higher costs
associated with new outsourcing contracts as well as our growing wireless
subscriber base increased expenses by approximately $0.2 billion. The higher
wireless expenses primarily related to higher costs of handsets sold due to an
increase in gross subscriber additions in the first quarter of 2001 compared
with the same period in the prior year.
50
61
FOR THE
THREE MONTHS
ENDED MARCH 31,
------------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Access and other connection......................... $3,286 $3,588
Access and other connection expenses decreased 8.4%, to $3.3 billion in the
first quarter of 2001, compared with $3.6 billion in the first quarter of 2000.
Included within access and other connection expenses are costs that we pay to
connect calls on the facilities of other service providers. Mandated reductions
in per-minute access costs and decreased per-line charges effective in the
second half of 2000 resulted in lower costs of approximately $0.5 billion. These
decreases were partially offset by approximately $0.2 billion of higher costs
due to volume increases, as well as higher Universal Service Fund contributions.
Since most of these charges are passed through to the customer, the per-minute
access-rate and per-line charge reductions and the Universal Service Fund
contributions have generally resulted in a corresponding impact on revenue.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Selling, general and administrative................... $3,868 $3,289
Selling, general and administrative (SG&A) expenses increased $0.6 billion,
or 17.6%, in the first quarter of 2001, compared with the first quarter of 2000.
Increased marketing, advertising and customer care in support of our growing
Wireless and Broadband businesses drove approximately $0.3 billion of the
increase. In addition, $0.4 billion of the increase was due to acquisitions,
primarily MediaOne, net of dispositions, and the impact of consolidating
Excite@Home. Partially offsetting these increases was cost savings of
approximately $0.2 billion as a result of continued cost-control initiatives,
primarily from our Consumer Services Business.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Depreciation and other amortization................... $2,141 $1,566
Depreciation and other amortization expenses increased $0.6 billion, or
36.8%, to $2.1 billion in the first quarter of 2001 compared with the
corresponding prior-year period. Approximately half of the increase was due to a
higher asset base resulting from continued infrastructure investment, and the
remaining increase resulted from acquisitions activity, primarily MediaOne.
Capital expenditures were $3.3 billion for the first quarter of 2001 compared
with $2.8 billion for the same period in 2000. The primary focus for capital
expenditures in 2001 continues to be on the core growth areas of wireless,
broadband, data and IP, and local.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Amortization of goodwill, franchise costs and other
purchased intangibles................................ $846 $368
Amortization of goodwill, franchise costs and other purchased intangibles
increased $0.5 billion to $0.8 billion, or 129.6%, in the first quarter of 2001
compared with the corresponding prior year
51
62
period. This increase was largely attributable to acquisitions, primarily
MediaOne, as well as the consolidation of Excite@Home.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Net restructuring and other charges.................... $808 $773
During the first quarter of 2001, AT&T recorded $808 million of net
restructuring and other charges, which had an approximate $0.21 impact on basic
and diluted earnings per share. Included in these charges was $739 million for
asset impairment charges related to Excite@Home, and $69 for restructuring and
exit costs which consisted of $59 million for cash severance costs, $6 million
related to facilities and $4 million related to termination of lease
obligations.
The asset impairment charges included $600 recorded by Excite@Home
associated with goodwill impairment of various acquisitions, primarily Excite,
and a related goodwill impairment charge of $139 recorded by AT&T associated
with its acquisition goodwill of Excite@Home. The impairment resulted from the
continued weakness of the online media market that Excite@Home operates in.
Since we consolidate, but only 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 eliminated in our March 31, 2001 Consolidated Statement of
Income as "Minority interest income (expense)."
The $59 million of cash severance costs were primarily recorded as a result
of synergies created by the MediaOne merger related to approximately 2,350
employees. Approximately 10% of the individuals were management employees and
90% were non-management employees. Nearly 88% of the affected employees have
left their positions as of March 31, 2001, and the remaining employees will
leave the company by the end of 2001.
This restructuring initiative is projected to yield cash savings of
approximately $42 million in 2001 (net of severance benefit pay-outs of
approximately $59 million) and approximately $132 million per year thereafter,
as well as EBIT savings of approximately $97 million in 2001 and approximately
$101 million per year thereafter. We expect increased spending in growth
businesses will largely offset these cash and EBIT savings. The EBIT savings,
primarily attributable to reduced personnel-related expenses, will be realized
in costs of services and products and SG&A expenses.
In the second quarter of 2001, we expect to incur additional restructuring
charges resulting from MediaOne synergies and work force reductions at
Excite@Home.
During the first quarter of 2000, AT&T recorded $773 million of net
restructuring and other charges, which included $682 million for restructuring
and exit costs associated with AT&T's initiative to reduce costs by the end of
2000, and $91 million related to the government-mandated disposition of AT&T
Communications (U.K.) Ltd., which would have competed directly with Concert.
Included in restructuring and exit costs was $458 million of cash termination
benefits associated with the involuntary separation of approximately 6,200
employees. Approximately one-half of the individuals were management employees
and one-half were non-management employees. Nearly 60% of the affected employees
have left their positions as of March 31, 2001, and the remaining employees will
leave the company during 2001.
We also recorded $62 million of network lease and other contract
termination costs associated with penalties incurred as part of notifying
vendors of the termination of these contracts during the quarter.
Also included in restructuring and exit costs was $144 of benefit
curtailment costs associated with employee separations as part of these exit
plans. We also recorded an asset impairment charge
52
63
of $18 related to the write-down of unrecoverable assets in certain businesses
in which the carrying value is no longer supported by future cash flows.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -------
Operating Income........................................ $977 $2,402
Operating income decreased $1.4 billion, or 59.4%, in the first quarter of
2001 compared with the same period in 2000. The decrease was primarily due to
the impact of acquisitions and the consolidation of Excite@Home, which lowered
operating income by nearly $1.1 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. Also contributing to the decrease in operating income
was the impact of lower revenue in Consumer Services, and higher operating
expenses for advanced Broadband services, including digital video, high-speed
data and broadband telephony, partially offset by restructuring charges, net of
asset impairment, recorded in the first quarter of 2000.
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ -----
Other (expense) income.................................. $(781) $668
Other (expense) income for the first quarter of 2001 was an expense of $0.8
billion, compared with income of $0.7 billion in the first quarter of 2000, an
increase in expense of $1.4 billion. Effective January 1, 2001, in conjunction
with the adoption of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," we reclassified certain investment securities, which
support debt that is indexed to those securities, from "available-for-sale" to
"trading." As a result of the reclassification, we recorded a pretax charge of
$1.0 billion in other income. Also contributing to the increase in expense were
lower net gains on sale of businesses and investments of approximately $0.4
billion.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Interest Expense....................................... $969 $589
Interest expense increased 64.6%, or $0.4 billion, in first quarter of 2001
compared with the same period in 2000. The increase was primarily due to the
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 debt issuance by AT&T Wireless in the quarter.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Provision for income taxes............................. $292 $509
The provision for income taxes was $0.3 billion in the first quarter of
2001 compared with $0.5 billion in the first quarter of 2000. The decrease in
expense was primarily due to a net loss before income taxes in the first quarter
of 2001, compared with earnings before income taxes in the first quarter of
2000. As AT&T recorded a tax provision despite having pretax losses for the
first quarter
53
64
of 2001, the effective tax rate for the quarter was a negative 37.6%, compared
with 20.5% for the first quarter of 2000. The first quarter 2001 effective tax
rate was impacted by a charge associated with the adoption of SFAS No. 133, as
well as a non tax-deductible asset impairment charge recorded related to
Excite@Home. The first quarter of 2001 effective tax rate was also negatively
impacted by the consolidation of operational losses of Excite@Home, which is
unable to record tax benefits on its pretax losses, and higher non
tax-deductible goodwill amortization. The first quarter 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.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Minority interest income (expense)..................... $650 $(44)
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 $0.7 billion decrease in minority interest
for the first quarter ended March 31, 2001, as compared with the corresponding
prior-year period resulted from the consolidation of Excite@Home effective
September 1, 2000. The minority interest income in 2001 primarily reflects
losses generated by Excite@Home, including an asset impairment charge that were
attributable to the approximate 77% of Excite@Home not owned by AT&T. The income
tax benefit recorded on minority interest income (expense) was $87 million and
$26 million for the first quarter of 2001 and 2000, respectively.
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ -----
Equity (losses) earnings from Liberty Media Group....... $(697) $942
Equity losses from LMG, which are recorded net of income taxes, were $0.7
billion in the first quarter of 2001, compared with earnings of $0.9 billion for
the same period in 2000. The decline was primarily due to lower 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, the impairment charges recorded
on LMG's investments to reflect other than temporary declines in value also
contributed to the decline. These were partially offset by tax benefits recorded
in the quarter associated with the net loss before cumulative accounting change
compared with tax expense in the prior year quarter associated with net
earnings.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Net losses from other equity Investments............... $136 $187
Net losses from other equity investments, which were recorded net of income
taxes, were $0.1 billion in the first quarter of 2001, a 27.0% decrease compared
with the first quarter of 2000. This decrease was primarily due to the
consolidation of Excite@Home and higher earnings related to Cablevision Systems
Corp. reflecting a gain associated with the swap of cable properties, partially
offset by higher losses from its normal business operations. Partially
offsetting these decreases were
54
65
higher equity losses from various investments including Concert, as well as
equity earnings in the first quarter of 2000 from investments sold in 2000. The
income tax benefit recorded on net losses from other equity investments were
$102 million and $115 million for the first quarter of 2001 and the first
quarter of 2000, respectively.
FOR THE
THREE MONTHS
ENDED MARCH
31,
------------
DOLLARS IN MILLIONS 2001 2000
------------------- ---- ----
Cumulative effect of accounting change.................... $904 $--
Cumulative effect of accounting change, net of applicable income taxes, was
$0.4 billion, in the first quarter of 2001 for AT&T Group. It represented fair
value adjustments of equity based derivative instruments embedded in indexed
debt instruments including those acquired in conjunction with the MediaOne
merger, as well as to our warrant portfolio due to the adoption of SFAS No. 133.
Cumulative effect of accounting change, net of applicable income taxes, was
$0.5 billion, for Liberty Media Group in the first quarter of 2001. The increase
was primarily due to separately recording the embedded call option obligations
associated with LMG's senior exchangeable debentures.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Dividend requirements of preferred stock................ $181 $--
Dividend requirements of preferred stock were $0.2 billion in the first
quarter of 2001. The preferred stock dividend represented interest in connection
with convertible preferred stock issued to NTT DoCoMo.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2001 2000
----------------------------------------------- ------ ------
AT&T Common Stock Group:
(Losses) income....................................... $ (366) $1,741
AT&T Common Stock Group -- per basic share:
(Losses) earnings -- before cumulative effect of
accounting change................................... $(0.19) $ 0.55
Cumulative effect of accounting change................ 0.09 --
AT&T Common Stock Group (losses) earnings............. $(0.10) $ 0.55
AT&T Common Stock Group -- per diluted share:
(Losses) earnings -- before cumulative effect of
accounting change................................... $(0.19) $ 0.54
Cumulative effect of accounting change................ 0.09 --
AT&T Common Stock Group (losses) earnings............. $(0.10) $ 0.54
AT&T Wireless Group:
Losses................................................ $ 7 --
Losses per basic and diluted.......................... $ 0.02 --
55
66
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2001 2000
----------------------------------------------- ------ ------
Liberty Media Group:
(Losses) earnings..................................... $ (152) $ 942
Liberty Media Group -- per basic and diluted share:
(Losses) earnings -- before cumulative effect of
accounting change................................... $(0.27) $ 0.37
Cumulative effect of accounting change................ 0.21 --
Liberty Media Group (losses) earnings................. $(0.06) $ 0.37
Losses per diluted share attributable to the AT&T Common Stock Group were
$0.10 in the first quarter of 2001 compared with EPS on a diluted basis of $0.54
in the first quarter of 2000. The decrease was primarily driven by lower
operating income, lower gains on the sales of businesses and investments, and
the net impact of the adoption of SFAS No. 133, which includes a $0.15 per share
charge relating to the revaluation of certain securities reclassified from
"available-for-sale" to "trading" recorded in other income and a net benefit of
$0.09 per share relating to the cumulative effect of adoption. Also contributing
to the decrease in earnings was increased interest expense, partially offset by
higher minority interest income.
Losses per diluted share attributable to Liberty Media Group (LMG) were
$0.06 in the first quarter of 2001, compared with earnings of $0.37 on a diluted
basis, in the first quarter of 2000. The decline was primarily due to lower
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, the impairment
charges recorded on LMG's investments to reflect other than temporary declines
in value also contributed to the decline. These were partially offset tax
benefits recorded in the quarter associated with the net loss before cumulative
accounting change compared with tax expense in the prior year quarter associated
with net earnings as well as by the cumulative effect of the accounting changes
due to the adoption of SFAS 133.
SEGMENT RESULTS
In support of the services we provide, we segment our results by the
business units that support our primary lines of business: Business Services,
Consumer Services, Wireless Services and Broadband. The balance of AT&T's
operations, excluding LMG is included in a Corporate and Other category.
Although not a segment, we also discuss the results of LMG.
The discussion of segment results includes revenue; EBIT (earnings before
interest, taxes, the cumulative effect of accounting changes and dividend
requirements on preferred stock); EBITDA [EBIT excluding depreciation and
amortization, and minority interest (expense) income other than Excite@Home's
minority (expense) interest]; total assets, and capital additions. The
discussion of EBITDA for Wireless Services and Broadband is modified to exclude
other income and net losses from equity investments. Total assets for each
segment generally include all assets, except intercompany receivables. However,
our Wireless Services segment included intercompany receivables from AT&T and
the related interest income since these assets relate to the results of the AT&T
Wireless Group tracked business. Prepaid pension assets and corporate-owned or
leased real estate are generally held at the corporate level, and therefore are
included in the Corporate and Other group. 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.
56
67
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 earnings before interest, taxes, the
cumulative effect of accounting changes and dividend requirements on preferred
stock. In addition, management also uses EBITDA as a measure of segment
profitability and performance, and is defined as EBIT, excluding depreciation
and amortization, minority interest (expense) income other than Excite@Home's
minority (expense) interest. 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 $0.5 billion and $2.7 billion for the quarters ended
March 31, 2001 and 2000, respectively. EBITDA for AT&T was $3.5 billion and $4.8
billion for the three months ended March 31, 2001 and 2000, 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.
In connection with our corporate restructuring program set forth in late
2000, our existing segments reflect certain managerial changes enacted since the
publication of our 2000 annual results. The changes are as follows: The Business
Services segment was expanded to include the results of international operations
and ventures. In addition, certain corporate costs that were previously recorded
within the Corporate and Other Group have been allocated to the respective
segments in an effort to ultimately have the results of these businesses reflect
all direct corporate costs as well as overhead for shared services. All prior
period results have been restated to reflect these changes. Total assets for our
reportable segments generally include all asset, except intercompany
receivables. However, our Wireless Services Segment included intercompany
receivables from AT&T and the related interest income since these assets relate
to the results of the AT&T Wireless Group tracked businesses.
Reflecting the dynamics of our business, we continuously review our
management model and structure, which may result in additional adjustments to
our operating segments in the future. In addition, when we create tracking
stocks for our Consumer and Broadband units, we will begin allocating 'pure'
corporate overhead to these units. See note (b) for further detail on our
restructuring plan.
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.
57
68
THREE MONTHS
ENDED
MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
External revenue...................................... $6,940 $7,094
Internal revenue...................................... 228 158
Total revenue......................................... 7,168 7,252
EBIT.................................................. 1,018 1,146
EBITDA................................................ 2,036 2,152
OTHER ITEMS
Capital additions..................................... $1,287 $1,366
AT AT
MARCH 31, DECEMBER 31,
2001 2000
---------- -------------
Total assets..................................... $42,562 $42,747
REVENUE
Business Services revenue declined $0.1 billion, or 1.2%, in the first
quarter of 2001 compared with the first quarter of 2000. The decrease was
primarily due to a decline in long distance voice revenue of approximately $0.5
billion, offset by growth in data/IP of approximately $0.4 billion.
Long distance voice services revenue declined at a low-teens percentage
rate in the first quarter due to a declining average price per minute reflecting
the competitive forces within the industry that are expected to continue.
Partially offsetting this decline was a mid single-digit percentage growth rate
in minutes.
Data services, which represent the transportation of data, rather than
voice, along our network, grew at a high-teens percentage rate in the first
quarter. 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.
AT&T Solutions outsourcing revenue grew at a mid-teens percentage rate in
the first quarter primarily due to growth from new contract signings and add-on
business from existing clients.
Local voice services revenue grew at a low-teens percentage rate in the
first quarter. AT&T added approximately 90,000 access lines in the first quarter
bringing total access lines in service as of March 31, 2001 to almost 2.4
million, an increase of 42.5% compared to March 31, 2000. AT&T serves more than
6,000 buildings on-net representing a 3.2% increase compared to March 31, 2000.
Business Services internal revenue increased $0.1 billion, or 44.6%, in the
first quarter as a result of greater sales of business long distance services to
other AT&T units that resell such services to their external customers,
primarily Broadband, Wireless Services and Excite@Home.
EBIT/EBITDA
EBIT and EBITDA declined $0.1 billion, or 11.2% and 5.4%, respectively, in
the first quarter of 2001 compared with the same period last year. The decline
primarily reflects the impact of pricing pressure within the long distance voice
business as well as the shift from higher margin long distance services to lower
margin growth services. The decline also reflects the impact of equity losses
recorded for Concert in the first quarter of $0.1 billion, representing a
decrease of approximately $0.2 billion compared to the first quarter of 2000.
Mostly offsetting the overall decrease was lower restructuring charges of $0.4
billion in the first quarter of 2001. For the remainder of 2001, Concert is
58
69
expected to continue to generate operating losses. Currently, Concert is
considering restructuring its business in order to return to profitability.
These actions could result in significant restructuring charges. In addition,
AT&T and BT are discussing ways to improve the performance of the Concert
business. These discussions include a variety of strategic alternatives,
including the acquisition of, or other business combination of our business
services operations with BT's business services unit. We have also considered
narrowing the scope of Concert's business, as well as its termination as a joint
venture.
OTHER ITEMS
Capital additions decreased $0.1 billion, or 5.8%, in the first quarter of
2001 compared to the first quarter of 2000.
Total assets decreased $0.2 billion, or 0.4%, at March 31, 2001 compared
with December 31, 2000.
CONSUMER SERVICES
Our Consumer Services segment provides a variety of any-distance
communications services including long distance, local toll (intrastate calls
outside the immediate local area) and Internet access to residential customers.
In addition, Consumer Services provides transaction services, such as prepaid
calling card and operator-handled calling services. Local phone service is also
provided in certain areas.
THREE MONTHS
ENDED
MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Revenue............................................... $4,007 $5,037
EBIT.................................................. 1,318 1,658
EBITDA................................................ 1,365 1,715
OTHER ITEMS
Capital additions..................................... $ 22 $ 23
AT AT
MARCH 31, DECEMBER 31,
2001 2000
---------- -------------
Total assets..................................... $2,768 $3,150
REVENUE
Consumer Services revenue declined 20.5%, or 1.0 billion, in the first
quarter of 2001 compared with the first quarter of 2000. The decline was
primarily due to a decline in traditional voice services, such as Domestic Dial
1, reflecting the ongoing competitive nature of the consumer long distance
industry, which has resulted in pricing pressures. In addition, approximately
$0.3 billion decline was related to the elimination of per-lines charges in
2000. Also negatively impacting revenue was product substitution and market
migration away from direct-dial wireline and higher priced calling-card services
to lower-priced prepaid-card services.
The calling volume decline was in the low-teen percentage rate in the first
quarter of 2001 primarily due to both the competition in the long distance
industry and production substitution which we expect will continue to negatively
impact Consumer Services revenue.
59
70
EBIT/EBITDA
EBIT and EBITDA for Consumer Services declined 20.5% and 20.4%,
respectively, in the first quarter of 2001 compared with the first quarter of
last year. The declines were primarily driven by impacts of lower revenue
partially offset by cost-control initiatives.
OTHER ITEMS
Capital additions was essentially flat in the first quarter of 2001
compared with the year-ago quarter.
Total assets declined $0.4 billion in the first quarter to $2.8 billion at
March 31, 2001. The decline was primarily driven by lower accounts receivables,
reflecting lower revenue.
WIRELESS SERVICES
Our Wireless Services segment offers wireless voice and data services and
products to customers in our 850 megahertz (cellular) and 1900 megahertz
(Personal Communications Services, or PCS) markets. Wireless Services also
includes certain interests in partnerships and affiliates that provide wireless
services in the United States and internationally, aviation-communications
services and fixed wireless. Fixed wireless services provide high-speed Internet
access and any-distance voice services using wireless technology to residential
and small business customers.
THREE MONTHS
ENDED
MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Revenue............................................... $3,212 $2,198
EBIT.................................................. 118 111
EBITDA*............................................... 717 401
OTHER ITEMS
Capital additions..................................... $1,904 $1,390
AT AT
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Total assets...................................... $46,930 $35,184
-------------------------
*EBITDA for Wireless Services excludes net pretax (losses) earnings from equity
investments and other income.
REVENUE
Wireless Services revenue grew $1.0 billion, or 46.2%, to $3.2 billion in
the first quarter of 2001 compared with the first quarter of 2000. Approximately
$0.5 billion of the growth was due to acquisitions, primarily Bay Area
Properties acquired in June 2000 and the Los Angeles market acquired in December
2000. The remaining increase was due to subscriber growth, slightly offset by a
decline in average monthly revenue per user (ARPU).
Consolidated subscribers grew 57.7% during the first quarter of 2001 to
15.7 million from 10.0 million for the first quarter of 2000. This growth
included approximately 3 million subscribers from acquisitions closed subsequent
to the first quarter of 2000. ARPU was $62.20 for the first quarter of 2001, a
7.4% decrease compared with the first quarter of 2000. AT&T Wireless Group's
average monthly churn rate in the first quarter of 2001 was 3.0% compared with
2.9% in the first quarter of
60
71
2000. The decline in ARPU and the increase in average monthly churn are
primarily a result of competitive pricing pressures, expansion into a broader
base of consumer segments, including prepaid wireless services, and the impact
of acquisitions which closed subsequent to the first quarter of 2000.
EBIT/EBITDA
EBIT increased $7 million, or 6.5%, to $0.1 billion in the first quarter of
2001 compared with the first quarter of 2000. The increase was primarily due to
higher revenue associated with the mobility business. However, these increases
were partially offset by higher SG&A and network costs to support growth in
subscribers and the wireless network, higher depreciation and amortization
expenses associated with an increased asset base and higher net pretax losses
from equity investments.
EBITDA, which excludes net pretax (losses) earnings of equity investments
and other income, increased $0.3 billion, or 78.9%, in the first quarter of 2001
to $0.7 billion compared with the prior year quarter. The improvement was
primarily driven by revenue growth associated with the mobility business. These
improvements were partially offset by related increase in expenses associated
with subscriber growth.
OTHER ITEMS
Capital additions increased $0.5 billion in the first quarter of 2001 to
$1.9 billion compared with the first quarter of 2000. The increase was primarily
driven by capital expenditures to upgrade and increase network capacity and
improve network quality.
Total assets were $47.0 billion as of March 31, 2001, an increase of $11.7
billion, or 33.4%, compared with December 31, 2000. $6.3 billion of the increase
was due to the net proceeds from the Senior Notes offering. Also contributing to
the increase was $6.2 billion of proceeds from the NTT DoCoMo investment that
was allocated to AT&T Wireless Group from AT&T. These amounts received were
loaned back to AT&T, in the form of an intercompany receivable. These increases
were partially offset by the repayment of short-term debt due to AT&T.
BROADBAND
Our Broadband segment offers a variety of services through our cable
broadband network, including traditional analog video and advanced services such
as digital video service, high-speed data service and broadband telephony
service.
THREE MONTHS
ENDED
MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Revenue.................................................... $2,465 $1,557
EBIT....................................................... (508) 236
EBITDA excluding other income.............................. 394 329
OTHER ITEMS
Capital additions.......................................... $ 910 $1,344
61
72
AT AT
MARCH 31, DECEMBER 31,
2001 2000
------------ ---------------
Total assets............................... $114,191 $114,848
-------------------------
*EBITDA for Broadband excludes net losses from equity investments and other
income
Results of operations for the three months ended March 2001, include the
results of MediaOne since its acquisition on June 15, 2000, while the three
months ended March 2000, does not include any results of MediaOne.
REVENUE
Broadband revenue grew $0.9 billion, or 58.3% for the three months ended
March 31, 2001 compared with the corresponding prior year period. Approximately
$0.8 billion of the increase in revenue was due to the acquisition of MediaOne
in 2000. In addition, revenue from advanced services (digital video, high-speed
data, and broadband telephony) contributed approximately $0.1 billion to the
increase.
At March 31, 2001, Broadband serviced approximately 15.9 million basic
cable customers, passing approximately 28.1 million homes, compared with 11.1
million basic cable customers, passing approximately 19.2 million homes at March
31, 2000. At March 2001, we provided digital video service to approximately 3.1
million customers, high-speed data service to approximately 1.3 million
customers and broadband telephony service to approximately 0.7 million
customers. This compares with nearly 2.0 million digital-video customers,
approximately 0.3 million high-speed data customers, and nearly 40,000 broadband
telephony customers at March 31, 2000.
EBIT/EBITDA
EBIT for the first quarter ended March 31, 2001 was a deficit of $0.5
billion, a decline of $0.7 billion from EBIT of $0.2 billion for the comparable
prior year period. This decline was primarily due to $0.4 billion of gains on
sales of businesses and investments, recorded in the first quarter of 2000,
primarily gains on the swap of cable properties with Cox as well as the prior
year sale of our investment in Lenfest. Also contributing to the decline was the
impact of the acquisition of MediaOne, including higher amortization of goodwill
and purchased intangibles, and higher expenses associated with high-speed data
and broadband telephony services of approximately $0.5 billion. These decreases
were offset by $0.2 billion of lower pretax losses from equity investments.
EBITDA, which excludes net losses from equity investments and other income,
was $0.4 billion for the three months ended March 31, 2001 an improvement of
$0.1 billion, or 19.9% from the comparable prior year period. This improvement
was primarily due to the acquisition of MediaOne offset by increased expenses
associated with high-speed data and broadband telephony services.
OTHER ITEMS
Capital additions decreased 32.3% to $0.9 billion at March 31, 2001, as
compared with $1.3 billion at March 31, 2000. This decrease was primarily driven
by decreased contributions to various nonconsolidated investments, slightly
offset by increased property, plant and equipment.
Total assets at March 31, 2001, were $114.2 billion compared with $114.9
billion at December 31, 2000. The decrease in total assets at March 31, 2001 is
primarily due to lower mark-to-market valuations on certain investments.
62
73
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.
THREE MONTHS
ENDED
MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------- -----
Revenue............................................... $ (89) $(143)
EBIT.................................................. (1,424) (453)
EBITDA................................................ (1,239) (308)
OTHER ITEMS
Capital additions..................................... $ 183 $ 30
AT AT
MARCH 31, DECEMBER 31,
2001 2000
------------ ---------------
Total assets............................... $618 $12,004
REVENUE
Revenue for corporate and other primarily includes the elimination of
intercompany revenue of negative $0.3 billion ($97 million increase from prior
year) and revenue from Excite@Home of approximately $0.1 billion which was
consolidated beginning September 1, 2000. The Corporate and other revenue
decline was primarily due to the higher intercompany elimination as a result of
higher sales from Business Services to Wireless and Broadband.
EBIT/EBITDA
EBIT and EBITDA declined $1.0 billion and $0.9 billion, respectively, to
deficits of $1.4 billion and $1.2 billion, respectively, in the first quarter of
2001 compared with the first quarter of 2000. The decline was primarily due to
the adoption of SFAS 133 in the quarter, which resulted in a charge of
approximately $1.0 billion. Also contributing to the decline was asset
impairment charges, net of minority interest, of $0.3 billion recorded by
Excite@Home and AT&T related to Excite@Home.
OTHER ITEMS
Capital additions increased approximately $0.2 billion in the first quarter
of 2001 compared with the first quarter of 2000. The increase was driven by the
capital additions of Excite@Home of $0.1 billion.
Total assets declined $11.4 billion during the first quarter of 2001 to
$0.6 billion. The decline was primarily driven by elimination of intercompany
receivables with AT&T Wireless Group of approximately $10.6 billion.
LIBERTY MEDIA GROUP RESULTS
Liberty Media Group (LMG) produces, acquires and distributes entertainment,
educational and informational programming services through all available formats
and media. LMG is also engaged in electronic retailing services, direct
marketing services, advertising sales relating to programming services,
infomercials and transaction processing. Losses from LMG were $0.2 billion for
the three months ended March 31, 2001, compared with earnings of $0.9 billion
for the three months ended March 31, 2000. The decline was primarily due to
lower gains on dispositions, including gains
63
74
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, the impairment charges recorded on LMG's investments to
reflect other than temporary declines in value also contributed to the decline.
These were partially offset tax benefits recorded in the quarter associated with
the net loss before cumulative accounting change compared with tax expense in
the prior year quarter associated with net earnings as well as by the cumulative
effect of the accounting changes due to the adoption of SFAS 133.
THREE YEARS ENDED DECEMBER 31, 2000
The comparison of 2000 results with 1999 was impacted by events, such as
acquisitions and dispositions that occurred during these two years. For example,
in 2000 we acquired MediaOne and wireless properties in the San Francisco Bay
area, which were both included in our 2000 results for part of the year, but
were not in 1999 results. In 1999, we acquired TCI, the IBM Global Network (now
AT&T Global Network Services, or AGNS) and Vanguard Cellular Systems, Inc.
(Vanguard). These businesses were included in 2000 results for a full year, but
only a part of 1999 (since their respective dates of acquisition). Further, we
disposed of certain international businesses during 1999 and 2000. The results
of businesses sold in 1999 were included in 1999 results for part of the year,
and were not in 2000 results. Likewise, businesses sold in 2000 were included in
1999 results for the full year and in 2000 results for part of the year.
Year-over-year comparison was also impacted by the consolidation of At Home
Corp. (Excite@Home) beginning September 1, 2000, due to corporate-governance
changes which gave AT&T a controlling interest. At that time and on December 31,
2000, we had an approximate 23% economic interest and 74% voting interest in
Excite@Home. Prior to September 1, 2000, we accounted for our ownership in
Excite@Home under the equity method of accounting, which means our investment
was included in "Other investments and related advances" in the 1999
Consolidated Balance Sheet and any earnings or losses were included as a
component of "Net losses from other equity investments" in the Consolidated
Statements of Income. The consolidation of Excite@Home resulted in the inclusion
of 100% of its results in each line item of AT&T's Consolidated Balance Sheet
and Consolidated Income Statement. The approximate 77% we do not own is shown in
the 2000 Consolidated Balance Sheet within "Minority interest" and as a
component of "Minority interest income (expense)" in the 2000 Consolidated
Statement of Income.
On January 5, 2000, we launched Concert, our global joint venture with
British Telecommunications plc (BT). AT&T contributed all of its international
gateway-to-gateway assets and the economic value of approximately 270
multinational customers specifically targeted for direct sales by Concert. As a
result, 2000 results do not include the revenue and expenses associated with
these customers and businesses, while 1999 does, and 2000 results include our
proportionate share of Concert's earnings in "Net losses from other equity
investments."
Effective July 1, 2000, the FCC eliminated Primary Interexchange Carrier
Charges (PICC or per-line charges) that AT&T pays for residential and
single-line business customers. The elimination of these per-line charges
resulted in lower access expense as well as lower revenue, since AT&T has
historically billed its customers for these charges.
The comparison of 1999 results with 1998 was also impacted by the 1999
acquisitions of TCI, AGNS and Vanguard, since 1999 results include these
businesses for part of the year, while 1998 does not include them. This
comparison is also impacted by the 1999 dispositions of international
businesses, which were included in 1999 results for part of the year, but were
in 1998 results for the full year.
64
75
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Business Services................................. $28,488 $27,480 $24,285
Consumer Services................................. 18,976 21,854 22,885
Wireless Services................................. 10,448 7,627 5,406
Broadband......................................... 8,217 5,070 --
Other and Corporate............................... (148) 569 647
Total revenue..................................... $65,981 $62,600 $53,223
Total revenue increased 5.4%, or $3.4 billion, in 2000 compared with the
prior year. Approximately $2.1 billion of the increase was due to the impact of
acquisitions and the consolidation of Excite@Home, offset by the impact of
Concert, dispositions and the elimination of PICC. The remaining $1.3 billion
increase was primarily driven by a growing demand for our wireless and data and
Internet protocol (IP) products, and outsourcing services, partially offset by
continued and accelerating declines in long distance voice revenue. We expect
long distance revenue to continue to be negatively impacted by ongoing
competition and product substitution.
Total revenue in 1999 increased $9.4 billion, or 17.6%, compared with 1998.
Nearly three-quarters of the increase was due to acquisitions, net of
dispositions. The remaining increase was fueled by growth in wireless, business
data, business long distance voice and outsourcing revenue, partially offset by
the continued decline of consumer long distance voice revenue.
Revenue by segment is discussed in greater detail in the segment results
section.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Costs of services and products.................... $17,587 $14,594 $10,495
Costs of services and products include the costs of operating and
maintaining our networks, costs to support our outsourcing contracts, fees paid
to other wireless carriers for the use of their networks (off-network roaming),
programming and licensing costs for cable services, costs of wireless handsets
sold, the provision for uncollectible receivables and other service-related
costs.
These costs increased $3.0 billion, or 20.5%, in 2000 compared with 1999.
Nearly $2.1 billion of the increase was due to acquisitions and the impact of
consolidating Excite@Home, net of the impact of Concert and divestments of
international businesses. The higher costs associated with our growing wireless
subscriber base and wireless network as well as new outsourcing contracts
increased expenses by approximately $1.5 billion. The higher wireless expenses
primarily related to higher costs of handsets sold, due to a 53.5% increase in
gross subscriber additions in 2000 compared with 1999. Expenses also increased
due to higher video-programming costs principally due to rate increases, and
higher costs associated with new broadband services of approximately $0.3
billion. These increases were partially offset by approximately $0.9 billion of
costs savings from continued cost control initiatives and a higher pension
credit in 2000, primarily driven by a higher pension trust asset base, resulting
from increased investment returns.
Costs of services and products rose $4.1 billion, or 39.1%, in 1999
compared with 1998, primarily due to acquisitions, net of dispositions, which
accounted for approximately $3.7 billion of the increase. The higher costs
associated with our growing wireless subscriber base as well as new outsourcing
contracts increased expenses by approximately $1.5 billion. Partially offsetting
the 1999 increases were network cost-control initiatives of approximately $0.4
billion, and approximately $0.3 billion of lower expenses in Business Services
related to per-call compensation expense, provision for uncollectible
receivables and gross receipts and property taxes.
65
76
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Access and other connection....................... $13,518 $14,686 $15,328
Access and other connection expenses decreased 8.0%, to $13.5 billion in
2000, compared with $14.7 billion in 1999. Included within access and other
connection expenses are costs that we pay to connect domestic calls on the
facilities of other service providers. Mandated reductions in per-minute access
costs and decreased per-line charges resulted in lower costs of approximately
$1.5 billion. Also contributing to the decrease was more efficient network
usage. These decreases were partially offset by approximately $0.7 billion of
higher costs due to volume increases, and $0.5 billion as a result of higher
Universal Service Fund contributions. Since most of these charges are passed
through to the customer, the per-minute access-rate and per-line charge
reductions and the increased Universal Service Fund contributions have generally
resulted in a corresponding impact on revenue.
Costs paid to telephone companies outside of the United States to connect
calls made to countries outside of the United States (international settlements)
are also included within access and other connection expenses. These costs
decreased approximately $0.5 billion in 2000, as result of the commencement of
operations of Concert. Concert now incurs most of our international settlements
as well as earns most of our foreign-billed revenue, previously incurred and
earned directly by AT&T. In 2000, Concert billed us a net expense composed of
international settlement (interconnection) expense and foreign-billed revenue.
The amount charged by Concert in 2000 was lower than interconnection expense
incurred in 1999, since AT&T recorded these transactions as revenue and expense,
as applicable. Partially offsetting the decline were costs incurred related to
Concert products that AT&T now sells to its customers.
Access and other connection expenses declined $0.6 billion, or 4.2%, in
1999 compared with the prior year. This decline resulted from $0.9 billion of
mandated reductions in per-minute access rates in 1999 and 1998, and $0.6
billion of lower international settlement rates resulting from our negotiations
with international carriers. Additionally, we continue to manage these costs
through more efficient network usage. These reductions were partially offset by
$0.8 billion of higher costs due to volume growth, and $0.3 billion as a result
of increased per-line charges and Universal Service Fund contributions.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Selling, general and administrative............... $13,303 $13,516 $12,770
Selling, general and administrative (SG&A) expenses decreased $0.2 billion,
or 1.6%, in 2000 compared with 1999. Approximately $2.0 billion of the decrease
was due to savings from continued cost-control initiatives and a higher pension
credit in 2000, primarily driven by a higher pension trust asset base, resulting
from increased investment returns. Largely offsetting this decrease was more
than $1.4 billion of higher expenses associated with our growing wireless and
broadband businesses, and nearly $0.7 billion of expenses associated with
acquisitions and the consolidation of Excite@Home, net of the impact of Concert
and dispositions.
SG&A expenses increased $0.7 billion, or 5.8%, in 1999 compared with 1998.
This increase was primarily due to acquisitions, net of dispositions, which
resulted in an increase in SG&A expenses of approximately $1.4 billion. Also
contributing to the increase was approximately $0.4 billion of higher costs to
support our growing wireless subscriber base. Partially offsetting these
increases were our continued efforts to control costs on a companywide basis,
which resulted in lower SG&A expenses of approximately $0.9 billion, including
lower spending for consumer long distance acquisition-programs.
66
77
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
(DOLLARS IN MILLIONS)
Depreciation and other amortization.................. $7,274 $6,138 $4,378
Depreciation and other amortization expenses rose $1.1 billion, or 18.5%,
in 2000 compared with 1999 and increased $1.8 billion, or 40.2%, in 1999
compared with 1998. Approximately one-half of the increase in both years was due
to acquisitions and the consolidation of Excite@Home, net of dispositions and
the impact of Concert, as applicable. The remaining increase was primarily due
to a higher asset base resulting from continued infrastructure investment. Total
capital expenditures for 2000, 1999 and 1998 were $14.6 billion, $13.5 billion
and $8.0 billion, respectively. We continue to focus the vast majority of our
capital spending on our growth businesses of broadband, wireless, data and IP
and local.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ----
(DOLLARS IN MILLIONS)
Amortization of goodwill, franchise costs and other
purchased intangibles............................... $2,993 $1,301 $251
Amortization of goodwill, franchise costs and other purchased intangibles
increased $1.7 billion, or 130.1%, in 2000 compared with the prior year. This
increase was largely attributable to the consolidation of Excite@Home, as well
as acquisitions, primarily MediaOne and TCI. Franchise costs represent the value
attributable to agreements with local authorities that allow access to homes in
Broadband's service areas. Other purchased intangibles arising from business
combinations primarily included customer relationships and licenses.
Amortization of goodwill, franchise costs and other purchased intangibles
increased $1.1 billion in 1999 compared with 1998 due primarily to the
acquisition of TCI and, to a lesser extent, AGNS.
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 wireless, telecommunications and cable operations will not exceed 25
years.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
(DOLLARS IN MILLIONS)
Net restructuring and other charges.................. $7,029 $1,506 $2,514
During 2000, we recorded $7.0 billion of net restructuring and other
charges, which had an approximate $0.90 earnings per diluted share impact to the
AT&T Common Stock Group. The 2000 charge included $6.2 billion of asset
impairment charges related to Excite@Home, $759 million for restructuring and
exit costs associated with AT&T's initiative to reduce costs, and $91 million
related to the government-mandated disposition of AT&T Communications (U.K.)
Ltd., which would have competed directly with Concert.
The asset impairment charges related to Excite@Home resulted from the
deterioration of the market conditions and market valuations of Internet-related
companies during the fourth quarter of 2000, which caused Excite@Home to
conclude that intangible assets related to their acquisitions of
Internet-related companies may not be recoverable. Accordingly, Excite@Home
conducted a detailed assessment of the recoverability of the carrying amounts of
acquired intangible assets. This assessment resulted in a determination that
certain acquired intangible assets, including goodwill, related to these
acquisitions, including Excite, were impaired as of December 31, 2000. As a
result, Excite@Home recorded impairment charges of $4.6 billion in December
2000, representing the excess of the carrying amount of the impaired assets over
their fair value.
67
78
The impairment was allocated to each asset group based on a comparison of
carrying values and fair values. The impairment write-down within each asset
group was allocated first to goodwill, and if goodwill was reduced to zero, to
identifiable intangible assets in proportion to carrying values.
Since we own approximately 23% of Excite@Home, 77% of the charge recorded
by Excite@Home was not included as a reduction to AT&T's net income, but rather
was eliminated in our 2000 Consolidated Statement of Income as "Minority
interest income (expense)."
Also as a result of the foregoing, AT&T recorded a goodwill and
acquisition-related impairment charge of $1.6 billion associated with the
acquisition of our investment in Excite@Home. The write-down of our investment
to fair value was determined utilizing discounted expected future cash flows.
The $759 million charge for restructuring and exit plans was primarily due
to headcount reductions, mainly in network operations and Business Services,
including the consolidation of customer-care and call centers, as well as
synergies created by the MediaOne merger.
Included in exit costs was $503 million of cash termination benefits
associated with the separation of approximately 7,300 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were nonmanagement employees.
Approximately 6,700 employee separations were related to involuntary
terminations and approximately 600 to voluntary terminations.
We also recorded $62 million of network lease and other contract
termination costs associated with penalties incurred as part of notifying
vendors of the termination of these contracts during the year, and net losses of
$32 million related to the disposition of facilities primarily due to synergies
created by the MediaOne merger.
Also included in restructuring and exit costs in 2000 was $144 million of
benefit plan curtailment costs associated with employee separations as part of
these exit plans. Further, we recorded an asset impairment charge of $18 million
related to the write-down of unrecoverable assets in certain businesses where
the carrying value was no longer supported by estimated future cash flows.
The 2000 restructuring initiatives are projected to yield cash savings of
approximately $690 million per year, as well as EBIT (earnings before interest
and taxes, including pretax minority interest and net pretax losses from other
equity investments) savings of approximately $700 million per year. We expect
increased spending in growth businesses will largely offset these cash and EBIT
savings. The EBIT savings, primarily attributable to reduced personnel-related
expenses, will be realized in SG&A expenses and costs of services and products.
During 1999, we recorded $1.5 billion of net restructuring and other
charges, which had an approximate $0.37 earnings per diluted share impact to the
AT&T Common Stock Group.
A $594 million in-process research and development charge was recorded
reflecting the estimated fair value of research and development projects at TCI,
as of the date of the acquisition, which had not yet reached technological
feasibility or had no alternative future use. The projects identified related to
efforts to offer voice over IP, product-integration efforts for advanced set-top
devices, cost-savings efforts for broadband-telephony implementation, and
in-process research and development related to Excite@Home. We estimated the
fair value of in-process research and development for each project using an
income approach, which was adjusted to allocate fair value based on the
project's percentage of completion. Under this approach, the present value of
the anticipated future benefits of the projects was determined using a discount
rate of 17%. For each project, the resulting net present value was multiplied by
a percentage of completion based on effort expended to date versus projected
costs to complete.
The charge associated with voice-over-IP technology, which allows voice
telephony traffic to be digitized and transmitted in IP data packets, was $225
million as of the date of acquisition. Current voice-over-IP equipment does not
yet support many of the features required to connect customer
68
79
premises equipment to traditional phone networks. Further technical development
is also needed to ensure voice quality that is comparable to conventional
circuit-switched telephony and to reduce the power consumption of the
IP-telephony equipment. We started testing IP-telephony equipment in the field
in late-2000 and will continue tests throughout 2001.
The charge associated with product-integration efforts for advanced set-top
devices, which will enable us to offer next-generation digital services, was
$114 million as of the acquisition date. The associated technology consists of
the development and integration work needed to provide a suite of software tools
to run on the digital set-top box hardware platform. It is anticipated that
field trials will begin in late-2001 for next-generation digital services.
The charge associated with cost-savings efforts for broadband-telephony
implementation was $101 million as of the date of acquisition. Telephony cost
reductions primarily consist of cost savings from the development of a "line of
power switch," which allows us to cost effectively provide power for customer
telephony equipment through the cable plant. This device will allow us to
provide line-powered telephony without burying the cable line to each house.
Trials related to our telephony cost reductions are complete, and implementation
has begun in certain markets.
Additionally, the in-process research and development charge related to
Excite@Home was valued at $154 million. This charge related to projects to allow
for self-provisioning of devices and the development of next-generation client
software, network and back-office infrastructure to enable a variety of network
devices beyond personal computers and improved design for the regional data
centers' infrastructure.
Although there are technological issues to overcome to successfully
complete the acquired in-process research and development, we expect successful
completion. We estimate the costs to complete the identified projects will not
have a material impact on our results of operations. If, however, we are unable
to establish technological feasibility and produce commercially viable
products/services, anticipated incremental future cash flows attributable to
expected profits from such new products/services may not be realized.
A $531 million asset impairment charge was recorded in 1999 associated with
the planned disposal of certain wireless communications equipment resulting from
a program to increase the capacity and operating efficiency of our wireless
network. As part of a multivendor program, contracts have been executed with
select vendors to replace significant portions of our wireless infrastructure
equipment in the western United States and the metropolitan New York markets.
The program is intended to provide Wireless Services with the newest technology
available and allow us to evolve to new, next-generation digital technology,
which is designed to provide high-speed data capabilities. Since the assets will
remain in service from the date of the decision to dispose of these assets to
the disposal date, the remaining net book value of the assets will be
depreciated over this period.
Also in 1999, a $145 million charge for restructuring and exit costs was
recorded as part of AT&T's initiative to reduce costs. The restructuring and
exit plans primarily focused on the maximization of synergies through headcount
reductions in Business Services and network operations, including the
consolidation of customer-care and call centers.
Included in exit costs was $142 million of cash termination benefits
associated with the separation of approximately 2,800 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were nonmanagement employees.
Approximately 1,700 employee separations were related to involuntary
terminations and approximately 1,100 to voluntary terminations.
The 1999 restructuring initiatives are projected to yield cash savings of
approximately $250 million per year. This restructuring yielded EBIT savings of
approximately $200 million in 2000, and is expected to save nearly $400 million
per year thereafter. We expect increased spending in growth businesses will
largely offset these cash and EBIT savings. The EBIT savings, primarily
attributable
69
80
to reduced personnel-related expenses, will be realized in SG&A expenses and
costs of services and products.
We also recorded net losses of $307 million related to the
government-mandated disposition of certain international businesses that would
have competed directly with Concert, and $50 million related to a contribution
agreement Broadband entered into with Phoenixstar, Inc. That agreement requires
Broadband to satisfy certain liabilities owed by Phoenixstar and its
subsidiaries. The remaining obligation under this contribution agreement and an
agreement that MediaOne had is $57 million, which was fully accrued for at
December 31, 2000. In addition, we recorded benefits of $121 million related to
the settlement of pension obligations for former employees who accepted AT&T's
1998 voluntary retirement incentive program (VRIP) offer.
During 1998, we recorded $2.5 billion of net restructuring and other
charges, which had an approximate $0.59 earnings per diluted share impact to the
AT&T Common Stock Group. The bulk of the charge was associated with our overall
cost-reduction program and the approximately 15,300 management employees who
accepted the VRIP offer. A restructuring charge of $2,724 million was composed
of $2,254 million and $169 million for pension and postretirement
special-termination benefits, respectively, $263 million of benefit plan
curtailment losses and $38 million of other administrative costs. We also
recorded charges of $125 million for related facility costs and $150 million for
executive-separation costs. These charges were partially offset by benefits of
$940 million as we settled pension benefit obligations for 13,700 of the total
VRIP employees. In addition, the VRIP charges were partially offset by the
reversal of $256 million of 1995 business restructuring reserves primarily
resulting from the overlap of VRIP on certain 1995 projects.
Also included in the 1998 net restructuring and other charges were asset
impairment charges totaling $718 million, of which $633 million was related to
our decision not to pursue Total Service Resale (TSR) as a local-service
strategy. We also recorded an $85 million asset impairment charge related to the
write-down of unrecoverable assets in certain international operations where the
carrying value was no longer supported by future cash flows. This charge was
made in connection with the review of certain operations that would have
competed directly with Concert.
Additionally, $85 million of merger-related expenses were recorded in 1998
in connection with the Teleport Communications Group Inc. (TCG) merger, which
was accounted for as a pooling of interests. Partially offsetting these charges
was a $92 million reversal of the 1995 restructuring reserve. This reversal
reflected reserves no longer deemed necessary. The reversal primarily included
separation costs attributed to projects completed at a cost lower than
originally anticipated. Consistent with the three-year plan, the 1995
restructuring initiatives were substantially completed by the end of 1998.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------- ------
(DOLLARS IN MILLIONS)
Operating income.................................... $4,277 $10,859 $7,487
Operating income decreased $6.6 billion, or 60.6%, in 2000 compared with
1999. The decrease was primarily due to higher net restructuring and other
charges of $5.5 billion. Also contributing to the decrease was the impact of the
acquisition of MediaOne and the consolidation of Excite@Home, which lowered
operating income by $1.5 billion. A majority of the impact of operating losses
and the restructuring charge generated by Excite@Home was offset in minority
interest income (expense), reflecting the approximate 77% of Excite@Home we do
not own. Partially offsetting these decreases were cost-control initiatives and
a larger pension credit associated with our mature long distance businesses and
related support groups, partially offset by lower long distance revenue.
Operating income rose $3.4 billion, or 45.0%, in 1999 compared with 1998.
The increase was driven by approximately $2.3 billion of operating income
improvements in Business Services and
70
81
Consumer Services, reflecting operating expense efficiencies. Also contributing
to the increase was $1.0 billion of lower net restructuring and other charges.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ---- ------
(DOLLARS IN MILLIONS)
Other income.......................................... $1,514 $931 $1,281
Other income increased $0.6 billion, or 62.4%, in 2000 compared with 1999.
This increase was primarily due to greater net gains on sales of businesses and
investments of approximately $1.0 billion, and higher investment-related income
of approximately $0.3 billion. The higher gains on sales were driven by
significant gains associated with the swap of cable properties with Comcast
Corporation (Comcast) and Cox Communications, Inc. (Cox), the sale of our
investment in Lenfest Communications, Inc. (Lenfest) and Celumovil, and a gain
recorded as a result of the merger of TeleCorp PCS, Inc. (TeleCorp) and Tritel,
Inc. (Tritel) and related transactions. These gains aggregated approximately
$1.0 billion and had an approximate $0.29 earnings per diluted share impact to
the AT&T Common Stock Group. In 1999, we recorded significant gains associated
with the sale of our Language Line Services business, a portion of our ownership
interest in AT&T Canada as well as our investment in Wood-TV. These gains
aggregated approximately $0.4 billion and had an approximate $0.07 earnings per
diluted share impact to the AT&T Common Stock Group. Offsetting the increases to
other income in 2000 was an approximate $0.5 billion charge reflecting the
increase in the fair value of put options held by Comcast and Cox related to
Excite@Home stock, and approximately $0.2 billion of higher investment
impairment charges.
Other income decreased $0.4 billion, or 27.3%, in 1999 compared with 1998.
The decrease was due to lower net gains on sales of businesses and investments
of approximately $0.3 billion as well as lower investment-related income of
approximately $0.2 billion. In 1999, we recorded significant gains associated
with the sale of our Language Line Services business, a portion of our ownership
interest in AT&T Canada as well as our investment in Wood-TV. These gains
aggregated approximately $0.4 billion and had an approximate $0.07 earnings per
diluted share impact to the AT&T Common Stock Group. In 1998, we recorded
significant gains associated with the sale of AT&T Solutions Customer Care, LIN
Television Corp. and SmarTone Telecommunications Holdings Limited. These gains
aggregated approximately $0.8 billion and had an approximate $0.18 earnings per
diluted share impact to the AT&T Common Stock Group.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ----
(DOLLARS IN MILLIONS)
Interest expense...................................... $3,183 $1,765 $427
Interest expense increased 80.3%, or $1.4 billion, in 2000 compared with
1999. The increase was primarily due to a higher average debt balance as a
result of our June 2000 acquisition of MediaOne, including outstanding debt of
MediaOne and debt issued to fund the MediaOne acquisition, and our March 1999
acquisition of TCI, partially offset by higher capitalized interest.
Interest expense increased $1.3 billion in 1999 compared with 1998, due to
a higher average debt balance associated with our acquisitions, including debt
outstanding of TCI at the date of acquisition.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
(DOLLARS IN MILLIONS)
Provision for income taxes........................... $3,342 $3,695 $3,049
The effective income tax rate is the provision for income taxes as a
percent of income from continuing operations before income taxes. The effective
income tax rate was 128.1% in 2000, 36.9% in 1999 and 36.6% in 1998. In 2000,
the effective tax rate was negatively impacted by Excite@Home, which is unable
to record tax benefits associated with its pretax losses. Therefore the $4.6
billion
71
82
restructuring charges taken by Excite@Home in 2000 had no associated tax
benefit. The 2000 effective tax rate was positively impacted by a tax-free gain
resulting from an exchange of AT&T stock for an entity owning certain cable
systems and other assets with Cox and the benefit of the write-off of the
related deferred tax liability. The 1999 effective tax rate was negatively
impacted by a non-tax-deductible research and development charge, but positively
impacted by a change in the net operating loss utilization tax rules that
resulted in a reduction in the valuation allowance and the income tax provision.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ----- ----
(DOLLARS IN MILLIONS)
Minority interest income (expense)...................... $4,120 $(115) $21
Minority interest income (expense), which is recorded net of income taxes,
represents an adjustment to AT&T's income to reflect the less than 100%
ownership of consolidated subsidiaries as well as dividends on preferred stock
issued by subsidiaries of AT&T. The $4.2 billion increase in minority interest
in 2000 resulted from the consolidation of Excite@Home effective September 1,
2000. The minority interest income in 2000 primarily reflects losses generated
by Excite@Home, including the goodwill impairment charge, that were attributable
to the approximate 77% of Excite@Home not owned by AT&T. The decrease in
minority interest in 1999 compared with 1998 was primarily due to dividends on
preferred securities issued by a subsidiary trust of AT&T in 1999.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------- ----
(DOLLARS IN MILLIONS)
Equity earnings (losses) from Liberty Media Group..... $1,488 $(2,022) --
Equity earnings from LMG, which are recorded net of income taxes, were $1.5
billion in 2000, compared with losses of $2.0 billion in 1999. The increase was
primarily due to gains on dispositions, including gains associated with the
mergers of various companies that LMG had investments in. Gains were recorded
for the difference between the carrying value of LMG's interest in the acquired
company and the fair value of securities received in the merger. In addition,
lower stock compensation expense in 2000 compared with 1999 contributed to the
increase. These were partially offset by impairment charges recorded on LMG's
investments to reflect other than temporary declines in value and higher losses
relating to LMG's equity affiliates.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ----- ----- -----
(DOLLARS IN MILLIONS)
Net losses from other equity investments.................. $205 $765 $78
Net losses from other equity investments, which are recorded net of income
taxes, were $0.2 billion in 2000, a 73.2% improvement compared with 1999. This
improvement was primarily a result of the redemption of our investment in AB
Cellular which resulted in the distribution of wireless properties in the Los
Angeles area to AT&T, which caused AB Cellular to record a gain on the
distribution. Our pro rata share of this gain was approximately $0.4 billion. In
addition, in 2000, earnings from our investment in Cablevision Systems Corp.
(Cablevision) were approximately $0.2 billion higher than 1999 due to gains from
cable-system sales. Offsetting these increases were losses from our stake in
Time Warner Entertainment Company, L.P. (TWE) which we acquired in connection
with the MediaOne merger and greater equity losses from Excite@Home, which
aggregated approximately $0.1 billion.
Net losses from equity investments were $0.8 billion in 1999 compared with
$78 million in 1998, primarily due to losses we recorded on investments we
acquired through TCI, largely Cablevision and Excite@Home.
72
83
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- -------- --------- --------
(DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
AT&T Common Stock Group:
Income from continuing operations................. $3,105 $ 5,450 $5,235
Earnings from continuing operations per share:
Basic.......................................... 0.89 1.77 1.96
Diluted........................................ 0.88 1.74 1.94
AT&T Wireless Group:
Income............................................ $ 76 -- --
Earnings per share:
Basic and diluted.............................. 0.21 -- --
Liberty Media Group:
Income (loss)..................................... $1,488 $(2,022) --
Earnings (loss per share:
Basic and diluted.............................. 0.58 (0.80)
Earnings per diluted share (EPS) attributable to the AT&T Common Stock
Group were $0.88 in 2000 compared with $1.74 in 1999, a decrease of 49.4%. The
decrease was primarily due to higher restructuring and asset impairment charges
and the MediaOne acquisition, including the impact of shares issued, operating
losses of MediaOne and additional interest expense. Also contributing to the
decrease was the impact of Excite@Home, including the mark-to-market adjustment
related to the put options held by Comcast and Cox. These were partially offset
by lower losses from equity investments and an increase in other income,
primarily associated with higher net gains on sales of businesses and
investments, and higher investment-related income. Also impacting EPS was higher
operating income associated with our mature long distance businesses.
EPS from continuing operations attributable to the AT&T Common Stock Group
on a diluted basis declined 10.3% in 1999, to $1.74, compared with 1998. The
decline was primarily due to the impact of the TCI and AGNS acquisitions,
including the impact of shares issued and equity losses of Excite@Home and
Cablevision. Partially offsetting these declines were increased income from the
remaining operations due to revenue growth and operating expense efficiencies,
as well as lower net restructuring and other charges.
EPS for Liberty Media Group was $0.58 in 2000, compared with a loss of
$0.80 per share for 1999. The increase in EPS was primarily due to gains on
dispositions, including gains associated with the mergers of various companies
that LMG had investments in. Gains were recorded for the difference between the
carrying value of LMG's interest in the acquired company and the fair value of
securities received in the merger. In addition, lower stock compensation expense
in 2000 compared with 1999 contributed to the increase. These were partially
offset by impairment charges recorded on LMG's investments to reflect other than
temporary declines in value and higher losses relating to LMG's equity
affiliates.
DISCONTINUED OPERATIONS
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of AT&T reflect the
disposition of AT&T Universal Card Services (UCS), which was sold on April 2,
1998, as discontinued operations. Accordingly, the revenue, costs and expenses,
and cash flows of UCS have been excluded from the respective captions in the
1998 Consolidated Statement of
73
84
Income and Consolidated Statement of Cash Flows, and have been reported through
the April 2, 1998 date of disposition as "Income from discontinued operations,"
net of applicable income taxes; and as "Net cash provided by discontinued
operations." The gain associated with the sale of UCS is recorded as "Gain on
sale of discontinued operations," net of applicable income taxes.
EXTRAORDINARY ITEMS
In August 1998, AT&T extinguished approximately $1.0 billion of TCG's debt.
The $217 million pretax loss on the early extinguishment of debt was recorded as
an extraordinary loss. The after-tax impact was $137 million, or $0.05 per
diluted share.
SEGMENT RESULTS
In support of the services we provided in 2000, we segment our results by
the business units that support our primary lines of business: Business
Services, Consumer Services, Wireless Services and Broadband. The balance of
AT&T's operations, excluding LMG, is included in a Corporate and Other category.
Although not a segment, we also discuss the results of LMG.
The discussion of segment results includes revenue; EBIT (earnings before
interest and taxes, including pretax minority interest and net pretax losses of
other equity investments); EBITDA (EBIT plus depreciation, amortization and
minority interest income (expense) other than Excite@Home); total assets, and
capital additions. The discussion of EBITDA for Wireless Services and Broadband
is modified to exclude other income and net losses from equity investments.
Total assets for each segment generally include all assets, except intercompany
receivables. However, our Wireless Services segment included intercompany
receivables from AT&T and the related interest income since these assets relate
to the results of the AT&T Wireless Group tracked business. Prepaid pension
assets and corporate-owned or leased real estate are generally held at the
corporate level, and therefore are included in the Corporate and Other group.
Shared network assets are allocated to the segments and reallocated each
January, based on two years of volumes. Capital additions for each segment
include capital expenditures for property, plant and equipment, acquisitions of
licenses, additions to nonconsolidated investments, increases in franchise costs
and additions to internal-use software.
EBIT is the primary measure used by AT&T's chief operating decision makers
to measure AT&T's operating results and to measure segment profitability and
performance. AT&T calculates EBIT as operating income plus net pretax losses
from equity investments, pretax minority interest income (expense) and other
income. In addition, management also uses EBITDA as a measure of segment
profitability and performance, and is defined as EBIT, excluding minority
interest income (expense) other than Excite@Home, plus depreciation and
amortization. Interest and taxes are not factored into the segment profitability
measure used by the chief operating decision makers; therefore, trends for these
items are discussed on a consolidated basis. Management believes EBIT is
meaningful to investors because it provides analysis of operating results using
the same measures used by AT&T's chief operating decision makers and provides a
return on total capitalization measure. We believe EBITDA is meaningful to
investors as a measure of each segment's liquidity consistent with the measure
utilized by our chief operating decision makers. In addition, we believe that
both EBIT and EBITDA allow investors a means to evaluate the financial results
of each segment in relation to total AT&T. EBIT for AT&T was $9.4 billion, $10.5
billion and $8.7 billion for the years ended December 31, 2000, 1999 and 1998,
respectively. EBITDA for AT&T was $19.8 billion, $18.6 billion and $13.4 billion
for the years ended December 31, 2000, 1999 and 1998, respectively. Our
calculation of EBIT and EBITDA may or may not be consistent with the calculation
of these measures by other public companies. EBIT and EBITDA should not be
viewed by investors as an alternative to generally accepted accounting
principles (GAAP) measures of income as a measure of performance or to cash
flows from operating, investing and financing activities as a measure of
liquidity. In addition, EBITDA does not take into account changes in certain
assets and liabilities as well as interest and taxes which can affect cash flow.
74
85
Reflecting the dynamics of our business, we continually review our
management model and structure and make adjustments accordingly.
BUSINESS SERVICES
Our Business Services segment offers a variety of global communications
services, including long distance, local, and data and IP networking to small
and medium-sized businesses, large domestic and multinational businesses and
government agencies. Business Services is also a provider of voice, data and IP
transport to service resellers (wholesale services).
Business Services includes AT&T Solutions, the company's
professional-services outsourcing business, which provides seamless solutions
that maximize the competitive advantage of networking-based electronic
applications for global clients. AT&T Solutions also provides e-infrastructure
and high-availability services to enterprise clients, and manages AT&T's unified
global network.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
External revenue.................................. $27,691 $26,749 $23,807
Internal revenue.................................. 797 731 478
Total revenue..................................... 28,488 27,480 24,285
EBIT.............................................. 6,548 6,136 4,994
EBITDA............................................ 10,260 9,488 7,548
Capital additions................................. 6,223 7,511 6,130
AT DECEMBER 31,
-------------------------------------------------- 2000 1999
------- -------
Total assets...................................... $34,804 $32,010
REVENUE
In 2000, Business Services revenue grew $1.0 billion, or 3.7%, compared
with 1999. Approximately $0.4 billion of the increase was due to the impact of
acquisitions, partially offset by the formation of Concert. Strength in data and
IP services as well as growth in our outsourcing business contributed $1.8
billion to the increase. This growth, however, was offset by an approximate $0.9
billion decline in long distance voice services as a result of continued pricing
pressures in the industry.
Revenue in 1999 grew $3.2 billion, or 13.2%. The acquisition of AGNS
contributed approximately $1.1 billion to the growth. Data, IP and outsourcing
services grew approximately $1.5 billion in 1999 compared with 1998, while long
distance voice services and local services contributed approximately $0.6
billion to the revenue increase.
Data services, which represent the transportation of data, rather than
voice, along our network, was impacted by acquisitions and the formation of
Concert. Excluding these impacts, data services grew at a high-teens percentage
rate in 2000. Growth was led by the continued strength of frame relay services;
IP services, which include IP-connectivity services and virtual private network
(VPN) services; and high-speed private-line services. Excluding the impact of
AGNS, data services grew at a high-teens percentage rate in 1999, led by
strength in frame relay and high-speed private-line services.
AT&T Solutions outsourcing revenue grew 47.9% in 2000 and 146.0% in 1999.
More than one-half of the 2000 growth and approximately 65% of the 1999 growth
was driven by our acquisition of AGNS. The remaining growth in both years was
primarily due to growth from new contract signings and add-on business from
existing clients.
75
86
Excluding the impact of Concert, long distance voice services revenue
declined at a mid single-digit percentage rate in 2000 due to a declining
average price per minute reflecting the competitive forces within the industry
which are expected to continue. Partially offsetting this decline was a high
single-digit percentage growth rate in minutes. In 1999, long distance voice
revenue grew at a low single-digit percentage rate, as volumes grew at a
high-teens percentage rate, which was largely offset by a declining average rate
per minute.
Local voice services revenue grew nearly 20% in 2000 and more than 50% in
1999. During 2000, AT&T added more than 867,000 access lines, with the total
reaching nearly 2.3 million at the end of the year. During 1999, AT&T added more
than 719,000 access lines. Access lines enable AT&T to provide local service to
customers by allowing direct connection from customer equipment to the AT&T
network. AT&T serves more than 6,000 buildings on-network (buildings where AT&T
owns the fiber that runs into the building), representing an increase of
approximately 3.5% over 1999. At the end of 1999, AT&T served just over 5,800
buildings on-network compared with approximately 5,200 buildings at the end of
1998.
Business Services internal revenue increased $66 million, or 9.1%, in 2000
and $253 million, or 52.8%, in 1999. The increase in 2000 was the result of
greater sales of business long distance services to other AT&T units that resell
such services to their external customers, primarily Broadband and Wireless
Services. The increase in 2000 was partially offset by a decline in sales
related to international businesses divested. In 1999, the increase in internal
revenue was primarily due to greater sales of long distance services to Wireless
Services.
EBIT/EBITDA
EBIT improved $0.4 billion, or 6.7%, and EBITDA improved $0.8 billion, or
8.1%, in 2000 compared with 1999. This improvement reflects an increase in
revenue and lower costs as a result of our continued cost-control efforts,
partially offset by the formation of Concert and the acquisition of AGNS.
Additionally, the EBIT increase was partially offset by an increase in
depreciation and amortization expense in 2000 compared with 1999 primarily due
to a higher network asset base.
In 1999, EBIT improved $1.1 billion, or 22.9%, and EBITDA improved $1.9
billion, or 25.7%, compared with 1998. These increases were driven by revenue
growth combined with margin improvement resulting from ongoing cost-control
initiatives. The increase in EBIT was offset somewhat by increased depreciation
and amortization expenses resulting from increased capital expenditures aimed at
data, IP and local services.
OTHER ITEMS
Capital additions decreased $1.3 billion in 2000, and increased $1.4
billion in 1999. In 2000, the decrease was a result of lower spending for our
long distance network (including the data network). In 1999, the increase was
primarily due to additional spending for the build out of our local services
SONET transport network.
Total assets increased $2.8 billion, or 8.7%, at December 31, 2000,
compared with December 31, 1999. The increase was primarily due to net increases
in property, plant and equipment as a result of capital additions, and a higher
accounts receivable balance.
CONSUMER SERVICES
Our Consumer Services segment provides residential customers with a variety
of any-distance communications services, including long distance, local toll
(intrastate calls outside the immediate local area) and Internet access. In
addition, Consumer Services provides transaction services, such as prepaid
calling card and operator-handled calling services. Local phone service is also
provided in certain areas.
76
87
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Revenue........................................... $18,976 $21,854 $22,885
EBIT.............................................. 7,090 7,909 6,570
EBITDA............................................ 7,650 8,692 7,263
Capital additions................................. 302 656 459
AT DECEMBER 31, 2000 1999
--------------- ------- -------
Total assets...................................... $ 4,801 $ 6,279
REVENUE
Consumer Services revenue declined 13.2%, or $2.9 billion, in 2000 compared
with 1999. Approximately $0.9 billion of the decline was due to the elimination
of per-line charges in 2000 and the impact of Concert. The remainder of the
decline was primarily due to a decline in traditional voice services, such as
Domestic Dial 1, reflecting the ongoing competitive nature of the consumer long
distance industry, which has resulted in pricing pressures and a loss of market
share. Also negatively impacting revenue was product substitution and market
migration away from direct-dial wireline and higher-priced calling-card services
to the rapidly growing wireless services and lower-priced prepaid-card services.
As a result, calling volumes declined at a mid single-digit percentage rate in
2000. We expect competition and product substitution to continue to negatively
impact Consumer Services revenue.
In August 1999, we introduced AT&T One Rate, which allows customers to make
long distance calls, 24 hours a day, seven days a week, for the same rate. These
One Rate offers continue to be well received in the market with more than 12
million customers enrolled since the plan's introduction. In addition, AT&T has
been successful in packaging services in the consumer market by giving customers
the option of intraLATA service with its One Rate offers. More than 60% of the
customers enrolled in One Rate have chosen AT&T as their intraLATA provider.
AT&T's any distance New York Local One Rate offer, which combines both
local and long distance service, has experienced high customer acceptance. AT&T
ended the year with nearly 760,000 customers under this plan.
In 1999, Consumer Services revenue decreased $1.0 billion, or 4.5%, on a
mid single-digit percentage decline in volumes. The 1999 decline reflects the
ongoing competitive nature of the consumer long distance industry, as well as
product substitution and market migration away from direct dial and
higher-priced calling-card services to rapidly growing wireless services and
lower-priced prepaid-card services.
EBIT/EBITDA
EBIT declined $0.8 billion, or 10.4%, and EBITDA declined $1.0 billion, or
12.0%, in 2000 compared with 1999. The declines in EBIT and EBITDA primarily
reflect the decline in the long distance business, offset somewhat by
cost-control initiatives. In addition, the declines reflect $0.2 billion of
lower gains on sales of businesses, primarily the 1999 sale of Language Line
Services, and higher restructuring charges. Reflecting our cost-control
initiatives, EBIT and EBITDA margins in 2000 improved to 37.4% and 40.3%,
respectively, compared with 36.2% and 39.8%, respectively, in 1999.
EBIT grew $1.3 billion, or 20.4%, and EBITDA grew $1.4 billion, or 19.7%,
in 1999. The EBIT margin improved to 36.2% in 1999 (excluding the gain on the
sale of Language Line Services, the 1999 EBIT margin was 35.5%) from 28.7% in
the prior year. The EBIT and EBITDA growth for
77
88
1999 reflects ongoing cost-reduction efforts, particularly in marketing
spending, as well as lower negotiated international settlement rates.
OTHER ITEMS
Capital additions decreased $0.4 billion, or 54.0%, in 2000 as a result of
a planned reduction in spending on the voice network and reduced spending on
internal-use software as most of the functionality upgrades were completed in
1999. In 1999, capital additions increased $0.2 billion, or 42.9%, primarily due
to increased spending on internal-use software to add more functionality to our
services and in support of AT&T WorldNet Services subscriber growth.
Total assets declined $1.5 billion, or 23.5%, during 2000. The decline was
primarily due to assets transferred to Concert during 2000, as well as lower
accounts receivable, reflecting lower revenue.
WIRELESS SERVICES
Our Wireless Services segment offers wireless voice and data services and
products to customers in our 850 megahertz (cellular) and 1900 megahertz
(Personal Communications Services, or PCS) markets. Wireless Services also
includes certain interests in partnerships and affiliates that provide wireless
services in the United States and internationally, aviation-communications
services and the results of our messaging business through the October 2, 1998
date of sale. Also included are fixed wireless services providing high-speed
Internet access and any-distance voice services using wireless technology to
residential and small business customers.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------ ------
(DOLLARS IN MILLIONS)
Revenue............................................. $10,448 $7,627 $5,406
EBIT................................................ 1,131 (473) 418
EBITDA*............................................. 1,653 581 856
Capital additions................................... 5,553 2,739 2,395
AT DECEMBER 31, 2000 1999
--------------- ------- -------
Total assets........................................ $35,184 $23,312
-------------------------
*EBITDA for Wireless Services excludes net earnings (losses) from equity
investments and other income.
REVENUE
Wireless Services revenue grew $2.8 billion, or 37.0%, in 2000, and $2.2
billion, or 41.1%, in 1999. Approximately $0.6 billion of the 2000 growth was
due to acquisitions, and approximately $0.2 billion of the 1999 growth was due
to the net impact of acquisitions and dispositions. The remaining increases were
due to subscriber growth, reflecting the continued successful execution of
AT&T's wireless strategy of targeting and retaining specific customer segments,
expanding the national wireless footprint, focusing on digital service, and
offering simple rate plans. In addition, an increase in average monthly revenue
per user (ARPU) contributed to the growth.
Consolidated subscribers grew 58.5% during 2000 to approximately 15.2
million, and grew 33.4% to approximately 9.6 million in 1999. This growth
included approximately 3.0 million subscribers from acquisitions closed during
2000, and approximately 900,000 from acquisitions closed during 1999. ARPU was
$68.20 for 2000, a 3.6% increase compared with 1999. ARPU in 1999 was $65.80, a
14.2% increase from 1998. The average monthly subscriber churn rate in 2000 was
2.9% compared with 2.6% in 1999. Average monthly subscriber churn increased
during 2000 as a result of competitive pressures, as well as our efforts to
expand to a broader base of consumer segments served
78
89
(e.g., prepaid wireless services). We expect these factors to continue, which
will result in a decline in ARPU.
EBIT/EBITDA
In 2000, EBIT improved $1.6 billion from a deficit of $0.5 billion in 1999.
Approximately one-half of the improvement was due to higher pretax earnings on
equity investments and greater gains on sales of businesses and investments.
These items included higher equity earnings due to a gain recorded relating to
the redemption of our investment in AB Cellular, as well as a gain on
transactions associated with our affiliate investments in TeleCorp and Tritel,
and a gain on the sale of Celumovil in 2000. In 1999, we recorded a gain on the
sale of WOOD-TV. Also positively impacting the EBIT growth in 2000 was a 1999
asset impairment charge of $0.5 billion and higher intercompany interest income
in 2000 resulting from the AT&T Wireless Group tracking stock offering proceeds
attributed to Wireless Services. The remaining EBIT increase was primarily due
to increased revenue, partially offset by a related increase in expenses.
In 1999, EBIT declined $0.9 billion from $0.4 billion in 1998. The EBIT
decline was primarily due to the 1999 asset impairment charge of approximately
$0.5 billion and lower gains on sales of businesses and investments of
approximately $0.5 billion.
EBITDA, which excludes net earnings (losses) from equity investments and
other income, increased $1.1 billion in 2000 to $1.7 billion. Approximately
one-half of the increase was due to the 1999 impairment charge and the remainder
was due to increased revenue, partially offset by a related increase in
expenses.
In 1999, EBITDA, which excludes net earnings (losses) from equity
investments and other income, declined $0.3 billion to $0.6 billion. The decline
was primarily due to the 1999 asset impairment charge, partially offset by an
increase in revenue net of related expenses.
OTHER ITEMS
Capital additions increased $2.8 billion in 2000, and increased $0.3
billion in 1999. Spending in both years focused on increasing the capacity and
quality of our national wireless network.
Total assets were $35.2 billion as of December 31, 2000, an increase of
$11.8 billion, or 50.3%, compared with December 31, 1999. The increase was
primarily due to increases in licensing costs, goodwill, and property, plant and
equipment associated with the acquisitions that closed in 2000. In addition,
property, plant and equipment increased as a result of significant capital
expenditures in 2000. These increases were partially offset by a decrease in
investments, as Wireless Services previously held equity interests in portions
of wireless properties in the San Francisco Bay area and Los Angeles through AB
Cellular. These markets were consolidated as of December 31, 2000.
BROADBAND
Our Broadband segment offers a variety of services through our cable
broadband network, including traditional analog video and new services such as
digital video service, high-speed data service and broadband telephony service.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999
-------------------------------- --------- ---------
(DOLLARS IN MILLIONS)
Revenue............................................. $ 8,217 $ 5,070
EBIT................................................ (1,175) (1,475)
EBITDA.............................................. 1,709 802
Capital additions................................... 4,963 4,759
79
90
AT DECEMBER 31, 2000 1999
--------------- -------- -------
Total assets....................................... $114,681 $53,819
-------------------------
*EBITDA for Broadband excludes net losses from equity investments and other
income.
Results of operations for the year ended December 31, 2000, include the
results of MediaOne since its acquisition on June 15, 2000, while the year ended
December 31, 1999, does not include any results of MediaOne. Additionally, the
results of operations for the year ended December 31, 1999, include 10 months of
TCI's results, reflecting its acquisition in March 1999, while 2000 includes a
full 12 months of TCI's results.
REVENUE
Broadband revenue grew $3.1 billion in 2000, or 62.1%, compared with 1999.
Approximately $2.8 billion of the increase in revenue was due to the acquisition
of MediaOne in 2000 and TCI in 1999. In addition, revenue from new services
(digital video, high-speed data, and broadband telephony) and a basic-cable rate
increase contributed approximately $0.4 billion to the revenue increase.
At December 31, 2000, Broadband serviced approximately 16.0 million
basic-cable customers, passing approximately 28.3 million homes, compared with
11.4 million basic-cable customers, passing approximately 19.7 million homes at
December 31, 1999. The increase reflects the acquisition of MediaOne. At
December 31, 2000, we provided digital video service to approximately 2.8
million customers, high-speed data service to approximately 1.1 million
customers, and broadband telephony service to approximately 547,000 customers.
This compares with approximately 1.8 million digital-video customers,
approximately 207,000 high-speed data customers, and nearly 8,300 broadband
telephony customers at the end of 1999.
EBIT/EBITDA
EBIT in 2000 was a deficit of $1.2 billion, an improvement of $0.3 billion,
or 20.4%. This improvement was due to approximately $0.5 billion of higher gains
on sales of businesses and investments, primarily gains on the swap of cable
properties with Cox and Comcast and the sale of our investment in Lenfest, and
$0.4 billion lower restructuring charges primarily associated with an in-process
research and development charge recorded in connection with the 1999 acquisition
of TCI. Also contributing to the improvement were lower pretax losses from
equity investments of $0.5 billion, due in part to a $0.3 billion improvement
from our investment in Cablevision due to gains from cable-system sales. These
improvements were largely offset by the impact of the acquisition of MediaOne as
well as TCI of approximately $0.5 billion and higher expenses associated with
high-speed data and broadband telephony services of approximately $0.4 billion.
EBITDA, which excludes net losses from equity investments and other income,
was $1.7 billion in 2000, an improvement of $0.9 billion compared with 1999.
This improvement was due to the impact of the MediaOne and TCI acquisitions of
$0.7 billion and lower restructuring charges of $0.4 billion. Higher expenses
associated with high-speed data and broadband telephony of approximately $0.2
billion offset these increases.
OTHER ITEMS
Capital additions increased 4.3% to approximately $5.0 billion in 2000,
from $4.8 billion in 1999. The increase was due to higher capital expenditures
of $0.8 billion primarily due to MediaOne, which was almost entirely offset by
decreased contributions to various nonconsolidated investments of $0.7 billion.
In 1999, spending was largely directed toward cable-distribution systems,
focusing on the upgrade of cable plant-assets, as well as equity infusions into
various investments.
80
91
Total assets at December 31, 2000, were $114.7 billion compared with $53.8
billion at December 31, 1999. The increase in total assets was primarily due to
the MediaOne acquisition and an increase in property, plant and equipment as a
result of capital expenditures, net of depreciation expense. These increases
were partially offset by a decrease in the mark-to-market valuation of certain
investments.
CORPORATE AND OTHER
This group reflects the results of corporate staff functions, the
elimination of transactions between segments, as well as the results of
international operations and ventures and Excite@Home.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Revenue........................................... $ (148) $ 569 $ 647
EBIT.............................................. (4,167) (1,625) (3,248)
EBITDA*........................................... (3,171) (871) (2,916)
Capital additions................................. 2,150 1,494 594
AT DECEMBER 31, 2000 1999
--------------- ------- -------
Total assets...................................... $18,463 $15,535
REVENUE
Revenue for corporate and other primarily includes the elimination of
intercompany revenue of negative $0.8 billion (an increase of $0.1 billion from
1999), revenue from Excite@Home of $0.2 billion (which was consolidated
beginning on September 1, 2000), and revenue from our international operations
and ventures of $0.3 billion (a decline of $0.9 billion from 1999). The
international operations and ventures revenue decrease was largely due to the
revenue impact of businesses contributed to Concert and due to the impact of the
divestment of certain businesses.
For 1999, revenue decreased $0.1 billion, or 12.0%. The decline was driven
by an increase in the elimination of intercompany revenue and the sale of AT&T
Solutions Customer Care (ASCC) in 1998, partially offset by growth in
international operations and ventures.
EBIT/EBITDA
EBIT and EBITDA deficits in 2000 increased $2.5 billion and $2.3 billion to
$4.2 billion and $3.2 billion, respectively. The increases in the deficits were
largely related to Excite@Home. In 2000, restructuring and other charges, net of
minority interest, were $2.8 billion higher primarily due to goodwill impairment
charges recorded by Excite@Home and AT&T related to Excite@Home. Other impacts
included a charge of approximately $0.5 billion for the fair market value
increase of put options held by Comcast and Cox related to Excite@Home, and
operating losses from Excite@Home. Partially offsetting these declines were an
increase in the pension credit due to a higher pension trust asset base
resulting from increased investment returns, and lower expenses associated with
our continued efforts to reduce costs, which aggregated approximately $1.0
billion. In addition, higher net gains on sales of investments and an increase
in interest income increased EBIT and EBITDA by approximately $0.6 billion.
In 1999, EBIT and EBITDA deficits improved by $1.6 billion and $2.0 billion
to $1.6 billion and $0.9 billion, respectively. The improvements were driven by
$2.1 billion of lower net restructuring and other charges in 1999 compared with
1998, partially offset by lower gains on the sales of businesses and lower
interest income, which negatively impacted EBIT and EBITDA by $0.3 billion.
81
92
Additionally, EBIT was impacted by dividends on trust preferred securities. In
1998, AT&T recorded a gain on the sale of ASCC.
OTHER ITEMS
Capital additions increased $0.7 billion in 2000. The increase was driven
by our investment in 2000 in Net2Phone, Inc. (Net2Phone), partially offset by
lower investments in international nonconsolidated subsidiaries. Capital
additions increased $0.9 billion in 1999 reflecting increased international
equity investments that support our global strategy.
Total assets increased $2.9 billion at December 31, 2000, primarily due to
our investments in Concert and Net2Phone.
LIBERTY MEDIA GROUP
LMG produces, acquires and distributes entertainment, educational and
informational programming services through all available formats and media. LMG
is also engaged in electronic-retailing services, direct-marketing services,
advertising sales relating to programming services, infomercials and transaction
processing. Earnings from LMG were $1.5 billion in 2000 compared with losses of
$2.0 billion from the date of acquisition through December 31, 1999. The
increase was primarily due to gains on dispositions, including gains associated
with the mergers of various companies that LMG had investments in. Gains were
recorded for the difference between the carrying value of LMG's interest in the
acquired company and the fair value of securities received in the merger. In
addition, lower stock compensation expense in 2000 compared with 1999
contributed to the increase. These were partially offset by impairment charges
recorded on LMG's investments to reflect other than temporary declines in value
and higher losses relating to LMG's equity affiliates.
LIQUIDITY
FOR THE
THREE MONTHS
ENDED MARCH 31,
------------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------- -------
CASH FLOWS:
Provided by operating activities.................. $ 1,938 $ 2,528
Used in investing activities...................... (3,184) (5,001)
Provided by financing activities.................. 1,256 1,551
In the first quarter of 2001, net cash provided by operating activities
decreased $0.6 billion, compared with the prior year period. The decrease was
primarily driven by decreases in accounts payable and net income excluding the
noncash income items. These decreases were partially offset by lower
receivables.
AT&T's investing activities resulted in a net use of cash of $3.2 billion
for the first quarter of 2001, compared with use of cash of $5.0 billion for the
first quarter of 2000. During the first quarter of 2001, AT&T paid approximately
$3.9 billion for capital expenditures and received approximately $0.6 billion
primarily related to the net dispositions of businesses. During the first
quarter of 2000, AT&T spent approximately $3.2 billion on capital expenditures,
$1.1 billion primarily for investments in cable and wireless businesses and
loaned $1.0 billion to Concert.
During the first quarter of 2001, net cash provided by financing activities
was $1.3 billion, compared with $1.6 billion for the first quarter of 2000.
During the first quarter of 2001, AT&T received $9.8 billion from the issuance
of convertible preferred stock to NTT DoCoMo and $6.5 billion from the bond
offering completed by AT&T Wireless, proceeds which in part were used
82
93
to repay short-term debt of $14.7 billion. During the first quarter of 2000,
AT&T received $3.2 billion from the issuance of short-term notes. This source of
cash was partially offset by the repayment of long-term debt of $1.0 billion and
the payment of dividends of $0.8 billion.
At March 31, 2001, we had current assets of $16.3 billion and current
liabilities of $34.4 billion. A significant portion of the current liabilities,
$17.2 billion, relates to short-term notes, the majority of which were
commercial paper or debt with an original maturity of one year or less. During
the first quarter of 2001, we continued to make progress in reducing our debt.
We have used proceeds received from the NTT DoCoMo transaction and the Wireless
bond offering to retire $14.7 billion of the short-term debt. We expect that we
will retire a portion of the remaining 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. During the quarter we have closed or announced the sale of
investments or assets, which will result in gross cash proceeds of approximately
$4.8 billion. Subsequent to March 31, 2001, we also entered into a program to
securitize a small percentage of our Consumer accounts receivable to receive up
to $0.5 billion, which will be used to retire a portion of the commercial paper.
At March 31, 2001, 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. 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. We also have requested Cablevision Systems Corporation (Cablevision)
to register for sale up to 30 million Cablevision shares currently owned by
AT&T.
In connection with the planned split-off of AT&T Wireless, we announced
that we will retain up to $3 billion in shares of AT&T Wireless Services, which
we will dispose of within six months following the split-off. Another aspect of
our restructuring is the expected sale, in late-2001, of a new class of stock
which will track our Broadband business.
AT&T is in a joint venture with Alaska Native Wireless (ANW), which
participated in the Federal Communication Commission's recent auction of license
spectrum. In January 2001, the auction was completed, and ANW was the highest
bidder on approximately $2.9 billion in licenses. AT&T has committed to
contribute $2.6 billion to fund this purchase. As of March 31, 2001, AT&T
Wireless Group funded approximately $309 of the commitment and has committed to
provide the remaining approximate $2.3 billion when such licenses are granted.
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 either downgraded and/or put
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 pursing various measures to reduce its debt level. However, there
can be no assurance that we will be able to obtain financing on terms that are
acceptable to us. If these efforts cannot be completed successfully or on terms
and within the timeframe contemplated, AT&T's financial condition would be
materially adversely affected. Some of these adverse conditions include the
company's ability to pursue acquisitions or 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. This facility was reduced to
$17.5 billion primarily as a result of the NTT DoCoMo investment of $9.8
billion, the AT&T Wireless bond offering and the sale of Japan Telecom. The
364-day facility exists principally as a back-up source to our commercial paper
program. On March 31, 2001, this facility was unused and AT&T has no current
plans to borrow against this
83
94
facility. In addition, on March 23, 2001, AT&T Wireless Services entered into
$2.5 billion in revolving credit facilities. The facilities include a 364-day
tranche and a 5-year tranche. The facilities are for general corporate purposes.
Also in connection with our restructuring plan, 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 prospects of
each group based on past performance.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- -------- -------- --------
(DOLLARS IN MILLIONS)
CASH FLOW OF CONTINUING OPERATIONS:
Provided by operating activities............. $ 13,307 $ 11,521 $ 10,217
(Used in) provided by investing activities... (39,934) (27,043) 3,582
Provided by (used in) financing activities... 25,729 13,386 (11,049)
In 2000, net cash provided by operating activities of continuing operations
increased $1.8 billion. The increase was primarily driven by an increase in net
income excluding the noncash impact of depreciation and amortization, net
restructuring and other charges and minority interest income (expense). In 1999,
net cash provided by operating activities of continuing operations increased
$1.3 billion, primarily due to an increase in net income, excluding the noncash
impact of depreciation and amortization, net restructuring and other charges and
the impact of earnings and losses from equity investments. This increase was
partially offset by higher receivables, due primarily to higher revenue, and an
increase in tax payments from the gain on the 1998 sale of UCS.
AT&T's investing activities resulted in a net use of cash of $39.9 billion
in 2000, compared with a net use of cash of $27.0 billion in 1999. During 2000,
AT&T used approximately $21.4 billion for acquisitions of businesses, primarily
MediaOne, and spent $15.5 billion on capital expenditures. During 1999, AT&T
spent approximately $14.3 billion on capital expenditures, approximately $6.7
billion on acquisitions of businesses, primarily AGNS, and contributed $5.5
billion of cash to LMG. During 1998, we received $10.8 billion related to the
sales of businesses, including receivables from UCS, partially offset by capital
expenditures of $7.8 billion.
During 2000, net cash provided by financing activities was $25.7 billion,
compared with $13.4 billion in 1999. In 2000, AT&T received $10.3 billion from
the AT&T Wireless Group tracking stock offering and borrowed an additional $17.0
billion of short-term debt and $2.5 billion of net long-term debt. These were
partially offset by the payment of $3.0 billion in dividends. In 1999, AT&T
received $10.2 billion from the issuance of commercial paper and short-term
debt, $5.6 billion from the net issuance of long-term debt and $4.6 billion from
the issuance of redeemable preferred securities. These sources of cash were
partially offset by the acquisition of treasury shares of $4.6 billion and the
payment of dividends of $2.7 billion. Cash used in financing activities in 1998
primarily related to repayment of long-term and short-term debt, the acquisition
of treasury shares and dividends paid on common stock.
At December 31, 2000, we had current assets of $17.1 billion and current
liabilities of $50.9 billion. A significant portion of the current liabilities,
$31.9 billion, relates to short-term notes,
84
95
the majority of which were commercial paper or debt with an original maturity of
one year or less. We expect that we will retire a portion of the short-term debt
with other financing arrangements, including the monetization of publicly-held
securities, sales of certain non-strategic assets and investments, and
securitization of certain accounts receivable. At December 31, 2000, we had a
current liability of $2.6 billion, reflecting our obligation under put options
held by Comcast and Cox. In January 2001, Comcast and Cox exercised their rights
under the put options and elected to receive AT&T stock in lieu of cash. Since
December 31, 2000, we have announced the sale of investments or assets, which
will result in gross cash proceeds of approximately $4.6 billion. In addition,
on February 28, 2001, we exercised our registration rights in TWE and formally
requested TWE to begin the process of converting the limited partnership into a
corporation with registered equity securities. We have, however, continued our
ongoing discussions with AOL Time Warner for the sale of our stake in TWE.
In connection with the planned split-off of AT&T Wireless, we announced
that we will retain up to $3.0 billion in shares of AT&T Wireless, which we will
dispose of within six months following the split-off. Also in connection with
the split-off, on March 6, 2001, AT&T Wireless completed a $6.5 billion global
bond offering. AT&T Wireless will ultimately use the proceeds to repay $4.8
billion in notes receivable and preferred stock that AT&T Common Stock Group
holds in AT&T Wireless. In addition on March 23, 2001, AT&T Wireless entered
into $2.5 billion in revolving credit facilities. The facilities include a
364-day tranche and a 5-year tranche. The facilities are for general corporate
purposes.
Another aspect of our restructuring is the expected sale, in late-2001, of
a new class of stock which will track our Broadband business.
AT&T is in a joint venture with Alaska Native Wireless (ANW). At December
31, 2000, AT&T had committed to fund ANW up to $2.4 billion based on the outcome
of FCC license spectrum auction. In January 2001, the auction was completed and
ANW was the highest bidder on approximately $2.9 billion in licenses.
Since the announced restructuring plans to create four new businesses,
AT&T's debt ratings have been under review by the applicable rating agencies. As
a result of this review, AT&T's ratings have been downgraded and continued to be
on credit watch with negative outlook. These actions will result in an increased
cost of future borrowings and will limit our access to the capital markets.
AT&T is pursuing various measures to reduce its debt level. However, there
can be no assurance that we will be able to obtain financing on terms that are
acceptable to us. If these efforts cannot be completed successfully, or on terms
and within the timeframe contemplated, AT&T's financial condition would be
materially adversely affected. Some of these adverse conditions include the
company's ability to pursue acquisitions, make capital expenditures to expand
its network and cable plant, or pay dividends.
On December 28, 2000, we entered into a 364-day, $25 billion
revolving-credit facility syndicated to 39 banks, which was unused at December
31, 2000. As a result of certain transactions subsequent to December 31, 2000,
specifically the investment by NTT DoCoMo of $9.8 billion for a new class of
AT&T preferred stock, and the $6.5 billion AT&T Wireless bond offering, this
credit facility was reduced to $18.3 billion.
Also in connection with our restructuring, we have reviewed our dividend
policy as it relates to each of the new businesses. On December 20, 2000, we
announced that the board of directors reduced AT&T's quarterly dividend to
$0.0375 per share, from $0.22 per share.
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
85
96
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 PROSPECTS 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 at March 31, 2001, the fair value of
unhedged debt would have increased by approximately $0.6 billion. Assuming a 10%
downward shift in interest rates, the fair value of interest rate swaps and the
underlying hedged debt would have changed by $10 million and $3 million at
December 31, 2000 and 1999, respectively. In 2000, we entered into a combined
interest rate, forward contract to hedge foreign-currency-denominated debt.
Assuming a 10% downward shift in both interest rates and the foreign currency,
the fair value of the contract and the underlying hedged debt would have changed
by $88 million. In addition, certain debt is indexed to the market prices of
securities we own. Changes in the market prices of these securities result in
changes in the fair value of this debt. Assuming a 10% downward change in the
market price of these securities, the fair value of the underlying debt and
securities would have decreased by $534 million at December 31, 2000. Assuming a
10% downward shift in interest rates at December 31, 2000 and 1999, the fair
value of unhedged debt would have increased by $1.2 billion and $938 million,
respectively.
We use forward and option contracts to reduce our exposure to the risk of
adverse changes in currency exchange rates. We are subject to foreign exchange
risk for foreign-currency-denominated transactions, such as debt issued. In
addition, in 1999 we were subject to foreign exchange risk related to
reimbursements to foreign telephone companies for their portion of the revenue
billed by AT&T for calls placed in the United States to a foreign country. We
monitor our foreign exchange rate risk on the basis of changes in fair value.
Assuming a 10% appreciation in the U.S. dollar at December 31, 2000 and 1999,
the fair value of these contracts would have resulted in additional unrealized
losses of $6 million and $29 million, respectively. Because these contracts are
entered into for hedging purposes, we believe that these losses would be largely
offset by gains on the underlying firmly committed or anticipated transactions.
We use equity hedges to manage our exposure to changes in equity prices
associated with stock appreciation rights (SARs) of affiliated companies.
Assuming a 10% decrease in equity prices of affiliated companies, the fair value
of the equity hedges would have decreased by $29 million and $81 million at
December 31, 2000 and 1999, respectively. Because these contracts are entered
into for hedging purposes, we believe that the decrease in fair value would be
largely offset by gains on the underlying transaction.
In order to determine the changes in fair value of our various financial
instruments, we use certain modeling techniques, namely Black-Scholes, for our
SARs and equity collars. We apply rate sensitivity changes directly to our
interest rate swap transactions and forward rate sensitivity to our foreign
currency forward contracts.
The changes in fair value, as discussed above, assume the occurrence of
certain adverse market conditions. They do not consider the potential effect of
favorable changes in market factors and do not represent projected losses in
fair value that we expect to incur. Future impacts would be based on
86
97
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
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Total assets.................................... $241,141 $242,223
Total liabilities............................... 118,881 129,432
Total shareowners' equity....................... 103,963 103,198
Total assets decreased $1.0 billion, or 0.4%, to $241.1 billion at March
31, 2001 from $242.2 billion at December 31, 2000. The decrease was primarily
due to reduced goodwill, primarily driven by the Excite@Home impairment charge,
lower trade receivables and the lower market value of our short-term
investments. Partially offsetting this decrease was an increase in property,
plant and equipment resulting from capital expenditures net of depreciation.
Total liabilities decreased $10.6 billion, or 8.2%, to $118.9 billion at
March 31, 2001 from $129.4 billion at December 31, 2000. This decrease primarily
resulted from the payment of short-term debt and accounts payable with the
proceeds from the NTT DoCoMo agreement. Partially offsetting this decrease was
the issuance of $6.5 billion in long-term debt through AT&T Wireless Services.
Minority Interest decreased $0.7 billion, or 13.5%, to $4.2 billion at
March 31, 2001 from $4.9 billion at December 31, 2000. This decrease primarily
reflects the losses of Excite@Home, primarily driven by an asset impairment
charge.
Total shareowners' equity increased $0.8 billion, or 0.7%, to $104.0
billion at March 31, 2001 from $103.2 billion at December 31, 2000. This
increase primarily resulted from the issuance of stock to acquire cable-systems
from Cablevision, and an increase in additional paid-in capital related to the
NTT DoCoMo warrants, as well as issuance of stock in connection with our
employee benefit plans.
Net debt-to-annualized EBITDA was 3.19x at March 31, 2001 as compared with
3.28x at December 31, 2000, reflecting lower EBITDA partially offset by lower
debt. The debt ratio (debt divided by total debt and equity) was 39.5% at March
31, 2001 as compared with 46.2% at December 31, 2000. For purposes of this
calculation, equity includes the convertible quarterly trust preferred
securities, redeemable preferred stock of subsidiary as well as convertible
preferred stock. The decrease in debt-to-capital was driven by the repayment of
short-term debt offset somewhat by the issuance of wireless bonds.
In addition, included in debt is approximately $8.6 billion of notes, which
are exchangeable into or collateralized by securities we own. Excluding this
debt, the ratio of debt to total capital at March 31, 2001 was 35.6%.
AT DECEMBER 31, 2000 1999
--------------- --------- ---------
(DOLLARS IN MILLIONS)
Total assets...................................... $242,223 $169,406
Total liabilities................................. 129,432 83,388
Total shareowners' equity......................... 103,198 78,927
Total assets increased $72.8 billion, or 43.0%, at December 31, 2000,
primarily due to the impact of the MediaOne acquisition, which resulted in
increased goodwill, franchise costs, other investments including TWE and
Vodafone Group plc; and the addition of property, plant and equipment. Property,
plant and equipment also increased due to capital expenditures made during the
year, net of depreciation expense and equipment contributed to Concert. This
equipment contribution, as well as a
87
98
$1.0 billion loan to Concert, and our investment in Net2Phone are reflected as
an increase to other investments. Additionally, other receivables increased due
to Concert. Wireless acquisitions, including the impact of consolidating former
equity investments, resulted in increased licensing costs.
Total liabilities at December 31, 2000, increased $46.0 billion, or 55.2%,
primarily due to the impact of the MediaOne acquisition, including debt of
MediaOne and borrowings to fund the acquisition, as well as the consolidation of
Excite@Home. In addition, total debt increased due to the monetization of our
investments in Microsoft Corporation and Comcast.
Minority interest increased $2.5 billion to $4.9 billion, primarily
reflecting the minority interest of our ownership of Excite@Home resulting from
the consolidation of Excite@Home beginning September 1, 2000, and the preferred
stock outstanding of a MediaOne subsidiary.
Total shareowners' equity was $103.2 billion at December 31, 2000, an
increase of 30.8% from December 31, 1999. This increase was primarily due to the
issuance of AT&T common stock for the MediaOne acquisition as well as the
issuance of AT&T Wireless Group tracking stock.
The ratio of total debt to total capital, excluding LMG (debt divided by
total debt and equity, excluding LMG) was 46.2% at December 31, 2000, compared
with 43.0% at December 31, 1999. The equity portion of this calculation includes
convertible trust preferred securities, as well as subsidiary redeemable
preferred stock. The increase was primarily driven by higher debt associated
with the MediaOne merger, largely offset by a higher equity base associated with
the MediaOne merger and the AT&T Wireless Group tracking stock offering. The
ratio of debt (net of cash) to EBITDA was 3.28X at December 31, 2000, compared
with 1.88X at December 31, 1999, reflecting additional debt associated with the
MediaOne merger. Included in debt was approximately $8.7 billion of notes, which
are exchangeable into or collateralized by securities we own. Excluding this
debt, the ratio of net-debt-to-EBITDA at December 31, 2000, was 2.84X.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Under these standards, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. AT&T does not
expect that the adoption of SFAS No. 140 will have a material impact on AT&T's
results of operations, financial position or cash flows.
SUBSEQUENT EVENTS
On May 7, 2001, AT&T agreed to sell our 99.75% interest in an entity owning
the Baltimore Maryland cable-system serving approximately 110,000 customers to
Comcast for approximately $0.5 billion. Pending certain closing conditions and
regulatory approvals, the transaction is expected to close in second or third
quarter of 2001.
On April 30, 2001, AT&T received 63.9 million common shares of AT&T common
held by Comcast Corporation 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 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
88
99
transaction were split evenly between AT&T and AT&T Wireless Group. The
transaction resulted in a pretax gain of approximately $0.9 billion.
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $0.5 billion of funding. Under the
program, a small percentage of consumer accounts receivable will be sold on a
discounted, revolving basis, to a special purpose, wholly-owned subsidiary,
which assigns interests in such receivables to unrelated third-party financing
entities. The proceeds will be used for general corporate purposes, including
the repayment of commercial paper.
89
100
REASONS FOR THE RESTRUCTURING PROPOSALS
The creation of AT&T Broadband Group tracking stock and AT&T Consumer
Services Group tracking stock and the spin-off of AT&T Communications Services,
Inc. are part of our previously announced plan to restructure AT&T. If the
proposals are approved and implemented in their entirety, shareholders of AT&T
common stock will hold securities in two entities -- historic AT&T (which will
be renamed "AT&T Broadband Corp.") and a new company, AT&T Communications
Services, Inc. (which will be spun off from historic AT&T and renamed "AT&T
Corp."). Shareholders will have two different securities in the new
company -- shares of common stock and shares of a new Consumer Services Group
tracking stock. Our board of directors recommends these actions based on its
view that AT&T's restructuring plan will promote greater market recognition of
the value of the various AT&T businesses. Our board of directors considered the
following factors among others in approving and recommending that shareholders
approve the proposals.
BACKGROUND OF THE RESTRUCTURING PLAN
By 1997, AT&T realized that competitive and regulatory forces impacting the
telecommunications business required it to undertake a fundamental shift in its
strategy. First, AT&T decided to invest in facilities-based businesses and
assets to enable it to reduce its reliance on the RBOCs for the local component
of its service and to enable AT&T to better serve its customers by providing
end-to-end communications services on its own. In addition, AT&T decided to
diversify its businesses to reduce its reliance on its long-distance voice
business and to increase the percentage of its businesses represented by growth
businesses.
To accomplish this strategy, AT&T undertook a series of major acquisitions.
In early 1998, AT&T agreed to acquire Teleport Communications Group Inc., a
provider of local telephone services to business customers. In 1998, AT&T agreed
to acquire TCI and in May 1999, AT&T agreed to acquire MediaOne. As a result of
these last two acquisitions, AT&T became the nation's largest cable company.
These three acquisitions provided AT&T with a significant facilities based
opportunity for direct access to its customers. In addition, these businesses,
together with AT&T Wireless Services, provided AT&T with a large base of growth
businesses.
AT&T had anticipated that its strong balance sheet and the cash generated
by its core long-distance voice business would be sufficient to fund its
acquisitions of, and capital expenditures required by, the cable and wireless
growth businesses. The core business was expected to be able to provide
sufficient resources until the growth businesses had time to realize the
benefits of their investment strategy.
In order to assist our wireless services business in meeting its capital
needs, AT&T sold shares of a tracking stock intended to reflect the financial
performance and economic value of a portion of our wireless services business.
However, the level of capital expenditures required by our wireless business
continued to rise as a result of factors such as the need to develop a
competitive third generation strategy and the need for investment in new
spectrum. At the same time, AT&T was facing a decline in its core voice long
distance business. These factors made it challenging to fund wireless' growth
strategy without creating a separate company for our wireless business.
AT&T began to face substantially greater than anticipated competition in
its core business. The ability of non-RBOC local telephone providers to offer
both local and long distance services, together with over-capacity in the
industry, made competition particularly severe. In addition, AT&T found that the
expected benefits of recent regulatory changes had not materialized and that
entry into local markets remained challenging.
The acquisitions of TCI and MediaOne, and the increased investments in
growth businesses, had increased AT&T's debt burden (which, as of March 31,
2001, was approximately $56.2 billion, including approximately $17.2 billion of
short-term debt). The benefits that AT&T's balance sheet
90
101
were expected to provide to the growth businesses was reduced by the downgrade
of AT&T's debt ratings. Additionally, AT&T faced a decline in its common stock
price on a split adjusted basis from a price of $ per share on
to a recent price of $ per share on , 2001.
AT&T's board of directors determined that each of its businesses would be
better able to reach its full growth potential if AT&T restructured itself. On
October 25, 2000, AT&T announced its strategic restructuring plan. Effective
July 9, 2001, AT&T split off AT&T Wireless Services, Inc. as a separate company,
and effective August 10, 2001, AT&T split off Liberty Media Corporation as a
separate company. Although the separation of AT&T Communications Services, Inc.
from AT&T Broadband Corp. has the consequence of separating the principal assets
of TCI and MediaOne from AT&T's other businesses, AT&T's board of directors
believes that these acquisitions nonetheless accomplished AT&T's strategic goal
of creating diversification for its shareholders since AT&T shareholders will be
able to share in the growth potential of its broadband business after the
restructuring. Also, as a result of these acquisitions, if the restructuring
plan is approved and implemented, AT&T's shareholders will have on-going
investments in facilities-based communications companies.
GREATER MARKET RECOGNITION OF VALUE
AT&T believes that issuing securities intended to reflect the separate
performance of each of AT&T Broadband Group and AT&T Consumer Services Group
will result in greater market recognition and realization of the value,
individually and collectively, of AT&T and its distinct lines of business
represented by each of these groups and allow the market to evaluate each
group's results against those of its competitors.
Similarly, following the spin-off, as separate, stand-alone entities, AT&T
Broadband Corp. and AT&T Communications Services, Inc. will offer more focused
investment opportunities than those presented by a diversified AT&T. For
example, we believe that the fundamental structural decline in long distance
revenue and profit makes it harder for the market to discern the growth
potential of our broadband and data/IP services businesses. We expect that the
spin-off will promote a more efficient equity valuation for AT&T Broadband Corp.
common stock, AT&T common stock and new Consumer Services Group tracking stock.
GREATER FINANCIAL AND STRATEGIC FLEXIBILITY
AT&T believes that the creation of AT&T Broadband Group tracking stock and
AT&T Consumer Services Group tracking stock will provide AT&T (and, later, AT&T
Communications Services, Inc.) with greater financial flexibility. AT&T expects
that each tracking stock will assist it (and, later, AT&T Communications
Services, Inc.) in meeting its capital needs by creating an additional publicly
traded equity security that it can use to raise capital. In addition, the
creation of AT&T Broadband Group tracking stock and AT&T Consumer Services Group
tracking stock prior to the spin-off will allow AT&T to issue AT&T Broadband
Group tracking stock or AT&T Consumer Services Group tracking stock in potential
group-specific acquisitions and investments prior to the spin-off. This would
allow shareholders of an entity that AT&T Broadband Group or AT&T Consumer
Services Group acquires the opportunity to participate more directly in the
success of the business in which that entity engages rather than participating
in the much larger and more diversified AT&T enterprise.
In addition, the restructuring plan also is intended to permit each of AT&T
Broadband Corp. and AT&T Communications Services, Inc. to target a debt and
equity profile consistent with its own needs and comparable companies in its
industry and to prioritize its capital and invest in its own growth.
91
102
Following the spin-off, with enhanced market recognition of the value of
each of AT&T Broadband Corp. and AT&T Communications Services, Inc., we expect
each company to be better positioned to pursue strategic acquisitions and
alliances to grow its businesses.
INCREASED SHAREHOLDER CHOICE
A corporation typically uses tracking stocks in situations where the
corporation has two or more businesses that have different investor profiles. In
this case, AT&T Broadband Group is a higher-risk, higher-growth potential
business focused on a distinct set of products and services, which contrast with
the more mature core businesses of AT&T Consumer Services Group. AT&T Consumer
Services Group consists of businesses offering a particular set of services and
targeting a particular type of customer, distinct from AT&T Business Services
Group. AT&T believes that the creation and issuance of AT&T Broadband Group
tracking stock and AT&T Consumer Services Group tracking stock will provide
investors with greater choice among the different types of investment currently
embedded in AT&T.
The creation of the tracking stocks is expected to be followed by the
spin-off, which will create two separate, distinct companies with different
investor profiles. Thus, the spin-off is intended to provide investors with an
opportunity to make an investment in different, separate entities and choose the
one(s) better suited to their investment needs without necessarily investing in
any other one.
REDUCE INDEBTEDNESS
AT&T believes that the creation and public offering of AT&T Broadband Group
tracking stock will raise funds that will allow AT&T to reduce its outstanding
indebtedness. By reducing indebtedness, AT&T intends to improve its financial
position and its credit rating.
MORE FOCUSED AND FLEXIBLE MANAGEMENT TEAMS BOTH BEFORE AND AFTER THE SPIN-OFF
Prior to the adoption of the restructuring plan, AT&T consisted of a number
of distinct businesses, including AT&T Wireless Services, AT&T Broadband
Services, AT&T Business Services and AT&T Consumer Services. The restructuring
plan would reduce the complexity inherent in managing an integrated enterprise
of this type. If the restructuring proposals are approved and implemented,
management of each separate group and company would have a greater ability to
focus on the execution of strategic objectives in its particular business and on
reacting to changes in its competitive environment. Each of our businesses would
be a smaller, but more focused and flexible, business unit, in a better position
to implement its respective business strategy and serve its customers more
effectively through quicker decision making, more efficient deployment of
resources, increased operational agility and enhanced responsiveness to
customers and markets and technological changes.
MANAGEMENT INCENTIVES
PRE-SPIN-OFF
We believe the existence of AT&T Broadband Group tracking stock and AT&T
Consumer Services Group tracking stock will permit the creation of more
effective management incentive and retention programs. In particular, we will be
able to grant stock options and other incentive awards to employees of each
group that are tied more directly to the performance of that group.
POST-SPIN-OFF
We expect the spin-off to enhance each of AT&T Broadband Corp.'s and AT&T
Communications Services, Inc.'s employees' motivation and to strengthen each
company's management's focus through incentive compensation programs tied to the
market performance of its separate common stock. The spin-off will enable each
of AT&T Broadband Corp. and AT&T Communications Services, Inc. to offer its
employees compensation more directly linked to the performance of its
92
103
business than if both were a part of a single corporation, which we expect will
enhance each company's ability to attract and retain qualified personnel.
TAX CONSIDERATIONS
In addition, our board of directors considered that we expect that
implementation of the charter amendments and the completion of the spin-off will
not be taxable for U.S. federal income tax purposes to us, to AT&T
Communications Services, Inc. or to our shareholders.
POTENTIAL NEGATIVE CONSEQUENCES OF THE PROPOSALS
Our board of directors also considered the following potential adverse
consequences of the creation of the tracking stocks and the completion of the
spin-off, including the following:
- with regard to the tracking stocks, our board of directors considered
that:
-- there can be no assurance as to the degree to which the market price
of the tracking stocks will reflect the separate performance of the
respective groups, and
-- holders of common stock and of the tracking stocks will continue to
bear the risks associated with an investment in a single corporation
and all of AT&T's businesses, assets and liabilities;
- with regard to the spin-off, our board of directors considered that:
-- there can be no assurance as to the market for, or the trading prices
of, AT&T Broadband Corp. common stock and AT&T Communications
Services, Inc. common stock following the spin-off,
-- the lack of diversification and smaller size could affect each of AT&T
Broadband Corp.'s and AT&T Communications Services, Inc.'s ability to
achieve economies of scale, could create capital and size constraints
that did not previously exist, could create increased costs due to
decreased purchasing power and could limit each company's ability to
obtain financing, and
-- as more focused companies, the earnings of each of AT&T Broadband
Corp. and AT&T Communications Services, Inc. will be more closely tied
to its particular performance and its industry performance and as a
result their securities could be subject to greater volatility.
Our board of directors also considered the risk factors related to the
creation of AT&T Broadband Group tracking stock and AT&T Consumer Services Group
tracking stock, described under "Risk Factors Relating to the Tracking Stock
Amendments," and the spin-off described under "Risk Factors Relating to the
Spin-off of AT&T Communications Services, Inc."
Our board of directors believes, however, that, on balance, the positive
aspects of the tracking stocks and the spin-off outweigh any potentially adverse
consequences.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has approved each of the charter amendment
proposals, the spin-off proposal, the incentive plan proposals and the proposal
to amend the employee stock purchase plan and recommends that shareholders vote
FOR each of these proposals.
93
104
THE BROADBAND CHARTER AMENDMENT PROPOSAL
We urge all shareholders to read the form of proposed charter amendment, a
copy of which we have attached as Appendix A to this proxy statement.
GENERAL
We are proposing the following amendment to our charter, which we refer to
as the Broadband charter amendment proposal:
Broadband Group tracking stock amendment -- an amendment to create a new
class of common stock called Broadband Group common stock, par value $1.00
per share, which we intend to reflect the financial performance and
economic value of our broadband services business. We refer to this stock
as "AT&T Broadband Group tracking stock."
Approval of the Broadband charter amendment proposal requires a majority of
the voting power of all outstanding shares of AT&T common stock to vote in its
favor. OUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL.
Any shares not voted, whether by abstention, broker non-vote or otherwise, have
the effect of a vote against the Broadband charter amendment proposal.
BROADBAND GROUP TRACKING STOCK AMENDMENT
The Broadband Group tracking stock amendment would, among other things:
- Define "AT&T Broadband Group," the financial performance and economic
value of which we intend AT&T Broadband Group tracking stock to reflect.
AT&T Broadband Group will consist of the assets and liabilities shown in
the combined balance sheets of AT&T Broadband Group and will include:
-- AT&T's cable television and cable telephone service customers;
-- AT&T's cable television and cable telephone licenses that solely
support cable telephone services;
-- AT&T's cable television and cable telephone systems and operations
that solely support cable telephone services;
-- AT&T's cable television and cable telephone support infrastructure,
including ordering, provisioning, billing and care;
-- AT&T's interest in partnerships and affiliates providing cable
television services, such as Cablevision and Time Warner
Entertainment; and
-- AT&T's interest in Excite@Home, its affiliate providing high-speed
cable Internet services.
- Establish the terms of AT&T Broadband Group tracking stock, consisting of
authorized shares and entitling the holders of AT&T
Broadband Group tracking stock to of a vote per share, voting as
one class with all other classes and series of AT&T common stock and
preferred stock of AT&T with respect to all matters to be voted upon by
AT&T shareholders, except as otherwise required by applicable state law
or by the terms of any other class or series of AT&T capital stock.
We include a more complete description of AT&T Broadband Group tracking
stock under "-- Terms of the Broadband Group Tracking Stock Amendment."
94
105
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS HAS APPROVED THE BROADBAND CHARTER AMENDMENT
PROPOSAL AND RECOMMENDS THAT YOU VOTE FOR THE BROADBAND CHARTER AMENDMENT
PROPOSAL.
TERMS OF THE BROADBAND GROUP TRACKING STOCK AMENDMENT
GENERAL
If we adopt the Broadband Group tracking stock amendment, we will amend our
charter to authorize billion shares of AT&T Broadband Group
tracking stock. If we adopt the Consumer Services Group tracking stock
amendment, we will amend our charter to authorize billion shares of AT&T
Consumer Services Group tracking stock. Approval of either tracking stock
proposal will also allow our board of directors to amend our charter to
eliminate all references to AT&T Wireless Group tracking stock, Class A Liberty
Media Group common stock, Class B Liberty Media Group common stock, and AT&T
Wireless Group preferred tracking stock, following the applicable split-off, and
to redesignate such series as shares of common stock or preferred stock, as
applicable, which would be available for issuance. Currently, 16.5 billion
shares of AT&T capital stock are authorized, consisting of 100 million shares of
preferred stock and 16.4 billion shares of common stock. If both tracking stock
proposals are approved, the total number of authorized shares of AT&T common
stock will be billion, of which billion will be designated
AT&T Broadband Group tracking stock and billion will be designated
AT&T Consumer Services Group tracking stock. As of July 10, 2001, we had
outstanding shares of AT&T common stock. As of July 10, 2001,
shares of a series of preferred stock of AT&T were held by subsidiaries of AT&T.
AT&T BROADBAND GROUP
We intend AT&T Broadband Group tracking stock to reflect the financial
performance and economic value of AT&T Broadband Group. The Broadband Group
tracking stock amendment defines "AT&T Broadband Group" generally as the
interest of AT&T or any of its subsidiaries in all of the businesses, assets and
liabilities reflected in the unaudited combined financial statements of AT&T
Broadband Group, dated December 31, 2000, as included in this proxy statement,
including any successor to AT&T Broadband Group by merger, consolidation or sale
of all or substantially all of its assets. The Broadband Group tracking stock
amendment contains adjustments to the definition of "AT&T Broadband Group" to
reflect, among other things, related assets and liabilities (including
contingent liabilities), net income and net losses arising after the date of
these financial statements, contributions and allocations of assets, liabilities
and businesses between the groups and acquisitions and dispositions. AT&T
Broadband Group is not a stand-alone entity, and AT&T's board of directors will
govern AT&T Broadband Group and could make operational and financial decisions
or implement policies that disproportionately affect the business of AT&T
Broadband Group. AT&T's board of directors may transfer funds or reallocate
assets, liabilities, revenue, expenses and cash flows to or from AT&T Broadband
Group without the consent of shareholders. The Broadband Group tracking stock
amendment provides that the AT&T Broadband Group allocation fraction may be
adjusted by AT&T's board of directors as it deems appropriate to reflect
contributions or allocations from AT&T Broadband Group to AT&T's other groups,
or vise versa. All actions by AT&T's board of directors are subject to the board
members' fiduciary duties under applicable state law to all shareholders of AT&T
as a group and not just to holders of a particular class of tracking stock and
to AT&T's charter, policy statements, by-laws and inter-company agreements.
AT&T BROADBAND GROUP ALLOCATION FRACTION
Operation of the Allocation Fraction. While AT&T Broadband Group tracking
stock is intended to reflect the financial performance and economic value of
AT&T Broadband Group, the AT&T Broadband Group tracking stock issued to the
public may not represent all of the interest in
95
106
the financial performance and economic value of AT&T Broadband Group. The
Broadband Group tracking stock amendment defines the "AT&T Broadband Group
allocation fraction" to represent the interest in the financial performance and
economic value of AT&T Broadband Group reflected by AT&T Broadband Group
tracking stock issued to the public. To the extent that AT&T Broadband Group
tracking stock issued to the public does not represent all of the interest in
the financial performance and economic value of AT&T Broadband Group, the
remaining interest in the financial performance and economic value of AT&T
Broadband Group will be allocated to AT&T. If AT&T is allocated an interest in
the financial performance and economic value of AT&T Broadband Group, AT&T will
have the right to participate in any dividend, distribution or liquidation made
to holders of AT&T Broadband Group tracking stock. This right to participate is
AT&T's retained portion of value of AT&T Broadband Group. The greater the
retained portion of value, the greater the percentage of the economic value and
financial performance of AT&T Broadband Group intended to be reflected in AT&T
common stock.
For example, if the AT&T Broadband Group allocation fraction is 0.2, this
means that shares of AT&T Broadband Group tracking stock issued to the public
are intended to represent 20% of the interest in the financial performance and
economic value of AT&T Broadband Group. In this case, the remaining 80% of the
interest in the financial performance and economic value of AT&T Broadband Group
would be kept by AT&T as its retained portion of value of AT&T Broadband Group.
In this example, to the extent that AT&T Broadband Group made a distribution to
holders of AT&T Broadband Group tracking stock, for every 20 cents distributed
to the public holders of AT&T Broadband Group tracking stock, AT&T would be
entitled to 80 cents.
If all of the interest in the financial performance and economic value of
AT&T Broadband Group is fully reflected by the AT&T Broadband Group tracking
stock held by the public, the AT&T Broadband Group allocation fraction will
equal one. None would be retained by AT&T.
Adjustments. Because the AT&T Broadband Group allocation fraction
determines the relative percentage interest in AT&T Broadband Group of public
holders of AT&T Broadband Group tracking stock, on the one hand, and AT&T, on
the other hand, the AT&T Broadband Group allocation fraction may be adjusted
from time to time as our board of directors deems appropriate for a number of
reasons, including:
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities from other AT&T groups
to AT&T Broadband Group (or vice versa);
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities of other AT&T groups to,
or for the benefit of, employees of AT&T Broadband Group in connection
with employee benefit plans or arrangements of AT&T or any of its
subsidiaries (or vice versa);
- to reflect the number of shares of AT&T capital stock contributed to, or
for the benefit of, employees of AT&T Broadband Group in connection with
benefit plans or arrangements of AT&T or any of its subsidiaries;
- to reflect repurchases by AT&T of shares of AT&T Broadband Group tracking
stock for the account of AT&T Broadband Group;
- to reflect issuances of AT&T Broadband Group tracking stock for the
account of AT&T Broadband Group;
- to reflect dividends or other distributions to holders of AT&T Broadband
Group tracking stock, to the extent no payment is made to AT&T;
- to reflect subdivisions and combinations of AT&T Broadband Group tracking
stock and stock dividends payable in shares of AT&T Broadband Group
tracking stock; and
- under other circumstances as our board of directors determines
appropriate to reflect the economic substance of any other event or
circumstance.
96
107
In addition, in determining the percentage interest of holders of AT&T
Broadband Group tracking stock in any particular dividend or other distribution,
we will reduce the economic interest of holders of AT&T Broadband Group tracking
stock to reflect dilution arising from shares of AT&T Broadband Group tracking
stock reserved for issuance upon conversion, exercise or exchange of other
securities that are entitled to participate in this dividend or other
distribution.
The Broadband Group tracking stock amendment provides that any adjustment
of this kind must be made in a manner that our board of directors determines to
be fair and equitable to holders of AT&T common stock and AT&T Broadband Group
tracking stock. In the event that any assets or other property are acquired by
other AT&T group(s) and allocated or contributed to AT&T Broadband Group, the
consideration paid by the other AT&T group(s) to acquire these assets or other
property will be presumed to be its "fair market value" as of its acquisition.
Any adjustment to the AT&T Broadband Group allocation fraction made by our board
of directors in good faith in accordance with these principles will be at the
sole discretion of our board of directors, and this good faith determination of
our board of directors will be final and binding on all shareholders.
VOTING RIGHTS
Currently, holders of AT&T common stock have one vote per share. Holders of
AT&T Consumer Services Group tracking stock would initially have of a vote
per share. Each outstanding share of AT&T Broadband Group tracking stock
initially will have of a vote. The voting rights of AT&T Broadband
Group tracking stock will be subject to adjustments to reflect stock splits,
reverse stock splits, stock dividends or certain stock distributions with
respect to AT&T common stock, AT&T Broadband Group tracking stock or AT&T
Consumer Services Group tracking stock.
Except as otherwise required by New York law or any special voting rights
of any class or series of AT&T preferred stock or common shares, holders of
shares of AT&T common stock, AT&T Broadband Group tracking stock, each other
class of AT&T common shares, if any, that is entitled to vote, AT&T Consumer
Services Group tracking stock and holders of shares of each class or series of
AT&T preferred stock, if any, that is entitled to vote, will vote as one class
with respect to all matters to be voted on by shareholders of AT&T. No separate
class vote of AT&T Broadband Group tracking stock will be required, except as
required by the New York Business Corporation Law.
DIVIDENDS
General. Provided that AT&T has sufficient assets to pay a dividend under
applicable law, after excluding the available dividend amount relating to AT&T
Consumer Services Group, the Broadband Group tracking stock amendment provides
that dividends on AT&T Broadband Group tracking stock are limited to an
available dividend amount that is designed to be equivalent to the amount that
would legally be available for dividends on that stock if AT&T Broadband Group
were a stand-alone entity. Dividends on AT&T common stock are limited to the
amount of legally available funds for all of AT&T less the sum of the available
dividend amount for AT&T Broadband Group tracking stock, and the available
dividend amount for AT&T Consumer Services Group tracking stock.
AT&T does not expect to pay any dividends on shares of AT&T Broadband Group
tracking stock. If and when our board of directors determines to pay any
dividends on shares of AT&T Broadband Group tracking stock, the AT&T Groups
policy statement provides that this determination also will be subject to
factors similar to those that we describe above with respect to the payment of
dividends on each class of AT&T common stock.
Following the spin-off of AT&T Communications Services, Inc., AT&T
Broadband Corp. does not expect to pay dividends on shares of its common stock.
The declaration of dividends by AT&T Broadband Corp. and the amount thereof,
will, however, be in the discretion of AT&T Broadband Corp.'s board of directors
and will depend upon AT&T Broadband Corp.'s financial performance, the dividend
policies and capital structures of comparable companies, its ongoing capital
needs, results of
97
108
operations, financial condition, cash requirements and future prospects and
other factors deemed relevant by its board of directors.
Discrimination among classes of common shares. The Broadband Group
tracking stock amendment does not provide for mandatory dividends. Our board of
directors will have the sole authority and discretion to declare and pay
dividends (or to refrain from declaring or paying dividends), in equal or
unequal amounts, on AT&T common stock, AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock, any other class of AT&T common shares or
any two or more of these classes. Subject to not exceeding the applicable
available dividend amount, our board of directors has this power regardless of
the relative available dividend amounts, prior dividend amounts declared,
liquidation rights or any other factor.
SHARE DISTRIBUTIONS
Subject to the provisions of AT&T Consumer Services Group tracking stock,
AT&T may declare and pay a distribution consisting of shares of AT&T common
stock, AT&T Broadband Group tracking stock or any other securities of AT&T or
any other person to holders of AT&T common stock or AT&T Broadband Group
tracking stock only in accordance with the provisions described below. We refer
to this type of distribution as a "share distribution."
Distributions on AT&T common stock or AT&T Broadband Group tracking
stock. Subject to any limitations imposed by the terms of AT&T Consumer
Services Group tracking stock, AT&T may declare and pay a share distribution to
holders of AT&T common stock, AT&T Broadband Group tracking stock or any other
class of AT&T common shares consisting of any securities of AT&T, any subsidiary
of AT&T or any other person. However, securities attributable to a group may be
distributed to holders of another group only for consideration. In the case of
shares of AT&T Broadband Group tracking stock distributed to holders of AT&T
common stock, the consideration may consist, in whole or in part, of a decrease
in AT&T's retained portion of the value of AT&T Broadband Group.
Discrimination among classes of AT&T common shares. The Broadband Group
tracking stock amendment does not provide for mandatory share distributions.
Subject to the restrictions described above or that are in effect regarding AT&T
Consumer Services Group tracking stock, our board of directors will have the
sole authority and discretion to declare and pay share distributions (or to
refrain from declaring or paying share distributions), in equal or unequal
amounts, on AT&T common stock, AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock, any other class of AT&T common shares or
any two or more of these classes. Subject to not exceeding the applicable
available dividend amounts, our board of directors has this power regardless of
the relative available dividend amounts, prior share distributions amounts
declared, liquidation rights or any other factor.
REDEMPTION
Redemption in exchange for shares of AT&T common stock after the spin off
of AT&T Communications Services, Inc. At any time, if the businesses, assets
and liabilities of AT&T Broadband Group are substantially equivalent to the
businesses, assets and liabilities of AT&T (as would be the case if the spin-off
of AT&T Communications Services, Inc. is completed as proposed), our board of
directors, in its sole discretion, may redeem all outstanding shares of AT&T
Broadband Group tracking stock for shares of AT&T common stock on a ratio
calculated in a manner intended to maintain the approximate relative
proportional interest in AT&T Broadband Group of holders of AT&T Broadband Group
tracking stock and AT&T common stock.
Specifically, each share of AT&T Broadband Group tracking stock will be
redeemed in exchange for that number of shares of AT&T common stock, calculated
to the nearest 1/10,000, equal to a fraction the numerator of which is:
98
109
- a fraction the numerator of which is the product of (1) the number of
shares of AT&T common stock outstanding on a fully diluted basis and (2)
the AT&T Broadband Group allocation fraction and the denominator of which
is 1 minus the AT&T Broadband Group allocation fraction;
and the denominator of which is:
- the number of shares of AT&T Broadband Group tracking stock outstanding
on a fully diluted basis.
For example, suppose that prior to the spin-off of AT&T Communications
Services, Inc.:
- 800 shares of AT&T common stock are outstanding;
- the AT&T Broadband Group allocation fraction is .2; and
- 20 shares of AT&T Broadband Group tracking stock are held by the public.
In this example, following the spin-off of AT&T Communications Services,
Inc., our board of directors could redeem all 20 shares of AT&T Broadband Group
tracking stock for shares AT&T common stock. Each share of AT&T Broadband Group
tracking stock would be redeemed for:
((800 times .2)/(1 minus .2))/20 = 10 shares of AT&T common stock.
This example also illustrates how the formula is designed to maintain the
approximate relative proportional interest in AT&T Broadband Group of holders of
AT&T Broadband Group tracking stock and AT&T common stock. Following the
spin-off of AT&T Communications Services, Inc., AT&T is essentially composed
solely of AT&T Broadband Group. In the above example:
- the AT&T Broadband Group allocation fraction is .2;
- the holders of AT&T Broadband Group tracking stock own a security
intended to represent approximately 20% of AT&T Broadband Group;
- each of the 20 outstanding shares of AT&T Broadband Group tracking stock
is intended to represent 1% of AT&T Broadband Group;
- the 800 outstanding shares of AT&T common stock are intended to represent
the remaining 80% of AT&T Broadband Group; and
- each share of AT&T common stock is intended to represent 0.1% of AT&T
Broadband Group.
Consequently, in the example above, redeeming each share of AT&T Broadband
Group tracking stock for 10 shares of AT&T common stock preserves the relative
proportional interest of holders of AT&T Broadband Group tracking stock and AT&T
common stock.
All calculations of fully diluted shares of AT&T common stock or AT&T
Broadband Group tracking stock will be made on the treasury basis in accordance
with United States generally accepted accounting principles.
Other redemptions in exchange for shares of AT&T common stock after
years or if tax-related events occur. At any time following either the
occurrence of tax-related events or the anniversary of the date that AT&T
Broadband Group tracking stock is initially issued, our board of directors, in
its sole discretion, may redeem all outstanding shares of AT&T Broadband Group
tracking stock for shares of AT&T common stock. In this event, each share of
AT&T Broadband Group tracking stock will be redeemed in exchange for that number
of shares of AT&T common stock, calculated to the nearest 1/10,000, equal to
% of the ratio of the average market price per share of AT&T Broadband
Group tracking stock to the average market price per share of AT&T common stock.
99
110
In this case, the average market price per share of AT&T common stock or
AT&T Broadband Group tracking stock, as the case may be, means the average of
the daily market value per share for such AT&T common stock or AT&T Broadband
Group tracking stock for the 40 consecutive trading days ending on the 15th
trading day prior to the date notice of the redemption is mailed to holders of
AT&T Broadband Group tracking stock.
In order to redeem AT&T Broadband Group tracking stock on the basis of a
tax-related event, AT&T must obtain the opinion of counsel that, as a result of
an amendment to or change (or prospective change) in a law or an interpretation
of the law that takes place after AT&T Broadband Group tracking stock is issued,
there is more than an insubstantial risk that:
- any issuance of AT&T Broadband Group tracking stock would be treated as a
sale or other taxable disposition by AT&T or any of its subsidiaries of
any of the assets, operations or relevant subsidiaries underlying AT&T
Broadband Group tracking stock;
- the existence of AT&T Broadband Group tracking stock would subject AT&T,
its subsidiaries or its affiliates, or any of their respective successors
to the imposition of tax or other adverse tax consequences; or
- either AT&T common stock or AT&T Broadband Group tracking stock would not
be treated solely as common stock of AT&T.
Redemption in exchange for stock of subsidiaries in connection with a spin
off of our Broadband Group. The Broadband Group tracking stock amendment also
provides that our board of directors may, at any time, redeem all outstanding
shares of AT&T Broadband Group tracking stock in exchange for a specified number
of outstanding shares of common stock of a subsidiary of AT&T that satisfies
requirements under the Code and that holds all of the assets and liabilities of
AT&T Broadband Group. We refer to a subsidiary that satisfies these requirements
as a "qualifying subsidiary." This type of redemption only may be made on a pro
rata basis, and must be tax free to the holders of AT&T Broadband Group tracking
stock, except with respect to any cash that holders receive in lieu of
fractional shares.
In this case, we would exchange each share of AT&T Broadband Group tracking
stock, on a pro rata basis, for an aggregate number of shares of common stock of
the qualifying subsidiary equal to the number of outstanding shares of common
stock of the qualifying subsidiary held by AT&T.
Redemption in exchange for shares of another tracking stock of another
company. At any time our board of directors may redeem all outstanding shares
of AT&T Broadband Group tracking stock for a new tracking stock of another
entity that owns all of the material assets and liabilities of AT&T Broadband
Group. In order to effect a redemption of this type, the new tracking stock must
have substantially the same terms as those governing AT&T Broadband Group
tracking stock as contained in AT&T's charter and by-laws, including with regard
to the definition of "AT&T Broadband Group." In the event of redemption of this
type, the voting rights of the new tracking stock will be set based on the
ratio, over a fixed measurement period, of the initial trading prices of this
new tracking stock to trading prices of the common stock of the new entity of
which the new tracking stock is a part.
Redemption in connection with significant dispositions. In the event of a
sale, transfer, assignment or other disposition by AT&T in a transaction or
series of related transactions, of all or substantially all of the properties
and assets of AT&T Broadband Group, AT&T generally is required to take one of
the following actions, which action will be selected in the sole discretion of
our board of directors:
- AT&T may redeem each outstanding share of AT&T Broadband Group tracking
stock in exchange for a number of shares of AT&T common stock (calculated
to the nearest 1/10,000) equal to % of the ratio of the average
market price per share of AT&T Broadband Group tracking stock to the
average market price per share of AT&T common
100
111
stock. For this purpose, the "average market price per share" of AT&T common
stock or AT&T Broadband Group tracking stock, as the case may be, means the
average of the daily market value per share for AT&T common stock or AT&T
Broadband Group tracking stock, respectively, during the 10-trading-day
period beginning on the 15th trading day following completion of that
transaction.
- Subject to limitations, AT&T may declare and pay a dividend in cash
and/or in securities (other than AT&T common stock) or other property to
holders of the outstanding shares of AT&T Broadband Group tracking stock
equally on a share-for-share basis in an aggregate amount equal to the
net proceeds of the disposition allocable to AT&T Broadband Group
tracking stock.
- Subject to limitations, if the disposition involves the disposition of
all, not merely substantially all, of the properties and assets of AT&T
Broadband Group, AT&T may redeem all outstanding shares of AT&T Broadband
Group tracking stock in exchange for cash and/or securities or other
property in an aggregate amount equal to the net proceeds of the
disposition allocable to AT&T Broadband Group tracking stock.
- Subject to limitations, if the disposition involves substantially all,
but not all, of the properties and assets of AT&T Broadband Group, AT&T
may redeem a number of outstanding shares of AT&T Broadband Group
tracking stock in exchange for a redemption price equal to the net
proceeds of that disposition. The number of shares of AT&T Broadband
Group tracking stock to be redeemed would be equal to the lesser of (1) a
number determined by dividing the aggregate amount allocated to the
redemption of these shares by the average market value of one share of
AT&T Broadband Group tracking stock during the 10-trading-day period
beginning on the 15th trading day following the completion of that
disposition and (2) the total number of outstanding shares of AT&T
Broadband Group tracking stock.
- Subject to limitations, AT&T may take a combination of the actions
described in the preceding bullets whereby AT&T may redeem some shares of
AT&T Broadband Group tracking stock in exchange for shares of AT&T common
stock at the exchange rate described in the first bullet above, and use
an amount equal to a portion of the net proceeds of the disposition
allocable to AT&T Broadband Group tracking stock to either (1) declare
and pay a dividend as described in the second bullet above, or (2) redeem
part or all of the remaining shares of AT&T Broadband Group tracking
stock as described in the third or fourth bullet above.
For purposes of these provisions, "substantially all of the properties and
assets" of AT&T Broadband Group as of any date means a portion of these
properties and assets that represents at least 80% of the fair value of the
properties and assets attributed to AT&T Broadband Group as of that date.
Exceptions. The provisions described under "-- Redemption in connection
with significant dispositions" will not apply, and AT&T will not be required to
redeem any securities or make any dividend or other distribution it would
otherwise be required to make, in some circumstances, including the following:
- if, in connection with the underlying transaction, our board of directors
redeems all outstanding shares of AT&T Broadband Group tracking stock for
a new tracking stock of another entity that owns all of the material
assets and liabilities of AT&T Broadband Group pursuant to "-- Redemption
in exchange for shares of another tracking stock of another company."
- if the underlying disposition is conditioned upon the affirmative vote of
a majority of holders of AT&T Broadband Group tracking stock, voting as a
separate class;
101
112
- if the disposition is in connection with a liquidation of AT&T;
- if the disposition is to a person or group of which AT&T is the majority
owner and AT&T Broadband Group receives in exchange primarily equity
securities of that person or group as consideration;
- in connection with a spin-off or similar distribution of AT&T's entire
interest in AT&T Broadband Group to the holders of AT&T Broadband Group
tracking stock, including a distribution that is made in connection with
a mandatory redemption as described under "-- Other redemptions in
exchange for shares of AT&T common stock after years or if tax-related
events occur" or "-- Redemption in exchange for stock of subsidiaries in
connection with a spin-off of our Broadband Group"; and
- in connection with a "related business transaction," which generally
means a disposition of all or substantially all of the assets attributed
to AT&T Broadband Group in which AT&T receives equity securities of an
entity that engages or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by AT&T
Broadband Group prior to that transaction.
GENERAL PROCEDURES
Conditions. With regard to any redemption at the discretion of our board
of directors, our board of directors may, in its discretion, condition the
redemption on the occurrence or failure to occur of any events set forth in the
applicable notice of redemption. Our board of directors will have the right to
waive any of these conditions in its sole discretion.
Public announcements; notices. The Broadband Group tracking stock
amendment provides that, in the case of specified dispositions or a redemption,
AT&T will publicly announce or otherwise provide specified information to
holders of AT&T Broadband Group tracking stock and, in the case of redemption of
the discretion of our board of directors, give the notice of redemption no fewer
than 15 days prior to the date of redemption.
Fractional shares. Our board of directors will not have to issue or
deliver any fractional shares to any holder of AT&T Broadband Group tracking
stock upon any redemption, dividend or other distribution under the provisions
described under "-- Redemption." Instead of issuing fractional shares, AT&T will
pay cash for the fractional share in an amount equal to the fair market value of
the fractional share, without interest.
No adjustments for dividends or other distributions. No adjustments for
dividends will be made upon the exchange of any shares of AT&T Broadband Group
tracking stock; except that, if a redemption date with respect to AT&T Broadband
Group tracking stock comes after the record date for the payment of a dividend
or other distribution to be paid on AT&T Broadband Group tracking stock but
before the payment or distribution, the registered holders of those shares of
AT&T Broadband Group tracking stock at the close of business on that record date
will be entitled to receive the dividend or other distribution on the payment
date, notwithstanding the redemption of those shares of stock or AT&T's default
in payment of the dividend or distribution.
Payment of taxes. If any person exchanging a certificate representing
shares of AT&T Broadband Group tracking stock wants us to issue a certificate in
a different name than the registered name on the old certificate, that person
must pay any transfer or other taxes required by reason of the issuance of the
certificate in another name, or establish, to the satisfaction of AT&T or its
agent, that the tax has been paid or is not applicable.
102
113
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of AT&T, whether
voluntary or involuntary, AT&T will first pay or provide for payment of debts
and other liabilities of AT&T, including the liquidation preferences of any
class or series of AT&T preferred stock. Thereafter, holders of the shares of
AT&T common stock, AT&T Consumer Services Group tracking stock, AT&T Broadband
Group tracking stock and any other class of AT&T common shares will share in the
funds of AT&T remaining for distribution to its common shareholders in
proportion to the aggregate market capitalization of the outstanding shares of
each class of stock, as applicable, to the aggregate market capitalization of
all the classes of AT&T common shares. AT&T will calculate the market
capitalizations based on the 20-trading-day period ending on the trading day
prior to the date of the public announcement of the liquidation, dissolution or
winding up of AT&T.
None of the following, by itself, will constitute a liquidation,
dissolution or winding up of AT&T:
- the consolidation or merger of AT&T with or into any other corporation or
corporations or the sale, transfer or lease of all or substantially all
of the assets of AT&T;
- any transaction or series of related transactions that results in all of
the assets and liabilities included in AT&T Broadband Group being held by
one or more AT&T Broadband Group subsidiaries and the distribution of
AT&T Broadband Group subsidiaries, and no other material assets or
liabilities, to the holders of outstanding AT&T Broadband Group tracking
stock; or
- any transaction or series of related transactions that results in all of
the assets and liabilities included in AT&T Consumer Services Group, if
created, being held by one or more AT&T Consumer Services Group
subsidiaries and the distribution of these AT&T Consumer Services Group
subsidiaries, and no other material assets or liabilities, to the holders
of outstanding AT&T Consumer Services Group tracking stock (but this will
be subject to the provisions relating to the redemption of shares of AT&T
Consumer Services Group tracking stock described in our charter).
If the spin-off of AT&T Communications Services, Inc. occurs as
contemplated, the remaining entity, which will be renamed "AT&T Broadband
Corp.", will no longer have the assets and liabilities included in AT&T Business
Services Group and AT&T Consumer Services Group, and AT&T Consumer Services
Group tracking stock will no longer be an outstanding security of AT&T Broadband
Corp. Also, it is expected that shares of AT&T Broadband Group tracking stock
will be redeemed in exchange for shares of AT&T Broadband Corp. common stock. As
a result, AT&T Broadband Corp. will have only a single class of common stock
outstanding and the liquidation rights of holders of AT&T Broadband Corp. common
stock will depend upon the holder's percentage interest in the company and not
on any relative trading prices at the time.
DETERMINATIONS BY OUR BOARD OF DIRECTORS
Any determinations made by our board of directors under any provision
described in this section "-- Terms of the Broadband Group Tracking Stock
Amendment" will be final and binding on all shareholders of AT&T, except as may
otherwise be required by law. AT&T will prepare a statement of any determination
by our board of directors respecting the fair market value of any properties,
assets or securities, and will file the statement with our Corporate Secretary.
NO PREEMPTIVE RIGHTS
Holders of AT&T common stock, AT&T Broadband Group tracking stock, or AT&T
Consumer Services Group tracking stock do not have any preemptive rights to
subscribe for any additional shares of AT&T capital stock or other obligations
convertible into or exercisable for shares of capital stock that may hereafter
be issued by AT&T.
103
114
THE BROADBAND PUBLIC OFFERING
THE PUBLIC OFFERING
We currently intend to issue, in an underwritten public offering, shares of
AT&T Broadband Group tracking stock representing a portion of the financial
performance and economic value of AT&T Broadband Group. We will determine the
amount to be issued based on capital requirements of AT&T and its groups, market
conditions at the time of the public offering and other factors. We currently
expect to issue shares of AT&T Broadband Group tracking stock in the public
offering reflecting no greater than 20% of the economic performance of AT&T
Broadband Group. The proceeds from the public offering may be allocated between
any of the groups or only to one group, which may or may not be the AT&T
Broadband Group.
TIMING OF THE PUBLIC OFFERING
We currently expect to complete the public offering later this year,
subject to market and other factors. However, our board of directors reserves
the right to change our current plans with respect to the public offering.
Our board of directors reserves the right to not create AT&T Broadband
Group tracking stock or to not issue AT&T Broadband Group tracking stock once it
is created. In addition, even if we complete the public offering, there is no
guarantee that the spin-off of AT&T Communications Services, Inc. will follow.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO AT&T
Subject to the discussion below in this section, neither the creation of
AT&T Broadband Group tracking stock nor the occurrence of the public offering of
AT&T Broadband Group tracking stock will be taxable to AT&T.
The conclusions in the preceding paragraph are not free from doubt. These
conclusions assume that AT&T Broadband Group tracking stock is treated as a
class of common stock of AT&T. The filing of consolidated income tax returns by
AT&T together with AT&T Broadband Group also assumes that AT&T Broadband Group
tracking stock is treated as a class of common stock of AT&T. While AT&T
believes that, under current law, AT&T Broadband Group tracking stock will be
treated as common stock of AT&T, there are no authorities directly on point nor
will AT&T receive an advance ruling from the Internal Revenue Service. There is
a risk that the Internal Revenue Service could assert that AT&T Broadband Group
tracking stock is property other than common stock of AT&T. AT&T believes it is
unlikely the Internal Revenue Service would prevail on that view, but no
assurance can be given that the views expressed in the preceding paragraph, if
contested, would be sustained by a court.
EFFECTS OF THE SPIN-OFF OF AT&T COMMUNICATIONS SERVICES, INC.
Under the terms of the proposed Broadband Group tracking stock amendment,
if the businesses, assets and liabilities of AT&T are substantially equivalent
to the business, assets and liabilities of AT&T Broadband Group, our board of
directors may redeem all outstanding shares of AT&T Broadband Group tracking
stock for shares of AT&T common stock. Following the spin-off of AT&T
Communications Services, Inc., we expect that AT&T will consist of AT&T
Broadband Group. For this reason, following the spin-off, we expect to redeem
all outstanding shares of AT&T Broadband Group tracking stock for shares of AT&T
common stock, as permitted by the terms of the proposed Broadband Group tracking
stock amendment. See "-- Terms of the Broadband Group Tracking Stock
Amendment -- Redemption."
104
115
DESCRIPTION OF AT&T BROADBAND GROUP
The description below of AT&T Broadband Group reflects our current plans
regarding the operation of AT&T Broadband Group. These plans may change from
time to time. For financial information about AT&T Broadband Group, see
"Summary -- Consolidating Condensed Financial Information" and the combined
financial statements of AT&T Broadband Group, which are included in Appendix D
to this document.
OVERVIEW
AT&T Broadband Group is one of the nation's largest broadband
communications businesses based on customers served as of March 31, 2001,
providing cable television, high-speed cable Internet services and telephone
services over one of the most extensive broadband networks in the country. AT&T
Broadband Group's business consists primarily of the combined assets and
business of TCI, acquired by AT&T on March 9, 1999, and MediaOne, acquired by
AT&T on June 15, 2000. As of March 31, 2001, AT&T Broadband Group owned and
operated cable systems in 13 of the 20 largest Designated Marketing Areas, or
DMAs, which represented 70% of AT&T Broadband Group's total subscribers. AT&T
Broadband Group's broadband networks passed approximately 28.1 million homes and
served approximately 15.9 million customers as of March 31, 2001. AT&T Broadband
Group continues to upgrade its systems, 74% of which were upgraded to a capacity
equal to or greater than 550 MHz and 72% of which were two-way capable as of
March 31, 2001.
AT&T Broadband Group's broadband networks enable it to deliver a suite of
advanced entertainment, information and communications services, including its
digital cable, high-speed cable Internet and broadband telephone services. As of
March 31, 2001, AT&T Broadband Group provided a variety of advanced services,
including:
- digital cable, with over 3.1 million digital cable subscribers or 19.7%
of AT&T Broadband Group's basic subscribers,
- high-speed cable Internet service, with approximately 1.3 million
high-speed cable Internet service subscribers or 8.3% of marketable homes,
and
- broadband telephone service, with approximately 700,000 local telephone
subscribers or 11.0% of marketable homes.
In addition to fees from residential customers for the services AT&T
Broadband Group offers, AT&T Broadband Group also derives revenues from the sale
of advertising time on satellite-delivered networks, such as ESPN, MTV and CNN,
and on local cable channels. AT&T Broadband Group is able to provide more
targeted audiences for advertisers because it offers more channels and is able
to target advertising to particular geographic zones. In addition to the sale of
advertising time to local and regional advertisers, AT&T Broadband Group
participates in the national spot advertising marketplace through its sales
representation arrangement with and investment in National Cable Communications,
L.L.C., a partnership that represents cable systems in the sale of time to
national spot advertisers.
AT&T Broadband Group's strategy is to focus on larger markets. To that end,
it has entered into a number of sales, acquisitions and exchanges of cable
systems. As of March 31, 2001, on a pro forma basis for the completion of
previously announced transactions:
- AT&T Broadband Group had 13.5 million basic subscribers, 94% of whom were
concentrated in AT&T Broadband Group's 20 largest markets,
- 40% of AT&T Broadband Group's customers were located in its three largest
markets: Boston, San Francisco and Chicago, and
105
116
- 11.2 million, or 83% of AT&T Broadband Group's subscribers, were in
markets where AT&T Broadband Group had more than 500,000 customers.
AT&T Broadband Group continues to upgrade its cable systems to allow it to
provide advanced services to more of its customers. AT&T Broadband Group
believes that by upgrading its cable systems, AT&T Broadband Group will be able
to provide its customers with greater programming diversity, better picture
quality, improved reliability and enhanced services. AT&T Broadband Group's
cable systems have bandwidth capacities in some areas up to 860 megahertz. At
March 31, 2001, over 74% of AT&T Broadband Group's networks had bandwidth
capacity equal to or greater than 550 MHz, the majority of AT&T Broadband
Group's networks had been upgraded to 750 MHz, and 72% of AT&T Broadband Group's
networks were two-way capable. AT&T Broadband Group also believes that
consolidation in major markets is essential in order to enable it to deploy a
bundled suite of entertainment, information and communications services on a
cost-effective basis. This combination of geographic concentration and
consolidation and system upgrades enables AT&T Broadband Group to offer a
complete bundle, under the AT&T brand, of interactive digital cable, high-speed
cable Internet and telephone services.
In addition to AT&T Broadband Group's wholly owned cable systems, AT&T
Broadband Group also owns a number of investments in companies, joint ventures
and partnerships, the most significant of which are:
- Excite@Home;
- Time Warner Entertainment, which owns and operates substantially all of
the business of Warner Bros., Inc., HBO and the cable television
businesses owned and operated by AOL Time Warner;
- Cablevision, which owns and operates cable systems that serve
approximately 3.0 million subscribers in the New York area;
- Insight Midwest, which owns and operates cable systems that serve
approximately 1.3 million subscribers in Indiana, Kentucky, Illinois and
Ohio; and
- Texas Cable Partners, which owns and operates cable systems that serve
approximately 1.1 million subscribers in Texas.
AT&T BROADBAND GROUP
AT&T Broadband Group tracking stock is intended to reflect the separate
financial performance and economic value of AT&T Broadband Group, which includes
the assets and liabilities shown in the combined balance sheets of AT&T
Broadband Group. If we acquire interests in other businesses, we intend to
attribute those assets and any related liabilities to AT&T Broadband Group or to
the other AT&T groups in accordance with the AT&T Groups policy statement. All
net income and net losses generated by the assets attributed to AT&T Broadband
Group will be attributed to AT&T Broadband Group and all net proceeds from any
disposition of these assets also will be attributed to AT&T Broadband Group.
Except as described elsewhere in this document, we attribute all of AT&T's
current Broadband business unit operations to AT&T Broadband Group, including:
- AT&T's cable television and cable telephone service customers;
- AT&T's cable television and telephone licenses that solely support cable
telephone service;
- AT&T's cable television and cable telephone systems and operations that
solely support cable telephone service;
106
117
- AT&T's cable television and cable telephone service support
infrastructure, including ordering, provisioning, billing and care;
- AT&T's interest in partnerships and affiliates providing cable television
services, such as Cablevision and Time Warner Entertainment; and
- AT&T's interest in Excite@Home, its affiliate providing high-speed cable
Internet services.
AGREEMENTS AMONG AT&T BROADBAND GROUP AND AT&T'S OTHER GROUPS
AT&T will seek to manage AT&T Broadband Group and AT&T's other groups in a
manner designed to maximize the operations, unique assets and value of all
groups. AT&T Broadband Group will be able to:
- use the powerful AT&T brand name in accordance with a brand license
agreement,
- use AT&T's intellectual property and technology on a royalty-free basis
in accordance with an intellectual property agreement, and
- benefit from AT&T's favorable purchasing contracts with major suppliers.
The relationship among the groups will be governed by the AT&T Groups
policy statement, including the process of fair dealing described under
"Relationship among AT&T's Groups -- The AT&T Groups Policy Statement -- General
Policy." Although our board of directors has no present intention to do so, it
may modify, suspend or rescind the policies set forth in the AT&T Groups policy
statement, adopt additional policies or make exceptions to existing policies, at
any time, without the approval of our shareholders, subject to limitations we
describe under "Relationship among AT&T Groups -- The AT&T Groups Policy
Statement" and our board of directors' fiduciary duties.
INDUSTRY OVERVIEW
AT&T Broadband Group operates in the broadband communications industry,
offering video television programming services (both analog and digital),
high-speed cable Internet services and broadband telephone service, in each case
primarily to residential and small business customers. AT&T Broadband Group also
is pursuing other additional services, including video on demand and interactive
television that take advantage of the robust broadband network that AT&T
Broadband Group has assembled and constructed.
Cable television is a service that delivers multiple channels of video and
audio programming to subscribers that pay a monthly fee for the services they
receive. Cable television systems receive video, audio and data signals
transmitted by nearby television broadcast stations, terrestrial microwave relay
services and communications satellites. These signals then are amplified and
distributed by coaxial cable and optical fiber to the premises of customers that
pay a fee for the service. In many cases, cable television systems also
originate and distribute local programming. Cable television systems typically
are constructed and operated pursuant to nonexclusive franchises awarded by
local franchising authorities for specified periods of time.
Cable television systems offer varying levels of service, which may
include, among other programming, local broadcast network affiliates and
independent television stations, other news, information and entertainment
channels, such as CNN, CNBC, ESPN, and MTV, and selected premium services, such
as HBO, Showtime, The Movie Channel, Starz and Cinemax.
Cable television revenues principally are derived from monthly fees paid by
subscribers, sales of pay-per-view movies and events, sale or advertising time
on advertiser supported programming and installation charges.
107
118
High-speed cable Internet services deliver typical ISP services, such as
e-mail, instant messaging, personal webspace management, and personalized front
pages, and content that takes advantage of the unique characteristics of
broadband distribution systems. In some cases, AT&T Broadband Group provides
unique localized content to complement the national content provided by
Excite@Home. Subscribers pay a monthly fee for the services they receive,
including unlimited access to the Internet. Other revenue streams may be derived
from sales of premium content and services, advertising spots, premium placement
of media/service providers within the service, and installation service.
Cable telephone service is a technology that allows cable operators to
offer telephone service over the same hybrid fiber/coaxial network that supplies
television service. Cable telephone service systems have three basic
components -- a headend unit, a customer premise unit and a management
interface -- though each vendor takes a slightly different approach. Cable
operators connect to the public switched telephone network through an interface
on the headend unit that conforms to one of several standards. At the customer
premise unit, voice transmission is separated from the coaxial drop and routed
to a twisted copper pair connected to the customer's existing inside telephone
wiring.
Cable telephone service continues to move forward to offer local
residential telephone service. Now, with IP networks emerging as viable
platforms for the delivery of voice traffic, cable operators hope to use their
high-speed data networks to support packet telephone services as an alternative
to deploying stand-alone telephone service equipment.
Using IP networks, cable operators attempt to create an integrated
multi-service communications platform that operates on a lower cost structure
than existing circuit-switched alternatives. Cable operators believe the
flexibility of IP networks will allow them to deliver a host of unique
value-added features, such as integrated voice mail and e-mail messaging and the
real-time provisioning of additional phone lines without rewiring a home.
STRATEGY
AT&T Broadband Group's business strategy is to utilize the technological
capabilities of its broadband networks and its regionally consolidated cable
systems to become the leading full-service provider of entertainment,
information and communications services in the markets it serves. This strategy
centers on the deployment of advanced services, including video, high-speed
cable Internet service and broadband telephone service, over AT&T Broadband
Group's broadband network infrastructure. AT&T Broadband Group believes that its
substantial investment in the technological capabilities of its broadband
networks, consolidation of operations in major markets and its service bundling
will enhance its ability to continue to offer advanced services to existing and
new customers. As a result, AT&T Broadband Group believes it will be able to
expand its customer base and reduce churn, which should result in increased
operating cash flow generated per customer.
AT&T Broadband Group's strategy consists of the following elements:
INCREASE PENETRATION OF AT&T BROADBAND GROUP'S ADVANCED SERVICES
AT&T Broadband Group offers advanced services, including interactive
digital cable, high-speed cable Internet service and all-distance telephone
services under the AT&T brand. AT&T Broadband Group believes that its ability to
provide multiple services provides it with a strong competitive advantage over
alternative video providers, such as direct broadcast satellite television
systems and incumbent telephone companies. AT&T Broadband Group's strategy is to
offer its customers a bundled suite of services, providing an increased choice
of services at a reduced overall price. AT&T Broadband Group believes that
offering a full bundle of services will result in higher customer penetrations,
higher customer satisfaction, increased use of AT&T Broadband Group's services
and greater customer retention.
108
119
- Digital cable. AT&T Broadband Group offers digital cable service, which
includes additional channels on its existing service tiers, the creation
of new service tiers and the introduction of multiple packages of premium
services. AT&T Broadband Group's digital cable service allows it to
increase the number of pay-per-view channels it offers and to provide an
electronic program guide, on demand pay-per-view and up to 30 channels of
digital music.
- High-speed cable Internet service. AT&T Broadband Group offers Internet
services to its customers, via cable modems attached to personal
computers, at speeds that are substantially faster than the speed of a
conventional telephone modem. AT&T Broadband Group uses Excite@Home, which
AT&T Broadband Group partially owns, as its primary provider of high-speed
cable Internet service.
- Broadband telephone services. AT&T Broadband Group currently offers
broadband telephone services to customers in 16 markets using AT&T
Broadband Group's systems' direct, two-way connections to homes. AT&T
Broadband Group utilizes the capacity and reliability of its advanced
broadband networks to provide all-distance telephone services.
Beyond these existing advanced services, a variety of emerging technologies
and the rapid growth of Internet usage present substantial opportunities to
provide new or expanded products and services to broadband customers and to
expand sources of revenue. As a result, AT&T Broadband Group is in the process
of developing, testing and offering on a limited basis a variety of new or
expanded services, including video on demand, interactive television, targeted
advertising, multiple service tiers of high-speed cable Internet service, home
networking, multiple ISP offerings and a set of communications services that
work seamlessly over all television, computer and telephone platforms.
MAXIMIZE CUSTOMER SATISFACTION TO BUILD CUSTOMER LOYALTY
Customer service is a key element of AT&T Broadband Group's strategy. AT&T
Broadband Group is dedicated to quality customer service and seeks a high level
of customer satisfaction by employing customer care tailored to address local
needs, using market research and providing customers with attractively priced
offerings. AT&T Broadband Group's customer care initiatives create substantial
marketing and promotion opportunities, which AT&T Broadband Group believes will
be effective in the deployment of all of its services. AT&T Broadband Group
believes that an integrated package of services, coupled with AT&T Broadband
Group's commitment to locally focused customer service, will enhance AT&T
Broadband Group's ability to acquire and retain customers in a competitive
environment while increasing revenues per customer.
In addition, AT&T Broadband Group is dedicated to fostering strong
relations in the communities it serves. AT&T Broadband Group supports local
charities and community causes through sponsored events and promotional
campaigns, including the industry's Cable in the Classroom program. AT&T
Broadband Group believes its emphasis on customer service and strong community
involvement has led to higher customer satisfaction. To further strengthen
community relations and differentiate it from direct broadcast satellite
television systems and other multichannel video providers, AT&T Broadband Group
provides locally produced and oriented programming that offers, among other
things, community information, local government proceedings and local specialty
interest shows.
INCREASE OPERATING PERFORMANCE OF AT&T BROADBAND GROUP'S MAJOR MARKET
CLUSTERS OF CABLE SYSTEMS
AT&T Broadband Group believes that the nature of its large, consolidated
clusters of cable systems enables it to maximize revenue enhancing opportunities
and implement significant cost savings benefits. Developing large, tightly
grouped, efficient operating clusters of cable systems should enable AT&T
Broadband Group to enhance system reliability, improve engineering support and
increase customer satisfaction.
109
120
AT&T Broadband Group believes that its major market clusters will improve
AT&T Broadband Group's ability to leverage its network capabilities, sell
advertising and enhance its ability to introduce and market new services
efficiently. In addition, AT&T Broadband Group expects that concentrating in
major markets will allow it to deploy its marketing expenditures more
efficiently and to enhance customer awareness, leading to increased use of AT&T
Broadband Group's services.
Locally and regionally focused cable television systems should enable AT&T
Broadband Group to reduce expenses through the consolidation of marketing and
support functions and to place more experienced management teams at the system
level that are better equipped to meet the new competitive and regulatory
challenges of today's broadband communications industry. AT&T Broadband Group is
currently engaged in a number of initiatives to reduce its operating costs,
including efforts to:
- increase the overall penetration of AT&T Broadband Group's cable systems;
- consolidate customer call centers, fulfillment, information technology
and support systems;
- consolidate network facilities in geographic regions;
- decrease churn of AT&T Broadband Group's existing video and advanced
services by offering new advanced services and bundling multiple services;
- reduce the cost structure of basic and advanced services; and
- reduce full time equivalent staff.
AT&T Broadband Group regularly seeks to improve the geographic
consolidation of its cable systems by selectively exchanging its cable systems
for systems of other cable operators or acquiring systems in close proximity to
AT&T Broadband Group's systems. AT&T Broadband Group has completed a significant
number of transactions in 2000, as described under "-- Acquisitions and
Divestitures," and has signed agreements in 2001 that further consolidate AT&T
Broadband Group's operations in large local and regional markets.
UPGRADE AND EXPAND AT&T BROADBAND GROUP'S BROADBAND NETWORKS
To facilitate the deployment of AT&T Broadband Group's advanced services,
AT&T Broadband Group continues to upgrade its networks to allow it to deliver
more information and entertainment services through its cable systems and to
provide for two-way communications capability, including all-distance telephone
services. AT&T Broadband Group's network upgrade includes the deployment of
fiber optic cable that creates a significant increase in network capacity,
quality and reliability, facilitating the delivery of additional higher value
added and high margin services. Currently AT&T Broadband Group's cable
television systems have bandwidth capacities in some areas of up to 860 MHz.
AT&T Broadband Group is presently upgrading its systems, 74% of which were
upgraded to a capacity equal to or greater than 550 MHz and 72% of which were
two-way capable as of March 31, 2001.
TECHNICAL OVERVIEW
AT&T Broadband Group believes that in order to achieve consistently high
levels of customer service, reduce operating costs, maintain a strong
competitive position and deploy new and advanced services, it needs to install
and maintain an advanced technical platform. The deployment of fiber optics, an
increase in the bandwidth to 550 MHz or higher, the activation of two-way
communications network and the installation of digital equipment allows AT&T
Broadband Group to deliver new and advanced services, including interactive
digital cable, high-speed cable Internet and all-distance telephone services.
110
121
As of March 31, 2001, AT&T Broadband Group's systems were comprised of
approximately 263,000 miles of network passing approximately 28.1 million homes,
resulting in a density of approximately 106 homes per mile. As of that date,
AT&T Broadband Group's systems were made up of an aggregate of 41 headends in
its top 20 markets. As of March 31, 2001, approximately 61% of AT&T Broadband
Group's network was equal to or greater than 750 MHz, approximately 13% of its
network was greater than or equal to 550 MHz and less than 750 MHz and
approximately 26% of its network was less than 550 MHz.
AT&T Broadband Group's network design calls for a digital two-way active
network with a fiber optic trunk system carrying signals to nodes within its
customers' neighborhoods. The signals are transferred to a coaxial network at
the node for delivery to its customers. AT&T Broadband Group has designed the
fiber system to be capable of subdividing the nodes if traffic on the network
requires additional capacity.
AT&T Broadband Group believes that active use of fiber optic technology as
a supplement to coaxial cable will play a major role in expanding channel
capacity and improving the performance of its systems. Fiber optic strands are
capable of carrying hundreds of video, data and voice channels over extended
distances without the extensive signal amplification typically required for
coaxial cable. AT&T Broadband Group plans to continue to deploy fiber optic
cable to further reduce amplifier cascades while improving picture quality and
system reliability.
A direct result of this extensive use of fiber optics is an improvement in
picture quality and a reduction of outages because system failures will be both
significantly reduced and will impact far fewer customers when they do occur.
AT&T Broadband Group's design allows its systems to have the capability to run
multiple separate channel line-ups from a single headend and to insert targeted
advertisements into specific neighborhoods based on node location.
The following chart outlines the status of the capacities of AT&T Broadband
Group's networks, historically and as of March 31, 2001:
PERCENT OF NETWORK MILES
------------------------------------------- PERCENT OF
GREATER THAN OR EQUAL 750 OR NETWORK
LESS THAN TO 550 MHZ AND GREATER TWO-WAY
550 MHZ LESS THAN 750 MHZ MHZ CAPABLE
--------- --------------------- ------- ----------
As of December 31, 1999............ 49% 22% 50% 55%
As of December 31, 2000............ 24% 15% 62% 69%
As of March 31, 2001............... 26% 13% 61% 72%
SERVICES
CABLE TELEVISION SERVICES
AT&T Broadband Group offer its customers a full array of traditional cable
television services and programming offerings. AT&T Broadband Group tailors both
its basic line-up and its additional channel offerings to each regional system
in response to demographics, programming preferences, competition and local
regulation. AT&T Broadband Group offers a basic level of service which includes
from 15 to 25 channels of television programming. As of March 31, 2001,
approximately 93% of AT&T Broadband Group's customers elected to pay an
additional amount to receive additional channels under its expanded basic
service, which AT&T Broadband Group calls its Standard Cable package. Premium
channels, which AT&T Broadband Group offers individually or in packages of
several channels, are optional add-ons to its basic service.
111
122
AT&T Broadband Group's cable television services include the following:
- Basic Service. All of AT&T Broadband Group's customers receive its basic
level of service, which generally consists of local broadcast television
and local community programming, including public, educational or
governmental programming, and may include a limited number of satellite
programs.
- Standard Cable. AT&T Broadband Group's Standard Cable package includes
basic service, plus expanded basic. This level of service includes a group
of satellite-delivered and non-broadcast channels such as ESPN, CNN,
Discovery Channel and Lifetime.
- Premium Channels. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming. AT&T
Broadband Group offers subscriptions to numerous premium channels,
including HBO, Cinemax, Starz!, Showtime and TMC, individually or in
packages.
- Pay-Per-View. These channels allow customers with addressable set top
boxes to pay to view a single showing of a recently released movie or a
one-time special sporting event or music concert on an unedited,
commercial-free basis.
Through AT&T Digital Cable, AT&T Broadband Group also offers additional
special interest networks, premium channels, pay-per-view, digital music and an
interactive on-screen guide, as described under "-- Advanced Services".
AT&T Broadband Group's basic subscribers, including its digital cable
customers, are served as follows:
DECEMBER 31,
MARCH 31, ------------------
2001 2000 1999 1998
--------- ---- ---- ----
(IN MILLIONS)
Managed through AT&T Broadband Group's operating
divisions.......................................... 15.8 15.9 11.3 11.4
Other non-managed subsidiaries of AT&T Broadband
Group.............................................. 0.1 0.1 0.1 0.5
---- ---- ---- ----
Total................................................ 15.9 16.0 11.4 11.9
==== ==== ==== ====
In addition to the above, the FCC attributes AT&T Broadband Group with the
subscribers of (1) Time Warner Entertainment and Time Warner as a consequence of
the MediaOne acquisition and (2) various other entities as a consequence of AT&T
Broadband Group's investments in those entities. The aggregate number of
attributable subscribers was approximately 18.8 million as of March 31, 2001.
112
123
The following table sets forth selected statistical data regarding AT&T
Broadband Group's cable television operations:
MARCH 31, DECEMBER 31,
---------- ------------------------------------
2001 2000 1999 1998
---------- ---------- ---------- ----------
Homes passed by cable(1)(3)................ 28,088,000 28,303,000 19,668,000 19,889,000
Basic service subscribers(3)............... 15,873,000 16,041,000 11,408,000 11,948,000
Basic service subscribers as a percentage
of homes passed.......................... 57% 56% 57% 59%
Average monthly revenue per basic service
subscriber(2)(3)......................... $ 47.12 $ 47.63 $ 42.97 $ 32.24
-------------------------
(1)Homes passed is based on homes actually marketed and does not include
multiple dwelling units passed by the cable plant that are not connected to
it.
(2)Based on video service revenues for the last month of the period, including
installation charges and certain other nonrecurring revenues, such as
pay-per-view, advertising and home shopping revenues.
(3)Year-end statistics regarding AT&T Broadband Group's subscribers and homes
passed by cable are materially affected by AT&T Broadband Group's acquisition
and divestiture program discussed below in "-- Acquisitions and
Divestitures". Notable variations arose during 1998, when AT&T Broadband
Group contributed cable systems serving approximately 2,700,000 customers to
other persons, and during 2000, when AT&T Broadband Group acquired
approximately 5,000,000 customers from MediaOne.
ADVANCED SERVICES
As network upgrades are activated, AT&T Broadband Group offers new and
advanced services, including interactive digital cable and high-speed cable
Internet service. In addition, AT&T Broadband Group offers all-distance
telephone services in selected markets.
DIGITAL CABLE
The implementation of interactive digital technology significantly enhances
and expands the video and service offerings AT&T Broadband Group provides to its
customers to include music, parental controls and an interactive program guide.
Because of the significantly increased bandwidth of its technical platform, AT&T
Broadband Group has the capacity to design a more extensive digital product that
is rich in program offerings and interactive with its customers. In addition,
AT&T Broadband Group offers more premium and special interest networks that it
believes compare favorably with the offerings of direct broadcast satellite.
AT&T Broadband Group's interactive digital cable service also allows it to offer
TV-formatted information to its customers that has local content and is targeted
to a specific system or community. For example, through this service AT&T
Broadband Group offers local weather, sports, news and dining information. In
addition to TV-formatted information, customers can access the Internet as well
as establish multiple email accounts through their televisions.
113
124
Below is a summary of operating statistics for digital cable services:
MARCH 31, DECEMBER 31,
--------- ---------------------
2001 2000 1999
---- --------- ---------
Digital cable customers.......................... 3,125,000 2,815,000 1,800,000
Digital penetration as a percentage of basic
service subscribers............................ 19.7% 17.5% 15.8%
AT&T digital cable offers the following features:
- A digital converter box;
- An onscreen navigational program guide from TV Guide Interactive;
- Additional special interest networks;
- Multiple channels of premium networks for customers who subscribe to
premium channels, such as HBO and Showtime on digital;
- Up to 36 channels of pay-per-view with remote control ordering; and
- Up to 30 channels of commercial free, digital audio music.
AT&T Broadband Group offers its customers four digital packages -- Bronze,
Silver, Gold, and Platinum. These packages allow viewers to select the level of
services they receive to fit their individual interests.
While channel offerings may vary somewhat from region to region, AT&T
Broadband Group's four digital packages generally include:
- Bronze -- includes AT&T Broadband Group's Standard Cable package,
multiple Encore channels, digital pay-per-view, digital music, digital
basic channels, one set-top box and remote.
- Silver -- includes AT&T Broadband Group's Standard Cable package,
multiple Encore channels, multiple Starz! channels, digital pay-per-view,
digital music, digital basic channels, one set-top box and remote,
multiple channels of one premium service and one bonus category.
- Gold -- includes AT&T Broadband Group's Standard Cable package, multiple
Encore channels, multiple Starz! channels, digital pay-per-view, digital
music, digital basic channels, two set-top boxes and remotes, multiple
channels of two premium services and two bonus categories.
- Platinum -- includes AT&T Broadband Group's Standard Cable package,
multiple Encore channels, multiple Starz! channels, digital pay-per-view,
digital music, digital basic channels, two set-top boxes and remotes,
multiple channels of all premium services and three bonus categories.
Bonus categories include movie and music channels, sports and information
channels and family and variety channels. The availability of bonus categories
is limited in some of AT&T Broadband Group's markets depending on network
bandwidth capacity.
As part of its digital cable offering, AT&T Broadband Group intends to
deploy video on demand service, which it has currently introduced into one of
its markets. Video on demand offers AT&T Broadband Group's customers the ability
to watch hit programs on demand. AT&T Broadband Group has entered into an
agreement with DIVA Systems Corporation, which allows it to offer DIVA's video
on demand services as part of a digital tier package. Through its agreement with
DIVA, AT&T Broadband Group provides a true video on demand service over the
cable television infrastructure.
114
125
AT&T Broadband Group's customers receive movies and other entertainment
programming electronically over the network and have full VCR functionality,
including pause, play, fast forward and rewind. The movies are delivered with a
high quality digital picture and digital sound. AT&T Broadband Group's video on
demand service provides movies at prices comparable to those charged for
videotape rentals, pay-per-view and near video on demand movies, but with far
greater convenience and functionality.
AT&T Broadband Group is working with multiple vendors, including Liberate,
Microsoft and Worldgate, to introduce interactive television services. Services
AT&T Broadband Group is offering on a trial basis include managed content (news,
weather, sports and other customized local information), games, Internet access
and email services, all over the customer's television. AT&T Broadband Group is
also working with these vendors to develop future service offerings, including
enhanced interactive services and games, e-commerce, and personal video recorder
capabilities.
HIGH-SPEED CABLE INTERNET
AT&T Broadband Group offers high-speed cable Internet service for personal
computers over its networks in all of its upgraded systems. AT&T Broadband Group
has a strategic relationship with Excite@Home that allows it to offer high-speed
cable Internet service to its customers under the AT&T@Home brand.
Below is a summary of AT&T Broadband Group's high-speed cable Internet
service operating statistics:
DECEMBER 31,
MARCH 31, -----------------------
2001 2000 1999
---------- ---------- ---------
Data marketable homes passed............... 15,466,000 14,523,000 4,974,000
Customers.................................. 1,280,000 1,060,000 207,000
Penetration................................ 8.3% 7.3% 4.2%
The broad bandwidth of AT&T Broadband Group's cable networks enables data
to be transmitted substantially faster than through conventional telephone modem
technologies, and the cable connection does not interfere with normal telephone
activity or usage. For example, cable's on-line customers can download large
files from the Internet in a fraction of the time it takes when using a
conventional telephone modem. Moreover, using the Internet on a high-speed cable
network removes the long delays for web pages to appear fully on the computer
screen, allowing the experience to approximate more closely the responsiveness
of changing channels on a television set. In addition, the cable modem is always
on and does not require the customer to dial into an ISP and await
authorization. AT&T Broadband Group believes that these factors of speed and
easy accessibility will increase the use and impact of the Internet. Although
other high-speed alternatives are being developed to compete with cable, AT&T
Broadband Group believes that the cable platform currently is best able to
deliver these services and has more long-term advantages.
In addition to being an ISP, Excite@Home provides its own content to AT&T
Broadband Group for its customers. Excite@Home aggregates high quality web sites
for customers to explore and also offers various chat rooms, newsgroups, on-line
stores, gaming channels, on-demand Fox News, NBA and MTV video clips, and easy-
to-use search engines and tip wizards.
AT&T Broadband Group's AT&T@Home service offers unlimited access to the
Internet. The service includes up to seven e-mail addresses and 10 megabytes of
space with which to create a personal web site. AT&T Broadband Group recently
increased its price for the AT&T@Home service to $35.95 per month, plus $10 per
month to lease the cable modem. Alternatively, customers may purchase the cable
modem independently. AT&T Broadband Group charges customers a $99.95
installation fee for a Premium Installation and $49.95 for a Basic Installation.
In the Premium
115
126
Installation, AT&T Broadband Group's technician installs one computer to one
data outlet, the cable modem, the Ethernet/USD device interface, and the @Home
client software. In the Basic Installation, our technician installs one cable
modem to one existing data outlet, while the customer must connect the cable
modem to his/her PC and install the @Home client software. In both the Premium
and the Basic installation, we offer an Ethernet device if one is required, at
an additional charge of $49.95. AT&T Broadband Group may, at its discretion,
discount installation to promote usage of cable modems or offer other
promotional incentives. Excite@Home also provides AT&T Broadband Group with
several additional services, such as remote access, the ability to dial-up away
from the customer's home, and the ability to share high-speed cable Internet
service on multiple computers using additional IP addresses. AT&T Broadband
Group charges its customers $4.95 per month for each additional IP address. In
addition, AT&T Broadband Group intends to offer additional premium services such
as home networking and enhanced security services.
AT&T Broadband Group has agreements with Excite@Home under which AT&T
Broadband Group is provided with broadband network services and content
aggregation necessary for the delivery of high-speed cable Internet services to
AT&T Broadband Group's subscribers. Agreements between AT&T Broadband Group and
Excite@Home extend to June 2008, with AT&T Broadband Group required to use
Excite@Home for broadband cable Internet services on an exclusive basis until
June 2002. AT&T Broadband Group cable systems acquired in the MediaOne
acquisition were covered by a similar broadband network services and content
aggregation agreement with Road Runner. Effective May 1, 2001, AT&T Broadband
Group and AOL Time Warner restructured the ownership of Road Runner, with AT&T
Broadband Group purchasing those assets used to support the AT&T Broadband Group
high-speed cable Internet subscribers and selling its equity interest in Road
Runner to subsidiaries of AOL Time Warner. As a consequence of this
restructuring, AT&T Broadband Group's affiliation agreement with Road Runner
terminated May 1, 2001. With respect to its cable systems previously affiliated
with Road Runner, AT&T Broadband Group has entered into a transitional service
agreement with an affiliate of AOL Time Warner to support AT&T Broadband Group's
pending a transition to the Excite@Home service.
BROADBAND TELEPHONE SERVICE
AT&T Broadband Group currently offers cable telephone services to customers
in 16 markets. AT&T Broadband Group utilizes the capacity and reliability of its
advanced broadband network to provide local telephone services and resell AT&T
long distance services.
Below is a summary of AT&T Broadband Group's operating statistics for
broadband telephone services:
DECEMBER 31,
MARCH 31, --------------------
2001 2000 1999
--------- --------- -------
Telephone ready homes passed................... 6,388,000 6,103,000 721,000
Customers...................................... 700,000 547,000 8,000
Penetration.................................... 11.0% 9.0% 1.1%
AT&T Broadband Group's broadband telephone service initiatives progressed
substantially in 2000. During 2000, AT&T Broadband Group commenced commercial
telephone service operations, increased the number of markets in which it offers
telephone service from ten to 16, and increased its customer base from 8,000 to
547,000. AT&T Broadband Group offers broadband telephone services in: Atlanta,
Boston, the San Francisco Bay Area, Chicago, Dallas, Denver, Hartford,
Jacksonville, Twin Cities, Pittsburgh, Richmond, Seattle, Salt Lake City, St.
Louis, Southern California and Portland, Oregon. As of March 31, 2001, AT&T
Broadband Group increased its customers to 700,000.
116
127
AT&T Broadband Group's telephone service offerings include AT&T Digital
Phone local phone service, unlimited local calling, low in-state long distance
calling rates, by the minute and block of time calling plans, up to four lines,
custom calling feature selections, and feature packages. The features available
are Call Waiting, Caller ID, Anonymous Call Rejection, Call Forwarding, Custom
Ring, 3-Way Calling, Speed Dialing, LD Alert, Distinctive Call Ringing, and
Voice Mail, among others. AT&T Broadband Group offers a variety of options and
calling plans with various price points to meet customers' needs. These options
and calling plans range from basic one line service to multiple lines with full
feature functionality.
AT&T Broadband Group's most popular service offering provides its customers
with two lines into the home, three features on one line, unlimited local calls
and a $.07 per minute interstate calling rate. The basic monthly fee for this
service ranges from $21.95 to $33.95 depending on the market. AT&T Broadband
Group periodically offers promotions to attract new customers. AT&T Broadband
Group's current promotions include, among other items, free installation and one
month of free service. Including the effect of these promotions and discounts,
AT&T Broadband Group's average monthly revenue per customer was $44 in the first
quarter of 2001.
ADVERTISING
In addition to monthly fees from residential customers, AT&T Broadband
Group sells advertising time on satellite-delivered networks such as CNN,
Discovery, ESPN and Lifetime, and on local channels. Currently, AT&T Broadband
Group inserts advertising locally on 24 to 40 networks in each of its systems,
depending on availability and market conditions. AT&T Broadband Group is able to
provide more targeted advertising because it offers more channels and is able to
target advertising to particular geographic zones. According to published
Nielsen data, audiences are increasingly watching cable channels instead of
broadcast channels. AT&T Broadband Group believes this trend will result in an
increase in the demand for its advertising services. In addition to the sale of
advertising time to local and regional advertisers, AT&T Broadband Group
participates in the national spot advertising marketplace through its sales
representation arrangement with and investment in National Cable Communications,
LLC, a partnership that represents cable systems in the sale of time to national
spot advertisers.
ACQUISITIONS AND DIVESTITURES
AT&T Broadband Group regularly seeks to improve the geographic footprint of
its cable systems by selectively exchanging its cable systems for systems of
other cable operators or acquiring systems in close proximity to its systems. In
this regard, AT&T Broadband Group completed a significant number of transactions
in 2000 and the first half of 2001 that substantially changed the size and
profile of its cable system network, and has signed agreements that will
substantially further the strategic objective of consolidating operations in
large local and regional markets:
- In January 2000, a subsidiary of AT&T Broadband Group sold its entire 50%
interest in Lenfest Communications, Inc. to a subsidiary of Comcast. In
consideration for its 50% interest, AT&T Broadband Group received
47,289,843 shares of Comcast Special Class A common stock.
- In February 2000, AT&T Broadband Group redeemed a portion of its interest
in Bresnan Communications Group LLC for $285 million in cash. AT&T
Broadband Group then contributed its remaining interest in Bresnan to CC
VIII, LLC, in exchange for a preferred ownership interest.
- In March 2000, AT&T Broadband Group redeemed approximately 50.3 million
shares of AT&T common stock held by Cox in exchange for stock of a
subsidiary of AT&T Broadband Group owning cable television systems
serving approximately 312,000 customers, AT&T
117
128
Broadband Group's interest of $1,088 million in certain investments, $878
million of franchise costs and $503 million of other net assets.
- In April 2000, AT&T Broadband Group contributed 103,000 subscribers into
a joint venture with Midcontinent Media, Inc. in exchange for a 50%
interest in Midcontinent Communications, a general partnership.
- In June 2000, MediaOne merged into a subsidiary of AT&T, whereby AT&T
Broadband Group acquired approximately 5 million basic cable subscribers,
0.2 million digital video subscribers, 0.3 million high-speed cable
Internet service subscribers and 0.1 million broadband telephone service
subscribers.
- Effective December 31, 2000, AT&T Broadband Group transferred systems
serving approximately 770,000 subscribers primarily located in Washington
D.C., Florida, Georgia, Michigan, New Jersey and Pennsylvania to Comcast
in exchange for systems serving approximately 700,000 subscribers
primarily located in Sacramento, California, Longmont, Colorado and
Chicago, Illinois.
- In January 2001, AT&T Broadband Group sold 98,400 subscribers to Insight
Communications Company, Inc. In a subsequent transaction, AT&T Broadband
Group contributed 247,500 additional subscribers in the Illinois markets
to Insight Midwest, L.P., a partnership owned 50% by AT&T Broadband Group
and 50% by Insight Communications, and Insight Communications also
contributed additional subscribers to the partnership. The expanded joint
venture will continue to be managed by Insight Communications.
- In January 2001, AT&T Broadband Group acquired 358,000 subscribers in the
Boston metropolitan area from Cablevision and transferred 130,000 New
York subscribers, 44 million shares of AT&T common stock valued at
approximately $871 million and approximately $204 million in cash to
Cablevision.
- Effective June 30, 2001, a subsidiary of AT&T transferred to Charter
Communications, Inc. cable systems attributed to AT&T Broadband Group
serving approximately 563,000 customers in Alabama, California, Illinois,
Missouri and Nevada. AT&T Broadband Group, through its attributed
entities, received $1,525 million in cash, $222 million in cash restricted
for future acquisitions of cable systems, and a cable system in Florida
serving 9,000 customers.
- On June 29, 2001, a subsidiary of AT&T sold to MediaCom cable systems
attributed to AT&T Broadband Group serving approximately 94,000 customers
in Missouri for approximately $309 million in cash. In addition, AT&T and
MediaCom have entered into definitive asset purchase agreements in which
certain cable systems attributed to AT&T Broadband Group serving
approximately 745,000 customers in Georgia, Iowa and Illinois will be sold
to MediaCom for approximately $1,895 million in cash, subject to
adjustments.
- On April 9, 2001, a subsidiary of AT&T and Adelphia Communications
Corporation signed a definitive agreement in which certain cable systems
attributed to AT&T Broadband Group serving approximately 128,000 customers
in central Pennsylvania and Ohio will be sold to Adelphia. AT&T Broadband
Group will receive cash of approximately $245 million and Adelphia Class A
common stock valued at approximately $73 million, subject to adjustments.
- On April 30, 2001, a subsidiary of AT&T sold to Comcast certain cable
systems attributed to AT&T Broadband Group serving approximately 590,000
subscribers in Delaware, New Mexico, Maryland, New Jersey, Pennsylvania
and Tennessee in exchange for 63.9 million shares of AT&T common stock
valued at $1,423 million.
- Effective June 30, 2001, AT&T, together with certain subsidiaries
attributed to AT&T Broadband Group transferred its 99.75% interest in an
entity owning the Baltimore, Maryland cable television system, serving
approximately 115,000 customers, to Comcast for approximately $518
million.
118
129
Total managed basic service customers declined between 1997 and 1998 as a
result of certain contribution transactions entered into in 1998. In the most
significant of these transactions, on March 4, 1998, AT&T Broadband Group
contributed to Cablevision certain of its cable television systems serving
approximately 830,000 customers in exchange for approximately 48.9 million newly
issued Cablevision Class A common shares and the assumption of indebtedness.
In addition to the Cablevision transaction discussed in the paragraph
above, during 1998 AT&T Broadband Group also completed eight transactions
whereby AT&T Broadband Group contributed cable television systems serving in the
aggregate approximately 1,924,000 customers to eight separate joint ventures in
exchange for non-controlling ownership interests in each of the joint ventures,
and the assumption and repayment by these joint ventures of indebtedness.
SALES AND MARKETING
AT&T Broadband Group seeks to increase penetration and revenues from its
basic cable television services and its advanced services in its markets. AT&T
Broadband Group's marketing programs and campaigns offer a variety of services
creatively packaged and tailored to individual markets. AT&T Broadband Group
manages its cable systems in markets centered around its major market focus.
AT&T Broadband Group also has two regional management teams to provide
leadership and best practices across its markets. This regional approach is
intended to improve AT&T Broadband Group's ability to sell advertising and
enhance its ability to efficiently introduce and market new services. AT&T
Broadband Group routinely surveys its customers to ensure that it is meeting
their demands and effectively countering competitors' service offerings and
promotional campaigns.
AT&T Broadband Group markets its services through promotional campaigns and
local media and newspaper advertising, through telemarketing, direct mail
advertising, online selling and in person selling. In addition, AT&T Broadband
Group reserves a portion of its inventory of locally inserted cable television
advertising to market its services.
AT&T Broadband Group builds awareness of the AT&T Broadband brand through
local and national advertising campaigns and strong community relations. As a
result of its branding efforts and consistent service standards, AT&T Broadband
Group believes it has developed an improved reputation for quality and
reliability. The well-known and respected AT&T brand provides AT&T Broadband
Group a unique ability to attract new and existing customers to its suite of
services. AT&T Broadband Group also believes that its marketing strategies are
particularly effective due to its national presence and strengths in major
market consolidation and market significance, which enable it to reach a greater
number of both current and potential customers in an efficient, uniform manner.
PROGRAMMING SUPPLIERS
AT&T Broadband Group has various contracts to obtain basic and premium
programming from program suppliers whose compensation is typically based on a
fixed fee per customer or a percentage of its gross receipts for the particular
service. AT&T Broadband Group has entered into long-term agreements with several
programming suppliers, including ABC, AOL Time Warner, CBS/Viacom, Disney,
Encore, Liberty Media Corporation, NBC, News Corp. and Starz!. Generally these
agreements provide for fees based on the number of subscribers. However, certain
of these agreements provide for a flat fee or guaranteed payment obligation
regardless of subscriber levels. AT&T Broadband Group's programming contracts
are generally for a fixed period of time and are subject to negotiated renewal.
Some program suppliers provide volume discount pricing structures or offer
marketing support to AT&T Broadband Group. AT&T Broadband Group's successful
marketing of multiple premium service packages emphasizing customer value
enables it to take advantage of such cost incentives. For more information about
the risks relating to these agreements, see "-- Risk Factors Relating to AT&T
Broadband Group's Business -- Certain entities included in AT&T
119
130
Broadband Group are subject to long-term exclusive agreements that may limit
their future operating flexibility and materially adversely affect AT&T
Broadband Group's financial results."
AT&T Broadband Group's programming costs have increased substantially in
recent years, and are expected to continue to increase due to additional
programming being provided to its customers, increased costs to produce or
purchase programming, inflationary increases and other factors affecting the
cable television industry. You should read "-- Risk Factors Relating to AT&T
Broadband Group's Business -- AT&T Broadband Group's programming costs are
increasing and it may not have the ability to pass these increases on to its
customers, which would materially adversely affect its cash flow and operating
margins."
AT&T Broadband Group believes that it will continue to have access to
programming services but at increasing cost levels. Although AT&T Broadband
Group presently is legally able to pass through increases in its programming
costs to customers, there can be no assurance that the marketplace will allow it
to do so. AT&T Broadband Group also has various retransmission consent
arrangements with commercial broadcast stations, which expire at various times
over the next ten years, with a significant portion expiring prior to December
31, 2002. None of these consent arrangements requires payment of fees for
carriage. However, AT&T Broadband Group does provide non-cash consideration,
including entering into agreements with certain networks to carry satellite-
delivered cable programming, which is associated with the network carried by
such stations.
Currently, there are over 200 cable channels carried or seeking to be
carried on AT&T Broadband Group's cable systems. AT&T Broadband Group has
continued to leverage both its systems' analog upgrades and digital cable
packages as an incentive to its suppliers to secure long term programming deals
with reasonable price structures and other creative financial arrangements to
offset license fee increases.
AGREEMENTS WITH LIBERTY MEDIA GROUP
AT&T Broadband Group is a party to various arrangements with Liberty Media.
PREFERRED VENDOR STATUS
AT&T Broadband Group has granted Liberty Media preferred vendor status with
respect to access, timing and placement of new programming services. This means
that AT&T Broadband Group must use its reasonable efforts to provide digital
basic distribution of new services created by Liberty Media and its affiliates,
on mutual "most favored nation" terms and conditions and otherwise consistent
with industry practices, subject to the programming meeting standards that are
consistent with the type, quality and character of AT&T Broadband Group's cable
services as they may evolve over time.
EXTENSION OF TERM OF AFFILIATION AGREEMENTS
AT&T Broadband Group has agreed to extend any existing affiliation
agreement of Liberty Media and its affiliates that expires on or before March 9,
2004, to a date not before March 9, 2009, if most favored nation terms are
offered and the arrangements are consistent with industry practice.
INTERACTIVE VIDEO SERVICES
AT&T Broadband Group has agreed to enter into arrangements with Liberty
Media for interactive video services under one of the following two
arrangements, which will be at the election of AT&T Broadband Group:
- Pursuant to a five-year arrangement, renewable for an additional
four-year period on then-current most favored nation terms, AT&T Broadband
Group will make available to Liberty Media capacity equal to one 6
megahertz channel (in digital form and including interactive
120
131
enablement, first screen access and hot links to relevant web sites -- all to
the extent implemented by AT&T Broadband Group cable systems) to be used for
interactive, category-specific video channels that will provide entertainment,
information and merchandising programming. The foregoing, however, will
not compel AT&T Broadband Group to disrupt other programming or other
channel arrangements. The services are to be accessible through advanced
set-top boxes deployed by AT&T Broadband Group, except that, unless
specifically addressed in a mutually acceptable manner, AT&T Broadband
Group will have no obligation to deploy set-top boxes of a type, design or
cost materially different from that it would otherwise have deployed. The
content categories may include, among others, music, travel, health,
sports, books, personal finance, automotive, home video sales and games;
or
- AT&T Broadband Group may enter into one or more mutually agreeable
ventures with Liberty Media for interactive, category-specific video
channels that will provide entertainment, information and merchandising
programming. Each venture will be structured as a 50/50 venture for a
reasonable commercial term and provide that Liberty Media and AT&T
Broadband Group will not provide interactive services in the category(s)
of interactive video services provided through the venture for the
duration of such term other than the joint venture services in the
applicable categories. When the distribution of interactive video services
occurs through a venture arrangement, AT&T Broadband Group will share in
the revenue and expense of the provision of the interactive services pro
rata to its ownership interest in lieu of the commercial arrangements
described in the preceding paragraph. At the third anniversary of the
formulation of any such venture, AT&T Broadband Group may elect to
purchase Liberty Media's ownership interest in the venture at fair market
value. Liberty Media and AT&T Broadband Group have agreed to endeavor to
make any such transaction tax efficient to Liberty Media.
At the date of this proxy statement, AT&T Broadband Group has not entered
into any further agreements with Liberty Media regarding the distribution of
specific interactive television channels. As a result, the exact terms under
which AT&T Broadband Group will provide carriage of these channels has not been
determined, and AT&T Broadband Group has not made any elections between the
alternative carriage arrangements described above. Although AT&T Broadband Group
will continue to endeavor to negotiate agreements with Liberty Media concerning
distribution of interactive channels within the framework of the intercompany
arrangement, there can be no assurance that we will be able to conclude any such
agreement on acceptable terms.
AFFILIATION AGREEMENTS
AT&T Broadband Group is party to affiliation agreements pursuant to which
it purchases programming from Liberty Media's subsidiaries and affiliates. Some
of these agreements provide for penalties and charges in the event the
supplier's programming is not carried on AT&T Broadband Group's cable systems or
not delivered to a contractually specified number of customers. Charges to AT&T
Broadband Group for such programming are generally based upon customary rates
and often provide for payments to AT&T Broadband Group by Liberty Media's
subsidiaries and business affiliates for marketing support.
In July 1997, AT&T Broadband Group's predecessor, TCI, entered into a 25
year affiliation term sheet with Starz Encore Group (formerly Encore Media
Group) pursuant to which AT&T Broadband Group may be obligated to pay monthly
fixed amounts in exchange for unlimited access to Encore and Starz! programming.
The affiliation term sheet further provides that to the extent Starz Encore
Group's programming costs increase above certain levels, AT&T Broadband Group's
payments under the term sheet will be increased in proportion to the excess.
Starz Encore Group has requested payment from AT&T Broadband Group of amounts it
contends are AT&T Broadband Group's proportionate share of Starz Encore Group's
excess programming costs during the first quarter of 2001 (which amount,
approximately $40 million, Starz Encore Group indicated it expects
121
132
to represent the bulk of what it considers AT&T Broadband Group's proportionate
share of excess programming costs Starz Encore considers to be payable for the
year 2001). Excess programming costs payable by AT&T Broadband Group for the
balance of 2001 and in future years are not presently estimable, and could be
significantly larger or smaller than the amount requested for the first quarter
of 2001. By letter dated May 29, 2001, AT&T Broadband Group indicated that in
its view the Starz Encore term sheet as a whole is unenforceable and reserved
its right to terminate the term sheet. AT&T Broadband Group indicated to Starz
Encore Group that it would not pay the excess programming costs requested to
date and disputed the enforceability of the excess programming costs pass
through provisions of the term sheet, among other provisions. The letter further
suggests that the parties meet to discuss a new affiliation arrangement. Starz
Encore Group has stated publicly that it views AT&T Broadband Group's position
on the term sheet to be without merit.
AT&T BROADBAND GROUP'S SYSTEMS
AT&T Broadband Group's cable systems give it a nationwide presence coupled
with a strong major market consolidation. As of March 31, 2001, approximately
83% of its customers were in markets where AT&T Broadband Group had more than
500,000 customers.
To maximize the operating and financial benefits of its major market cable
systems, AT&T Broadband Group manages and operates its systems on a regional
basis, with centralized direction and support as appropriate in areas such as
network management and systems integration. AT&T Broadband Group establishes
market regions for management purposes primarily based on geographic clusters,
but also considers other factors where appropriate. AT&T Broadband Group has
fifteen regional Senior Vice Presidents coordinating the cable systems in the
various geographic regions, with an average of fourteen years experience each in
the communications industry.
OTHER ASSETS
JOINT VENTURES
AT&T Broadband Group possesses a number of investments in companies, joint
ventures and partnerships, the most significant of which are Excite@Home, Time
Warner Entertainment, Cablevision, Insight Midwest, and Texas Cable Partners.
Excite@Home. Excite@Home is a provider of content and cable Internet
services over the cable television infrastructure and leased digital
telecommunication lines to consumers and businesses. On September 1, 2000,
Excite@Home converted approximately 50 million of the Excite@Home Series A
shares held by AT&T Broadband Group into Excite@Home Series B shares, each of
which has 10 votes. As a result, AT&T Broadband Group has approximately 23% of
the economic interest and 74% of the voting interest in Excite@Home, as compared
to the 56% voting interest AT&T Broadband Group had previously. AT&T Broadband
Group's interest reflects modifications to Excite@Home's governance structure
which were effective on September 1, 2000. Based on these governance changes,
Excite@Home's financial results, which previously were accounted for by AT&T
Broadband Group as an equity investment, are now fully consolidated and included
in AT&T Broadband Group's financial results. On January 11, 2001, Comcast and
Cox exercised their rights to sell a combined total of approximately 60.4
million shares of Excite@Home to AT&T as part of the March 2000 agreement to
reorganize Excite@Home's governance. In May 2001, AT&T completed negotiations to
restructure the transactions that resulted from Comcast and Cox exercising their
sale rights. Under these restructured transactions, Comcast and Cox retained
their respective Excite@Home shares, and AT&T issued approximately 80.3 million
shares of AT&T common stock to Comcast and 75 million shares of AT&T common
stock to Cox.
On April 17, 2001, Excite@Home issued a press release announcing that, due
to recent acceleration in the weakness of the market for online advertising and
marketing services, it expected to report significantly lower revenues, greater
operating losses and more rapid use of cash than
122
133
previously forecasted for the balance of 2001. As a result, Excite@Home recorded
in its first quarter results an impairment charge associated with its media
business. Because AT&T owns approximately 23% of the outstanding shares of
capital stock of Excite@Home, AT&T recorded an impairment charge in its first
quarter results of $739 million, which had a net income impact, after minority
elimination, of $279 million. After giving effect to the charge, AT&T's carrying
value of Excite@Home was approximately $490 million.
In light of the weaker financial outlook, Excite@Home announced it is
taking several measures to conserve cash and raise additional funds. These
measures included adopting a revised operating plan with lower expenses and the
execution of a non-binding letter of agreement with AT&T under which AT&T may
provide Excite@Home with $75 million to $85 million in connection with the
restructuring of the backbone fiber agreement between the companies and with a
joint initiative to maintain and improve current network performance levels. In
addition, Excite@Home said it may negotiate additional debt and/or equity
financing from third parties, and continue efforts to focus its resources around
its broadband franchise through the potential sale or restructuring of its media
operations not directly supporting the broadband strategy.
On June 11, 2001, Excite@Home announced that it had completed the private
sale of $100 million of zero-percent five-year convertible secured notes. The
notes are convertible at the holders' option at any time into Excite@Home Series
A common stock at a 10% premium to the weighted average trading price of these
shares on June 8, 2001, or $4.3806 per share. The notes mature in July 2006 but
may be redeemed by the holders on each anniversary of the date of issuance of
the notes or by Excite@Home on the second, third and fourth anniversaries of the
date of issuance of the notes. Subject to certain conditions, redemption may be
made, at the option of Excite@Home, either in cash or by issuing shares of its
Series A common stock.
On June 19, 2001 Excite@Home announced that it had renegotiated its
optical-fiber backbone capacity contract with AT&T. Under terms of the
renegotiated agreement, AT&T will refund $85 million to Excite@Home for the
cancellation of the companies' original agreement and enter into a new
agreement. The companies said their new capacity agreement covers Excite@Home's
existing capacity and future upgrades, under which Excite@Home agreed to pay
$8.8 million per year to AT&T for the next 18 1/2 years. Separately, Excite@Home
agreed to pay AT&T $7 million in normal upgrade fees under the existing
contract. The new arrangement replaced in its entirety the non-binding letter of
agreement described above.
On June 27, 2001, AT&T and Excite@Home announced a joint Service Level
Agreement for cross-network performance for their high-speed, dedicated Internet
access services. This joint Service Level Agreement, which supports the
agreement between AT&T and Excite@Home announced February 14, 2001, will be
effective for all business customers who purchase the managed multi-homing
service.
Time Warner Entertainment. Time Warner Entertainment is a Delaware limited
partnership that was formed in 1992 to own and operate substantially all of the
business of Warner Bros., Inc., HBO and the cable television businesses owned
and operated by Time Warner prior to that time. AT&T Broadband Group's current
interest in Time Warner Entertainment was acquired by AT&T Broadband Group in
connection with the MediaOne acquisition. Currently, AT&T Broadband Group,
through its wholly owned subsidiaries, owns general and limited partnership
interests in 25.51% of the pro rata priority capital and residual equity capital
of Time Warner Entertainment. The remaining 74.49% limited partnership interests
in the Series A capital and residual capital of Time Warner Entertainment are
held by subsidiaries of AOL Time Warner. AT&T has an option to increase its
priority capital and residual capital interests of Time Warner Entertainment
from 25.51% to up to 31.84% in certain events. Subsidiaries of AOL Time Warner
act as the general partners of Time Warner Entertainment, and AT&T has only
certain protective governance rights pertaining to certain limited significant
matters relating to Time Warner Entertainment.
123
134
On February 28, 2001, AT&T submitted a request to Time Warner
Entertainment, pursuant to the Time Warner Entertainment partnership agreement,
that Time Warner Entertainment reconstitute itself as a corporation and register
for sale in an initial public offering an amount of partnership interests held
by AT&T (up to the full amount held by AT&T) determined by an independent
investment banking firm so as to provide sufficient trading liquidity and
minimize the initial public offering discount, if any. Under the Time Warner
Entertainment partnership agreement, upon this request, AT&T and Time Warner are
to cause an independent investment banker to determine both the registrable
amount of partnership interests and the price at which the registrable amount
could be sold in a public offering, and upon determination of the registrable
amount and the appraised value of the registrable amount, Time Warner
Entertainment may elect not to register these interests, but instead to allow
AT&T the option to require that Time Warner Entertainment purchase the
registrable amount at the appraised value, subject to certain adjustments. If
AT&T does put the registrable amount to Time Warner Entertainment under such
circumstances, Time Warner Entertainment may call the remainder of AT&T's
interest in Time Warner Entertainment at a price described in the Time Warner
Entertainment partnership agreement. If Time Warner Entertainment elects to
register the interests, Time Warner Entertainment may have an option to purchase
these interests immediately prior to the time the public offering would
otherwise have been declared effective by the Securities and Exchange Commission
at the proposed public offering price less underwriting fees and discounts if
the proposed public offering price (as determined by the managing underwriter)
is less than 92.5% of the appraised value. If, at the conclusion of this
process, AT&T has any remaining interests in Time Warner Entertainment, AT&T
will have the right to request registration of those interests for public sale
within 60 days of July 1, 2002.
Insight Midwest. Insight Midwest is a Delaware limited partnership formed
in 1999 to own and operate certain cable systems in Indiana. AT&T Broadband
Group holds a 50% limited partnership interest and Insight Communications holds
a 50% general partnership interest in Insight Midwest. The business of the
partnership is managed by Insight Communications, as the general partner,
although certain matters also require the approval of AT&T Broadband Group.
Insight Midwest currently has approximately 1.3 million cable video subscribers.
Texas Cable Partners. Texas Cable Partners is a Delaware limited
partnership formed in December 1998 to own and operate certain cable systems in
Texas. The partnership is owned 50% by AT&T Broadband Group and 50% by the Time
Warner Entertainment-Advance /Newhouse Partnership, approximately two-thirds of
which is owned by Time Warner Entertainment. The general manager of Texas Cable
Partners is Time Warner Cable, a division of Time Warner Entertainment, although
certain governance matters require the approval of the management committee on
which the Time Warner Entertainment -- Advance /Newhouse Partnership and AT&T
Broadband Group have equal representation. Texas Cable Partners currently has
approximately 1.1 million cable video subscribers.
OTHER INVESTMENTS
AT&T Broadband Group has interests in a number of different companies,
including its ownership interest in Cablevision.
COMPETITION
Cable television competes for customers in local markets with other
providers of entertainment, news and information. The competitors in these
markets include broadcast television and radio, newspapers, magazines and other
printed material, motion picture theatres, video cassettes and other sources of
information and entertainment, including direct broadcast service, directly
competitive cable television operations and ISPs. The 1992 Cable Act and the
Telecommunications Act are designed to increase competition in the cable
television industry.
124
135
Additionally, AT&T Broadband Group faces significant competition from both
the local telephone companies and new providers of services such as high-speed
cable Internet service and telephone services. Providers of competitive
high-speed data offerings include fixed wireless companies, direct broadcast
satellite companies and DSL resellers.
There are alternative methods of distributing the same or similar services
offered by cable television systems. Further, these technologies have been
encouraged by Congress and the FCC to offer services in direct competition with
existing cable systems.
DIRECT BROADCAST SATELLITE
Direct broadcast satellite has emerged as significant competition to cable
systems. The direct broadcast satellite industry has grown rapidly over the last
several years, far exceeding the growth rate of the cable television industry,
and now serves approximately 14 million subscribers nationwide. Direct broadcast
satellite service allows a subscriber to receive video services directly via
satellite using a relatively small dish antenna. Moreover, video compression
technology allows direct broadcast satellite providers to offer more than 200
digital channels, thereby surpassing the typical analog cable system. Direct
broadcast satellite companies historically were prohibited from retransmitting
popular local broadcast programming, but a change to the existing copyright laws
in November 1999 eliminated this legal impediment. Direct broadcast satellite
companies now need to secure retransmission consent from the popular broadcast
stations they wish to carry, and they will face mandatory carriage obligations
of less popular broadcast stations as of January 2002. In response to the
legislation, DirecTV, Inc. and EchoStar Communications Corporation already have
begun carrying the major network stations in the nation's top television
markets. Direct broadcast satellite, however, is limited in the local
programming it can provide because of the current capacity limitations of
satellite technology. It is, therefore, expected that direct broadcast satellite
companies will offer local broadcast programming only in the larger U.S. markets
for the foreseeable future. The direct broadcast satellite industry recently
initiated a judicial challenge to the statutory requirement mandating carriage
of less popular broadcast stations. This lawsuit alleges that the must-carry
requirement (similar to the requirement already applicable to cable systems, and
discussed under "-- Cable Regulation and Legislation -- Must
Carry/Retransmission Consent") is unconstitutional. Direct broadband satellite
companies also have begun offering Internet services. EchoStar began providing
high-speed Internet service in late 2000, and DirecTV, who has partnered with
AOL Time Warner, reports that it will begin providing its own version of
high-speed Internet service shortly. These developments will provide significant
new competition to AT&T Broadband Group's offering of high-speed cable Internet
service.
BROADCAST TELEVISION
Cable television has long competed with broadcast television, which
consists of television signals that the viewer is able to receive without charge
using an "off-air" antenna. The extent of this competition is dependent upon the
quality and quantity of broadcast signals available through off-air reception
compared to the services provided by the local cable system. The recent
licensing of digital spectrum by the FCC will provide incumbent television
licensees with the ability to deliver high definition television pictures and
multiple digital-quality program streams, as well as advanced digital services,
such as subscription video.
DSL
The deployment of DSL technology will allow the provision of Internet
services to subscribers at data transmission speeds greater than available over
conventional telephone lines. In addition, DSL providers also offer voice
services including via offerings that divide up a phone line into several voice
channels and an always-on data line. All significant local telephone companies
and certain other telecommunications companies are introducing DSL service. The
FCC has a policy of encouraging
125
136
the deployment of DSL and similar technologies, both by incumbent telephone
companies and new, competing telephone companies. The FCC's regulations in this
area are subject to change. The development and deployment of DSL technology by
local telephone companies will provide substantial competition to AT&T Broadband
Group's high-speed cable Internet services and cable telephone services.
PRIVATE CABLE
AT&T Broadband Group also competes with Satellite Master Antenna
Television, or SMATV, systems, which provide multichannel program services and
high-speed Internet Services directly to hotel, motel, apartment, condominium
and similar multi-unit complexes within a cable television system's franchise
area, generally free of any regulation by state and local government authorities
and sometimes on an exclusive basis. FCC rules restrict the ability of cable
operators to maintain ownership of cable wiring inside multi-unit buildings,
thereby making it less expensive for SMATV competitors to reach those customers.
The FCC also has ruled that private cable operators can lease video distribution
capacity from local telephone companies and, thereby, distribute cable
programming services over the public rights-of-way without obtaining a
franchise. In 1999, both the Fifth and Seventh Circuit Courts of Appeal upheld
this FCC policy. This could provide a significant regulatory advantage for
private cable operators in the future.
CABLE SYSTEM OVERBUILDS
Cable operators may compete with other cable operators or new entities
seeking franchises for competing cable television systems at any time during the
terms of existing franchises. The 1992 Cable Act promotes the granting of
competitive franchises and AT&T Broadband Group systems operate under
nonexclusive franchises. Recently, there has been a significant increase in the
number of cities that have constructed their own cable television systems in a
manner similar to city-provided utility services. These systems typically
compete directly with the existing cable operator without the burdens of
franchise fees or other local regulation. Although the total number of municipal
overbuild cable systems remains relatively small, recent developments would
indicate an increasing trend in cities authorizing this direct municipal
competition with cable operators. Additionally, over the last few years there
has been significant new investment in private company overbuilders of cable
systems. If this trend continues, AT&T Broadband Group cable systems could face
an increasing number of markets in which a second cable system will be competing
directly with the AT&T Broadband Group system, providing video, audio,
interactive television, high-speed Internet and telephone services.
TELEPHONE COMPANY ENTRY
The Telecommunications Act eliminated the statutory and regulatory
restrictions that prevented local telephone companies from competing with cable
operators in the provision of video services. The Telecommunications Act allows
local telephone companies, including RBOCs, to compete with cable television
operators both inside and outside their telephone service areas. AT&T Broadband
Group expects that it could face competition from telephone companies for the
provision of video services, whether it is through wireless cable or through
upgraded telephone networks. AT&T Broadband Group assumes that all major
telephone companies already have entered or may enter the business of providing
video services. Although enthusiasm on the part of local exchange carriers
appears to be waning, AT&T Broadband Group is aware that telephone companies
have already built, or are in the process of building, competing cable system
facilities in a number of AT&T Broadband Group's franchise areas. The 1992 Cable
Act ensures that telephone company providers of video services will have access
to most of the significant cable television programming services. As AT&T
Broadband Group expands its offerings to include Internet and other
telecommunications services, it will be subject to competition from the local
telephone companies and other telecommunications providers. The
telecommunications industry is highly competitive, and includes competitors with
substantial
126
137
financial and personnel resources, brand name recognition and long-standing
relationships with regulatory authorities.
UTILITY COMPANY ENTRY
The Telecommunications Act eliminates certain U.S. federal restrictions on
utility holding companies and thus frees all utility companies to provide cable
television services. AT&T Broadband Group expects this could result in another
source of competition in the delivery of video, telephone and high-speed
Internet services.
MMDS
Another alternative method of distribution is multichannel, multi-point
distribution systems, or MMDS, which deliver programming services over microwave
channels to customers equipped with special antennas. MMDSs are less capital
intensive, are not required to obtain local franchises or pay franchise fees,
and are subject to fewer regulatory requirements than cable television systems.
The 1992 Cable Act also ensures that MMDS operators have the opportunity to
acquire most significant cable television programming services.
LOCAL VOICE
AT&T Broadband Group's cable telephone service competes against incumbent
local exchange carriers and competitive local exchange carriers in the provision
of local voice services. Moreover, many of these companies are expanding their
offerings to include Internet service. The incumbent local exchange carriers
have very substantial capital and other resources, longstanding customer
relationships and extensive existing facilities and network rights-of-way. A few
competitive local exchange carriers also have existing local networks and
significant financial resources.
FIXED WIRELESS
Fixed wireless technologies compete with AT&T Broadband Group in the
provision of Internet and voice services. Fixed wireless providers serve the
same functions as a wireline provider, by interconnecting private networks,
bypassing a local exchange carrier or connecting to the Internet. The technology
involved in point-to-point microwave connections has advanced, allowing the use
of higher frequencies, and thus smaller antennas, resulting in lower costs and
easier-to-deploy systems for private use and encouraging the use of such
technology by carriers. Fixed wireless systems are designed to emulate cable
connections, and they use the same interfaces and protocols, such as T1, frame
relay, Ethernet and asynchronous transfer mode. Fixed wireless systems also
match the service parameters of cable systems, and consequently any application
that operates over a cable should be able to operate over a fixed wireless
system.
RESELLERS
Among AT&T Broadband Group's competitors in the areas of voice and Internet
services are resellers. Resellers typically are low-cost aggregators that serve
price-conscious market segments and value-added resellers that target customers
with special needs.
IP TELEPHONE
IP telephone providers compete directly against AT&T Broadband Group's
cable telephone service. IP telephone providers derive most of their revenues
from per-minute charges, but they also offer other services including voicemail
and IP telephone equipment. The leading IP telephone company is Net2Phone, Inc.,
which derived approximately 85% of its 2000 revenue from per-minute charges, and
approximately 34% of its 2000 revenue from international customers. Although the
offerings of IP telephone providers are limited mostly to voice services, these
companies seek to expand to other areas of the telecommunications industry, and
may succeed in doing so in the future.
127
138
GENERAL
In addition to competition for customers, the cable television industry
competes with broadcast television, radio, print media and other sources of
information and entertainment for advertising revenue. As the cable television
industry has developed additional programming, its advertising revenue has
increased. Cable operators sell advertising spots primarily to local and
regional advertisers.
AT&T Broadband Group has no basis upon which to estimate the number of
cable television companies and other entities with which it competes or may
potentially compete. The full extent to which other media or home delivery
services will compete with cable television systems may not be known for some
time, and there can be no assurance that existing, proposed or as yet
undeveloped technologies will not become dominant in the future.
EMPLOYEES
At December 31, 2000, AT&T Broadband Group employed approximately 51,000
individuals in its operations, virtually all of whom are located in the United
States. Approximately 2,000 of these employees are represented by the
Communications Workers of America or the International Brotherhood of Electrical
Workers, both of which are affiliated with the AFL-CIO.
LEGAL PROCEEDINGS
In the normal course of business, AT&T Broadband Group is subject to
proceedings, lawsuits and other claims, including proceedings under government
laws and regulations related to environmental and other matters. Such matters
are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Broadband Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at December 31, 2000. While these matters could affect
operating results of any one quarter when resolved in future periods, it is
management's opinion that after final disposition, any monetary liability of
financial impact to AT&T Broadband Group beyond that provided for at year-end
would not be material to AT&T Broadband Group's annual consolidated financial
position or results of operations.
CABLE REGULATION AND LEGISLATION
The operation of cable television systems is extensively regulated by the
FCC, some state governments and most local governments. The Telecommunications
Act altered the regulatory structure governing the nation's telecommunications
providers. It removes barriers to competition in both the cable television
market and the local telephone market. Among other things, it reduces the scope
of cable rate regulation.
The Telecommunications Act required the FCC to implement numerous
rulemakings, some of which are still subject to court challenges. Moreover,
Congress and the FCC have frequently revisited the subject of cable television
regulation and may do so again. Future legislative and regulatory changes could
adversely affect AT&T Broadband Group's operations. This section briefly
summarizes key laws and regulations currently affecting the growth and operation
of AT&T Broadband Group's cable systems.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the cable
television industry, which regulation limited the ability of cable companies to
increase subscriber fees. Under that regime, all cable systems were subjected to
rate regulation, unless they faced effective competition in
128
139
their local franchise area. U.S. federal law now defines "effective competition"
on a community-specific basis as requiring satisfaction of conditions not
typically satisfied in the current marketplace.
Although the FCC establishes all cable rate rules, local government units
(commonly referred to as local franchising authorities) are primarily
responsible for administering the regulation of the lowest level of cable -- the
basic service tier, which typically contains local broadcast stations and PEG
access channels. Before a local franchising authority begins basic service tier
rate regulation, it must certify to the FCC that it will follow applicable U.S.
federal rules, and many local franchising authorities have voluntarily declined
to exercise this authority. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under U.S. federal law,
charges for various types of cable equipment must be unbundled from each other
and from monthly charges for programming services, and priced no higher than the
operator's actual cost, plus an 11.25% rate of return.
The FCC historically administered rate regulation of any cable programming
service tiers, which typically contain satellite-delivered programming. Under
the Telecommunications Act, however, the FCC's authority to regulate cable
programming service tier rates ended on March 31, 1999.
CABLE ENTRY INTO TELECOMMUNICATIONS
The Telecommunications Act provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. States are
authorized, however, to impose "competitively neutral" requirements regarding
universal service, public safety and welfare, service quality and consumer
protection. State and local governments also retain their authority to manage
the public rights-of-way. Although the Telecommunications Act clarifies that
traditional cable franchise fees may be based only on revenues related to the
provision of cable television services, it also provides that local franchising
authorities may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The Telecommunications Act prohibits local
franchising authorities from requiring cable operators to provide
telecommunications service or facilities as a condition of a franchise grant,
renewal or transfer, except that local franchising authorities argue they can
seek "institutional networks" as part of these franchise negotiations.
In particular, cable operators that provide telecommunications services and
cannot reach agreement with local utilities over pole attachment rates in states
that do not regulate pole attachment rates will be subject to a methodology
prescribed by the FCC for determining the rates. These rates may be higher than
those paid by cable operators that do not provide telecommunications services.
The favorable pole attachment rates afforded cable operators under U.S.
federal law can be increased by utility companies owning the poles during a
five-year phase-in period beginning in 2001 if the cable operator provides
telecommunications service as well as cable service over its plant. The FCC
clarified that a cable operator's provision of cable Internet service does not
affect the favorable pole rates, but a recent decision by the Eleventh Circuit
Court of Appeals disagreed and suggested that Internet traffic is neither cable
service nor telecommunications service and might leave cable attachments that
carry Internet traffic ineligible for the U.S. federal rate structure. This
decision could lead to substantial increases in pole attachment rates, and
certain utilities have already proposed vastly higher pole attachment rates
based in part on the existing court decision. The U.S. Supreme Court is now
reviewing this decision. The Eleventh Circuit mandate has been stayed pending
Supreme Court action, and a variety of cable operators, including AT&T Broadband
Group, are challenging certain increased pole attachment rates at the FCC.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the Telecommunications Act intended to facilitate the entry of new
telecommunications providers (including cable operators) is
129
140
the interconnection obligation imposed on all telecommunications carriers. This
requires, for example, that the incumbent local exchange carrier must allow new
competing telecommunications providers to connect to the local telephone
distribution system. A number of implementation details are subject to ongoing
regulatory and judicial review, but the basic requirement is now well
established.
CABLE SYSTEMS PROVIDING INTERNET SERVICE
Although there is at present no significant U.S. federal regulation of
cable system delivery of Internet services, and the FCC recently issued several
reports finding no immediate need to impose this regulation, this situation may
change as cable systems expand their broadband delivery of Internet services. In
particular, proposals have been advanced at the FCC and Congress that would
require cable operators to provide access to unaffiliated ISPs and on-line
service providers. The Federal Trade Commission and the FCC recently imposed
certain open access requirements on Time Warner and AOL in connection with their
merger, but those requirements are not applicable to other cable operators. Some
states and local franchising authorities are considering the imposition of
mandatory Internet access requirements as part of cable franchise renewals or
transfers. In June 2000, the Ninth Circuit Court of Appeals rejected an attempt
by the City of Portland, Oregon to impose mandatory Internet access requirements
on the local cable operator. AT&T Broadband Group has commenced a technical and
operational trial to test how multiple ISPs can offer high-speed, always-on
cable Internet service over a hybrid fiber/coaxial network.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The Telecommunications Act allows telephone companies to compete directly
with cable operators by repealing the historic telephone company/cable company
cross-ownership ban and the FCC's video dial tone regulations. This will allow
local exchange carriers, including RBOCs, to compete with cable operators both
inside and outside their telephone service areas. Because of their resources,
local exchange carriers could be formidable competitors to traditional cable
operators, and certain local exchange carriers have begun offering cable
service.
Under the Telecommunications Act, a local exchange carrier or other entity
providing video programming to customers will be regulated as a traditional
cable operator (subject to local franchising authority and U.S. federal
regulatory requirements), unless it elects to provide its programming via an
open video system. It was anticipated that the primary benefit of using an open
video system regulatory model was to avoid the need to obtain a local franchise
prior to providing services. However, a January 1999 federal court of appeals
decision held that open video system providers can be required to obtain the
franchise. To be eligible for open video system status, a provider cannot occupy
more than one-third of the system's activated channels when demand for channels
exceeds supply, nor can it discriminate among programmers or establish
unreasonable rates, terms or conditions for service.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibitions remain
on local exchange carrier buyouts (i.e., any ownership interest exceeding 10%)
of co-located cable systems, cable operator buyouts of co-located local exchange
carrier systems, and joint ventures among cable operators and local exchange
carriers in the same market. The Telecommunications Act provides a few limited
exceptions to this buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The Telecommunications Act provides that registered utility holding
companies and subsidiaries may provide telecommunications services, information
services, and other services or products subject to the jurisdiction of the FCC,
notwithstanding the Public Utilities Holding Company Act. Electric utilities
must establish separate subsidiaries, known as "exempt telecommunications
companies," and
130
141
must apply to the FCC for operating authority. Again, because of their
resources, electric utilities could be formidable competitors to traditional
cable systems.
CABLE TELEVISION OWNERSHIP RESTRICTIONS
Pursuant to the 1992 Cable Act, the FCC adopted regulations establishing a
30% limit on the number of multichannel video subscribers (including cable and
direct broadcast satellite subscribers) nationwide that a cable operator may
reach through cable systems in which it holds an attributable interest, with an
increase to 35% if the additional cable systems are minority controlled. The FCC
stayed the effectiveness of its ownership limits pending judicial review.
The FCC directly addressed the 30% ownership rule (and the applicable
ownership attribution standards) in its June 2000 ruling on the MediaOne
acquisition. The FCC allowed the MediaOne acquisition to go forward, but
required AT&T to elect one of three divestiture options to come into compliance
with the 30% ownership cap. Specifically, AT&T was required to either (1) divest
its interest in Time Warner Entertainment, (2) terminate its involvement in Time
Warner Entertainment's video programming activities, which would require
divestiture of substantially all of AT&T's video programming interests,
including its interest in Liberty Media, or (3) divest interests in cable
systems. Compliance (or arrangements for compliance) was required by May 2001.
The FCC previously adopted regulations limiting carriage by a cable
operator of national programming services in which that operator holds an
attributable interest to 40% of the activated channels on each of the cable
operator's systems. The rules provide for the use of two additional channels or
a 45% limit, whichever is greater, provided that the additional channels carry
minority controlled programming services. The regulations also grandfather
existing carriage arrangements that exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. These channel occupancy limits
apply only up to 75 activated channels on the cable system, and the rules do not
apply to local or regional programming services.
In March 2001, the D.C. Circuit Court of Appeals struck down the rules
adopted by the FCC pertaining to ownership and programming carriage and remanded
the issues back to the FCC for further review. Following this decision, the FCC
suspended the compliance deadlines initially provided in its order related to
the MediaOne acquisition to afford the FCC an opportunity to determine the
relationship, if any, between the court decision and the conditions required in
the MediaOne order. The duration of such suspension and the ultimate actions of
the FCC cannot be determined at this time.
The Telecommunications Act eliminates statutory restrictions on
broadcast/cable cross-ownership (including broadcast network/cable
restrictions), but leaves in place existing FCC regulations prohibiting local
cross-ownership between television stations and cable systems. The
Telecommunications Act leaves in place existing restrictions on cable
cross-ownership with SMATV and MMDS facilities, but lifts those restrictions
where the cable operator is subject to effective competition. In January 1995,
however, the FCC adopted regulations that permit cable operators to own and
operate SMATV systems within their franchise area, provided that this operation
is consistent with local cable franchise requirements.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements that
allow local commercial television broadcast stations to elect once every three
years between requiring a cable system to carry the station, or must carry, or
negotiating for payments for granting permission to the cable operator to carry
the station, or retransmission consent. Less popular stations typically elect
must carry, and more popular stations typically elect retransmission consent.
Must carry requests can dilute the appeal of a cable system's programming
offerings, and retransmission consent demands may require substantial
131
142
payments or other concessions (e.g., a requirement that the cable system also
carry the local broadcaster's affiliated cable programming service). Either
option has a potentially adverse effect on AT&T Broadband Group's business. The
burden associated with must carry obligations could dramatically increase if
television broadcast stations proceed with planned conversions to digital
transmissions and if the FCC determines that cable systems must carry
simultaneously all analog and digital signals transmitted by the television
stations during the multi-year transition in which a single broadcast license is
authorized to transmit both an analog and a digital signal. The FCC tentatively
decided against imposition of dual digital and analog must carry in a January
2001 ruling. At the same time, however, it initiated further fact gathering,
which, ultimately, could lead to a reconsideration of that tentative conclusion.
ACCESS CHANNELS
Local franchising authorities can include franchise provisions requiring
cable operators to set aside certain channels for non-commercial PEG access
programming. U.S. federal law also requires a cable system with 36 or more
channels to designate a portion of its activated channel capacity (up to 15%)
for commercial leased access by unaffiliated third parties. The FCC has adopted
rules regulating the terms, conditions and maximum rates a cable operator may
charge for use of this designated channel capacity, but use of commercial leased
access channels has been relatively limited.
"ANTI-BUY THROUGH" PROVISIONS
U.S. federal law requires each cable system to permit customers to purchase
premium services or pay-per-view video programming offered by the operator on a
per-channel or a per-program basis without the necessity of subscribing to any
tier of service (other than the basic service tier) unless the system's lack of
addressable converter boxes or other technological limitations does not permit
it to do so. The statutory exemption for cable systems that do not have the
technological capability to comply expires in October 2002, but the FCC may
extend that period if deemed necessary.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers. Of special significance
from a competitive business posture, the 1992 Cable Act precludes satellite
video programmers affiliated with cable operators from favoring cable operators
over competing multichannel video programming distributors (such as direct
broadcast satellite and MMDS distributors). This provision limits the ability of
vertically integrated satellite cable programmers to offer exclusive programming
arrangements to AT&T Broadband Group. Both Congress and the FCC have considered
proposals that would expand the program access rights of cable's competitors,
including the possibility of subjecting both terrestrially delivered video
programming and video programmers that are not affiliated with cable operators
to all program access requirements. Pursuant to the Satellite Home Viewer
Improvement Act, the FCC has adopted regulations governing retransmission
consent negotiations between broadcasters and all multichannel video programming
distributors, including cable and direct broadcast satellite.
INSIDE WIRING; SUBSCRIBER ACCESS
FCC rules require an incumbent cable operator, upon expiration of a
multiple dwelling unit service contract, to sell, abandon or remove "home run"
wiring that was installed by the cable operator in the multiple dwelling unit
building. These inside wiring rules are expected to assist building owners in
their attempts to replace existing cable operators with new programming
providers that are willing to pay the building owner a higher fee, where a
higher fee is permissible. The FCC also has proposed abrogating all exclusive
multiple-dwelling unit service agreements held by
132
143
incumbent operators, but allowing these contracts when held by new entrants. In
another proceeding, the FCC has preempted restrictions on the deployment of
private antenna on rental property within the exclusive use of a tenant, such as
balconies and patios. This FCC ruling may limit the extent to which multiple
dwelling unit owners may enforce certain aspects of multiple dwelling unit
agreements that otherwise prohibit, for example, placement of digital broadcast
satellite receiver antennae in multiple dwelling unit areas under the exclusive
occupancy of a renter. These developments may make it more difficult for AT&T
Broadband Group to provide service in multiple dwelling unit complexes.
OTHER REGULATIONS OF THE FCC
In addition to the FCC regulations noted above, there are other regulations
of the FCC covering such areas as:
- equal employment opportunity (currently suspended as a result of a
judicial ruling);
- subscriber privacy;
- programming practices, including, among other things,
-- syndicated program exclusivity, which requires a cable system to
delete particular programming offered by a distant broadcast signal
carried on the system that duplicates the programming for which a
local broadcast station has secured exclusive distribution rights,
-- network program nonduplication,
-- local sports blackouts,
-- indecent programming,
-- lottery programming,
-- political programming,
-- sponsorship identification,
-- children's programming advertisements, and
-- closed captioning;
- registration of cable systems and facilities licensing;
- maintenance of various records and public inspection files;
- aeronautical frequency usage;
- lockbox availability;
- antenna structure notification;
- tower marking and lighting;
- consumer protection and customer service standards;
- technical standards;
- consumer electronics equipment compatibility; and
- emergency alert systems.
The FCC recently ruled that cable customers must be allowed to purchase
cable converters from third parties and established a multi-year phase-in during
which security functions, which would remain in the operator's exclusive
control, would be unbundled from basic converter functions, which
133
144
then could be satisfied by third-party vendors. The first phase implementation
date was July 1, 2000. Compliance was technically and operationally difficult in
some locations, so AT&T Broadband Group and several other cable operators filed
a request at the FCC that the requirement be waived in those systems. The
request resulted in a temporary deferral of the compliance deadline for those
systems.
The FCC recently initiated an inquiry to determine whether the cable
industry's future provision of interactive services should be subject to
regulations ensuring equal access and competition among service vendors. The
inquiry, which grew out of the FCC's review of the AOL/Time Warner merger, is in
its earliest stages.
The FCC has the authority to enforce its regulations through the imposition
of substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
COPYRIGHT
Cable television systems are subject to U.S. federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenue to a U.S.
federal copyright royalty pool (this percentage varies depending on the size of
the system and the number of distant broadcast television signals carried),
cable operators can obtain blanket permission to retransmit copyrighted material
on broadcast signals. The possible modification or elimination of this
compulsory copyright license is subject to continuing review and could adversely
affect AT&T Broadband Group's ability to obtain desired broadcast programming.
In addition, the cable industry pays music licensing fees to Broadcast Music,
Inc. and the American Society of Composers, Authors and Publishers. Copyright
clearances for nonbroadcast programming services are arranged through private
negotiations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity.
The Telecommunications Act clarified that the need for an entity providing cable
services to obtain a local franchise depends solely on whether the entity
crosses public rights-of-way. U.S. federal law now prohibits franchise
authorities from granting exclusive franchises or from unreasonably refusing to
award additional franchises covering an existing cable system's service area.
Cable franchises generally are granted for fixed terms, and in many cases, are
terminable if the franchisee fails to comply with material provisions.
Noncompliance by the cable operator with franchise provisions also may result in
monetary penalties.
The terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states subject
cable television systems to the jurisdiction of centralized state governmental
agencies. Although local franchising authorities have considerable discretion in
establishing franchise terms, there are certain U.S. federal limitations. For
example, local franchising authorities cannot insist on franchise fees exceeding
5% of the system's gross revenue, cannot dictate the particular technology used
by the system, and cannot specify video programming other than identifying broad
categories of programming.
U.S. federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements, such as significant upgrades in facilities and services or
increased franchise fees and funding for PEG access channels as a condition of
renewal. Similarly, if a franchise authority's consent is required for the
purchase or sale of a cable system or franchise, this
134
145
authority may attempt to impose more burdensome or onerous franchise
requirements in connection with a request for consent. Historically, franchises
have been renewed for cable operators that have provided satisfactory services
and have complied with the terms of their franchises.
PROPOSED CHANGES IN REGULATION
The regulation of cable television systems at the U.S. federal, state and
local levels is subject to the political process and has been in constant flux
over the past decade. Material changes in the law and regulatory requirements
must be anticipated, and there can be no assurance that AT&T Broadband Group's
business will not be affected adversely by future legislation, new regulation or
deregulation.
135
146
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AT&T Broadband Group is an integrated business of AT&T and not a
stand-alone entity. The combined financial statements included herein reflect
the results of the proposed AT&T Broadband Group tracking stock. Separate
financial statements are not required to be filed for tracking stocks. However,
AT&T Broadband Group has provided the financial statements as an exhibit to this
document to provide additional disclosures to investors to allow them to assess
the financial performance of AT&T Broadband Group. Since the tracking stocks are
governed by a common board of directors, AT&T's board of directors could make
operational and financial decisions or implement policies that affect
disproportionately the businesses of AT&T Broadband Group. For example, AT&T's
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 AT&T's 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 AT&T's charter,
policy statements, by-laws and inter-company agreements.
AT&T's board of directors may change or supplement the policies set forth
in the AT&T Groups policy statement and AT&T's other policy statements and
AT&T's by-laws in the sole discretion of AT&T's board of directors, subject to
the provisions of any inter-group agreement but without approval of AT&T's
shareholders. In addition, the fact that AT&T has separate classes of common
stock could give rise to occasions when the interests of the holders of AT&T
Broadband Group tracking stock and those of the holders of the other classes of
AT&T common stock conflict or appear to diverge or conflict. AT&T's board of
directors would make any change or addition to the policies set forth in the
AT&T Groups policy statement or AT&T's by-laws, and would respond to any actual
or apparent divergence of interest among the groups, in a manner consistent with
its fiduciary duties to AT&T and all of AT&T's shareholders after giving
consideration to the potentially divergent interests and all other relevant
interests of the holders of the separate classes of AT&T shares.
YOU SHOULD CONSIDER THAT AS A RESULT OF THE FLEXIBILITY PROVIDED TO AT&T'S
BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS TO ASSESS THE FUTURE
PROSPECTS OF AT&T BROADBAND GROUP BASED ON AT&T BROADBAND GROUP'S PAST
PERFORMANCE.
AT&T Broadband Group consists primarily of the assets and business of AT&T
Broadband, LLC (formerly TCI), acquired by AT&T on March 9, 1999 in the TCI
merger, and MediaOne, acquired by AT&T on June 15, 2000 in the MediaOne
acquisition. AT&T Broadband Group is one of the nation's largest broadband
communications providers, providing cable television, high-speed cable Internet
and telephone services. At or for the three months ended March 31, 2001, AT&T
Broadband Group's network passed approximately 28.1 million homes, and had 15.9
million basic cable subscribers. AT&T Broadband Group had approximately $2.6
billion in revenue, $1.7 billion in operating losses, approximately $1.5 billion
in net losses, and approximately ($.5) billion in EBITDA. EBITDA, excluding
asset impairment, pre-tax losses from equity investments and other income or
expense was $.4 billion for the three months ended March 31, 2001. At or for the
year ended December 31, 2000, AT&T Broadband Group's broadband network passed
approximately 28.3 million homes, and had over 16 million basic cable
subscribers. AT&T Broadband Group had approximately $8.4 billion in combined
revenue, approximately $8.6 billion in operating losses, approximately $5.4
billion in net losses, and approximately $(2.3) billion in EBITDA. EBITDA,
excluding asset impairment, pre-tax losses from equity investments and other
income or expense was $1.7 billion for
136
147
the year ended December 31, 2000. AT&T Broadband Group provides a broad range of
traditional cable services to customers individually and in combination with
other services, including basic programming, expanded basic programming, premium
service, and pay-per-view programming. In addition, AT&T Broadband Group has
been upgrading its network to provide a variety of advanced services, including
digital video, high-speed cable Internet service, and cable telephone services.
AT&T Broadband Group's revenue is derived primarily from the provision of
analog and digital video services, high-speed cable Internet and broadband
telephone services. AT&T Broadband Group charges customers for installation of
equipment into their homes. Additionally, AT&T Broadband Group derives revenue
from the sale of advertising time via ad avails on certain cable networks. AT&T
Broadband Group sells its services on an individual basis as well as through
packages or on a bundled basis. AT&T Broadband Group expects revenue will
continue to increase in the future as a result of increases in customers for its
various services as well as rate increases. AT&T Broadband Group anticipates
that the mix of its customers will change over time as the number of customers
of advanced services increases. Accordingly, AT&T Broadband Group expects
revenue from advanced services to increase as a percentage of total revenue over
time.
Operating expenses consist of service costs and selling, general and
administrative expenses attributable to management of its 15.9 million customer
base. Service costs include fees paid to programming suppliers, expenses related
to copyright fees, wages and salaries of technical personnel, franchise fees and
plant operating costs. Programming fees have historically increased at rates in
excess of inflation due to increases in the number of programming services
offered and improvements in the quality of programming. AT&T Broadband Group
expects programming costs will continue to increase. Competitive factors may
limit AT&T Broadband Group's ability to recover increases in programming costs
through rate increases to customers. Selling, general and administrative
expenses directly attributable to our cable television systems include wages and
salaries for customer service and administrative personnel, and expenses related
to billing, marketing, advertising sales and office administration. AT&T
Broadband Group anticipates that it will reduce costs, exclusive of programming
through the consolidation of customer call centers and the reduction of its
overall cost structure.
Debt attributed to AT&T Broadband Group includes the third party
obligations of AT&T Broadband LLC (formerly TCI) and MediaOne and all
monetization debt. Additional intercompany debt has been allocated to AT&T
Broadband Group to achieve a total debt level based on several factors,
including prospective financing requirements, desired stand-alone credit
profile, working capital and capital expenditure requirements, expected sources
of future deleveraging, and comparable company profiles. Increases in historical
intercompany debt are based on historical cash flows. Such cash outflows include
capital expenditures, cash used in operations and investments in cable
companies. By the time AT&T's restructuring activities are complete, the
then-intercompany debt balance of AT&T Broadband Group will be replaced with an
equal amount of external debt in a manner to be determined. The historical
interest expense on the allocated intercompany debt was calculated based on a
rate intended to be equivalent to the rate AT&T Broadband Group would receive if
it were a stand-alone entity. Due to AT&T's deleveraging activities, the $28.8
billion of debt at March 31, 2001 is expected to be significantly lower in the
future. AT&T's expected deleveraging activities that relate to AT&T Broadband
Group include, but may not be limited to, the following: the announced sale of
non-strategic cable systems which is expected to result in net cash proceeds of
$3.1 billion; any proceeds that may result from the exercise of AT&T's
registration rights in Time Warner Entertainment; and any proceeds from the sale
of shares of Cablevision. Finally, AT&T has made no final determination as to
the allocation of proceeds from the sale of shares of AT&T Broadband Group
tracking stock.
137
148
OPERATING RESULTS
The comparison of first quarter 2001 results with the first quarter of 2000
and the comparison of the year ended December 31, 2000 with the ten months ended
December 31, 1999 were impacted by acquisitions and dispositions that occurred
during 2000 and 2001. Effective June 15, 2000, AT&T completed the acquisition of
MediaOne. On March 15, 2000, AT&T Broadband Group 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. In addition AT&T Broadband Group completed other dispositions and
exchanges that in the aggregate affect the comparability of financial results
between periods.
In addition to the above, the comparability of operating results between
periods has also been affected by the consolidation of Excite@Home beginning
September 1, 2000, due to AT&T Broadband Group gaining voting control. AT&T
Broadband Group, through AT&T Broadband, LLC, has an approximate 23% economic
interest and a 74% voting interest in Excite@Home. Prior to September 1, 2000,
the ownership of Excite@Home was accounted for under the equity method of
accounting, which means the investment was shown in "investments" in the
combined balance sheet, and any earnings or losses were included as a component
of "net losses from equity investments" in the combined statements of
operations. The consolidation of Excite@Home resulted in the inclusion of 100%
of its results in each line item on the combined balance sheet and statement of
operations. The approximate 77% not owned by AT&T Broadband Group, through AT&T
Broadband, LLC, is shown as a single line item on the combined balance sheet
within "minority interest" and within "minority interest income (expense)" in
the combined statement of operations.
The results of operations for AT&T Broadband Group begin on March 1, 1999,
the effective date of the TCI merger. Accordingly, the results of operations for
1999 include 10 months of operations as compared to a full 12 months of
operations in 2000 for the business of AT&T Broadband, LLC.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 2000
Revenue
Total revenue increased $1,030 million, or 66%, for the first quarter 2001
compared to the first quarter of 2000. This increase was due to the impact of
the MediaOne acquisition of $814 million and the consolidation of Excite@Home of
$143 million. The remaining increase was primarily a result of increased revenue
from advanced services (digital video, high-speed cable Internet and cable
telephone services) of $106 million and an increase in basic cable revenue of
approximately $53 million. Basic cable revenue increased as a result of rate
increases. Such increases were offset by a decrease in revenue of $59 million
due to dispositions and exchanges.
At March 31, 2001, AT&T Broadband Group served approximately 15.9 million
basic cable customers, while passing approximately 28.1 million homes, compared
with 11.1 million basic-cable customers, while passing approximately 19.2
million homes at March 31, 2000. AT&T Broadband acquired systems passing
approximately 8.7 million homes with approximately 5.0 million basic cable
customers in the MediaOne acquisition. At March 31, 2001 AT&T Broadband Group
provided digital video service to approximately 3.1 million customers,
high-speed cable Internet service to approximately 1.3 million customers, and
cable telephone service to approximately 686,000 customers. This compares with
approximately 2.0 million digital video customers, approximately 297,000 high
speed cable Internet service customers, and nearly 40,000 cable telephone
customers at March 31, 2000. The MediaOne acquisition added 0.2 million digital
video service customers, 0.3 million high-speed cable Internet customers and 0.1
million cable telephone customers.
138
149
Cost of Services
Cost of services increased $595 million, or 68%, for the first quarter of
2001 compared to the first quarter of 2000. This increase was primarily due to
the impact of the MediaOne acquisition of $426 million and the consolidation of
Excite@Home of $129 million. The remaining increase is primarily a result of an
increase of $66 million associated with high-speed cable Internet and cable
telephone services due to growth in the business and an increase in programming
costs of $18 million. Such increases were offset by a decrease in costs of $14
million due to dispositions and exchanges.
Selling, General and Administrative
Selling, general and administrative expenses increased $339 million, or 94%
for the first quarter of 2001 compared to the first quarter of 2000. This
increase was primarily due to the impact of the MediaOne acquisition of $183
million, an increase in expenses related to high-speed cable Internet and cable
telephone services of $49 million due to growth in the business and the
consolidation of Excite@Home of $29 million. The increase was offset by a
decrease of $14 million due to dispositions and exchanges.
Depreciation and Other Amortization
Depreciation and other amortization increased $406 million, or 166%, for
the first quarter of 2001 compared to the first quarter of 2000. The increase
was primarily due to the impact of the MediaOne acquisition of $227 million, the
consolidation of Excite@Home of $67 million and a higher asset base resulting
from continued infrastructure investment. Total capital expenditures for the
first quarters of 2001 and 2000 were $928 million and $885 million,
respectively.
Amortization of Goodwill, Franchise Costs and Other Purchased Intangibles
Amortization increased $395 million, or 167%, for the first quarter 2001
compared to the first quarter 2000. The increase was primarily due to the
MediaOne acquisition of $260 million and the consolidation of Excite@Home of
$123 million.
As a result of an evaluation of recent changes in the cable industry and
the views of regulatory authorities, AT&T Broadband Group, effective January 1,
2001, began using an amortization period for all franchise costs and goodwill
associated with newly acquired cable operations not to exceed 25 years. This
change did not have a material impact to AT&T Broadband Group's results of
operations for the three months ended March 31, 2001.
Asset Impairment, Restructuring and Other Charges
During the first quarter of 2001, AT&T Broadband Group recorded $808
million of asset impairment, restructuring and other charges. Included in these
charges were $739 million for asset impairment charges related to Excite@Home
and $69 million for restructuring and exit costs, of which $13 million related
to Excite@Home. Restructuring and exit costs consisted of $59 million for cash
severance costs, $6 million related to facilities and $4 million related to
termination of lease obligations.
The asset impairment charges included $600 million recorded by Excite@Home
associated with goodwill impairment of various acquisitions, primarily Excite,
and a related goodwill impairment charge of $139 million recorded by AT&T
Broadband Group associated with its acquisition goodwill of Excite@Home. The
impairment resulted from continued weakness of the online media market in which
Excite@Home operates. Since AT&T Broadband Group consolidates Excite@Home, but
only owns 23% of Excite@Home, 77% of the charge recorded by Excite@Home was not
included as a reduction of AT&T Broadband Group's net income (loss), but rather
eliminated in the consolidated statement of income as "minority interest income
(expense)."
139
150
The $59 million of cash severance costs were part of an initiative to
reduce costs. The restructuring and exit plans primarily focus on the
maximization of synergies through involuntary headcount reductions of 2,350
employees, including the consolidation of customer-care and call centers and the
reduction of construction efforts on rebuilds. Approximately 10% of the
employees were management and 90% were non-management employees. Nearly 88% of
the affected employees have left their positions as of March 31, 2001, and the
remaining employees will leave the company by the end of 2001. The restructuring
initiative is projected to yield cash savings, after severance pay-outs of
approximately $59 million, of approximately $42 million in 2001 and
approximately $132 million per year thereafter, as well as operating expense
savings of approximately $97 million in 2001 and approximately $101 million per
year thereafter. We expect increased spending in growth businesses will largely
offset these cash and operating expense savings. The operating expense savings,
primarily attributable to reduced personnel-related expenses, will be realized
in cost of services and SG&A expenses.
In the second quarter of 2001, additional restructuring charges are
expected to be incurred related to continued headcount reductions and
consolidation of facilities.
During the first quarter of 2000, AT&T Broadband Group recorded a $16
million restructuring charge associated with the involuntary headcount
reductions of 36 employees of which 78% were management employees and 22% were
non-management employees. All of the affected employees had left their positions
as of March 31, 2000.
Operating Loss
Operating loss increased $1,497 million to $1,667 million for the first
quarter of 2001 compared to the first quarter of 2000. The increase was
primarily due to the consolidation of Excite@Home, which increased operating
losses by $956 million. A majority of the impact of operating losses generated
by Excite@Home was offset in minority interest income (expense), reflecting the
approximate 77% of Excite@Home AT&T Broadband Group does not own. Also
contributing to the increase were the impact of the MediaOne acquisition, an
increase in restructuring and exit costs, and higher costs for advanced
services.
Other (Expense) Income
Other (expense) income decreased from income of $484 million for the first
quarter of 2000 to expense of $953 million for the first quarter of 2001.
Effective January 1, 2001, in conjunction with the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," certain
investment securities, which support debt that is indexed to such securities,
were transferred from "available-for-sale" to "trading." As a result of the
reclassification, a noncash pretax charge of $1.0 billion was taken. This charge
represents amounts charged to combined attributed net assets in prior periods.
The first quarter of 2001 also included a $62 million charge resulting from the
increase in the fair value of the put options held by Comcast and Cox related to
Excite@Home stock, and an investment impairment charge of $62 million. Also,
contributing to the increase in expense were lower gains of approximately $331
million on the sale of businesses and investments.
Interest Expense
Interest expense increased $215 million to $479 million for the first
quarter of 2001 compared to the first quarter of 2000. The increase was a result
of an increase in debt due primarily to the MediaOne acquisition and the
monetization of investments in Microsoft and Comcast.
Benefit for Income Taxes
The benefit for income taxes for the first quarter of 2001 was $744
million, compared with a benefit of $414 million for the first quarter of 2000.
The effective income tax rate for the first quarter
140
151
of 2001 was 24.0%, compared to (828.0%) for the first quarter of 2000. The
effective rate for 2001 was impacted by the consolidation of operational losses
of Excite@Home, which is unable to record tax benefits on its pretax losses, and
higher non tax-deductible goodwill amortization. The first quarter 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.
Net Earnings (Losses) from Equity Investments
Net earnings (losses) from equity investments which are recorded net of
income taxes increased from a loss of $218 million for the first quarter of 2000
to income of $49 million for the first quarter of 2001. The increase was
primarily due to the consolidation of Excite@Home and higher earnings of
Cablevision Systems Corporation resulting from a gain associated with the
exchange of cable properties, partially offset by higher losses from its normal
business operations. Partially offsetting these increases were higher equity
losses from various equity investments. The income tax benefit (provision)
recorded on net earnings (losses) from equity investments was $(31) million and
$136 million for first quarter 2001 and 2000, respectively.
Minority Interest Income (Expense)
Minority interest income (expense), which is recorded net of income taxes,
represents an adjustment to AT&T Broadband Group's net income (loss) to reflect
the less than 100% ownership of entities attributed to AT&T Broadband Group as
well as dividends on preferred stock issued by subsidiaries of AT&T which have
been attributed to AT&T Broadband Group. The increase of $599 million in the
first quarter of 2001 compared to the first quarter of 2000 primarily resulted
from the consolidation of Excite@Home effective September 1, 2000. Minority
interest income (expense) in 2001 primarily reflects the losses generated by
Excite@Home, including the goodwill impairment charge, that were attributed to
the approximate 77% of Excite@Home not owned by AT&T Broadband Group, through
AT&T Broadband, LLC. The income tax benefit recorded on minority interest income
(expense) was $25 million for both the first quarter of 2001 and 2000.
Cumulative Effect of Accounting Change
Cumulative effect of accounting change, net of applicable income taxes, was
$229 million in the first quarter of 2001. The cumulative effect was
attributable to the adoption of SFAS No. 133 and represented fair value
adjustments to equity based derivative instruments embedded in indexed debt
instruments and to the warrant portfolio.
Net (Loss) Income
Net (loss) income decreased from net income of $196 million for the first
quarter of 2000 to a net loss of $1,528 million for the first quarter of 2001.
The decrease is primarily a result of increased operating losses; the adoption
of SFAS No. 133, which included a charge relating to the recognition of net
losses on the transfer of investments from available-for-sale to trading and a
benefit relating to the cumulative effect of adoption; lower gains on the sale
of businesses and investments, and an increase in interest expense. Such
decreases were offset by an increase in minority interest income and net
earnings from equity investments.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE TEN MONTHS ENDED DECEMBER
31, 1999
Revenue
Total revenue increased $3,365 million, or 66%, in 2000 compared to 1999.
This increase was due to additional revenue from the MediaOne acquisition of
$1,730 million, an additional two months of revenue in 2000 of $1,035 million,
and the consolidation of Excite@Home of $248 million. The
141
152
remaining increase was primarily a result of increased revenue from advanced
services (digital video, high-speed cable Internet and cable telephone services)
of $242 million and an increase in basic cable revenue of approximately $195
million. Basic cable revenue increased as a result of rate increases. Such
increases were offset by a decrease in revenues of $104 million due to the Cox
disposition.
At December 31, 2000, AT&T Broadband Group serviced approximately 16.0
million basic cable customers, while passing approximately 28.3 million homes,
compared with 11.4 million basic cable customers, while passing approximately
19.7 million homes at December 31, 1999. AT&T Broadband Group acquired systems
passing approximately 8.7 million homes with approximately 5.0 million basic
cable customers in the MediaOne acquisition. At December 31, 2000, AT&T
Broadband Group provided digital video service to approximately 2.8 million
customers, high-speed cable Internet service to approximately 1.1 million
customers, and cable telephone service to approximately 547,000 customers. This
compares with approximately 1.8 million digital video customers, approximately
207,000 high-speed cable Internet service customers, and nearly 8,300 cable
telephone customers at December 31, 1999. The MediaOne acquisition added 0.2
million digital video service customers, 0.3 million high-speed cable Internet
customers and 0.1 million cable telephone customers.
Cost of Services. Cost of services increased $1,914 million, or 71%, in
2000 compared with 1999. This increase was primarily due to the impact of the
MediaOne acquisition of $833 million, an additional two months of costs in 2000
of $576 million and the consolidation of Excite@Home of $195 million. The
remaining increase primarily is a result of $180 million programming costs, an
increase of $142 million associated with high-speed cable Internet and cable
telephone services and an increase in salary expense and other basic cable costs
of $138 million due to growth in business. Such increases were offset by a
decrease in costs of $48 million due to the Cox disposition.
Selling, General and Administrative. Selling, general and administrative
expenses increased $927 million, or 74%, in 2000 compared to 1999. This increase
was primarily due to the impact of the MediaOne acquisition of $458 million, an
additional two months in 2000 of $210 million, an increase in expenses related
to high-speed cable Internet and cable telephone service of $232 million and the
consolidation of Excite@Home of $56 million.
Depreciation and Other Amortization. Depreciation and other amortization
increased $869 million, or 108%, in 2000 compared to 1999. The increase was
primarily due to the impact of the MediaOne acquisition of $473 million, the
consolidation of Excite@Home of $80 million, an additional two months in 2000 of
$157 million and a higher asset base resulting from continued infrastructure
investment. Total capital expenditures for 2000 and 1999 were $4,426 million and
$3,161 million, respectively.
Amortization of Goodwill, Franchise Costs and Other Purchased
Intangibles. Amortization increased $1,508 million, or 174%, in 2000 compared
to 1999. The increase was primarily due to the MediaOne acquisition of $515
million, the consolidation of Excite@Home of $911 million, and an additional two
months in 2000 of $161 million.
Asset Impairment Restructuring and Other Charges. Asset impairment,
restructuring and other charges increased $5,626 million in 2000 to $6,270
million. For the year ended 2000, the charge included $6,179 million of asset
impairment charges related to Excite@Home and $91 million related to
restructuring and exit costs.
The charges related to Excite@Home include $4,609 million of asset
impairment charges recorded by Excite@Home associated with the impairment of
goodwill from various acquisitions and a related goodwill impairment charge of
$1,570 million recorded by AT&T Broadband Group associated with goodwill from
the acquisition of its investment in Excite@Home. The impairments resulted from
a decision by Excite@Home to exit certain businesses, as well as significant
changes to the dynamics of the online media market that Excite@Home operates in,
which necessitated a general impairment review of Excite@Home's intangible
assets. Since AT&T Broadband Group,
142
153
through AT&T Broadband, LLC, owns approximately 23% of Excite@Home, 77% of the
charge recorded by Excite@Home was not included as a reduction of net income,
but rather was eliminated through minority interest in income (expense) in the
combined statements of operations.
The $91 million charge for restructuring and exit plans was primarily due
to headcount reductions as part of the integration of MediaOne, the
centralization of certain functions, and the consolidation of call center
facilities. This charge included $61 million of cash termination benefits
associated with the involuntary separation of 1,060 employees. Approximately 25%
of the employees were management while 75% were non-management employees.
Approximately 74% of the affected employees have left their positions as of
December 31, 2000. The $91 million charge also included a loss of $30 million
recognized on the disposition of facilities as a result of synergies created by
the MediaOne acquisition.
The 2000 restructuring initiatives are projected to yield cash savings of
approximately $80 million per year. It is expected that increased spending in
growth businesses will largely offset these cash and earnings before interest
and taxes, or EBIT, savings of approximately $50 million. The EBIT savings,
primarily attributable to reduced personnel related expenses, will be realized
in cost of services and selling, general and administrative expenses.
During 1999, AT&T Broadband Group recorded $644 million of asset
impairment, restructuring and other charges. This included an in-process
research and development charge of $594 million reflecting the estimated fair
value of research and development projects, as of the date of the TCI merger,
which had not yet reached technological feasibility or had 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 cable telephone services implementation, and in-process research and
development related to Excite@Home. The fair value of in-process research and
development was estimated 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 the voice-over-IP technology, which allows voice
telephone traffic to be digitalized and transmitted in IP data packets, was $225
million as of the date of the TCI merger. 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 telephone services and to reduce the power consumption of the
IP telephone services equipment. Testing of IP telephone services equipment in
the field was started in late 2000 and will continue 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 date of the TCI merger. 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 telephone
services implementation was $101 million as of the date of the TCI merger.
Telephone services cost reductions primarily consist of cost savings from the
development of a "line of power switch," which allows cost effective power for
customer telephone equipment through the cable plant. This device will allow us
to provide line-powered telephone service without burying the cable line to each
house. Trials related to the telephone services 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
143
154
variety of network devices beyond personal computers and improved design for the
regional data centers' infrastructure.
Although there are technological issues to overcome to complete
successfully the acquired in-process research and development, successful
completion is expected. The costs to complete the identified projects will not
have a material impact on the results of operations. If, however, management of
AT&T Broadband Group is unable to establish technological feasibility and
produce commercially viable products/services, anticipated incremental cash
flows attributed to expected profits from such new products/services may not be
realized.
Also in 1999, the asset impairment, restructuring and other charges
included a $50 million loss related to a contribution agreement TCI entered into
with Phoenixstar, Inc. This agreement requires AT&T Broadband Group to satisfy
certain liabilities owned by Phoenixstar and its subsidiaries. The remaining
obligation under this contribution agreement and an agreement that MediaOne has
is $57 million, which was fully accrued at December 31, 2000.
Operating Loss. Operating loss increased $7,479 million to $8,656 million
in 2000 compared to 1999. The increase was primarily due to the consolidation of
Excite@Home which increased operating losses by $7,173 million. The operating
loss of Excite@Home included asset impairment charges of $6,179 million. A
majority of the impact of operating losses generated by Excite@Home was offset
in minority interest income (expense), reflecting the approximate 77% of
Excite@Home AT&T Broadband Group does not own. Also contributing to the increase
was the impact of the MediaOne acquisition and higher costs of advanced
services.
Other (Expense) Income. Other (expense) income, decreased from income of
$50 million in 1999 to expense of $39 million for 2000. This decrease was
primarily a result of a $537 million charge resulting from the increase in the
fair value of the put options held by Comcast and Cox related to Excite@Home
stock and investment impairment charges of $240 million. This was offset by an
increase in gains on sales of businesses and investments of $577 million,
including the swap of cable systems with Comcast and Cox and the sale of the
investment in Lenfest, and an increase of $69 million in interest and dividend
income.
Interest Expense. Interest expense increased $618 million in 2000 to
$1,323 million compared to 1999. The increase was a result of an increase in
debt of $13.5 billion due primarily to the MediaOne acquisition, the
monetization of investments in Microsoft and Comcast, two additional months of
interest in 2000, and an increase in the interest rate charged from AT&T for
intercompany debt.
Benefit for Income Taxes. The benefit for income taxes for the year ended
December 31, 2000, was $1,183 million, compared with a benefit of $465 million
for the ten months ended December 31, 1999. The effective income tax rate for
the year ended December 31, 2000 was 11.8%, compared to 25.3% for the ten months
ended December 31, 1999. The effective rate for 2000 was impacted by the
inclusion of Excite@Home as a consolidated entity, and the Cox disposition. The
1999 effective tax rate was impacted by the non tax-deductible write-off of
in-process research and development.
Net Losses from Equity Investments. Net losses from equity investments,
which are recorded net of income taxes decreased $110 million compared to 1999.
The decrease was due in part to a $185 million improvement in Cablevision's
results, which was partially offset by additional equity losses of $64 million
from amortization of excess basis of equity investments acquired in the MediaOne
acquisition. The improvement in Cablevision's results is primarily due to gains
from cable system sales.
Minority Interest Income (Expense). Minority interest income (expense),
which is recorded net of income taxes, represents an adjustment to AT&T
Broadband Group's net loss to reflect the less than 100% ownership of entities
attributed to AT&T Broadband Group as well as dividends on preferred stock
issued by subsidiaries of AT&T which have been attributed to AT&T Broadband
Group. The increase of $4,188 million in 2000 primarily resulted from the
consolidation of
144
155
Excite@Home effective September 1, 2000. The minority interest in 2000 primarily
reflects the losses generated by Excite@Home, including the goodwill impairment
charge, that were attributed to the approximate 77% of Excite@Home not owned by
AT&T Broadband Group through AT&T Broadband, LLC.
Net loss. Net loss increased $3,170 million to $5,370 million in 2000
compared to 1999. The increase was primarily due to increased operating losses,
the mark-to-market adjustment related to the put options held by Comcast and
Cox; increases in interest expense; and impairment of investments. Such
increases were offset by an increase in minority interest income and increased
gains on the sale of businesses and investments.
LIQUIDITY AND CAPITAL RESOURCES
AT&T Broadband Group has funded its operations through internally generated
funds, asset sales, capital contributions from AT&T and intercompany borrowings
from AT&T. Capital contributions from AT&T include acquisitions made by AT&T
that have been attributed to AT&T Broadband Group which are treated as non cash.
Currently, financing activities for AT&T Broadband Group are managed by
AT&T on a centralized basis. Sources for AT&T Broadband Group's future financing
requirements may include borrowing of funds, including additional debt from AT&T
and/or third party debt. Loans from AT&T to any entity within AT&T Broadband
Group have been made at interest rates and on other terms and conditions
intended to be substantially equivalent to the interest rates and other terms
and conditions that AT&T Broadband Group would be able to obtain from third
parties, including the public markets, as a non-affiliate of AT&T without the
benefit of any guaranty by AT&T.
AT&T performs cash management functions on behalf of AT&T Broadband Group.
Substantially all of AT&T Broadband Group's cash balances are swept to AT&T on a
daily basis, where they are managed and invested by AT&T. Transfers of cash to
and from AT&T, after giving consideration to the debt allocation methodology,
are reflected as a component of combined attributed net assets.
Net cash used in operating activities for the three months ended March 31,
2001 was $660 million compared with $22 million for the three months ended March
31, 2000. The increase in cash used in operating activities was primarily due to
a net use of cash from changes in the timing of payments for accounts payable
and other operating assets and liabilities and the launch of high-speed cable
Internet service and broadband telephone service in 2000.
Net cash used in investing activities for the three months ended March 31,
2001 was $458 million compared with $1,210 million for the three months ended
March 31, 2000. AT&T Broadband Group received $598 million from business
dispositions and exchanges, compared to the first quarter of 2000 when it spent
$89 million for net acquisitions and dispositions. In addition, the remaining
decrease in cash used in investing activities is primarily due to a reduction in
equity investment purchases and contributions from $569 million in the first
quarter of 2000 to $239 million in the first quarter of 2001.
Net cash provided by financing activities for the three months ended March
31, 2001 was $1,121 million compared with $1,232 million for the three months
ended March 31, 2000. AT&T Broadband Group continues to receive funding from
AT&T to cover capital expenditures and other investing activities and operating
activities. The slight decrease was primarily due to fewer payments on debt
obligations and less borrowings from AT&T.
Net cash provided by operating activities for the year ended December 31,
2000, was $802 million, compared with $1,380 million for the ten months ended
December 31, 1999. The decrease in cash provided by operating activities was
primarily due to the launch of high-speed cable Internet service and broadband
telephone service, and a net use of cash from changes in accounts receivable,
accounts payable and other operating assets and liabilities.
145
156
Net cash used in investing activities for the year ended December 31, 2000
was $4,511 million compared with $2,915 million for the ten months ended
December 31, 1999. The increase was primarily due to capital expenditures for
upgrades and rebuilds of the broadband network. In 2000, AT&T Broadband Group
spent $71 million for net acquisitions and dispositions and in 1999 received
$740 million from net acquisitions and dispositions.
Net cash provided by financing activities for the year ended December 31,
2000 was $3,770 million compared with $1,535 million for the ten months ended
December 31, 1999. The increase was primarily due to additional funding needed
for increased capital expenditures.
The continued expansion and upgrade of AT&T Broadband Group's network to
provide advanced services, including digital video, high-speed cable Internet
service and cable telephone service will continue to require substantial
capital. AT&T Broadband Group anticipates that it will spend approximately $3.9
billion in 2001 to expand and upgrade its network for the provision of advanced
services. AT&T has provided and it is anticipated that AT&T will continue to
provide funding to AT&T Broadband Group for capital expenditures.
At March 31, 2001, AT&T Broadband Group had current assets of $2,824
million and current liabilities of $15,656 million. Included in this amount is a
$2,627 million liability under a put option granted to Cox and Comcast on
Excite@Home common shares. Such obligation was satisfied with shares of AT&T
common stock subsequent to March 31, 2001. A significant portion of the current
liabilities, $9,277 million, relates to short-term debt, of which $1,919 million
was monetized investments and $6,707 million was due to AT&T. The monetized
investments can be delivered in full satisfaction of the underlying debt at the
time of maturity. AT&T Broadband Group expects that it will repay a portion of
the short-term debt payable in a variety of ways. Major elements of this
deleveraging plan include net cash proceeds of approximately $3.1 billion from
announced sales of cable systems which are expected to close in 2001 and
proceeds from the sale of other investments such as Time Warner Entertainment
and Cablevision. In February 2001, AT&T exercised its registration rights in
Time Warner Entertainment and formally requested Time Warner Entertainment to
begin the process of converting the limited partnership into a corporation with
registered equity securities. Since Time Warner Entertainment and Cablevision
are attributed to AT&T Broadband Group, any proceeds from sales would also be
attributed to AT&T Broadband Group. In addition, AT&T retains the flexibility to
allocate proceeds from the AT&T Broadband Group tracking stock offering among
the AT&T groups in any manner which it deems most appropriate.
As of March 31, 2001, total debt was $28.8 billion of which $8.6 billion
was monetized by investments, where such investments can be delivered in full
satisfaction of the underlying debt at the time of maturity.
EBITDA, excluding asset impairment, pre-tax losses from equity investments
and other income or expense, is the primary measure used by the chief operating
decision-makers to measure the ability to generate cash flow. EBITDA, excluding
asset impairment, pre-tax losses from equity investments and other income or
expense, may or may not be consistent with the calculation of EBITDA for other
companies and should not be viewed as an alternative to generally accepted
accounting principles, measures of performance or to cash flow from operating,
investing and financing activities as a measure of liquidity.
EBITDA, excluding asset impairment, pre-tax losses from equity investments
and other income or expense, for the first quarter of 2001, was $356 million,
compared with $312 million for the first quarter of 2000. This improvement was
due to the impact of the MediaOne acquisition. Higher expenses in high-speed
cable Internet and cable broadband telephone services and the asset impairment
and restructuring charge offset this increase.
EBITDA, excluding asset impairment, pre-tax losses from equity investments
and other income or expense, for the year ended December 31, 2000, was $1.7
billion, compared with $1.1 billion for
146
157
the ten months ended December 31, 1999. This improvement was due to the impact
of the MediaOne acquisition and an additional two months of operations of AT&T
Broadband, LLC in 2000. Higher expenses in high-speed cable Internet and cable
telephone services offset this increase.
AT&T Broadband Group has other commitments and contractual obligations that
will also impact its cash needs. AT&T Broadband Group's more significant
commitments and contractual obligations are as follows:
- Pursuant to an affiliation term sheet with a subsidiary of Liberty Media,
entities attributed to AT&T Broadband Group purchase programming and other
services from a subsidiary of Liberty Media, and are required to make
minimum payments for these programming and other services through 2022.
The commitment increases annually from $288 million in 2001 to $315
million in 2003, and will increase annually through 2022 with inflation.
In the event that programming costs of this Liberty Media subsidiary
increase by more than 10 percent of an amount specified in the agreement,
AT&T Broadband Group's commitment may be increased by an amount equal to
66 percent of the increase over the amount specified in the term sheet.
Other factors such as acquisitions and divestitures also affect the
commitment amounts. By letter dated May 29, 2001, AT&T Broadband Group
indicated that in its view the term sheet as a whole is unenforceable and
reserved its right to terminate the term sheet. AT&T Broadband Group
indicated that it would not pay the excess programming costs requested by
the Liberty Media Group subsidiary to date and disputed the enforceability
of the excess programming costs pass through provisions of the term sheet,
among other provisions. The letter further suggests that the parties meet
to discuss a new affiliation arrangement. The Liberty Media Group
subsidiary has stated publicly that it views AT&T Broadband Group's
position on the term sheet to be without merit.
- AT&T Broadband Group is party to an agreement under which it purchases
certain billing services from an unaffiliated third party. Unless
terminated by either party pursuant to the terms of the agreement, the
agreement expires on December 31, 2012. The agreement calls for monthly
payments. Such payments are subject to adjustments and conditions pursuant
to the terms of the underlying agreement. Amounts included in selling,
general and administrative expenses that were incurred in connection with
these arrangements were approximately $143 million for the year ended
December 31, 2000.
- AT&T Broadband Group, through MediaOne, had a 31.4% ownership interest in
Road Runner. The members of Road Runner have dissolved Road Runner during
2001 and agreed to convert the customers to the respective cable members'
systems. In order to accomplish this, AT&T Broadband Group acquired
approximately $66 million of network assets, net of related liabilities,
and will incur additional transition and dissolution costs estimated at
$75 million to $100 million.
- An entity attributed to AT&T Broadband Group 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 until 2001. This commitment
has been satisfied.
In light of the weaker financial outlook, Excite@Home announced it is
taking several immediate measures to conserve cash and raise additional funds.
These measures included adopting a revised operating plan with lower expenses
and the execution of a non-binding letter of agreement with AT&T under which
AT&T may provide Excite@Home with $75 million to $85 million in connection with
the restructuring of the backbone fiber agreement between the companies and with
a joint initiative to maintain and improve current network performance levels.
In addition, Excite@Home said it may negotiate additional debt and/or equity
financing from third parties, and continue efforts to focus its resources around
its broadband franchise through the potential sale or restructuring of its media
operations not directly supporting the broadband strategy.
147
158
On June 11, 2001, Excite@Home announced that it had completed the private
sale of $100 million of zero-percent five-year convertible secured notes. The
notes are convertible at the holders' option at any time into Excite@Home Series
A common stock at a 10% premium to the weighted average trading price of these
shares on June 8, 2001, or $4.3806 per share. The notes mature in July 2006 but
may be redeemed by the holders on each anniversary of the date of issuance of
the notes or by Excite@Home on the second, third and fourth anniversaries of the
date of issuance of the notes. Subject to certain conditions, redemption may be
made, at the option of Excite@Home, either in cash or by issuing shares of its
Series A common stock.
On June 19, 2001 Excite@Home announced that it had renegotiated its
optical-fiber backbone capacity contract with AT&T. Under terms of the
renegotiated agreement, AT&T will refund $85 million to Excite@Home for the
cancellation of the companies' original agreement and entry into a new
agreement. The companies said their new capacity agreement covers Excite@Home's
existing capacity and future upgrades, under which Excite@Home agreed to pay
$8.8 million per year to AT&T for the next 18 1/2-years. Separately, Excite@Home
agreed to pay AT&T $7 million in normal upgrade fees under the existing
contract. The new arrangement replaced in its entirety the non-binding letter of
agreement described above.
On June 27, 2001, AT&T and Excite@Home announced a joint Service Level
Agreement for cross-network performance for their high-speed, dedicated Internet
access services. This joint Service Level Agreement, which supports the
agreement between AT&T and Excite@Home announced February 14, 2001, will be
effective for all business customers who purchase the managed multi-homing
service.
AT&T'S BOARD OF DIRECTORS HAS THE POWER TO MAKE DETERMINATIONS THAT MAY
IMPACT THE FINANCIAL AND LIQUIDITY POSITION OF AT&T BROADBAND GROUP. 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 AT&T'S 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 AT&T'S CHARTER, POLICY
STATEMENTS, BY-LAWS AND INTER-COMPANY AGREEMENTS. AS A RESULT OF THIS DISCRETION
OF AT&T'S BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS TO ASSESS AT&T
BROADBAND GROUP'S LIQUIDITY AND CAPITAL RESOURCE NEEDS AND IN TURN THE FUTURE
PROSPECTS OF AT&T BROADBAND GROUP BASED ON PAST PERFORMANCE.
FINANCIAL CONDITION
Total assets were $115,985 million as of March 31, 2001, which represented
a decrease of $1,549 million compared to December 31, 2000. The decrease
primarily resulted from the disposition and exchange of cable systems during the
first quarter of 2001, the transfer of $628 million of investments to AT&T
offset by an increase in the value of investments, reduced goodwill due to the
Excite@Home impairment charge and amortization of franchise costs and goodwill.
Total liabilities were $63,611 million as of March 31, 2001, representing a
decrease of $1,475 million compared to December 31, 2000. This decrease was
primarily due to dispositions and exchanges of cable systems and the adoption of
SFAS No. 133.
Minority Interest decreased $626 million to $3,795 million at March 31,
2001. This decrease primarily reflects the losses of Excite@Home, which were
primarily driven by asset impairment charges.
Combined attributed net assets were $43,866 million as of March 31, 2001,
an increase of $549 million from December 31, 2000. The increase is due to
contributions from AT&T and an increase in accumulated other comprehensive
income due to an increase in the valuation of financial instruments and the
adoption of SFAS No. 133. This was offset by the net loss for the first quarter
of 2001.
148
159
Total assets were $117,534 million as of December 31, 2000, which increased
$59,306 million compared to December 31, 1999. The increase was primarily due to
the impact of the MediaOne acquisition, which resulted in increased goodwill,
franchise costs, other investments including Time Warner Entertainment and
Vodafone Group plc and the impact of the consolidation of Excite@Home. In
addition, the increase resulted from capital expenditures, net of depreciation.
These increases were partially offset by a decrease in the mark to market
valuation of certain investments.
Total liabilities were $65,086 million as of December 31, 2000, which
increased $28,774 million compared to December 31, 1999 primarily due to the
impact of the MediaOne acquisition, including the debt of MediaOne and the
deferred taxes related to the franchise costs, as well as the consolidation of
Excite@Home. In addition, total debt increased due to the monetization of
investments in Microsoft and Comcast. At December 31, 2000, $8.7 billion of
total debt was monetized investments, where such investments can be delivered in
full satisfaction of the underlying debt at the time of maturity.
Minority interest increased $2,094 million to $4,421 million at December
31, 2000, primarily reflecting the minority interest in Excite@Home resulting
from the consolidation of Excite@Home beginning September 1, 2000 and the
preferred stock outstanding of a MediaOne subsidiary.
Combined attributed net assets were $43,317 million as of December 31,
2000, an increase of $28,428 million compared to December 31, 1999. The increase
was primarily due to the net transfers from AT&T for the MediaOne acquisition
and net transfers from AT&T to fund capital expenditures.
RISK MANAGEMENT
AT&T Broadband Group is exposed to market risk from changes in interest
rates, as well as changes in equity prices associated with affiliated companies.
In addition, AT&T Broadband Group is exposed to market risk from fluctuations in
the prices of securities which have been monetized through the issuance of debt.
On a limited basis, certain derivative financial instruments, including interest
rate swaps and options are used to manage these risks. Financial instruments are
not used for trading or speculative purposes. All financial instruments are used
in accordance with AT&T board-approved policies.
Interest rate swaps are used to manage the impact of interest rate changes
on earnings and cash flows and to lower overall borrowing costs. Option
contracts are used to reduce exposure to the risk of fluctuations in the prices
of securities that have been monetized. Interest rate risk is monitored 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 $15 million and $1 million at December 31, 2000 and 1999,
respectively. In addition, certain debt is indexed to the market prices of
certain securities owned. Changes in the market price of these securities result
in changes in the fair value of this debt. Assuming a 10% downward change in the
market price of the 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 $563 million and $288 million,
respectively.
Equity hedges are used to manage exposure to changes in equity prices
associated with stock appreciation rights, or SARs, of affiliated companies.
Assuming a 10% decrease in equity prices of affiliated companies, the fair value
of equity hedges would have decreased by $29 million and $75 million at December
31, 2000 and 1999, respectively. Because these contracts are entered into for
hedging purposes, it's believed that the decrease in fair value would be largely
offset by gains on the underlying transaction.
149
160
In order to determine the changes in fair value of the various financial
instruments, certain modeling techniques, namely Black-Scholes, are used for the
SARs and equity collars. Rate sensitivity changes are directly applied to
interest rate swap transactions.
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 expected to incur. Future impacts would be based on actual
developments in global financial markets. There are no significant foreseen
changes in the strategies used to manage interest rate risk or equity price risk
in the near future.
RECENT ACCOUNTING PRONOUNCEMENTS
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 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 Broadband Group does not expect
the adoption of SFAS No. 140 will have a material impact on AT&T Broadband
Group's results of operations, financial position or cash flows.
SUBSEQUENT EVENTS
On April 9, 2001, a subsidiary of AT&T and Adelphia signed a definitive
agreement in which certain cable systems attributed to AT&T Broadband Group
serving approximately 128,000 customers in central Pennsylvania and Ohio will be
sold to Adelphia. AT&T Broadband Group will receive cash of approximately $245
million and Adelphia Class A common stock valued at approximately $73 million,
subject to adjustments. Pending certain closing conditions and regulatory
approvals, the transaction is expected to close in the third quarter of 2001.
On April 30, 2001, a subsidiary of AT&T sold to Comcast certain cable
systems attributed to AT&T Broadband Group serving approximately 590,000
customers in Delaware, New Mexico, Maryland, New Jersey, Pennsylvania and
Tennessee in exchange for 63.9 million shares of AT&T stock valued at $1,423
million.
Effective June 30, 2001, AT&T, together with certain subsidiaries
attributed to AT&T Broadband Group, transferred its 99.75% interest in an entity
owning the Baltimore, Maryland cable system serving approximately 115,000
customers to Comcast for approximately $518 million.
Effective June 30, 2001, a subsidiary of AT&T transferred to Charter cable
systems attributed to AT&T Broadband Group serving approximately 563,000
customers in Alabama, California, Illinois, Missouri and Nevada. AT&T Broadband
Group, through its attributed entities, received $1,525 million in cash, $222
million in cash restricted for future acquisitions of cable systems, and a cable
system in Florida serving 9,000 customers.
Effective June 29, 2001, a subsidiary of AT&T sold to MediaCom cable
systems attributed to AT&T Broadband Group serving approximately 94,000
customers in Missouri for approximately $309 million in cash. In addition, AT&T
and MediaCom have entered into definitive asset purchase agreements in which
certain cable systems attributed to AT&T Broadband Group serving approximately
745,000 customers in Georgia, Iowa and Illinois will be sold to MediaCom for
approximately $1,895 million in cash, subject to adjustments. Pending certain
closing conditions and regulatory approvals, the transaction is expected to
close in the third quarter of 2001.
150
161
On June 11, 2001, Excite@Home announced that it had completed the private
sale of $100 million of zero-percent five-year convertible secured notes. The
notes are convertible at the holders' option at any time into Excite@Home Series
A common stock at a 10% premium to the weighted average trading price of these
shares on June 8, 2001, or $4.3806 per share. The notes mature in July 2006 but
may be redeemed by the holders on each anniversary of the date of issuance of
the notes or by Excite@Home on the second, third and fourth anniversaries of the
date of issuance of the notes. Subject to certain conditions, redemption may be
made, at the option of Excite@Home, either in cash or by issuing shares of its
Series A common stock.
On June 19, 2001 Excite@Home announced that it had renegotiated its
optical-fiber backbone capacity contract with AT&T. Under terms of the
renegotiated agreement, AT&T will refund $85 million to Excite@Home for the
cancellation of the companies' original agreement and entry into a new
agreement. The companies said their new capacity agreement covers Excite@Home's
existing capacity and future upgrades, under which Excite@Home agreed to pay
$8.8 million per year to AT&T for the next 18 1/2-years. Separately, Excite@Home
agreed to pay AT&T $7 million in normal upgrade fees under the existing
contract. The new arrangement replaced in its entirety the non-binding letter of
agreement described above.
On June 27, 2001, AT&T and Excite@Home announced a joint Service Level
Agreement for cross-network performance for their high-speed, dedicated Internet
access services. This joint Service Level Agreement, which supports the
agreement between AT&T and Excite@Home announced February 14, 2001, will be
effective for all business customers who purchase the managed multi-homing
service.
In January 2001, AT&T announced that Cox and Comcast exercised their rights
to sell a combined total of approximately 60.4 million shares of Excite@Home
Series A common stock to AT&T as part of the March 2000 agreement to reorganize
Excite@Home's governance. In May 2001, AT&T completed negotiations to
restructure the transactions that resulted from Comcast and Cox exercising their
sale rights. Under these restructured transactions, Comcast and Cox retained
their respective Excite@Home shares, and AT&T issued approximately 80.3 million
shares of AT&T common stock to Comcast and 75 million shares of AT&T common
stock to Cox.
151
162
THE CONSUMER SERVICES CHARTER AMENDMENT PROPOSAL
We urge all shareholders to read the form of proposed charter amendment, a
copy of which we have attached as Appendix B to this proxy statement.
GENERAL
We are proposing the following amendment to our charter, which we refer to
as the Consumer Services charter amendment proposal:
Consumer Services Group tracking stock amendment -- an amendment to create
a new class of common stock called Consumer Services Group common stock,
par value $1.00 per share, which we intend to reflect the financial
performance and economic value of our Consumer Services business. We refer
to this stock as "AT&T Consumer Services Group tracking stock."
Approval of the Consumer Services charter amendment proposal requires a
majority of the voting power of all outstanding shares of AT&T common stock to
vote in its favor. OUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL. Any shares not voted, whether by abstention, broker non-vote or
otherwise, have the effect of a vote against the Consumer Services charter
amendment proposal.
CONSUMER SERVICES GROUP TRACKING STOCK AMENDMENT
The Consumer Services Group tracking stock amendment would, among other
things:
- Define "AT&T Consumer Services Group," the financial performance and
economic value of which we intend AT&T Consumer Services Group tracking
stock to reflect. AT&T Consumer Services Group will consist of the assets
and liabilities shown in the combined balance sheets of AT&T Consumer
Services Group and will include:
-- all Consumer Services long distance customers;
-- all Consumer Services support infrastructure, including ordering,
provisioning, billing and care; and
-- all Consumer Services marketing operations.
- Establish the terms of AT&T Consumer Services Group tracking stock,
consisting of authorized shares and entitling the holders
of the AT&T Consumer Services Group tracking stock to
of a vote per share, voting as one class with
all other classes and series of common stock and preferred stock of AT&T
with respect to all matters to be voted upon by AT&T shareholders, except
as otherwise required by the New York Business Corporation Law or by the
terms of any other class or series of AT&T's capital stock.
We include a more complete description of AT&T Consumer Services Group
tracking stock under "--Terms of the Consumer Services Group Tracking Stock
Amendment."
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS HAS APPROVED THE CONSUMER SERVICES CHARTER AMENDMENT
PROPOSAL AND RECOMMENDS THAT YOU VOTE FOR THE CONSUMER SERVICES CHARTER
AMENDMENT PROPOSAL.
TERMS OF THE CONSUMER SERVICES GROUP TRACKING STOCK AMENDMENT
GENERAL
If we adopt the Consumer Services Group tracking stock amendment, we will
amend our charter to authorize billion shares of AT&T Consumer
Services Group tracking stock. For a description of the currently authorized and
outstanding shares of AT&T capital stock, see "The Broadband Charter Amendment
Proposal -- Terms of the Broadband Group Tracking Stock Amendment -- General."
152
163
AT&T CONSUMER SERVICES GROUP
We intend AT&T Consumer Services Group tracking stock to reflect the
financial performance and economic value of AT&T Consumer Services Group. The
Consumer Services Group tracking stock amendment defines "AT&T Consumer Services
Group" generally as the interest of AT&T or any of its subsidiaries in all of
the businesses, assets and liabilities reflected in the unaudited combined
financial statements of AT&T Consumer Services Group, dated December 31, 2000,
as included in this proxy statement, including any successor to AT&T Consumer
Services Group by merger, consolidation or sale of all or substantially all of
its assets. The Consumer Services Group tracking stock amendment contains
adjustments to the definition of "AT&T Consumer Services Group" to reflect,
among other things, related assets and liabilities (including contingent
liabilities), net income and net losses arising after the date of these
financial statements, contributions and allocations of assets, liabilities and
businesses between the groups and acquisitions and dispositions.
AT&T Consumer Services Group is not a stand-alone entity, and AT&T's board
of directors will govern AT&T Consumer Services Group and could make operational
and financial decisions or implement policies that disproportionately affect the
businesses of AT&T Consumer Services Group. AT&T's board of directors may
transfer funds or reallocate assets, liabilities, revenue, expenses and cash
flows to or from AT&T Consumer Services Group without the consent of
shareholders. The Consumer Services Group tracking stock amendment provides that
the AT&T Consumer Services Group allocation fraction may be adjusted by AT&T's
board of directors as it deems appropriate to reflect contributions or
allocations from AT&T Consumer Services Group to AT&T's other groups, or vice
versa. All actions by AT&T's board of directors are subject to the board
members' fiduciary duties under New York law to all shareholders of AT&T as a
group and not just to holders of a particular class of tracking stock and to
AT&T's charter, policy statements, by-laws and inter-company agreements.
Any retained portion of the value of AT&T Consumer Services Group
represented by AT&T common stock will be included in AT&T Business Services
Group. See "-- AT&T Consumer Services Group Allocation Fraction."
AT&T CONSUMER SERVICES GROUP ALLOCATION FRACTION
Operation of the Allocation Fraction. While AT&T Consumer Services Group
tracking stock is intended to reflect the financial performance and economic
value of AT&T Consumer Services Group, the AT&T Consumer Services Group tracking
stock issued to the public may not represent all of the interest in the
financial performance and economic value of AT&T Consumer Services Group. The
Consumer Services Group tracking stock amendment defines the "AT&T Consumer
Services Group allocation fraction" to represent the interest in the financial
performance and economic value of AT&T Consumer Services Group reflected by AT&T
Consumer Services Group tracking stock distributed to the public.
To the extent that AT&T Consumer Services Group tracking stock issued to
the public does not represent all of the interest in the financial performance
and economic value of AT&T Consumer Services Group, the remaining interest in
the financial performance and economic value of AT&T Consumer Services Group
will be allocated to AT&T. If AT&T is allocated an interest in the financial
performance and economic value of AT&T Consumer Services Group, AT&T will have
the right to participate in any dividend, distribution or liquidation made to
holders of AT&T Consumer Services Group tracking stock. This right to
participate is AT&T's retained portion of value of AT&T Consumer Services Group.
If all of the interest in the financial performance and economic value of AT&T
Consumer Services Group is intended to be fully reflected by the AT&T Consumer
Services Group tracking stock held by the public, none will be allocated to AT&T
and this fraction will equal one.
Adjustments. Because the AT&T Consumer Services Group allocation fraction
determines the relative percentage interest in AT&T Consumer Services Group of
public holders of AT&T
153
164
Consumer Services Group tracking stock, on the one hand, and AT&T, on the other
hand, the AT&T Consumer Services Group allocation fraction may be adjusted from
time to time as our board of directors deems appropriate for a number of
reasons, including:
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities from other AT&T groups
to AT&T Consumer Services Group (or vice versa);
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities of other AT&T groups to,
or for the benefit of, employees of AT&T Consumer Services Group in
connection with employee benefit plans or arrangements of AT&T or any of
its subsidiaries (or vice versa);
- to reflect the number of shares of AT&T capital stock contributed to, or
for the benefit of, employees of AT&T Consumer Services Group in
connection with benefit plans or arrangements of AT&T or any of its
subsidiaries;
- to reflect repurchases by AT&T of shares of AT&T Consumer Services Group
tracking stock for the account of AT&T Broadband Group;
- to reflect issuances of AT&T Consumer Services Group tracking stock for
the account of AT&T Consumer Services Group;
- to reflect dividends or other distributions to holders of AT&T Consumer
Services Group tracking stock, to the extent no required payment is made
to AT&T;
- to reflect subdivisions and combinations of AT&T Consumer Services Group
tracking stock and stock dividends payable in shares of AT&T Consumer
Services Group tracking stock; and
- under other circumstances as our board of directors determines
appropriate to reflect the economic substance of any other event or
circumstance.
In addition, in determining the percentage interest of holders of AT&T
Consumer Services Group tracking stock in any particular dividend or other
distribution, we will reduce the economic interest of holders of AT&T Consumer
Services Group tracking stock to reflect dilution arising from shares of AT&T
Consumer Services Group tracking stock reserved for issuance upon conversion,
exercise or exchange of other securities that are entitled to participate in
this dividend or other distribution.
The Consumer Services Group tracking stock amendment provides that any
adjustment of this kind must be made in a manner that our board of directors
determines to be fair and equitable to holders of AT&T common stock and AT&T
Consumer Services Group tracking stock. In the event that any assets or other
property are acquired by other AT&T group(s) and allocated or contributed to
AT&T Consumer Services Group, the consideration paid by the other AT&T group(s)
to acquire these assets or other property will be presumed to be its "fair
market value" as of its acquisition. Any adjustment to the AT&T Consumer
Services Group allocation fraction made by our board of directors in good faith
in accordance with these principles will be at the sole discretion of our board
of directors and this good faith determination of our board of directors will be
final and binding on all shareholders.
VOTING RIGHTS
Currently, holders of AT&T common stock have one vote per share. Holders of
AT&T Broadband Group tracking stock would initially have of a vote per
share. Each outstanding share of AT&T Consumer Services Group tracking stock
initially will have of a vote. The voting rights of AT&T Consumer
Services Group tracking stock will be subject to adjustments to reflect stock
splits, reverse stock splits, stock dividends or certain stock distributions
with respect to AT&T common stock, AT&T Consumer Services Group tracking stock
or AT&T Broadband Group tracking stock.
154
165
Except as otherwise required by New York law or any special voting rights
of any class or series of AT&T preferred stock, AT&T Broadband Group tracking
stock or any other class of AT&T common shares, holders of shares of AT&T common
stock, AT&T Consumer Services Group tracking stock, each other class of AT&T
common shares, if any, that is entitled to vote, AT&T Broadband Group tracking
stock and holders of shares of each class or series of AT&T preferred stock, if
any, that is entitled to vote, will vote as one class with respect to all
matters to be voted on by shareholders of AT&T. No separate class vote of AT&T
Consumer Services Group tracking stock will be required, except as required by
the New York Business Corporation Law.
DIVIDENDS
General. AT&T's current quarterly dividend is $.0375 per share of AT&T
common stock. Following any issuance of AT&T Consumer Services Group tracking
stock, it is currently expected that one-third of the current dividend payable
on AT&T common stock will be allocated to AT&T common stock and that two-thirds
of the dividend will be allocated to AT&T Consumer Services Group tracking
stock. In that event, the aggregate dividend payable to holders of AT&T common
stock and holders of AT&T Consumer Services Group tracking stock would be the
same as that payable to holders of AT&T common stock before the issuance of the
AT&T Consumer Services Group tracking stock. The declaration of dividends by
AT&T and the amount thereof will, however, be in the discretion of our board of
directors and will depend upon each of our group's financial performance, the
dividend policies and capital structures of comparable companies, each group's
ongoing capital needs, and AT&T's results of operations, financial condition,
cash requirements and future prospects and other factors deemed relevant by our
board of directors. Payment of dividends also may be restricted by loan
agreements, indentures and other transactions that AT&T enters into from time to
time.
Provided that AT&T has sufficient assets to pay a dividend under applicable
law, after excluding the available dividend amount relating to AT&T Broadband
Group, the Consumer Services Group tracking stock amendment provides that
dividends on AT&T Consumer Services Group tracking stock are limited to an
available dividend amount that is designed to be equivalent to the amount that
would legally be available for dividends on that stock if AT&T Consumer Services
Group were a stand-alone entity. Dividends on AT&T common stock are limited to
the amount of legally available funds for all of AT&T less the sum of the
available dividend amount for AT&T Consumer Services Group tracking stock and
the available dividend amount for AT&T Broadband Group tracking stock.
Discrimination among classes of common shares. The Consumer Services Group
tracking stock amendment does not provide for mandatory dividends. Our board of
directors will have the sole authority and discretion to declare and pay
dividends (or to refrain from declaring or paying dividends), in equal or
unequal amounts, on AT&T common stock, AT&T Consumer Services Group tracking
stocks, AT&T Broadband Group tracking stock, any other class of AT&T common
shares or any two or more of these classes. Subject to not exceeding the
applicable available dividend amount, our board of directors has this power
regardless of the relative available dividend amounts, prior dividend amounts
declared, liquidation rights or any other factor.
SHARE DISTRIBUTIONS
Subject to the provisions of AT&T Broadband Group tracking stock, AT&T may
declare and pay a distribution consisting of shares of AT&T common stock, AT&T
Consumer Services Group tracking stock or any other securities of AT&T or any
other person to holders of AT&T common stock or AT&T Consumer Services Group
tracking stock only in accordance with the provisions described below. We refer
to this type of distribution as a "share distribution."
Distributions on AT&T common stock or AT&T Consumer Services Group tracking
stock. Subject to any limitations imposed by the terms of AT&T Broadband Group
tracking stock, AT&T may declare and pay a share distribution to holders of AT&T
common stock, AT&T Consumer Services Group tracking stock or any other class of
AT&T common shares consisting of any securities
155
166
of AT&T, any subsidiary of AT&T, or any other person. However, securities
attributable to a group may be distributed to holders of another group only for
consideration. In the case of shares of AT&T Consumer Services Group tracking
stock distributed to holders of AT&T common stock, the consideration may
consist, in whole or in part, of a decrease in the retained portion of the
value, if any, held by AT&T in AT&T Consumer Services Group.
Discrimination among classes of AT&T common shares. The Consumer Services
Group tracking stock amendment does not provide for mandatory share
distributions. Subject to the restrictions described above or that are in effect
regarding AT&T Broadband Group tracking stock, our board of directors will have
the sole authority and discretion to declare and pay share distributions (or to
refrain from declaring or paying share distributions), in equal or unequal
amounts, on AT&T common stock, AT&T Consumer Services Group tracking stock, AT&T
Broadband Group tracking stock, any other class of AT&T common shares or any two
or more of these classes. Subject to not exceeding the applicable available
dividend amounts, our board of directors has this power regardless of the
relative available dividend amounts, prior share distributions amounts declared,
liquidation rights or any other factor.
REDEMPTION
Redemption in exchange for shares of another tracking stock of another
company. At any time our board of directors may redeem all outstanding shares
of AT&T Consumer Services Group tracking stock for a new tracking stock of
another entity that owns all of the material assets and liabilities of AT&T
Consumer Services Group. In order to effect a redemption of this type, the new
tracking stock must have substantially the same terms as those governing AT&T
Consumer Services Group tracking stock as contained in AT&T's charter and
by-laws, including with regard to the definition of "AT&T Consumer Services
Group." In the event of a redemption of this type, the voting rights of the new
tracking stock will be set based on the ratio, over a fixed measurement period,
of the initial trading prices of this new tracking stock to trading prices of
the common stock of the new entity of which the new tracking stock is a part. In
connection with the spin-off of AT&T Communications Services, Inc., we expect to
redeem all outstanding shares of AT&T Consumer Services Group tracking stock for
shares of the new Consumer Services Group tracking stock.
Redemption in exchange for shares of AT&T common stock after years or if
tax-related events occur. At any time following either the occurrence of
tax-related events or the anniversary of the date that AT&T Consumer
Services Group tracking stock initially is issued, our board of directors, in
its sole discretion, may redeem all outstanding shares of AT&T Consumer Services
Group tracking stock for shares of AT&T common stock. In this event, each share
of AT&T Consumer Services Group tracking stock will be redeemed in exchange for
that number of shares of AT&T common stock, calculated to the nearest 1/10,000,
equal to % of the ratio of the average market price per share of AT&T
Consumer Services Group tracking stock to the average market price per share of
AT&T common stock.
In this case, the average market price per share of AT&T common stock or
AT&T Consumer Services Group tracking stock, as the case may be, means the
average of the daily market value per share for such AT&T common stock or AT&T
Consumer Services Group tracking stock for the 40 consecutive trading days
ending on the 15th trading day prior to the date notice of the redemption is
mailed to holders of AT&T Consumer Services Group tracking stock.
In order to redeem AT&T Consumer Services Group tracking stock on the basis
of a tax-related event, AT&T must obtain the opinion of counsel that, as a
result of an amendment to or change (or prospective change) in a law or an
interpretation of the law that takes place after AT&T Consumer Services Group
tracking stock is issued, there is more than an insubstantial risk that:
- any issuance of AT&T Consumer Services Group tracking stock would be
treated as a sale or other taxable disposition by AT&T or any of its
subsidiaries of any of the assets, operations or relevant subsidiaries
underlying AT&T Consumer Services Group tracking stock;
156
167
- the existence of AT&T Consumer Services Group tracking stock would
subject AT&T, its subsidiaries or its affiliates, or any of their
respective successors to the imposition of tax or other adverse tax
consequences; or
- either AT&T common stock or AT&T Consumer Services Group tracking stock
would not be treated solely as common stock of AT&T.
Redemption in exchange for stock of subsidiaries in connection with a
spin-off of our Consumer Services Group. The Consumer Services Group tracking
stock amendment also provides that AT&T may, at any time, redeem all outstanding
shares of AT&T Consumer Services Group tracking stock in exchange for a
specified number of outstanding shares of common stock of a subsidiary of AT&T
that satisfies certain requirements under the Code and that holds all of the
assets and liabilities of AT&T Consumer Services Group. We refer to a subsidiary
that satisfies these requirements as a "qualifying subsidiary." This type of
redemption only may be made on a pro rata basis, and must be tax free to the
holders of AT&T Consumer Services Group tracking stock, except with respect to
any cash that holders receive in lieu of fractional shares.
In this case, we would exchange each share of AT&T Consumer Services Group
tracking stock, on a pro rata basis, for an aggregate number of shares of common
stock of the qualifying subsidiary equal to the number of outstanding shares of
common stock of the qualifying subsidiary held by AT&T.
Redemption in connection with significant dispositions. In the event of a
sale, transfer, assignment or other disposition by AT&T in a transaction or
series of related transactions, of all or substantially all of the properties
and assets of AT&T Consumer Services Group, AT&T generally is required to take
one of the following actions, which action will be selected in the sole
discretion of our board of directors:
- AT&T may redeem each outstanding share of AT&T Consumer Services Group
tracking stock in exchange for a number of shares of AT&T common stock
(calculated to the nearest 1/10,000) equal to % of the ratio of the
average market price per share of AT&T Consumer Services Group tracking
stock to the average market price per share of AT&T common stock.
- Subject to limitations, AT&T may declare and pay a dividend in cash
and/or in securities (other than AT&T common stock) or other property to
holders of the outstanding shares of AT&T Consumer Services Group
tracking stock equally on a share-for-share basis in an aggregate amount
equal to the net proceeds of the disposition allocable to AT&T Consumer
Services Group tracking stock.
- Subject to limitations, if the disposition involves the disposition of
all, not merely substantially all, of the properties and assets of AT&T
Consumer Services Group, AT&T may redeem all outstanding shares of AT&T
Consumer Services Group tracking stock in exchange for cash and/or
securities or other property in an aggregate amount equal to the net
proceeds of the disposition allocable to AT&T Consumer Services Group
tracking stock.
- Subject to limitations, if the disposition involves substantially all,
but not all, of the properties and assets of AT&T Consumer Services
Group, AT&T may redeem a number of outstanding shares of AT&T Consumer
Services Group tracking stock in exchange for a redemption price equal to
the net proceeds of that disposition. The number of shares of AT&T
Consumer Services Group tracking stock to be redeemed would be equal to
the lesser of (1) a number determined by dividing the aggregate amount
allocated to the redemption of these shares by the average market value
of one share of AT&T Consumer Services Group tracking stock during the
10-trading-day period beginning on the 15th trading day following the
completion of that disposition and (2) the total number of outstanding
shares of AT&T Consumer Services Group tracking stock.
157
168
- Subject to limitations, AT&T may take a combination of the actions
described in the preceding bullets whereby AT&T may redeem some shares of
AT&T Consumer Services Group tracking stock in exchange for shares of
AT&T common stock at the exchange rate described in the first bullet
above, and use an amount equal to a portion of the net proceeds of the
disposition allocable to AT&T Consumer Services Group tracking stock to
either (1) declare and pay a dividend as described in the second bullet
above, or (2) redeem part or all of the remaining shares of AT&T Consumer
Services Group tracking stock as described in the third or fourth bullet
above.
For purposes of these provisions, "substantially all of the properties and
assets" of AT&T Consumer Services Group as of any date means a portion of these
properties and assets that represents at least 80% of the fair value of the
properties and assets attributed to AT&T Consumer Services Group as of that
date.
Exceptions. The provisions described under "-- Redemption in connection
with significant dispositions" will not apply, and AT&T will not be required to
redeem any securities or make any dividend or other distribution it would
otherwise be required to make, in some circumstances, including the following:
- if, in connection with the underlying transaction, our board of directors
redeems all outstanding shares of AT&T Consumer Services Group tracking
stock for a new tracking stock of another entity that owns all of the
material assets and liabilities of AT&T Broadband Group pursuant to
"-- Redemption in exchange for shares of another tracking stock of
another company";
- if the underlying disposition is conditioned upon the affirmative vote of
a majority of holders of AT&T Consumer Services Group tracking stock,
voting as a separate class;
- if the disposition is in connection with a liquidation of AT&T;
- if the disposition is to a person or group of which AT&T is the majority
owner and AT&T Consumer Services Group receives in exchange primarily
equity securities of that person or group as consideration;
- in connection with a spin-off or similar distribution of AT&T's entire
interest in AT&T Consumer Services Group to the holders of AT&T Consumer
Services Group tracking stock, including a distribution that is made in
connection with a mandatory redemption as described under "-- Redemption
in exchange for shares of AT&T common stock after years or if
tax-related events occur" or "-- Redemption in exchange for stock of
subsidiaries in connection with a spin-off of our Consumer Services
Group"; and
- in connection with a "related business transaction," which generally
means a disposition of all or substantially all of the assets attributed
to AT&T Consumer Services Group in which AT&T receives equity securities
of an entity that engages or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by AT&T
Consumer Services Group prior to that transaction.
GENERAL PROCEDURES
Conditions. With regard to any redemption at the discretion of our board
of directors, our board of directors may, in its discretion, condition such
redemption on the occurrence or failure to occur of any events set forth in the
applicable notice of redemption. Our board of directors will have the right to
waive any of these conditions in its sole discretion.
Public announcements; notices. The Consumer Services Group tracking stock
amendment provides that, in the case of specified dispositions or a redemption,
AT&T will publicly announce or otherwise provide specified information to
holders of AT&T Consumer Services Group tracking stock and, in the case of
redemption at the discretion of our board of directors, give the notice of
redemption no less than 15 days prior to the date of redemption.
158
169
Fractional shares. Our board of directors will not have to issue or
deliver any fractional shares to any holder of AT&T Consumer Services Group
tracking stock upon any redemption, dividend or other distribution under the
provisions described under "-- Redemption." Instead of issuing fractional
shares, AT&T will pay cash for the fractional share in an amount equal to the
fair market value of the fractional share, without interest.
No adjustments for dividends or other distributions. No adjustments for
dividends will be made upon the exchange of any shares of AT&T Consumer Services
Group tracking stock; except that, if a redemption date with respect to AT&T
Consumer Services Group tracking stock comes after the record date for the
payment of a dividend or other distribution to be paid on AT&T Consumer Services
Group tracking stock but before the payment or distribution, the registered
holders of those shares of AT&T Consumer Services Group tracking stock at the
close of business on that record date will be entitled to receive the dividend
or other distribution on the payment date, notwithstanding the redemption of
those shares of stock or AT&T's default in payment of the dividend or
distribution.
Payment of taxes. If any person exchanging a certificate representing
shares of AT&T Consumer Services Group tracking stock wants us to issue a
certificate in a different name than the registered name on the old certificate,
that person must pay any transfer or other taxes required by reason of the
issuance of the certificate in another name, or establish, to the satisfaction
of AT&T or its agent, that the tax has been paid or is not applicable.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of AT&T, whether
voluntary or involuntary, AT&T will first pay or provide for payment of debts
and other liabilities of AT&T, including the liquidation preferences of any
class or series of AT&T preferred stock. Thereafter, holders of the shares of
AT&T common stock, AT&T Broadband Group tracking stock, AT&T Consumer Services
Group tracking stock and any other class of AT&T common shares will share in the
funds of AT&T remaining for distribution to its common shareholders in
proportion to the aggregate market capitalization of the outstanding shares of
each class of stock, as applicable, to the aggregate market capitalization of
all the classes of AT&T common shares. AT&T will calculate the market
capitalizations based on the 20-trading-day period ending on the trading day
prior to the date of the public announcement of the liquidation, dissolution or
winding up of AT&T.
None of the following, by itself, will constitute a liquidation,
dissolution or winding up of AT&T:
- the consolidation or merger of AT&T with or into any other corporation or
corporations or the sale, transfer or lease of all or substantially all
of the assets of AT&T;
- any transaction or series of related transactions that results in all of
the assets and liabilities included in AT&T Consumer Services Group being
held by one or more AT&T Consumer Services Group subsidiaries and the
distribution of AT&T Consumer Services Group subsidiaries, and no other
material assets or liabilities, to the holders of the outstanding AT&T
Consumer Services Group tracking stock; or
- any transaction or series of related transactions that results in all of
the assets and liabilities included in AT&T Broadband Group being held by
one or more AT&T Broadband Group subsidiaries and the distribution of
these AT&T Broadband Group subsidiaries, and no other material assets or
liabilities, to the holders of outstanding AT&T Broadband Group tracking
stock (but this will be subject to the provisions relating to the
redemption of shares of AT&T Broadband Group tracking stock described in
our charter).
DETERMINATIONS BY OUR BOARD OF DIRECTORS
Any determinations made by our board of directors under any provision
described in this section "-- Terms of the Consumer Services Group Tracking
Stock Amendment" will be final and binding on all shareholders of AT&T, except
as may otherwise be required by law. AT&T will prepare a
159
170
statement of any determination by our board of directors respecting the fair
market value of any properties, assets or securities, and will file the
statement with our Corporate Secretary.
NO PREEMPTIVE RIGHTS
Holders of AT&T common stock, AT&T Consumer Services Group tracking stock
or AT&T Broadband Group tracking stock do not have any preemptive rights to
subscribe for any additional shares of capital stock or other obligations
convertible into or exercisable for shares of capital stock that may hereafter
be issued by AT&T.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
Subject to the discussion under this section, neither the adoption of the
Consumer Services Group tracking stock amendment nor the distribution of AT&T
Consumer Services Group tracking stock to holders of AT&T common stock will be
taxable to AT&T or holders of AT&T common stock.
Holders of AT&T common stock who receive AT&T Consumer Services tracking
stock in a pro rata distribution will allocate their tax basis in AT&T common
stock between AT&T common stock and AT&T Consumer Services Group tracking stock
in accordance with the relative fair market values of such stocks on the date on
which AT&T Consumer Services Group tracking stock is distributed. A holder's
holding period for AT&T Consumer Services Group tracking stock will include such
holder's holding period of AT&T common stock with respect to which AT&T Consumer
Services Group tracking stock is distributed.
The conclusions in the two preceding paragraphs are not free from doubt.
These conclusions assume that AT&T Consumer Services Group tracking stock is
treated as a class of common stock of AT&T. The filing of consolidated income
tax returns by AT&T together with AT&T Consumer Services Group also assumes that
AT&T Consumer Services Group tracking stock is treated as a class of common
stock of AT&T. While AT&T believes that, under current law, AT&T Consumer
Services Group tracking stock will be treated as common stock of AT&T, there are
no authorities directly on point nor will AT&T receive an advance ruling from
the Internal Revenue Service. There is a risk that the Internal Revenue Service
could assert that AT&T Consumer Services Group tracking stock is property other
than common stock of AT&T. AT&T believes it is unlikely the Internal Revenue
Service would prevail on that view, but no assurance can be given that the views
expressed in the two preceding paragraphs, if contested, would be sustained by a
court.
The foregoing discussion under this section "-- Material U.S. Federal
Income Tax Consequences" is only a general summary of the material federal
income tax consequences of the issuance and distribution of AT&T Consumer
Services Group tracking stock. It is not a complete analysis of all potential
tax effects relevant to the issuance or distribution of AT&T Consumer Services
Group tracking stock. The discussion does not address consequences that may be
relevant to a particular AT&T common stock holder subject to special treatment
under U.S. federal income tax laws (such as dealers in securities, banks,
insurance companies, tax-exempt organizations, non-U.S. persons, holders that
acquired their AT&T common stock pursuant to the exercise of options or
otherwise as compensation and holders that do not hold such shares as capital
assets, nor any consequences arising under any state, local or foreign
jurisdiction). The discussion is based on current provisions of the Code,
Treasury Regulations promulgated thereunder, judicial opinions, published
positions of the Internal Revenue Service, and all other applicable authorities,
all of which are subject to change (possibly with retroactive effect).
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL,
STATE AND LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE ISSUANCE AND DISTRIBUTION
OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK TO YOU.
160
171
DESCRIPTION OF AT&T CONSUMER SERVICES GROUP
The description below of AT&T Consumer Services Group reflects our current
plans regarding the operation of AT&T Consumer Services Group. These plans may
change from time to time. For financial information about AT&T Consumer Services
Group, see "Summary -- Consolidating Condensed Financial Information" and the
combined financial statements of AT&T Consumer Services Group, which are
included in Appendix D to this document.
OVERVIEW
AT&T Consumer Services Group is the leading provider of domestic and
international long distance service to residential consumers in the United
States with approximately 60 million customers. AT&T Consumer Services Group
provides interstate and intrastate long distance communications services
throughout the continental United States, and provides, or joins in providing
with other carriers, communications services to and from Alaska, Hawaii, Puerto
Rico and the Virgin Islands and international communications services to and
from virtually all nations and territories around the world.
AT&T Consumer Services Group had:
- approximately $18.9 billion, $21.8 billion and $22.8 billion in combined
revenue for the years ended December 31, 2000, 1999 and 1998,
respectively;
- approximately $6.7 billion, $7.3 billion and $6.1 billion in combined
operating income for the years ended December 31, 2000, 1999 and 1998,
respectively;
- approximately $4.1 billion, $4.6 billion and $3.8 billion in combined net
income for the years ended December 31, 2000, 1999 and 1998, respectively;
and
- approximately $7.0 billion, $7.7 billion and $6.3 billion in combined
EBITDA for the years ended December 31, 2000, 1999 and 1998, respectively.
AT&T Consumer Services Group provides a broad range of communications
services to consumers individually and in combination with other services,
including:
- inbound and outbound domestic and international long distance through the
traditional "one plus" dialing of the desired call destination;
- transaction-based long distance services, such as operator-assisted
calling services and prepaid phone cards;
- local calling through unbundled network elements platform resale and
service offers; and
- dial-up Internet service through AT&T WorldNet Service.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group tracking stock is designed to reflect the
separate economic performance of AT&T Consumer Services Group, which includes
the assets and liabilities shown in the combined balance sheets of AT&T Consumer
Services Group. If we acquire interests in other businesses, we intend to
attribute those assets and any related liabilities to AT&T Consumer Services
Group or to our other groups in accordance with the AT&T Groups policy
statement. All net income and cash flows generated by the assets attributed to
AT&T Consumer Services Group will be attributed to AT&T Consumer Services Group
and all net proceeds from any disposition of these assets also will be
attributed to AT&T Consumer Services Group.
161
172
Except as described elsewhere in this document, we attribute all of AT&T's
current Consumer Services operations to AT&T Consumer Services Group, including:
- all Consumer Services wireline long distance customers and AT&T WorldNet
Service consumer customers;
- all Consumer Services support infrastructure, including ordering,
provisioning, billing and care; and
- all Consumer Services marketing operations.
AGREEMENTS AMONG AT&T CONSUMER SERVICES GROUP AND AT&T'S OTHER GROUPS
AT&T will seek to manage AT&T Consumer Services Group and AT&T's other
groups in a manner designed to maximize the value of all groups. Following the
issuance of AT&T Consumer Services Group tracking stock, AT&T Consumer Services
Group will be able to:
- use the powerful AT&T brand name in accordance with a brand agreement,
- use AT&T's Communications Services, Inc.'s extensive network assets
including its DSL assets,
- use AT&T's intellectual property and technology in accordance with an
intellectual property agreement, and
- benefit from AT&T's favorable purchasing contracts with major suppliers.
The relationship among the groups will be governed by the AT&T Groups
policy statement, including the process of fair dealing described under
"Relationship among AT&T Groups -- The AT&T Groups Policy Statement -- General
Policy." Although our board of directors has no present intention to do so, it
may modify, suspend or rescind the policies set forth in the AT&T Groups policy
statement, adopt additional policies or make exceptions to existing polices, at
any time, without the approval of our shareholders, subject to limitations we
describe under "Relationship among AT&T Groups -- The AT&T Groups Policy
Statement" and our board of directors' fiduciary duties.
INDUSTRY OVERVIEW
The communications services industry continues to change competitively and
technologically both domestically and internationally, providing significant
opportunities and risks to the participants in these markets. In the United
States, the Telecommunications Act has had a significant impact on AT&T Consumer
Services Group's business by establishing a statutory framework for opening the
local service markets to competition and by allowing RBOCs to provide in-region
long distance services bundled with their existing local franchise. In addition,
prices for long distance minutes and other basic communications services have
declined as a result of competitive pressures, excess capacity as a result of
substantial network build-out, the introduction of more efficient networks and
advanced technologies, product substitution, and deregulation. Competition in
the provision of basic communications services to consumers is based more on
price and less on other differentiating factors that appeal to the larger
business market customers, such as the range of services offered, bundling of
products, customer service, and communications quality, reliability and
availability.
The consumer long distance market is characterized by rapid deregulation
and intense competition among long distance providers, and, more recently,
incumbent local exchange carriers. Under the Telecommunications Act, an RBOC may
offer long distance services in a state within its region if the FCC finds,
first, that the RBOC's service territory within the state has been sufficiently
opened to local competition, and second, that allowing the RBOC to provide these
services is in the public interest. To date, the FCC has granted this access to
Verizon in New York and Massachusetts and to SBC in Texas, Kansas and Oklahoma,
and Verizon has applications pending with the FCC for
162
173
authorization to offer long distance services in other states within their
respective regions. The incumbent local exchange carriers presently have
numerous advantages as a result of their historic monopoly control over local
exchanges. Additionally, in the next few years, AT&T Consumer Services Group
expects that Verizon and SBC will seek to enter virtually all states in their
regions and that other RBOCs will be given permission to offer long distance
services within their regions. AT&T Consumer Services Group has challenged, and
will continue to challenge, any of these regulatory applications that do not
meet the criteria envisioned by the Telecommunications Act or the related rules
relating to local competition issued by the FCC. To date, these challenges have
focused on the pricing of unbundled network elements and on the adequacy of the
RBOCs' operations support systems.
Other important factors affecting the markets in which AT&T Consumer
Services Group competes include the development of new technologies and the
resulting increased availability of domestic and international transmission
capacity, and increasing competition from entities that own their own access
facilities. These developments, among others, impact the degree to which AT&T
Consumer Services Group's communications services offerings are competitive with
the services of other companies.
STRATEGY
AT&T Consumer Services Group's goal is to maintain its leadership position
in the long distance market while utilizing its current consumer marketing
service capabilities to pursue new product or service opportunities.
MAINTAIN MARKET LEADERSHIP
Focus marketing and retention efforts to maximize its share of high-value
long distance consumers. Historically, the long distance communications
industry focused on market share, and marketing efforts were targeted to reach
mass audiences in order to maintain share. AT&T Consumer Services Group focuses
its marketing and retention efforts on high-value long distance customers, with
targeted offers and solicitations. AT&T Consumer Services Group narrowed new
customer solicitations in direct mail and outbound telemarketing only to
high-value customers with aggressively priced by the minute and block of time
calling plans. Further, high-value customers in AT&T Consumer Services Group's
embedded base have the opportunity to participate in a portfolio of
loyalty-centric plans. For example, high-value customers can earn rewards, such
as frequent flier miles, free cable programming or contributions to an
educational fund. AT&T Consumer Services Group believes that these high-value
customers are more likely to use offers of the AT&T Consumer Services Group,
such as local toll, calling card, international plans, AT&T WorldNet Service
and, eventually, DSL, and are more desirable because their revenues are capable
of offsetting the cost of obtaining, provisioning and maintaining each customer.
Provisioning costs include the channel-related cost to acquire customers,
billing and customer care support. These expenses are relatively independent of
customer spending levels. Going forward, AT&T Consumer Services Group will seek
to create efficiencies and to generate new revenues through serving these
high-value customers. These efforts include cross-marketing telecommunications
and non-telecommunications services, new loyalty-based rewards, increased use of
leading-edge voice recognition technology and new billing and communication
options via the AT&T Consumer Services Group web site.
Continue to hold a significant operating margin through operating cost
reductions. AT&T Consumer Services Group has significantly reduced costs and
expenses over the past three years. These efforts were focused on access reform
and reductions in the cost associated with terminating international calls,
billing costs and headcount. As a result, AT&T Consumer Services Group has
reduced selling, general and administrative expenses by $1 billion and reduced
overall costs and expenses by $5 billion over the past three years.
163
174
Continue to benefit from AT&T Consumer Services Group's relationship with
and use of the resources of AT&T, including the use of the AT&T brand and
network, cross-marketing opportunities and bundled offers. AT&T Consumer
Services Group believes that its relationship with AT&T provides it with
significant competitive advantages, including:
- use of the powerful AT&T brand name substantially in the same manner as
it has been used by AT&T Consumer Services Group up to now consistent
with guidelines to avoid confusion with certain competing services;
- an opportunity to use AT&T Consumer Services Group sales channels through
cross-marketing arrangements and, where appropriate, through bundled
offers, (as may be agreed by AT&T, AT&T Broadband Group, AT&T Consumer
Services Group and AT&T Wireless Group), of AT&T Consumer Services Group
with services of other AT&T groups;
- use of specified AT&T intellectual property and technology;
- use of the AT&T network on contractual terms; and
- potential benefits from certain AT&T purchasing contracts with suppliers
where permitted by existing contracts or where arrangements can be made
with these suppliers.
AT&T brand. The AT&T brand is one of the best known and respected brand
names in the United States. AT&T Consumer Services Group believes that the AT&T
brand positively impacts consumer awareness of, and confidence in, AT&T Consumer
Services Group's products and services. In addition, as competition in the
consumer services communications industry intensifies, AT&T Consumer Services
Group believes that the power of a strong national brand plays an increasingly
important role in consumers' purchasing decisions.
Marketing. AT&T Consumer Services Group believes that its relationship
with AT&T's other groups has and can continue to provide marketing benefits.
AT&T Consumer Services Group will be able, in certain circumstances, to use its
sales channels to market the services of AT&T Broadband Group or AT&T Wireless
Group in exchange for a marketing fee. In addition, AT&T Business Services
Group, AT&T Broadband Group and AT&T Consumer Services Group will have the
opportunity to cooperatively bundle offers of services designed for targeted
markets.
Technology. AT&T Consumer Services Group will continue to have the
advantage of being able to use specified AT&T proprietary intellectual property
and technology as well as specified intellectual property that AT&T has the
right to use through licensing or other arrangements.
Purchasing power. AT&T, as a large communications carrier has substantial
leverage in the industry with major equipment and other suppliers. AT&T's
ability to purchase large amounts of goods has enabled it to obtain favorable
pricing and other terms with those suppliers. Through contractual and other
arrangements, AT&T Consumer Services Group may be able to participate in certain
of AT&T's supplier contracts.
PURSUE NEW GROWTH OPPORTUNITIES
Provide communication services to customers by bundling AT&T long distance
with local resale, Internet services and DSL opportunities. AT&T Consumer
Services Group believes there may be opportunities to provide communication
services to customers by bundling AT&T long distance with local services (using
incumbent local exchange carrier network combinations), AT&T WorldNet Services
and high-speed Internet access services on a DSL platform.
AT&T Consumer Services Group currently provides local service in eight
markets via network element combinations and resale. The largest numbers of its
customers are in New York and Texas. AT&T Consumer Services Group entered both
of these markets in late 1999 providing customers with bundled local and long
distance services on a single bill.
164
175
Integrated high-speed data and voice services. AT&T Consumer Services
Group has been laying the groundwork for moving, in selected markets, from
traditional narrowband telecommunications to broadband telecommunications. AT&T
Consumer Services Group plans to focus on creating offers consistent with the
evolution of communications services using the DSL platform currently being
integrated into the AT&T network.
DSL is provided over traditional telephone "twisted pair" copper lines
leased from local exchange carriers. Using electronics attached to a typical
telephone line both at the customer premises (through a modem) and at a point in
the AT&T network, DSL service provides customers with a continuous connection to
the Internet, featuring AT&T WorldNet Service. The typical residential offering
features connection speeds up to 12 times faster than current 56k modem
technology.
The DSL platform broadens AT&T Consumer Services Group's franchise from
long distance and local voice services, to telephone and communication, whether
voice, Internet, data, e-mail or messaging.
AT&T Consumer Services Group expects to introduce high-speed data and voice
service into the consumer marketplace in late 2001 on a trial basis and plans to
offer a choice of DSL platform services based on customer needs, including
connection speed and appropriate price levels. Provided the trial is successful,
both from technical and economic perspectives, AT&T Consumer Services Group
plans to expand its services strategically in selected markets throughout 2002
and beyond.
As part of the March 28, 2000 term sheets among AT&T, Excite@Home, Comcast
and Cox relating to the reorganization of the governance and distribution
arrangements of Excite@Home, AT&T agreed that, until June 4, 2006, AT&T will not
provide wireline (e.g., DSL or hybrid fiber/coaxial) high-speed Internet access
services to residential customers in the territories served by the U.S. cable
systems of Cox or Comcast, as the case may be. AT&T's obligation will terminate
automatically as to either Comcast or Cox, if Comcast or Cox, as the case may
be, does not continue to use Excite@Home as its provider of
platform/connectivity services used in its residential high-speed ISP services
over cable in substantially all of its U.S. cable systems. This agreement could
be terminated by either Cox or Comcast as early as June 2002. AT&T further
agreed to use all reasonable efforts to cause its subsidiaries and affiliates to
comply with the provisions, terms and obligations of that agreement that are
applicable to them. If this agreement is interpreted to apply to the activities
of AT&T Consumer Services Group, it could limit AT&T Consumer Services Group's
ability to provide some wireline high-speed Internet services in the geographic
areas where Comcast and Cox have cable systems and could have an adverse effect
on AT&T Consumer Services Group's ability to expand and grow its wireline
high-speed Internet business generally or to achieve economies of scale in that
business.
LEVERAGE AT&T WORLDNET SERVICE'S NARROWBAND OPPORTUNITIES WITH LONG
DISTANCE AND MIGRATE TO BROADBAND OPPORTUNITIES WITH DSL IN KEY MARKETS
AT&T WorldNet Service currently has narrowband subscribers that use IP
communication services within the AT&T WorldNet Service offer, such as e-mail,
calendar and alerting. AT&T Consumer Services Group plans to extend IP
communication services to its base of long distance customers via bridge offers
and bundles. AT&T Consumer Services Group's objective is to increase usage by
the long distance customer base of AT&T Consumer Services Group's IP-based
services and then migrate those customers to more advanced IP-based services,
such as Voice Mail. Once the IP-based offers are readily available, AT&T
Consumer Services Group plans to market its DSL offers to both the narrowband
customer base and the long distance customer base, including those customers who
use IP communication services.
165
176
SERVICES AND PRODUCTS
LONG DISTANCE
AT&T Consumer Services Group provides interstate and intrastate long
distance telecommunications services throughout the continental United States
and provides, or joins in providing with other carriers, telecommunications
services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and
international telecommunications services to and from virtually all nations and
territories around the world. Consumers can use AT&T Consumer Services' domestic
and international long distance services through traditional "one plus" dialing
of the desired call destination, through dial-up access or through use of AT&T
calling cards.
AT&T purchases transport services from Concert for the delivery and receipt
of AT&T's international service. In accordance with the terms of the operating
agreements Concert has with foreign carriers throughout the world, the cost of
transporting AT&T's traffic is sensitive to changes in international settlement
rates and international traffic routing patterns.
In the continental United States, AT&T Consumer Services Group provides
long distance telecommunications services over AT&T Business Services Group's
backbone network. International telecommunications services are provided by
submarine cable systems in which Concert holds investment positions, satellites
and facilities of other domestic and foreign carriers.
Calling Card. AT&T Consumer Services Group provides a fast, easy to use,
convenient way for placing all "away from home" calls. The AT&T calling card can
be used to place domestic and international calls in the U.S. and Canada by
accessing 1-800CALLATT, 10-10-288 or 0+ the number dialed. Features include
purchase limits, geographic restrictions, native language preference, voice
messaging and sequence dialing. Customers can place calls over the AT&T network
by using any of the following options: AT&T calling cards, local exchange
carrier cards and commercial credit cards.
TRANSACTION-BASED SERVICES
AT&T Consumer Services Group offers a variety of transaction-based services
that are designed to provide customers with an alternative to access long
distance services as well as to provide assistance in completing long distance
communications.
Operator Services. Traditional Collect, Billed to Third Number, Person to
Person and Coin Sent Paid are the family of operator-assisted calling services.
Directory Assistance. Directory Assistance is provided to customers both
domestically and internationally, with an option to complete the call for a
nominal extra charge.
AT&T Direct Services. AT&T Consumer Services Group provides customers with
the ability to reach the AT&T network from outside the U.S. By dialing the
access code associated with the country of origin, customers can receive all the
benefits of our calling card and operator-assisted calling services.
True Message. AT&T True Messages is a voice store and forward service.
Using this service, callers can record a message in their own voice and have it
delivered to a telephone number that they called or they can access AT&T True
Messages directly and send a message.
Accessible Communication Service. AT&T Consumer Services Group provides
Telecommunications Relay Service for the deaf and hearing-impaired customers to
help them communicate with anyone in the world on the phone.
1-800CALLATT (Collect). 1-800CALLATT for collect calls continues to be
AT&T Consumer Services Group's lead discounted collect calling offer in the
operator services portfolio. 1-800CALLATT is a domestic, automated, flat-rate
collect calling service. The service is targeted at
166
177
price conscious consumers and advertised nationally through multiple media
channels. Optional collect messaging capabilities exist as well.
AT&T Prepaid Card. AT&T prepaid cards provide local, long distance and
international calls charged to an AT&T prepaid card account maintained on AT&T's
prepaid platform. The AT&T prepaid card service is available 24 hours a day, 7
days a week. The service is accessed using an 800 number printed on the card and
entering the card PIN number, also printed on the card. This PIN number is
unique to each card issued. An announcement confirms the time remaining on the
card. The user then dials the telephone number they wish to reach, and the call
is completed. The user's call will be interrupted with an announcement when the
balance is about to be depleted. This announcement will occur one minute prior
to depletion, based on the terminating location of the call. Call times are
billed in one-minute increments. Recorded prompts and announcements are
available in both English and Spanish. AT&T prepaid cards are available in both
minute- and dollar-based denominations. Minute-based denominations are based on
U.S. domestic calling rates. Currently, AT&T prepaid cards are available in over
60,000 retail locations of various types including grocery, drug, convenience,
mass merchandise, wholesale clubs, electronics/office and military/government.
10-10-345. 10-10-345 is a non-AT&T-branded dial-around service that allows
customers an alternative way to make a long distance call. The service is
targeted at price-savvy, budget-conscious dial-around and other common carriers'
users completing domestic and/or international calls from home. A customer can
use the service by dialing 10-10-345 + 1 + area code + number for domestic calls
and 10-10-345 + 011 + country code + number for international calls. When a
customer dials 10-10-345, they pay a competitive per-minute rate, 24 hours a
day, 7 days a week with a minimal surcharge per call. Charges made for calls
using 10-10-345 are billed through the local telephone company.
LOCAL AND LONG DISTANCE
In August 1999, AT&T Consumer Services Group began offering residential
customers in New York and Texas local service via unbundled network elements
platform bundled together with intraLATA and long distance services resulting in
a package of complete phone service from one company on one bill. The unbundled
network elements platform generally refers to a combination of incumbent local
exchange carrier network elements that AT&T leases in order to supply the
underlying local connectivity for AT&T's integrated local and long distance
offering. The local services are priced roughly at parity with those offered by
the incumbent RBOC and are available with AT&T Consumer Services Group's most
popular local toll and long distance rates.
AT&T Consumer Services Group provides local service to customers by using
the incumbent local exchange carrier's local phone service using combinations of
incumbent local exchange carrier unbundled network elements, as well as
incumbent local exchange carrier unbundled loops (which are, in general, the
lines from a customer's home to the switching facility -- these can be combined
with switching, transport and other network elements) to support differentiated
voice and data services. However, this fact is transparent to the customer. AT&T
Consumer Services Group handles all aspects of the phone service for the
customer, including ordering, customer service, billing and inside wiring. AT&T
Consumer Services Group also offers many of the same local calling features as
the incumbent local exchange carriers, such as Call Waiting and Caller ID.
AT&T WORLDNET SERVICE
AT&T offers dial-up Internet access to consumers through its award-winning
AT&T WorldNet Service, a leading provider of Internet access service in the
United States.
In 1999, AT&T WorldNet Service began offering members an AT&T-branded
search engine as part of the redesign of the AT&T's website, and enhanced
several other subscriber features, including increasing the disk storage space
for personal web pages to 10 megabytes for each e-mail id (six
167
178
e-mail ids per account, 60 megabytes of disk storage) and providing a template
that helps members build personal web pages quickly and easily. AT&T WorldNet
Service also offers the AT&T Any Who Internet directory, as well as AT&T-branded
advanced communications services, such as instant messaging. The AT&T WorldNet
web site also serves as a stand-alone Internet portal and, together with the
AT&T Any Who Internet directory and the advanced communications services, are
also available to, and are used by, nonsubscribers to AT&T WorldNet Service.
In 2000, AT&T WorldNet Service began offering members Internet service that
includes a persistently present toolbar that displays advertising to subscribers
even when they are on web sites other than those operated by AT&T. This new
service was marketed directly by AT&T WorldNet Service and indirectly through
several major distribution arrangements.
J.D. Power and Associates ranked AT&T WorldNet Service #1 in "Customer
Satisfaction" among the largest national ISPs in their 2000 National ISP
Customer Satisfaction Study based on 4,173 responses. AT&T WorldNet Service
earned its top position of overall customer satisfaction based on seven factors,
including speed/availability, cost/billing/image, suitability of
services/content, customer care/technical support, e-mail services,
navigation/access to other portals and ease of use. In November, PC World gave
AT&T WorldNet Service their "Best Buy" award, noting AT&T WorldNet Service's
outstanding dial-up speed, high connection success rate and extras, such as
multiple e-mail boxes, and superior support.
AT&T WorldNet Service generates revenues principally through subscription
and usage fees, as well as from electronic commerce and advertising. AT&T
WorldNet Service offers a variety of pricing plan options, including bundled
options with AT&T long distance and AT&T wireless offers. Generally, customers
are charged a flat rate for a certain number of hours with charges for each
additional hour of usage. AT&T WorldNet Service also offers a plan without a
usage restriction.
AT&T WorldNet Service's marketing programs are designed to attract and
retain high-value customers. AT&T Consumer Services Group seeks to build brand
recognition and customer loyalty and to make it easy for consumers to try, and
stay with, AT&T WorldNet Service. In addition to direct marketing through brand
name mass advertising, direct mail and magazine insert promotions and bundling
offers, AT&T WorldNet Service maintains a large indirect channel marketing
effort. Through this indirect channel, AT&T WorldNet Service software is bundled
in new computers produced by major manufacturers and is included in millions of
software titles published by independent software vendors. AT&T WorldNet Service
also has a co-branded ISP offer that enables businesses to offer customers their
own branded, full-featured Internet access in affiliation with AT&T.
LONG DISTANCE MARKETING
AT&T Consumer Services Group develops customer awareness through its
marketing and promotion efforts. AT&T Consumer Services Group uses the AT&T
brand name and provides superior customer care. AT&T Consumer Services Group
reinforces its brand position in the market through direct mail, outbound
telemarketing, the mass media, bill inserts and network announcements in eleven
different languages.
AT&T Consumer Services Group offers customers a family of calling plans.
These calling plans are simple and are consistently offered on the web and over
the telephone. Further, these plans offer customers a broad choice of price
points to meet their needs. The newest plan, AT&T 7/7, introduced in February
2001, offers customers combined Internet access and phone service for a $7
monthly fee. The service provides customers unlimited access to the Internet and
a round-the-clock rate of 7 cents a minute for state-to-state long distance
calls from home.
AT&T Consumer Services Group also offers various reward and partnership
programs for high-value customers. For example, customers enrolled in AT&T
rewards receive redemption options every
168
179
six months based on their long distance spending. AT&T Consumer Services Group
partnerships with companies such as Continental Airlines, Inc., Starwood Hotels
& Resorts Worldwide Inc. and Cablevision, among others, provide customers with
options ranging from airline miles to hotel nights to premium cable channel
upgrades. Through one of the most recent partnerships, announced in January 2001
with Upromise Inc., the customer can receive a contribution equal to 4% of the
cost of residential long distance calls made into an Upromise savings account to
be used for education.
AT&T Consumer Services Group provides its customers with excellent customer
care and support. J.D. Power and Associates' 2000 Customer Satisfaction Survey
ranked AT&T Consumer Services Group highest in residential long distance
satisfaction for customers with monthly charges in excess of $50, and strongest
in the areas of customer service, corporate image, communications and operators.
There are 26 service centers, handling 9 million calls per month, in eleven
different languages.
SALES
AT&T Consumer Services Group markets its products and services to a broad
spectrum of customers seeking to communicate locally or globally. AT&T Consumer
Services Group predominantly markets under the AT&T brand with the exception of
its 10-10-345 service. AT&T Consumer Services Group extensively utilizes direct
marketing channels, including the Internet, direct mail, mass media, probe and
transfer, and outbound telemarketing to communicate with its existing customer
base as well as to market to prospective customers regarding the breadth of
services available to them. AT&T Consumer Services Group's marketing efforts
focus on offering its services to its customers based on their unique needs.
These efforts involve the selling of stand-alone services, such as long
distance, local and AT&T WorldNet Service, as well as bundled service offerings
including long distance/AT&T WorldNet Service, long distance/local, and long
distance/calling card.
AT&T Consumer Services Group relies on an integrated sales and service team
to solicit and handle customer contact opportunities. The customer care centers
consist of a network of internal and external vendors. The breadth of support
provided by the centers ranges from universal sales and service (multiple
services and functions) to specialized services based on functional area (local,
long distance, etc.) or customer needs (domestic, global (including languages
other than English), regional, etc.). AT&T Consumer Services Group generally
pays its vendors based on a contracted hourly rate; however, it is aggressively
moving to a pay-for-performance scale methodology.
AT&T Consumer Services Group also has begun to implement various
initiatives aimed at improving the overall quality of its sales channels as well
as lowering its costs of adding new subscribers. Recent initiatives targeted at
reducing costs and enhancing channel efficiencies have included the expansion of
AT&T Consumer Services Group's on-line capacity and capabilities (including
billing, sales and service) and the increased use of interactive voice response
technology.
RATES AND BILLING
AT&T Consumer Services Group charges long distance customers based on
applicable tariffs filed with the FCC and individual states. Effective as of
August 1, 2001, the rates for state-to-state and international calls will be set
by contract rather than by FCC tariffs as a result of the FCC de-tariffing
order. Customers select different services and various rate plans, which
determine the price per minute that customers pay on their long distance calls.
Rates typically vary based on a variety of factors, particularly the volume of
usage and the day and time that calls are made.
AT&T Consumer Services Group long distance charges may include fees per
minute for transporting a call, per call or per minute surcharges, monthly
recurring charges, minimums and price structures that offer a fixed number of
minutes each month for a specific price. The fees per minute for transporting a
call may vary by time of day or length of call and by whether the call is
domestic or international. Within the United States, in-state rates may vary
from interstate rates. These rate
169
180
structures apply to customer dialed calls, calling card calls, directory
assistance calls, operator-assisted calls and certain miscellaneous services.
Customers also may be assessed a percentage of revenue, or a fixed monthly fee,
to satisfy AT&T Consumer Services Group's obligations to recover U.S. federal-
and state-mandated assessments and access surcharges.
ELECTRONIC CONSUMER RELATIONSHIPS
The evolution of the Internet has created a number of new business
opportunities for AT&T Consumer Services Group. AT&T Consumer Services Group is
pursuing an e-enabling strategy designed to create a more convenient,
interactive relationship with the consumer, while streamlining its existing
processes and reducing the costs of providing services.
Through the use of digital technologies, AT&T Consumer Services Group is
attempting to build a cost-effective, loyalty-enhancing relationship with its
most profitable customers. AT&T Consumer Services Group's efforts center on
making it easier for customers to do business with AT&T, and are seeking to bond
customers to the unique level of convenience and value-added services only the
Internet can provide. Monthly, an average of two million visitors come to AT&T
Consumer Services Group's web site to learn about new offers, order services and
find information that will help them stay more connected while traveling, or to
make service inquiries. To further the relationship with specific customer
segments, AT&T Consumer Services Group provides access to information in 5
languages other than English. These transactions increase consumer satisfaction
by providing a new level of control and, in many cases, reduce time consuming
contacts with AT&T Consumer Services Group's care and sales channels.
AT&T Consumer Services Group's e-consumer strategy embodies the entire
business process from advertising and marketing through sales, ordering,
billing, fulfillment, customer service, and after-sales support. AT&T Consumer
Services Group is supplying a full range of product information, bill management
utilities and customer care capabilities designed to attract and retain its most
valuable customers. AT&T Consumer Services Group's on-line billing
infrastructure enables customers to view, sort, adjust, investigate and resolve
questions regarding their billing statements. In 2000, AT&T Consumer Services
Group increased its e-billed customer base by 66%, more than double the industry
growth rate. AT&T Consumer Services Group aims to grow on-line sign-ups of
customers.
COMPETITION
Competition in communications services is based on price and pricing plans,
types of services offered, customer service, access to customer premises and
communications quality, reliability and availability. AT&T Consumer Services
Group's principal competitors include Worldcom, Inc., Sprint Corporation and
RBOCs. AT&T also experiences significant competition in long distance from dial-
around resellers.
Incumbent local exchange carriers own the only universal telephone
connection to the home, have very substantial capital and other resources,
long-standing customer relationships and extensive existing facilities and
network rights-of-way, and are AT&T Consumer Services Group's primary
competitors in the local services market. In addition, it is anticipated that a
number of long distance telecommunication, wireless and cable service providers
and others will enter the local services market in competition with AT&T
Consumer Services Group. Some of these potential competitors have substantial
financial and other resources. AT&T Consumer Services Group also will compete in
the local services market with a number of competitive local exchange carriers,
a few of which have existing local networks and significant financial resources.
See "Risk Factors Relating to AT&T Consumer Services Group and AT&T Business
Services Group -- AT&T Consumer Services Group and AT&T Business Services Group
face substantial competition that may materially adversely impact both market
share and margins."
170
181
AT&T Consumer Services Group currently faces significant competition and
expects that the level of competition will continue to increase. As competitive,
regulatory and technological changes occur, including those occasioned by the
Telecommunications Act described under "-- Legislative and Regulatory
Developments -- Telecommunications Act of 1996," AT&T Consumer Services Group
anticipates that new and different competitors will enter and expand their
position in the communications services markets. These will include RBOC
competitors in existing states and new states plus entrants from other segments
of the communications and information services industry or global competitors
seeking to expand their market opportunities. Many of these new competitors are
likely to enter with a strong market presence, well-recognized names and
pre-existing direct customer relationships.
The Telecommunications Act already has impacted the competitive
environment. Anticipating changes in the industry, non-RBOC local exchange
carriers, which are not required to implement the Telecommunications Act's
competitive checklist prior to offering long distance in their home markets,
have begun integrating their local service offerings with long distance
offerings in advance of AT&T Consumer Services Group's offering combined local
and long distance service in these areas, adversely affecting AT&T Consumer
Services Group's revenues and earnings in these service regions.
In addition, the Telecommunications Act permits RBOCs to provide interLATA
interexchange services after demonstrating to the FCC that providing these
services is in the public interest and satisfying the conditions for developing
local competition established by the Telecommunications Act. See "-- Legislative
and Regulatory Developments -- Telecommunications Act of 1996." RBOCs have
petitioned the FCC for permission to provide interLATA interexchange services in
one or more states within their home markets. In December 1999, Verizon became
the first RBOC to obtain approval to provide long distance in a state within its
home territory, in New York, and was granted authorization to provide long
distance service in Massachusetts in April 2001. In April 2000, SBC was granted
authorization to provide long distance service in Texas, and in January 2001,
obtained authorization to provide long distance service in Kansas and Oklahoma.
In April 2001, Verizon filed an application with the FCC for authority to
provide long distance telecommunications service in Connecticut and in June
filed an application seeking such authority in Pennsylvania. The FCC is due to
rule on those requests by July 16 and September 19, 2001, respectively.
To the extent that RBOCs obtain in-region interLATA authority before the
Telecommunications Act's checklist of conditions have been fully or
satisfactorily implemented and adequate facilities-based local exchange
competition exists, or before there is an ability to resell at fair and
competitive rates there is a substantial risk that AT&T Consumer Services Group
and other interexchange service providers will be at a disadvantage to RBOCs in
providing both local service and combined service packages. Because it is widely
anticipated that substantial numbers of long distance customers will seek to
purchase local, interexchange and other services from a single carrier as part
of a combined or full service package, any competitive disadvantage, inability
to profitably provide local service at competitive rates or delays or
limitations in providing local service or combined service packages could
materially adversely affect AT&T Consumer Services Group's future revenue and
earnings. In any event, the simultaneous entrance of numerous new competitors
for interexchange and combined service packages is likely to materially
adversely affect AT&T Consumer Services Group's future long distance revenue and
could affect materially adversely future earnings.
In addition to the matters referred to above, various other factors,
including technological hurdles, market acceptance, start-up and ongoing costs
associated with the provision of new services and local conditions and
obstacles, could materially adversely affect the timing and success of AT&T
Consumer Services Group's entrance into the local exchange services market and
AT&T Consumer Services Group's ability to offer combined service packages that
include local service.
171
182
EMPLOYEES
At December 31, 2000, AT&T Consumer Services Group employed approximately
17,400 individuals in its operations, virtually all of whom are located in the
United States. About 79% of the domestically located employees of AT&T Consumer
Services Group are represented by unions. Of those represented by unions, about
94% are represented by the Communications Workers of America and about 5% are
represented by the International Brotherhood of Electrical Workers, or IBEW,
both of which are affiliated with the AFL-CIO. In addition, there is a very
small number of domestic employees represented by other unions. Labor agreements
with most of these unions extend through May 2002.
LEGAL PROCEEDINGS
In the normal course of business, AT&T Consumer Services Group is subject
to proceedings, lawsuits and other claims, including proceedings under
government laws and regulations related to environmental and other matters. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Consumer Services Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at December 31, 2000. While these matters could affect
operating results of any one quarter when resolved in future periods, it is
management's opinion that after final disposition, any monetary liability or
financial impact to AT&T Consumer Services Group beyond that provided for at
year-end would not be material to AT&T Consumer Services Group's annual
consolidated financial position or results of operations.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
TELECOMMUNICATIONS ACT OF 1996
In February 1996, the Telecommunications Act became law. The
Telecommunications Act, among other things, was designed to foster local
exchange competition by establishing a regulatory framework to govern new
competitive entry in local and long distance telecommunications services. The
Telecommunications Act permits an RBOC to provide interexchange services
originating in any state in its region after it demonstrates to the FCC that
this provision is in the public interest and it satisfies the conditions for
developing local competition established by the Telecommunications Act.
In August 1996, the FCC adopted rules and regulations, including pricing
rules, to implement the local competition provisions of the Telecommunications
Act, including with respect to the terms and conditions of interconnection with
local exchange carrier networks and the standards governing the purchase of
unbundled network elements and wholesale services from local exchange carriers.
These rules and regulations rely on PUCs, to develop the specific rates and
procedures applicable to particular states within the framework prescribed by
the FCC.
On July 18, 1997, the Eighth Circuit Court of Appeals issued a decision
holding that the FCC lacks authority to establish pricing rules to implement the
sections of the local competition provisions of the Telecommunications Act
applicable to interconnection with local exchange carrier networks and the
purchase of unbundled network elements and wholesale services from local
exchange carriers. Accordingly, the Eighth Circuit Court of Appeals vacated the
rules that the FCC had adopted in August 1996, and that had been stayed by the
Court since September 1996. On October 14, 1997, the Eighth Circuit Court of
Appeals vacated an FCC rule that prohibited incumbent local exchange carriers
from separating network elements that are combined in an incumbent local
exchange carrier's network, except at the request of the competitor purchasing
the elements. This decision increased the difficulty and cost of providing
competitive local service through the use of unbundled network elements
purchased from incumbent local exchange carriers.
On January 25, 1999, the Supreme Court issued a decision reversing the
Eighth Circuit Court of Appeal's holding that the FCC lacks jurisdiction to
establish pricing rules applicable to
172
183
interconnection and the purchase of unbundled network elements, and the Eighth
Circuit Court of Appeal's decision to vacate the FCC's rule prohibiting
incumbent local exchange carriers from separating network elements that are
combined in an incumbent local exchange carrier's network. The effect of the
Supreme Court's decision was to reinstate the FCC's rules governing pricing and
the separation of unbundled network elements. The pricing issues were then
remanded to the Eighth Circuit Court of Appeals to consider the incumbent local
exchange carriers' claims that, although the FCC has jurisdiction to adopt
pricing rules, the rules it adopted are not consistent with the applicable
provisions of the Telecommunications Act. The Supreme Court also vacated the
FCC's rule identifying and defining the unbundled network elements that
incumbent local exchange carriers are required to make available to new
entrants, and directed the FCC to reexamine this issue in light of the standards
mandated by the Telecommunications Act.
In response to the Supreme Court's decision, the FCC completed its
reexamination of, and released an order identifying and defining, the unbundled
network elements that incumbent local exchange carriers are required to make
available to new entrants. That order re-adopted the original list of elements,
with certain exceptions. An association of incumbent local exchange carriers has
appealed the FCC's order to the District of Columbia Circuit Court of Appeals,
and has asked this Court to hear the appeal on an expedited basis. A number of
parties, including AT&T and other incumbent local exchange carriers, have
petitioned the FCC to reconsider and/or clarify its order. The FCC has moved to
hold the appeal in abeyance pending its disposition of the reconsideration
petitions.
In July 2000, the Eighth Circuit Court of Appeals issued a decision
addressing the incumbent local exchange carriers' claims that the FCC's pricing
rules are not consistent with the applicable provisions of the
Telecommunications Act. It rejected the incumbent local exchange carriers'
claims that the prices for network elements must be based on their "historical
costs" rather than, as the FCC had held, their "forward-looking" costs. It also
held, however, that the FCC rule providing that forward-looking costs should be
calculated on the basis of the cost of the most efficient alternatives was
contrary to the Telecommunications Act. The Eighth Circuit Court of Appeals then
stayed this ruling to enable the parties to seek review before the Supreme
Court, so the FCC's rules remain in effect until the Supreme Court decides the
case. The Supreme Court agreed to review the Eighth Circuit Court of Appeals'
decision, and a decision by the Supreme Court is anticipated by the end of June
2002. The Supreme Court will be considering the claims of AT&T, the FCC and
others that the Eighth Circuit Court of Appeals erred by invalidating the FCC
rule, and the claim by the incumbent local exchange carriers that the Eighth
Circuit Court of Appeals erred by not requiring prices based on their historical
cost.
The Eighth Circuit Court of Appeals also invalidated the FCC's rules
setting the pricing methodology for resold local services. That aspect of its
decision was not stayed and will not be reviewed by the Supreme Court.
In view of the proceedings pending before the Supreme Court, the District
of Columbia Circuit Court of Appeals, the FCC and state PUCs, there can be no
assurance that the prices and other conditions established in each state will
provide for effective local service entry and competition or provide AT&T
Consumer Services Group with new market opportunities. The effect of the most
recent decision by the Eighth Circuit Court of Appeals is to increase the risks,
costs, difficulties, and uncertainty of entering local markets through using the
incumbent local exchange carriers' facilities and services.
In December 1999, Bell Atlantic Corporation (now Verizon) obtained approval
to offer long distance telecommunications service in the State of New York,
which was the first time an RBOC had received this approval under the
Telecommunications Act. Bell Atlantic began offering combined local and long
distance service in January 2000. In July 2000, SBC became the second RBOC to
receive this approval, this time for the State of Texas, and began providing
combined local and long
173
184
distance service in July 2000. In January 2001, the FCC approved SBC's request
for this authority for the States of Oklahoma and Kansas, and, pursuant to the
terms of that authority, SBC is free to begin providing combined local and long
distance services in those states in March 2001. Verizon received the same
authority in April 2001 for the Commonwealth of Massachusetts. In April 2001,
Verizon filed an application with the FCC for authority to provide long distance
telecommunications service in Connecticut, and in June Verizon filed an
application seeking such authority in Pennsylvania. The FCC is due to rule on
those requests by July 16 and September 19, 2001, respectively.
REGULATION OF RATES
AT&T Consumer Services Group is subject to the jurisdiction of the FCC with
respect to interstate and international rates, lines and services, and other
matters. From July 1989 to October 1995, the FCC regulated AT&T Consumer
Services Group under a system known as "price caps" whereby AT&T Consumer
Services Group's prices, rather than its earnings, were limited. On October 12,
1995, recognizing a decade of enormous change in the long distance market and
finding that AT&T lacked market power in the interstate long distance market,
the FCC reclassified AT&T as a "non-dominant" carrier for its domestic
interstate services. As a result, AT&T Consumer Services Group became subject to
the same regulations as its long distance competitors for these services. Thus,
AT&T Consumer Services Group was no longer subject to price cap regulation for
these services, was able to file tariffs that are presumed lawful on one day's
notice, and was free of other regulations and reporting requirements that apply
only to dominant carriers.
On October 31, 1996, the FCC issued an order that would have prohibited
non-dominant carriers, including AT&T Consumer Services Group, from filing
tariffs for their domestic interstate services. Non-dominant carriers, including
AT&T Consumer Services Group, have begun implementation of mechanisms other than
tariffs to establish the terms and conditions that apply to domestic, interstate
telecommunications services, and, by August 1, 2001, will have to use these
mechanisms for virtually all domestic, interstate telecommunications services.
Further, on March 16, 2001, the FCC adopted an order applying detariffing
requirements to international services.
In May 1997, the FCC adopted orders relating to price caps, access reform
and universal service that substantially revised the level and structure of
access charges that AT&T Consumer Services Group, as a long distance carrier,
pays to incumbent local exchange carriers. Under the price cap order, local
exchange carriers were required to reduce their price cap indices by 6.5%
annually, less an adjustment for inflation, which has resulted in significant
reductions in access charges that long distance companies pay to local exchange
carriers. The access reform order permitted increased flat-rate assessments to
multiline business customers and to residential customers other than for the
primary telephone line. AT&T Consumer Services Group has agreed to pass through
to consumers any savings to AT&T Consumer Services Group as a result of these
access charge reforms. Consequently, AT&T Consumer Services Group's results
after June 1997 reflect lower revenue per minute of usage and lower access and
other interconnection costs per minute of usage.
In May 2000, the FCC adopted the CALLS order for the price cap local
exchange carriers, which made additional significant access and price cap
changes. The CALLS order reduced by $3.2 billion during 2000 the interstate
access charges that AT&T Consumer Services Group and other long distance
carriers paid to these local exchange carriers for access to their networks, and
established target access rates for the long distance carriers companies, which,
over the next two years, will result in further reductions, albeit of a much
smaller magnitude. Once the target rates are reached, the annual price
reductions required by the price cap order no longer apply. In addition, the
CALLS order removed implicit subsidies from access charges and converted them
into an explicit, portable subsidy administered as part of the universal service
program described below. Also, under the CALLS order, the caps on certain
line-based costs that do not vary with usage have been increased so that these
costs increasingly are recovered from end user customers. These restructurings
174
185
allowed the reduction in access charges assessed on long distance carriers on a
usage basis. As part of the CALLS order, AT&T Consumer Services Group agreed to
pass through to customers access charge reductions over the five-year life of
the CALLS order and made certain other commitments regarding the rate structure
of certain residential long distance offerings.
Under the August 1999 local exchange carrier pricing flexibility order,
which was affirmed by the District of Columbia Circuit Court of Appeals in
February 2001, the FCC established certain triggers that enable the price cap
local exchange carriers to obtain pricing flexibility for their interstate
access services, including Phase II relief that permits them to remove these
services from price cap regulation. Although these triggers indicate a
competitive presence sufficient to constrain monopoly pricing by the local
exchange carriers, purportedly, they may allow for premature deregulation that
could force access rates upwards.
Finally, in the universal service order, the FCC adopted a new mechanism
for funding universal service, which includes programs that defray the costs of
telephone service in high-cost areas, for low-income consumers, and for schools,
libraries and rural health care providers. Specifically, the FCC expanded the
set of carriers that must contribute to support universal service from solely
long distance carriers to all carriers, including local exchange carriers, that
provide interstate telecommunications services. Similarly, the set of carriers
eligible for the universal service support has been expanded from only local
exchange carriers to any eligible carrier providing local service to a customer,
including AT&T Consumer Services Group as a new entrant in local markets. The
universal service order also adopted measures to provide discounts on
telecommunications services, Internet access and inside wiring for eligible
schools and libraries and on telecommunications services only for rural health
care providers.
AT&T Consumer Services Group remains subject to the statutory requirements
of Title II of the Communications Act of 1934, as amended. AT&T Consumer
Services Group must offer service under rates, terms and conditions that are
just, reasonable and not unreasonably discriminatory. It also is subject to the
FCC's complaint process, and it must give notice to the FCC and affected
customers prior to discontinuance, reduction or impairment of service.
Commitments made by AT&T Consumer Services Group to address concerns that had
been raised about declaring AT&T Consumer Services Group to be non-dominant have
been satisfied or otherwise expired.
In addition to the matters described above with respect to the
Telecommunications Act, state public service or utilities commissions or similar
authorities having regulatory power over intrastate rates, lines and services
and other matters regulate AT&T Consumer Services Group's local and intrastate
communications services. The system of regulation used in many states is
rate-of-return regulation. In recent years, many states have adopted different
systems of regulation, such as complete removal of rate-of-return regulation,
pricing flexibility rules, price caps and incentive regulation.
175
186
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AT&T Consumer Services Group is an integrated business of AT&T and is not a
stand-alone entity. The combined financial statements included herein reflect
the results of the proposed AT&T Consumer Services Group tracking stock.
Separate financial statements are not required to be filed for tracking stocks.
However, AT&T Consumer Services Group has provided the financial statements as
an exhibit to this document to provide additional disclosures to investors to
allow them to assess the financial performance of AT&T Consumer Services Group.
Since the tracking stocks are governed by a common board of directors, AT&T's
board of directors could make operational and financial decisions or implement
policies that affect disproportionately the businesses of any group. For
example, AT&T's 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 AT&T's
charter, policy statements, by-laws and inter-company agreements.
AT&T's board of directors may change or supplement the policies set forth
in the tracking stock policy statements and AT&T's by-laws at the sole
discretion of AT&T's board of directors, subject to the provisions of any
inter-group agreement but without approval of AT&T's shareholders. In addition,
the fact that AT&T has separate classes of common stock could give rise to
occasions when the interests of the holders of the various classes of stock
diverge, conflict or appear to diverge or conflict. AT&T's board of directors
would make any change or addition to the policies set forth in the tracking
stock policy statements or AT&T's by-laws, and would respond to any actual or
apparent divergence of interest among AT&T's groups, in a manner consistent with
its fiduciary duties to AT&T and all of AT&T's shareholders after giving
consideration to the potentially divergent interests and all other relevant
interests of the holders of the separate classes of AT&T shares.
YOU SHOULD CONSIDER THAT AS A RESULT OF THE FLEXIBILITY PROVIDED TO AT&T'S
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.
AT&T Consumer Services Group is the leading provider of domestic and
international long distance service to residential consumers in the United
States with approximately 60 million customers. AT&T Consumer Services Group
provides interstate and intrastate long distance communications services
throughout the continental United States and provides, or joins in providing
with other carriers, communications services to and from Alaska, Hawaii, Puerto
Rico and the Virgin Islands and international communications services to and
from virtually all nations and territories around the world.
AT&T Consumer Services Group provides a broad range of communications
services to consumers individually and in combination with other services,
including: inbound and outbound domestic and international long distance through
the traditional "one plus" dialing of the desired call destination;
transaction-based long distance services such as calling cards and prepaid phone
cards; local and local toll calling through unbundled network elements platform
resale service offers; and dial-up Internet service and telephone over the
Internet through AT&T WorldNet Service.
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.
Under this plan AT&T will create a new class of stock intended
176
187
to track the financial performance and economic value of AT&T Consumer Services
Group. If the Consumer Services charter amendment proposal is approved, AT&T
expects to distribute some or all of the tracking stock to AT&T shareholders
later this year.
Debt has been allocated to AT&T Consumer Services Group based on our future
view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T. This allocation took into account the following
factors: prospective financing requirements, working capital and capital
expenditure requirements and comparable company profiles. Increases in
historical debt levels are based, in general, on historical cash flows generated
by AT&T Consumer Services Group in relation to total AT&T. Such cash outflows
include acquisitions, dividend payments and capital expenditures partially
offset by cash flow from operations. For purposes of this allocation, certain
"corporate" activities were deemed to be partially funded by this entity by
contributing proceeds to the parent for these activities. These activities
included the repurchase of common shares by AT&T and cash payments associated
with the TCI merger and the MediaOne acquisition. Since AT&T Consumer Services
Group will be a tracking stock of AT&T Communications Services, Inc. following
the spin-off, the intercompany debt allocated to them will be payable to AT&T
Communications Services, Inc. The interest expense on the allocated debt was
calculated based on a rate intended to be equivalent to the rate AT&T Consumer
Services Group would have received if it were a stand-alone entity. Due to the
expected positive operating cash flow of AT&T Consumer Services Group, the level
of debt of AT&T Consumer Services Group in the future is expected to be
significantly lower than the level at March 31, 2001.
COMBINED RESULTS OF OPERATIONS
AT&T Consumer Services Group is an integrated business of AT&T and not a
stand-alone entity. The combined financial statements included herein reflect
the results of the proposed AT&T Consumer Services Group tracking stock.
Separate financial statements are not required to be filed for tracking stocks.
However, AT&T Consumer Services Group has provided the financial statements as
an exhibit to this document to provide additional disclosures to investors to
allow them to assess the financial performance of AT&T Consumer Services Group.
Presenting separate financial statements for AT&T Consumer Services Group does
not indicate that AT&T has changed title to any assets or responsibility for any
liabilities, and does not purport to affect the rights of any of AT&T's
creditors. Holders of AT&T Consumer Services Group tracking stock do not have
claims against the assets of AT&T Consumer Services Group. Instead, AT&T
Consumer Services Group shareholders own a separate class of AT&T common stock
that is intended to reflect the financial performance and economic value of
AT&T's consumer services businesses.
The comparison of 2001 results with 2000 was impacted by events that
occurred during these two periods. For example, effective July 1, 2000, the FCC
eliminated Primary Interexchange Carrier Charges, or per-line charges, that AT&T
Consumer Services Group pays for residential and single-line businesses. The
elimination of these per-line charges resulted in lower access expense as well
as lower revenue, since AT&T Consumer Services Group has historically billed its
customers for these charges.
The comparison of 2000 results with 1999 was impacted by events that
occurred during these two years. For example, on January 5, 2000, AT&T launched
Concert, its global joint venture with BT. AT&T contributed all of its
international cross-border network facilities and the economic value of
approximately 270 AT&T Business Services Group multinational customers
specifically targeted for direct sales by Concert and substantially all
international traffic of AT&T Consumer Services Group. As a result, AT&T
Consumer Services Group's 2000 results do not include the revenue and expenses
associated with international traffic contributed to Concert.
In addition, comparison of 2000 results with 1999 was impacted by the
elimination of Primary Interexchange Carrier Charges.
177
188
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2000
Revenue
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Revenue..................................................... $4,007 $5,037
Total revenue decreased 20.5%, or $1,030 million, in the first quarter of
2001, compared with the prior year period. This decrease was primarily due to a
decline in traditional voice services such as Domestic Dial 1, reflecting the
ongoing competitive nature of the consumer long distance industry, which has
resulted in pricing pressures. In addition, approximately $253 million of the
decline was related to the elimination of per-line charges in 2000. Also
negatively impacting revenue was product substitution and market migration away
from direct-dial wireline and higher priced calling card services to lower
priced prepaid card services.
The calling volume declined at a low-teen percentage rate in the first
quarter of 2001 primarily due to both the competition in the long distance
industry and product substitution which we expect will continue to negatively
impact AT&T Consumer Services Group's revenue.
Operating Expenses
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Access and other connection................................. $1,081 $1,463
Access and other connection expenses decreased 26.1%, or $382 million, in
the first quarter of 2001, compared with the first quarter of 2000. Included
within access and other connection expenses are costs that we pay to connect
calls on the facilities of other service providers. The year-over-year decline
was primarily due to the elimination of per line charges of $191 million, access
rate reductions of $128 million and volume-related reductions of $94 million.
Partially offsetting this decline was an increase in Local Connectivity expense
of $67 million primarily due to the expansion of local service in New York and
Texas.
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Selling, general and administrative......................... $ 986 $1,169
Selling, general and administrative (SG&A) expenses decreased 15.7%, or
$183 million, in the first quarter of 2001, compared with the first quarter of
2000. The decline is primarily due to lower costs associated with billing,
customer care, marketing and advertising expenses as a result of lower volumes,
outsourcing efficiencies and cost control initiatives.
178
189
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Costs of services and products.............................. $598 $621
Costs of services and products decreased 3.7%, or $23 million, in the first
quarter of 2001, compared with the first quarter of 2000. Approximately $39
million of the decrease was due to lower costs for utilizing AT&T's network as a
result of lower volumes. Partially offsetting this decline was an increase in
the provision for uncollectible receivables of $13 million.
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Depreciation and amortization............................... $47 $56
Depreciation and amortization expenses decreased 16.1%, or $9 million,
compared with the corresponding prior-year period. Capital expenditures for the
three months ended March 31, 2001 and 2000 were $25 million and $23 million,
respectively.
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Net restructuring and other charges......................... $-- $97
During the first quarter of 2000, AT&T Consumer Services Group recorded $97
million of net restructuring and other charges. The charge for restructuring and
other charges was primarily due to headcount reductions, including the
consolidation of customer care and call centers.
Also included in restructuring and other charges was an asset impairment
charge of $18 million related to the write-down of unrecoverable assets in
certain businesses in which the carrying value is no longer supported by
estimated future cash flows.
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Operating income............................................ $1,295 $1,631
Operating income decreased 20.6%, or $336 million, in the first quarter of
2001, compared with the same period in 2000. The decrease was primarily due to
revenue declines partially offset by reductions in operating expenses. Operating
income margin (operating income as a percent of revenue) was 32.3% in 2001 and
32.4% in 2000.
179
190
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Interest expense............................................ $60 $9
Interest expense increased $51 million in first quarter of 2001 compared
with the same period in 2000. The increase was primarily due to an increase in
long-term debt due to AT&T.
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Provision for income taxes.................................. $475 $622
The provision for income taxes decreased 23.6%, or $147 million, in the
first quarter of 2001, compared with the first quarter of 2000. The decrease in
expense was primarily due to lower income before income taxes. The effective tax
rate for the quarter remained unchanged from the first quarter of 2000 at 38.2%.
THREE YEARS ENDED DECEMBER 31, 2000
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Revenue........................................... $18,894 $21,753 $22,763
In 2000, AT&T Consumer Services Group's revenue decreased $2,859 million or
13.1%, on a mid-single-digit decline in volumes. Revenue in 1999 fell $1,010
million, or 4.4%, on a mid-single-digit decline in volumes. In 2000,
approximately $884 million of this decline was due to the elimination of
per-line charges and the impact of Concert. The remaining decline in both years
reflects the ongoing competitive nature of the consumer long distance industry,
which has resulted in pricing pressures and a loss of customers, which is
expected to continue. Also negatively impacting revenue growth was product
substitution and market migration away from direct dial wireline and
higher-priced calling card services to rapidly growing wireless services and
lower-priced prepaid card services. During 2000, the New York and Texas long
distance markets were opened up to competition by the RBOCs. The continued entry
of the RBOCs into the long distance market is expected to increase competitive
pressures in 2001.
AT&T Consumer Services Group has continued to demonstrate its commitment to
providing customers with choice, simplicity and competitive rates. AT&T Consumer
Services Group's One Rate plans, which allow customers to make long distance
calls 24 hours a day, seven days a week for the same rate, have continued to be
well received. As of December 31, 2000, over 12 million customers were enrolled
in these plans, with more than 60% of those customers electing to bundle their
long distance with local toll (intraLATA) service. Over one-half of the
customers enrolled in the One Rate plans were new long distance customers.
AT&T WorldNet Service revenue increased 5.9% to $319 million in 2000, and
41.2% to $301 million in 1999. The increase in 2000 is due to stronger
subscription revenue in the first half of 2000 as well as increased advertising
revenue. Growth in 1999 was higher primarily due to increased marketing efforts
and the introduction of the premium $21.95 unlimited access price plan.
Competition within the ISP industry has recently increased. AT&T WorldNet
Service has remained
180
191
competitive with the industry, and launched their i495 plan in July 2000, which
provides up to 150 hours of Internet service for $4.95 per month.
AT&T WorldNet Service served 1.42 million residential customers as of
December 31, 2000, a decrease of 3.8% over 1999, due to the competitive nature
of the industry. At December 31, 1999, AT&T WorldNet Service served 1.48 million
residential customers, an increase of 29.5% over 1998.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Access and other connection........................ $5,204 $6,223 $7,453
Access and other connection expenses declined $1,019 million, or 16.4%, in
2000 compared with 1999. Included within access and other connection expenses
are costs paid to connect domestic calls on the facilities of other service
providers. Approximately $932 million of this decline was driven by mandated
reductions in per-minute access rates in 2000 and decreased per-line charges.
Approximately $295 million of this decline was driven by volume declines in
2000. These decreases were partially offset by an increase in Universal Service
Fund contributions of $224 million. Since most of these charges are passed
through to the customer, the per-minute access-rate, the per-line charge
reductions and the increased Universal Service Fund contributions have generally
resulted in a corresponding impact on revenue. In addition, local connectivity
charges increased $173 million, reflecting growth in the local business.
Costs paid to telephone companies outside of the United States to connect
calls made to countries outside of the United States (international settlements)
also are included within access and other connection expenses. These costs
decreased $193 million in 2000, as a result of the commencement of operations of
Concert. Concert now incurs most of AT&T's international settlements as well as
earns most of AT&T's foreign-billed revenue, previously incurred and earned
directly by AT&T Consumer Services Group. In 2000, Concert billed AT&T Consumer
Services Group a net expense composed of international settlement
(interconnection) expense, administrative fees, and foreign-billed revenue. The
amount charged by Concert in 2000 was lower than interconnection expense
incurred in 1999, since AT&T Consumer Services Group recorded these transactions
as revenue and expense, as applicable.
Access and other connection expenses declined $1,230 million, or 16.5%, in
1999 compared with the prior year. Approximately $960 million of this decline
resulted from mandated reductions in per-minute access rates and lower
international settlement rates resulting from AT&T's negotiations with
international carriers. Approximately $236 million of this decline was driven by
volume declines in 1999. These reductions were partially offset by increased
per-line charges and Universal Service Fund contributions in the amount of $172
million.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Selling, general and administrative.................. $4,128 $4,688 $5,453
Selling, general and administrative, or SG&A, expenses decreased $560
million, or 11.9%, in 2000 compared with 1999. These reductions were primarily
attributed to cost control efforts such as targeted marketing, consolidation of
functions and reduction of support and corporate staff headcounts.
181
192
In 1999, SG&A expenses decreased $765 million, or 14.0% compared with the
prior year. This decrease was primarily due to AT&T Consumer Services Group's
focus on high-value customers, which led to lower spending on
customer-acquisition and retention programs.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Costs of services and products....................... $2,557 $3,316 $3,656
Costs of services and products expenses include such costs as the transport
costs for utilizing AT&T's network, operator service costs, and the provision
for uncollectible receivables. These costs decreased $759 million, or 22.9%, in
2000 and $340 million, or 9.3%, in 1999 compared with the prior year. These
declines are largely due to volume declines and network cost-control
initiatives, and the lower provision for uncollectible receivables.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Depreciation and amortization............................ $167 $184 $116
Depreciation and amortization expenses decreased $17 million, or 9.2%, in
2000. Depreciation and amortization expenses increased $68 million, or 58.6%, in
1999 compared with 1998. Total capital expenditures for 2000, 1999 and 1998 were
$148 million, $300 million and $98 million, respectively.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Net restructuring and other charges........................ $97 $7 $(19)
During 2000, AT&T Consumer Services Group recorded $97 million of net
restructuring and other charges. The charge for restructuring and exit plans was
primarily due to headcount reductions, including the consolidation of customer
care and call centers. Included in exit costs was $79 million of cash
termination benefits associated with the involuntary separation of about 1,300
employees. Approximately 65% of the individuals were management employees and
35% were non-management employees.
AT&T Consumer Services Group also 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.
During 1999, AT&T Consumer Services Group recorded $7 million of net
restructuring and other charges. This $7 million charge for restructuring and
exit costs was recorded in conjunction with AT&T's initiative to reduce costs.
The restructuring and exit plans primarily focused on the maximization of
synergies through headcount reductions, including the consolidation of
customer-care and call centers.
The exit costs represent cash termination benefits associated with the
separation of approximately 164 employees as part of voluntary termination
plans. All of the terminations were nonmanagement employees.
During 1998, AT&T Consumer Services Group recorded a $19 million benefit to
net restructuring and other charges. This benefit represents the reversal of
1995 business restructuring
182
193
reserves primarily resulting from the overlap of AT&T's 1998 voluntary
retirement incentive program, or VRIP, on certain 1995 projects.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Operating income..................................... $6,741 $7,335 $6,104
Operating income decreased 8.1% in 2000 compared with 1999. These results
primarily reflect a decline in revenues, partially offset by cost reductions,
primarily in SG&A, and costs of services and products. The decrease was also
attributed to higher net restructuring and other charges in 2000 of $90 million.
Operating income margin (operating income as a percent of revenue) was 35.7% in
2000 compared with 33.7% in 1999. Increased competition and migration of
customers to products which may have a lower margin will negatively impact
operating margins in the future.
In 1999, operating income increased 20.2% compared to the prior year. This
increase was primarily driven by reduced SG&A expenses, largely due to AT&T
Consumer Services Group's focus on high-value customers, which led to lower
spending on customer-acquisition and retention programs.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Other income, net.......................................... $81 $208 $86
Other income decreased $127 million or 61.1% in 2000 compared with 1999.
Other income increased $122 million or 141.9% in 1999 compared with the prior
year. These results are primarily due to the 1999 sale of AT&T Consumer Services
Group's Language Line Services business, which resulted in a gain of $153
million.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Interest expense........................................... $164 $41 $27
In 2000, interest expense was $164 million compared to interest expense of
$41 million in 1999. This interest expense is primarily due to an increase in
long-term debt from AT&T.
In 1999, interest expense increased $14 million versus the prior year. This
is primarily due to the increase in long-term debt in 1999.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Provision for income taxes........................... $2,546 $2,869 $2,356
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 for AT&T Consumer Services Group was 38.24%, 38.24%, and 38.22%,
in 2000, 1999, and 1998, respectively.
183
194
LIQUIDITY
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
CASH FLOWS:
Provided by operating activities.......................... $ 1,483 $ 1,231
Used in investing activities.............................. (22) (23)
Used in financing activities.............................. (1,459) (1,208)
Net cash provided by operating activities increased by $252 million in 2001
as compared with the first quarter of 2000. This increase was primarily due to
changes in accounts receivable, partially offset by decreases in net income and
accounts payable.
Investing activities resulted in a net use of cash of $22 million for the
first quarter of 2001. The primary use of cash was for capital expenditures.
For the first quarter 2001, net cash used in financing activities increased
by $251 million over the same prior year period. This increase was due to a
decrease in long-term debt due to AT&T, partially offset by lower dividend
payments.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
CASH FLOWS:
Provided by operating activities................ $ 4,787 $ 4,350 $ 4,141
(Used in)/provided by investing activities...... (132) 1,398 (1,641)
Used in financing activities.................... (4,661) (5,742) (2,500)
In 2000, net cash provided by operating activities increased $437 million.
This increase is primarily due to changes in accounts receivable and accounts
payable. These increases in net cash were partially offset by a decrease in net
income, excluding the noncash impacts of depreciation and amortization, net
restructuring and other charges and provision for uncollectibles. The increase
in net cash provided by operating activities in 1999 compared with 1998 was
primarily due to an increase in net income.
Investing activities resulted in a net use of cash of $132 million for
2000. The primary use of cash in 2000 was for capital expenditures.
Net cash provided by investing activities in 1999 was $1,398 million,
compared with a net use of cash in 1998 of $1,641 million. In 1998, AT&T
Consumer Services Group made a short term loan to AT&T; this receivable was
collected in 1999.
In 2000, net cash used in financing activities decreased by $1,081 million.
This decrease is primarily due to an increase in long term debt due to AT&T,
partially offset by a higher transfer to AT&T and dividend payment in 2000.
In 1999, net cash used in financing activities increased $3,242 million.
This increase is primarily due to an increase in transfers to AT&T.
AT&T'S BOARD OF DIRECTORS HAS THE POWER TO MAKE DETERMINATIONS THAT MAY
IMPACT THE FINANCIAL AND LIQUIDITY POSITION OF EACH OF ITS 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
184
195
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
AT&T'S POLICY STATEMENTS, BY-LAWS AND INTER-COMPANY AGREEMENTS. AS A RESULT OF
THIS DISCRETION OF AT&T'S BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS
TO ASSESS EACH GROUP'S LIQUIDITY AND CAPITAL RESOURCE NEEDS AND IN TURN THE
FUTURE PROSPECTS OF EACH GROUP BASED ON PAST PERFORMANCE.
FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(DOLLARS IN MILLIONS)
Total assets.......................................... $3,036 $3,543
Total liabilities..................................... 5,156 6,084
Total assets decreased $507 million, or 14.3%, to $3,036 million at March
31, 2001 from $3,543 million at December 31, 2000. The decrease was primarily
due to lower trade receivables as a result of lower revenue.
Total liabilities decreased $928 million, or 15.3%, to $5,156 million at
March 31, 2001 from $6,084 million at December 31, 2000. This decrease primarily
resulted from a decrease in debt as a result of favorable net operating cash
flow and a decrease in accounts payable, partially offset by an increase in
income taxes payable to AT&T.
AT DECEMBER 31,
---------------------
2000 1999
-------- -------
(DOLLARS IN MILLIONS)
Total assets............................................... $ 3,543 $4,072
Total liabilities.......................................... 6,084 3,002
Combined attributed net (liabilities) assets............... (2,541) 1,070
Total assets decreased $529 million, or 13.0%, during 2000. The decrease in
total assets was primarily associated with a decrease in accounts receivable,
reflecting lower revenue.
Total liabilities at December 31, 2000 increased $3,082 million or 102.7%
during 2000. This increase is primarily due to an increase in long-term debt due
to AT&T.
Total combined attributed net (liabilities) assets at December 31, 2000,
decreased $3,611 million from the previous year, reflecting dividends and
transfers to AT&T of $7.7 billion, partially offset by net income of $4.1
billion.
NEW ACCOUNTING PRONOUNCEMENTS
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 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 Consumer
185
196
Services Group does not expect that the adoption of SFAS No. 140 will have a
material impact on AT&T Consumer Services Group's results of operations,
financial position or cash flows.
SUBSEQUENT EVENTS
On May 25, 2001, AT&T Corp. completed the acquisition of substantially all
of the assets of NorthPoint Communications Group, Inc. valued at approximately
$135 million. The acquisition includes all of NorthPoint's co-locations
nationwide, certain network equipment, systems and support software and related
assets, including two leased buildings. The purchase of these NorthPoint
Communications Group, Inc.'s assets was attributed to AT&T Communications
Services, Inc.
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $500 million of funding. Under the
program, a small percentage of AT&T Consumer Services Group accounts receivable
will be sold on a discounted, revolving basis, to a special purpose,
wholly-owned subsidiary, which assigns interests in such receivables to
unrelated third-party financing entities.
186
197
RELATIONSHIP AMONG AT&T GROUPS
We urge all shareholders to read the by-law amendment relating to the AT&T
Groups capital stock committee and the AT&T Groups policy statement, a copy of
which we have attached as Appendix C to this proxy statement.
THE AT&T GROUPS CAPITAL STOCK COMMITTEE
Upon creation and issuance of either AT&T Broadband Group tracking stock or
AT&T Consumer Services Group tracking stock, we will amend our by-laws to
establish an AT&T Groups capital stock committee of our board of directors to
oversee the interaction among the businesses of different AT&T groups. The
members of the AT&T Groups capital stock committee will be selected by our board
of directors. The by-law amendment provides that our board of directors will
delegate to the AT&T Groups capital stock committee authority to:
- interpret, make determinations under and oversee the implementation of
the policies described in the Policy Statement Regarding AT&T Groups
Tracking Stock Matters described under "-- The AT&T Groups Policy
Statement;"
- review the policies, programs and practices of AT&T relating to:
-- the business and financial relationships of AT&T's groups; and
-- any matters arising in connection with any of the foregoing, all to
the extent the AT&T Groups capital stock committee may deem
appropriate; and
- recommend changes in the policies, programs and practices that the AT&T
Groups capital stock committee may deem appropriate.
The AT&T Groups capital stock committee will have and may exercise other
powers, authority and responsibilities as our board of directors may determine
from time to time.
However, as with all of our groups, there will not be a separate board of
directors for AT&T Broadband Group or AT&T Consumer Services Group, and the AT&T
Groups capital stock committee will not function as a board of directors for
AT&T Broadband Group tracking stock or AT&T Consumer Services Group tracking
stock. Under existing law, neither our board of directors nor the AT&T Groups
capital stock committee owes a separate fiduciary duty to the holders of AT&T
Broadband Group tracking stock or AT&T Consumer Services Group tracking stock
apart from the general duty that is owed to all AT&T shareholders.
Although our board of directors has no present intention to do so, it may
modify, suspend or rescind the by-law amendment or adopt additional by-laws, at
any time, without the approval of our shareholders, subject to our board of
directors' fiduciary duties.
THE AT&T GROUPS POLICY STATEMENT
In connection with the creation and issuance of AT&T Broadband Group
tracking stock and/or AT&T Consumer Services Group tracking stock, AT&T will,
effective upon issuance of AT&T Broadband Group tracking stock and/or AT&T
Consumer Services Group tracking stock, adopt the AT&T Groups policy statement,
which AT&T intends to follow.
GENERAL POLICY
Our board of directors has determined that all material matters in which
holders of AT&T common stock, AT&T Broadband Group tracking stock and/or AT&T
Consumer Services Group tracking stock may have divergent interests generally
will be resolved in a manner that is in the best interests of AT&T and all of
its common shareholders as a whole after giving fair consideration to the
potentially divergent interests and all other relevant interests of the holders
of the separate classes of AT&T common shares. Under the AT&T Groups policy
statement, the relationships among AT&T groups and the means by which the terms
of any material transactions among them will be determined will be governed by a
process of fair dealing.
187
198
RELATIONSHIP AMONG AT&T GROUPS
The AT&T Groups policy statement provides that AT&T will seek to manage
AT&T groups in a manner designed to maximize the operations, unique assets and
value of all of the AT&T groups, and with complementary deployment of capital
and facilities.
General. Subject to special arrangements or existing commercial
arrangements in effect at the time this policy statement is adopted, the AT&T
Groups policy statement provides that, except as otherwise provided in the AT&T
Groups policy statement, all material commercial transactions among the AT&T
groups will be on commercially reasonable terms taken as a whole, and will be
subject to the review and approval of the AT&T Groups capital stock committee.
The AT&T groups may make loans to each other on terms and conditions
substantially equivalent to the interest rates and terms and conditions that the
groups would be able to obtain from third parties without the benefit of support
or guarantee by AT&T.
For shared corporate services that arise as a result of being part of a
combined entity, including securities filing and financial reporting services,
costs relating to these services will be:
- allocated directly to the group utilizing those services, and
- if not directly allocable to a group, allocated between the groups on a
fair and reasonable basis as our board of directors determines.
For other support services, for example, billing and purchasing services,
the AT&T Groups policy statement provides that the AT&T groups will seek to
achieve enterprise efficiencies to minimize the aggregate costs incurred by the
AT&T groups on a combined basis, although each group also will be entitled to
negotiate and procure support services on its own either from the other groups
or from third parties.
In addition, the AT&T Groups policy statement provides that the groups will
work collaboratively with each other to understand and take into account one
another's expansion, acquisition, deployment, marketing and sales plans, with
the goal of minimizing overlaps and conflicts between the groups.
CORPORATE OPPORTUNITIES
The AT&T Groups policy statement provides that our board of directors will
allocate any business opportunities and operations, any acquired assets and
businesses and any assumed liabilities among the groups, in whole or in part, as
it considers to be in the best interests of AT&T and its shareholders as a whole
and as contemplated by the other provisions of the AT&T Groups policy statement.
If a business opportunity or operation, an acquired asset or business, or an
assumed liability would be suitable to be undertaken by or allocated to more
than one group, our board of directors will allocate it using its business
judgment or in accordance with procedures that our board of directors adopts
from time to time to ensure that decisions will be made in the best interests of
AT&T and its shareholders as a whole. Any allocation of this type may involve
the consideration of a number of factors that our board of directors determines
to be relevant, including, without limitation, whether the business opportunity
or operation, the acquired asset or business, or the assumed liability is
principally within the existing scope of a group's business and whether a group
is comparatively better positioned to undertake or have allocated to it the
business opportunity or operation, acquired asset or business or assumed
liability.
Except under the AT&T Groups policy statement and any other policies
adopted by our board of directors, and except as may arise under branding
agreements and arrangements no group will have any duty, responsibility or
obligation to refrain from:
- engaging in the same or similar activities or lines of business as any
member of the other groups;
- doing business with any potential or actual supplier, competitor or
customer of any member of any other group; or
188
199
- engaging in, or refraining from, any other activities whatsoever relating
to any of the potential or actual suppliers or customers of any member of
the other groups.
In addition, except under the AT&T Groups policy statement and any other
policies adopted by our board of directors, no group will have any duty,
responsibility or obligation:
- to communicate or offer any business or other corporate opportunity to
any other person, including any business or other corporate opportunity
that may arise that more than one group may be financially able to
undertake, and that is, from its nature, in the line of more than one
group's business and is of practical advantage to more than one group;
- to provide financial support to another group, or any member of that
group, except as described under "-- Relationships with AT&T -- Financing
Arrangements;" or
- otherwise to assist any other group.
Under no circumstances will any members of any AT&T group be prevented from
entering into written agreements with another group to define or restrict any
aspect of the relationship between the groups.
DIVIDEND POLICY
The AT&T Groups policy statement provides that, subject to the limitations
on dividends set forth in our charter, including any preferential rights of any
series of AT&T preferred stock, and to the limitations of applicable law,
holders of shares of any class of AT&T common stock will be entitled to receive
dividends on that stock when, as and if our board of directors authorizes and
declares dividends on that stock. The payment of dividends on any class of AT&T
common stock will be a business decision that our board of directors makes from
time to time based on the results of operations, financial condition, cash
requirements and future prospects of AT&T and other factors that our board of
directors considers relevant. Payment of dividends on any class of AT&T common
stock also may be restricted by loan agreements, indentures and other
transactions that AT&T enters into from time to time.
AT&T does not expect to pay any dividends on shares of AT&T Broadband Group
tracking stock. If and when our board of directors determines to pay any
dividends on shares of AT&T Broadband Group tracking stock, the AT&T Groups
policy statement provides that this determination also will be subject to
factors similar to those that we describe above with respect to the payment of
dividends on each class of AT&T common stock.
Following any issuance of AT&T Consumer Services Group tracking stock, it
is currently expected that one-third of the current dividend payable on AT&T
common stock will be allocated to AT&T common stock and that two-thirds of that
dividend will be allocated to AT&T Consumer Services Group tracking stock in a
manner to be determined by our board of directors. In that event, the aggregate
dividend payable to holders of AT&T common stock and holders of AT&T Consumer
Services Group tracking stock would be the same as that payable to holders of
AT&T common stock before the issuance of the AT&T Consumer Services Group
tracking stock. The declaration of dividends by AT&T and the amount thereof
will, however, be in the discretion of our board of directors and will depend
upon each of our group's financial performance, the dividend policies and
capital structures of comparable companies and each group's ongoing capital
needs. If and when our board of directors determines to pay any dividends on
shares of AT&T Consumer Services Group tracking stock, the AT&T Groups policy
statement provides that this determination also will be subject to factors
similar to those that we describe above with respect to the payment of dividends
on each class of AT&T common stock.
AT&T GROUPS CAPITAL STOCK COMMITTEE
Our by-laws will provide for the AT&T Groups capital stock committee of our
board of directors. In making determinations in connection with the policies set
forth in the AT&T Groups policy statement, the members of our board of directors
and the AT&T Groups capital stock
189
200
committee will act in a fiduciary capacity and in accordance with legal guidance
concerning their respective obligations under applicable law. The delegation of
responsibilities to the AT&T Groups capital stock committee will be subject to
changes our board of directors may determine.
AMENDMENT AND MODIFICATION TO THE AT&T GROUPS POLICY STATEMENT
Our board of directors may modify, suspend or rescind the policies set
forth in the AT&T Groups policy statement, including any resolution implementing
the provisions of the AT&T Groups policy statement. Our board of directors also
may adopt additional or other policies or make exceptions with respect to the
application of the policies described in the AT&T Groups policy statement in
connection with particular facts and circumstances, all as our board of
directors may determine, consistent with its fiduciary duties to AT&T and our
shareholders as a whole.
RELATIONSHIPS WITH AT&T
BRANDING
Each of AT&T Broadband Group and AT&T Consumer Services Group will obtain
the right, on a royalty-free basis, to continue to use certain of the AT&T
brands, including the AT&T globe design and the AT&T trade dress, which we
collectively refer to as the "AT&T Broadband Brands" and "AT&T Consumer Services
Brands," respectively, in accordance with a brand agreement. Under the brand
agreements, AT&T Broadband Group will be entitled to use the AT&T Broadband
Brands for the provision over a cable system of its multi-channel video services
and interactive television services, and for the provision over a cable system
to residential subscribers of local telephone services (including any distance
telephone service associated with local service) and high-speed cable Internet
services and AT&T Consumer Services Group will be entitled to use AT&T Consumer
Services Brands for the provision of stand-alone residential long distance
services, prepaid consumer calling card services, consumer calling card
services, operator-assisted international telephone services for consumer
travelers, certain DSL-based communications services, residential unbundled
network elements platform services, consumer dial-up narrow-band Internet access
services, high-speed Internet access services, and certain portals, content,
equipment and software and for bundles of the foregoing offered by AT&T Consumer
Services Group. In addition, under its brand agreement AT&T Broadband Group will
have the right to use the AT&T Broadband Brands in connection with certain
satellite transmission services, digital processing services and production
studio services, each in relation to audio/video content. The rights to be
granted to AT&T Broadband Group and AT&T Consumer Services Group under their
respective brand agreements will be for a period of five years following its
effective date. After the initial five-year period, AT&T Broadband Group and
AT&T Consumer Services Group would be entitled, if they choose, to continue to
use the AT&T Broadband Brands and AT&T Consumer Services Brands, respectively,
on these services for an additional five-year period. During this second
five-year period, AT&T Broadband Group and AT&T Consumer Services Group may
terminate their respective brand agreements by providing 12 months' prior
notice.
Under its respective brand agreement, AT&T Broadband Group's rights to use
the AT&T Broadband Brands in connection with cable-based multichannel video
services and interactive television services will be exclusive. AT&T Broadband
Group will also have certain nonexclusive rights. Under its respective brand
agreement, AT&T Consumer Services Group's rights to use the AT&T Consumer
Services Brands in connection with stand-alone residential long distance
services, prepaid consumer calling card services, consumer calling card service,
operator-assisted international telephone services for consumer travelers and
consumer dial-up narrow-band Internet access services will be exclusive. AT&T
Consumer Services Group will also have certain nonexclusive rights.
The territory of each brand agreement generally will be worldwide with
exceptions where AT&T already has granted brand license agreements or where
another AT&T unit or group has exclusive brand rights for competing services.
Subject to certain conditions set forth in its brand agreement, AT&T Consumer
Services Group also may extend certain rights to use the AT&T Consumer
190
201
Services Brands to authorized dealers of AT&T Consumer Services Group's
services. Each brand agreement will provide that AT&T Broadband Group or AT&T
Consumer Services Group, as applicable, must comply with specified quality,
customer care, graphics and marketing standards and guidelines to avoid
confusion in connection with the use of the AT&T Broadband Brands or AT&T
Consumer Services Brands, as applicable. It also will provide that, for so long
as AT&T Broadband Group or AT&T Consumer Services Group, as applicable, uses the
AT&T Broadband Brands or AT&T Consumer Services Brands, as applicable, it shall
pay AT&T a brand maintenance fee for the administration, protection and
promotion of the AT&T Broadband Brands or AT&T Consumer Services Brands, as
applicable. AT&T may terminate each brand agreement in the event of a
significant breach (as defined in the respective brand agreements), including a
change of control of AT&T Broadband Group or AT&T Consumer Services Group, as
applicable, or a failure by AT&T Broadband Group or AT&T Consumer Services
Group, as applicable, to use the AT&T Broadband Brands or AT&T Consumer Services
Brands, as applicable, on a specified portion of its products and services.
INTELLECTUAL PROPERTY
Intellectual property will continue to be managed by the AT&T group that
has managed it historically. Each group will have the right to use the
intellectual property existing as of December 31, 2000 and managed by the other
groups, or with respect to which any group has the power to grant these rights,
in accordance with an intellectual property agreement. Rights under future
intellectual property would be governed by sponsored development agreements that
may, or may not, be entered into among the groups. Pursuant to any such
sponsored development agreement, the group contracted and paid to perform the
work would own the newly developed intellectual property and the other group
would be granted perpetual, paid-up rights necessary to use the development on a
worldwide basis.
The intellectual property agreement to be entered into by each of AT&T
Broadband Group and AT&T Consumer Services Group will specify the ownership and
license rights in specified patents, software, copyrights and trade secrets.
Each AT&T group will grant to the other groups under its specified patents, if
any, a nonexclusive, fully paid-up, worldwide, perpetual license to make, use
and sell all products and services in the conduct of its present and future
business. The groups will also grant special rights under certain of each
other's patents, if any, for defensive protection, special affiliate licensing
and supplier licensing. Each group will own all of the software, trade secrets
and copyrights that it created prior to the applicable intellectual property
agreement's effective date. Each group will further grant to the other groups a
nonexclusive, fully paid-up, worldwide, perpetual license to use the group's
software, trade secrets and copyrights that they possess as of the applicable
intellectual property agreement's effective date for use in its present and
future business. Proprietary information related to a group's customers will
receive special protection under the respective intellectual property
agreements.
COMMERCIAL TRANSACTIONS BETWEEN GROUPS
We intend that, except as otherwise provided in the AT&T Groups policy
statement, all commercial transactions among the groups will be on commercially
reasonable terms taken as a whole. We expect the groups will negotiate and
develop their arrangements over time, and that these arrangements will be
subject to the review and approval of the AT&T Groups capital stock committee.
We may reallocate assets among the groups in exchange for an increase or
decrease in the retained portion of value held by AT&T Business Services Group.
Any reallocations of assets between
191
202
the groups that do not result in this adjustment, other than reallocations made
under a contract for the provision of goods or services between the groups, will
be accompanied by:
- the reallocation by the transferee group to the transferor group of other
assets or consideration,
- the creation of inter-group debt owed by the transferee group to the
transferor group, or
- the reduction of inter-group debt owed by the transferor group to the
transferee group,
in each case, in an amount having a fair market value, in the judgment of our
board of directors, equivalent to the fair market value of the assets
reallocated by the transferor group.
AT&T's groups will enter into various network agreements with AT&T Business
Services Group.
AT&T Business Services Group and AT&T Wireless Group will also enter into
an Agency and Referral Agreement, which will provide that AT&T Business Services
Group, for compensation, will act as an agent in selling AT&T Wireless Group
services to large and small business customers.
For example, AT&T Broadband Group will enter into four principal network
agreements with AT&T Business Services Group:
- Master Carrier Agreement. This will reflect the rates, terms and
conditions on which AT&T Business Services Group will provide voice and
data services to AT&T Broadband Group, including both wholesale services
(to be used as a component in AT&T Broadband Group's services to its
customers), and "administrative" services (e.g., internal AT&T Broadband
Group usage). Pricing is market based, with provisions defining an
ongoing process to ensure the prices remain competitive. AT&T Broadband
Group's purchase commitments vary by service and over the 5-year term of
the agreement. In the first year, AT&T Broadband Group will purchase all
its requirements from AT&T Business Services Group, subject to
pre-existing contractual commitments and the right to acquire data
services (including voice over IP) from Excite@Home. In years 2 and 3,
AT&T Broadband Group may put up to 20% of its domestic needs up for bid,
subject to AT&T Business Services Group's right to retain the business if
it provides or matches the best offer. In years 4 and 5, AT&T Broadband
Group may select the vendor of its choice for the 20%. AT&T Broadband
Group will obtain all of its international requirements from AT&T
Business Services Group to the same extent and on the same terms that
AT&T Business Services Group must obtain its requirements from Concert.
- Local Network Connectivity Services Agreement (incorporated within the
Master Carrier Agreement). This agreement will reflect the rates, terms
and conditions on which AT&T Business Services Group will provide certain
local network connectivity services to AT&T Broadband Group for use in
providing local telephone services to AT&T Broadband Group's subscribers.
The agreement consists of two parts:
-- a capital lease from AT&T Business Services Group to AT&T Broadband
Group of certain network switching and transport assets to be used
exclusively by AT&T Broadband Group for a term of up to 12 years; and
-- an operating agreement for the provision of local network
connectivity, management and operational services in support of AT&T
Broadband Group's local cable telephone services, with a minimum term
of five years.
AT&T Broadband Group will be required to purchase 100% of its requirements
for circuit-switched telephone services from AT&T Business Services Group
over the initial 5-year term of the agreement, and also will be required
to pay for a minimum of 85% of the volumes initially forecasted by AT&T
Broadband Group throughout the initial 5-year term of the agreement. The
initial prices under the agreement will be based on AT&T Business Services
Group's cost plus cost of capital, subject to provisions assuring that
AT&T Broadband Group will receive prices as favorable as those provided by
AT&T Business Services Group to similarly situated wholesale customers of
AT&T Business Services Group.
192
203
- Fiber Facilities Agreement. In 1998, Teleport Communications Group Inc.,
or TCG, and TCI (the predecessors of AT&T Local Network Services -- part
of AT&T Business Services Group -- and AT&T Broadband Group,
respectively) entered into a facilities lease agreement whereby AT&T
Broadband Group, under certain circumstances, would construct for, and
lease to TCG, fiber facilities in the areas served by AT&T Broadband
Group's cable systems for use in providing telecommunications services.
That agreement will be modified to allow, among other things, that the
areas served by the systems formerly operated by MediaOne will be
included in the Agreement. In addition, charges for the facilities
constructed and provided to AT&T Business Services Group will be based on
AT&T Broadband Group's costs. The term of the build out period will be
unchanged from the original 1998 contract, and as before, any leases
entered into during the term will be perpetual, at the option of AT&T
Business Services Group.
- Interconnection and Intercarrier Compensation Agreement. This agreement
will specify the terms of interconnection of the parties' networks, and
compensation for:
-- the origination or termination of interexchange traffic for the other
party; and
-- the exchange of local traffic between the parties' local customers.
The term will be five years. During 2001, the existing internal
arrangements with respect to access charges for interexchange traffic will
be largely retained. Beginning in 2002, each party may charge the other
prevailing rates (based on the rates charged by incumbent local exchange
carriers). Local traffic will be exchanged at standard rates in effect
between AT&T Business Services Group and the incumbent local exchange
carriers.
There will be two network agreements between AT&T Business Services Group
and AT&T Consumer Services Group.
- Master Carrier Agreement. This agreement will specify the rates, terms
and conditions on which AT&T Business Services Group will provide voice,
data, IP dial-up access and other services to AT&T Consumer Services
Group both for internal corporate purposes and for resale to other
customers. AT&T Consumer Services Group will procure all of its covered
telecommunications needs during the 3-year term of the agreement from
AT&T Business Services Group, and pricing will be based on costs, but
will be no less favorable than provided by AT&T Business Services Group
to other customers.
- Intercarrier Compensation Agreement. This agreement will specify the
terms under which AT&T Business Services Group and AT&T Consumer Services
Group will charge each other for:
-- the origination and termination of interexchange traffic; and
-- the exchange of local traffic between each other's local customers.
In addition, there will be a number of other agreements governing the provision
of other services between AT&T Business Services Group and AT&T Consumer
Services Group.
FINANCING ARRANGEMENTS
Loans between groups will be made at interest rates and on other terms and
conditions designed to be substantially equivalent to the interest rates and
other terms and conditions that the borrowing group would be able to obtain from
third parties, including the public markets, as a non-affiliate of AT&T without
the benefit of any guaranty by AT&T or any member of any AT&T group. This policy
contemplates that these loans will be made on the basis set forth above,
regardless of the interest rates and other terms and conditions on which AT&T or
members of any AT&T group may have acquired the funds. If, however, a group
incurs any fees or charges in order to keep available funds for use by another
group, those fees or charges will be allocated to the borrowing group.
193
204
We may borrow funds and provide the proceeds to AT&T Business Services
Group, AT&T Consumer Services Group and AT&T Broadband Group on the terms and
conditions described above and subject to market availability. We may also cause
these groups to loan funds to AT&T.
In the case of AT&T Broadband Group, the financial statements included
elsewhere in this document reflect a cost of borrowing slightly in excess of the
cost historically achieved at the consolidated AT&T level. In the case of each
of AT&T Consumer Services Group and AT&T Business Services Group, the financial
statements included elsewhere in this document make no distinction between the
inter-group rate and the cost at which consolidated AT&T was historically able
to raise funds in the external market. In both of these cases, AT&T believes
that the inter-group rate is a reasonable estimate of the rate of borrowing in
the external market. However, in the future, although AT&T Consumer Services
Group is expected to be part of the same legal entity as AT&T Business Services
Group, AT&T Consumer Services Group may be charged interest at a rate higher or
lower than that of AT&T Business Services Group. The actual rates of interest
charged or paid by any of the groups in the future is uncertain and will depend
on a variety of factors including the credit profile of the group and market
conditions. As a result, future interest rates charged or paid by any of the
groups may materially exceed those reflected in the financial statements
included elsewhere in this document.
ACCOUNTING MATTERS
Following issuance of any shares of AT&T Broadband Group tracking stock
and/or AT&T Consumer Services Group tracking stock, AT&T will prepare financial
statements in accordance with generally accepted accounting principles,
consistently applied, for AT&T Broadband Group and/or AT&T Consumer Services
Group, as applicable, as well as full consolidated financial statements of AT&T.
The financial statements and information for each of the groups principally will
reflect the financial position, results of operations and cash flows of the
businesses included in those groups, respectively. Notwithstanding any
allocation of assets or liabilities for dividend purposes or the purpose of
preparing group financial statements, holders of AT&T common stock and holders
of AT&T tracking stocks will continue to be subject to risks associated with an
investment in a single corporation and all of AT&T's businesses, assets and
liabilities.
TAX SHARING AGREEMENT
Prior to issuance of any shares of AT&T Broadband Group or AT&T Consumer
Services Group tracking stock, AT&T Consumer Services Group, AT&T Business
Services Group and AT&T Broadband Group will enter into a tax sharing agreement
that will provide for tax sharing payments between these three groups based on
the taxes or tax benefits of a hypothetical affiliated group consisting of these
three groups. Each of these three groups shall generally be responsible for the
taxes attributable to its lines of business and entities comprising its group as
of such date.
This hypothetical group will not include Liberty Media Group or AT&T
Wireless Group. A separate tax sharing agreement exists between AT&T and Liberty
Media Group under which tax sharing payments are made between AT&T and Liberty
Media Group to the extent that the taxes of the actual affiliated group of which
AT&T is the common parent are increased or decreased as a result of the
inclusion of Liberty Media Group in that affiliated group. In addition, a
separate tax sharing agreement exists between AT&T and AT&T Wireless Group that
provides for tax sharing payments between AT&T and AT&T Wireless Group based on
the taxes or tax benefits of a hypothetical affiliated group consisting of AT&T
and AT&T Wireless Group with respect to taxable periods ending after the
issuance of the shares of AT&T Wireless Group tracking stock. This hypothetical
group does not include Liberty Media Group.
Under the tax sharing agreement between AT&T Consumer Services Group, AT&T
Business Services Group and AT&T Broadband Group, the consolidated tax liability
before credits of the hypothetical group will be allocated to each group and
based on each group's contribution to consolidated taxable income of the
hypothetical group. This allocation will take into account losses,
194
205
deductions and other tax attributes, such as capital losses or charitable
deductions, that are utilized by the hypothetical group even if these attributes
could not be utilized on a stand-alone basis. Tax sharing payments in respect of
the consolidated tax liability of the hypothetical group, after allocation of
consolidated tax credits, will be made between AT&T Consumer Services Group,
AT&T Business Services Group and AT&T Broadband Group consistent with the
allocations under the tax sharing agreement. In addition, under the tax sharing
agreement, each tracking stock group will be responsible for all tax items (and
benefits from all tax benefits) resulting from the attribution of assets or
interests to such group, or transfer to a legal entity that is a member of such
group of assets, as well as any tax items and benefits resulting from the
distribution of the stock of any company the assets of which are tracked by such
group's tracking stock. Tax items or tax benefits arising from or related to
assets or interests that are not tracked by either AT&T Broadband Group tracking
stock or AT&T Consumer Services Group tracking stock will be for the account of
AT&T Business Services Group.
The tax sharing payments under the tax sharing agreement assume that the
members of AT&T Broadband Group, AT&T Consumer Services Group, and AT&T Business
Services Group are members of the same affiliated, consolidated, combined or
unitary group for the relevant U.S. federal, state, local or foreign income tax
purposes with respect to taxable periods ending after the issuance of the shares
of AT&T Consumer Services Group tracking stock and AT&T Broadband Group tracking
stock. It is possible, however, that the Internal Revenue Service may assert
that AT&T Broadband Group tracking stock or AT&T Consumer Services Group
tracking stock is not stock of AT&T, in which case each of the groups may not be
members of the same U.S. federal income tax affiliated group filing consolidated
returns. AT&T believes that it is unlikely that the Internal Revenue Service
would prevail on that view, but no assurance can be given in that regard. Each
group will be responsible under the tax sharing agreement for any
corporate-level taxes resulting from the treatment of its tracking stock as not
stock of AT&T, and any corporate-level taxes on the actual or deemed disposition
of assets caused by the issuance of its tracking stock.
Non-income tax liabilities will generally be allocated based on line of
business as of the Issue Date. As between AT&T Consumer Services Group and AT&T
Business Services Group, if the tax liability is associated with a particular
line of business, but the portion of the tax liability associated with the line
of business is not readily determinable, then the tax liability will be shared
between the businesses based on an allocation formula.
With respect to taxes resulting from audit adjustments other than those
relating to characterization of tracking stock as not stock of AT&T or relating
to the spin-off of AT&T Communications Services, Inc., tax liabilities will
generally be allocated among the three groups based on line of business.
AT&T Broadband Group, AT&T Business Services Group and AT&T Consumer
Services Group may each carry back a loss, credit or other tax attribute from a
post-spin-off period to a pre-spin-off period to the extent permitted by
applicable law.
195
206
THE INCENTIVE PLAN PROPOSALS
GENERAL
We currently issue stock-based awards to our employees and non-employee
directors under the AT&T 1997 Long Term Incentive Program, or 1997 incentive
plan. AT&T's shareholders approved this plan in 1997 and approved amendments to
the plan in 1999 and 2000. As of , this plan authorized a total of
approximately million shares of AT&T common stock and
million shares of AT&T Wireless Group tracking stock for stock-based awards
consisting of:
- stock options, including incentive stock options, or ISOs, under the
Code,
- SARs in tandem with stock options or free-standing,
- restricted stock,
- performance shares and performance units conditioned upon meeting
performance criteria, and
- other awards of stock or awards valued, in whole or in part, by reference
to, or otherwise based on, stock or other property of AT&T, or other
stock unit awards.
In connection with any award or any deferred award, payments also may be
made representing dividends or their equivalent.
In anticipation of the issuance of AT&T Broadband Group tracking stock and
AT&T Consumer Services Group tracking stock, our board of directors will approve
the adoption of the AT&T Broadband Group 2001 Long Term Incentive Program, or
Broadband incentive plan, and the AT&T Consumer Services Group 2001 Long Term
Incentive Program, or Consumer Services incentive plan, or together, 2001
incentive plans, subject to the approval of shareholders of AT&T. The 2001
incentive plans will be substantially similar to the 1997 incentive plan, except
that instead of providing for awards based on AT&T common stock and AT&T
Wireless Group tracking stock, the Broadband incentive plan provides for awards
based on AT&T Broadband Group tracking stock and the Consumer Services incentive
plan provides for awards based on AT&T Consumer Services Group tracking stock.
Approval of each of the 2001 incentive plans requires a majority of the
votes cast by all outstanding shares of AT&T common stock to vote in its favor.
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF EACH OF THE 2001
INCENTIVE PLANS. Any shares not voted, whether by abstention, broker non-vote or
otherwise, will have no affect on the approval of the incentive plan proposals.
Our board of directors will not implement the 2001 incentive plans unless
our shareholders approve the corresponding charter amendment proposal.
The 1997 incentive plan, and a number of additional compensation plans,
under which stock-based awards with respect to AT&T common stock are
outstanding, are administered by the Compensation and Employee Benefits
Committee of our board of directors, subject to delegations by the Compensation
and Employee Benefits Committee to AT&T's Chairman and Chief Executive Officer,
committees comprised of other AT&T senior officers or other compensation
committees that may be designated in the additional plans. If approved, the 2001
incentive plans are expected to be administered in the same manner.
DESCRIPTION OF 2001 INCENTIVE PLANS
ADMINISTRATION AND ELIGIBILITY
Each of the 2001 incentive plans will be administered by a committee, each
of the members of which is a "non-employee director" as defined in the
Securities Exchange Act of 1934, as amended, and an "outside director" as
defined in the Code. Under each of the 2001 incentive plans, the committee has
the authority to select employees to whom awards are granted, to determine the
types of awards and the number of shares covered, and to set the terms,
conditions, and provisions of these
196
207
awards and to cancel or suspend awards. In each case, the committee is
authorized to interpret the incentive plan and to establish, amend, and rescind
any rules and regulations relating to the incentive plan, to determine the terms
and provisions of any agreements entered into under the incentive plan, and to
make all other determinations which may be necessary or advisable for the
administration of the plan. Prospectively, all employees and directors of AT&T
and its subsidiaries and other affiliates are eligible to be participants in the
2001 incentive plans, except employees of Liberty Media Group.
SHARES SUBJECT TO PLANS
Subject to adjustment as described below, the following shares will be
available for awards granted under the 2001 incentive plans during their terms:
- Under the Broadband incentive plan, 13.5% of the total outstanding shares
of AT&T Broadband Group tracking stock; and
- Under the Consumer Services incentive plan, 9.0% of the total number of
outstanding shares of AT&T Consumer Services Group tracking stock.
As defined in the plans, the term "outstanding" includes:
- the total issued and outstanding shares of the applicable tracking stock,
plus
- the number of shares of the applicable tracking stock represented by the
retained portion of the interest held by AT&T on the particular reference
date.
If another company is acquired by AT&T, or combines with AT&T, any shares
of AT&T Broadband Group tracking stock or AT&T Consumer Services Group tracking
stock issued or reserved for issuance as a result of the assumption or
substitution of outstanding grants of the acquired company would not be deemed
issued under the applicable plan and would not be subtracted from the shares of
AT&T Broadband Group tracking stock or AT&T Consumer Services Group tracking
stock available for grant under the applicable incentive plan. If any shares
subject to any award under either of the 2001 incentive plans are forfeited, or
such award is settled for cash, or expires, or is otherwise terminated without
issuance of shares, the shares subject to such award will again be available for
grant under that incentive plan. The number of shares available for awards under
each of the 2001 incentive plans will also increase by the number of shares AT&T
withholds or tenders in connection with the payment of the exercise price of an
option or other award under that incentive plan or the satisfaction of tax
withholding obligations. The shares of stock deliverable under the 2001
incentive plans may consist in whole or in part of authorized and unissued
shares, treasury shares, or shares purchased in the open market, or otherwise.
STOCK OPTIONS
The price per share of stock purchasable under any stock option will be
determined by a committee, but will not be less than 100% of the fair market
value of the stock on the date of the grant of such option. The term of each
option will be fixed by the committee. Options will be exercisable at such time
or times as determined by the committee, but no stock option will be exercisable
after the expiration of ten years from the date the option is granted.
STOCK APPRECIATION RIGHTS
An SAR may be granted free-standing or in tandem with new options or after
the grant of a related option that is not an ISO. Upon exercise of an SAR, the
holder of that SAR is entitled to receive the excess of the fair market value of
the shares for which the right is exercised, calculated as of the exercise date
or, if the committee shall so determine in the case of any SAR, not related to
an ISO, as of any time during a specified period before the exercise date, over
the grant price of the SAR. The grant price, which will not be less than the
fair market value of the shares on the date of grant, and other terms of the SAR
will be determined by the committee. Payment by AT&T upon exercise of an SAR
will be in cash, stock, other property or any combination, as the committee
determines. Unless otherwise determined by the committee, any related option
will no longer be
197
208
exercisable to the extent the SAR has been exercised and the exercise of an
option will cancel the related SAR to the extent of the exercise.
RESTRICTED STOCK
Restricted stock may not be disposed of by the recipient until restrictions
established by the committee lapse. Recipients of restricted stock are not
required to provide consideration other than the rendering of services or the
payment of any minimum amount required by law. The participant will have, with
respect to restricted stock, all of the rights of a shareholder of AT&T,
including the right to vote the shares, and the right to receive any cash
dividends, unless the committee determines otherwise. Upon termination of
employment during the restriction period, all restricted stock shall be
forfeited, subject to such exceptions, if any, as are authorized by the
committee.
PERFORMANCE AWARDS
From time to time, the committee may select a period during which
performance criteria determined by the committee are measured for the purpose of
determining the extent to which a performance award has been earned. Performance
awards may be in the form of performance shares, which are units valued by
reference to shares of stock, or performance units, which are units valued by
reference to cash or property other than stock. Performance awards may be paid
in cash, stock, other property, or a combination thereof. Recipients of
performance awards are not required to provide consideration other than the
rendering of service or the payment of any minimum amount required by law.
OTHER STOCK UNIT AWARDS
The committee is authorized to grant other stock unit awards to
participants, either alone or in addition to other awards granted under the
plan. Other stock unit awards may be paid in tracking stock, cash, or any other
form of property as the committee determines.
NONASSIGNABILITY OF AWARDS
Unless the committee determines otherwise at the time of an award, no award
granted under the 2001 incentive plans may be assigned, transferred, pledged or
otherwise encumbered by a participant, other than by will, by designation of a
beneficiary after death, or by the laws of descent and distribution. Each award
will be exercisable, during the participant's lifetime, only by the participant,
or, if permissible under applicable law, by the participant's guardian or legal
representative.
DEFERRALS OF AWARDS
The committee may permit participants to defer the distribution of all or
part of the specified stock, cash or other consideration in accordance with the
terms and conditions as the committee shall establish.
ADJUSTMENTS
In the event of any change affecting the shares of tracking stock subject
to either of the 2001 incentive plans by reason of any stock dividend or split,
recapitalization, reorganization, merger, consolidation, spin-off, combination,
or exchange of shares or other corporate change, or any distributions to common
shareholders other than cash dividends, the committee will substitute or adjust
the aggregate number or class of shares that may be distributed under the
applicable incentive plan (including the substitution of similar options to
purchase shares of, or other awards denominated in shares of, another company)
and substitute or adjust the number, class, and option price or other price of
shares subject to the outstanding awards granted under the applicable incentive
plan as the committee deems to be appropriate to maintain the purpose of the
original grant.
The committee will be authorized to make adjustments in performance award
criteria or in the terms and conditions of other awards in recognition of
unusual or nonrecurring events affecting AT&T or AT&T's financial statements or
changes in applicable laws, regulations or accounting
198
209
principles. The committee may correct any defect, supply any omission or
reconcile any inconsistency in the 2001 incentive plans or any award in the
manner and to the extent it shall deem desirable to carry the incentive plan
into effect.
AMENDMENT AND TERMINATION
Our board of directors may assume responsibilities otherwise assigned to
the committee under the 2001 incentive plans and may amend, alter, or
discontinue the 2001 incentive plans or any portion thereof at any time,
provided that no such action will impair the rights of a participant without the
participant's consent and provided that no incentive plan amendment will be made
without shareholder approval either to increase the number of shares available
under the 2001 incentive plans or if such approval is necessary to qualify for
or to comply with any tax or regulatory requirement. The committee may amend the
terms of any award granted under the 2001 incentive plans, prospectively or
retroactively, but no amendment may impair the rights of any participant without
his or her consent or amend the terms of any option to reduce the option price.
TERM
No awards will be granted under the 2001 incentive plans after
, 2011.
PLAN BENEFITS
Because the 2001 incentive plans are discretionary and based on AT&T's
financial performance, it is not possible to determine or to estimate the
benefits or amounts that will be received in the future by individual employees
or groups of employees under the 2001 incentive plans.
SECTION 162(m) OF THE INTERNAL REVENUE CODE PERFORMANCE-BASED COMPENSATION
If the committee determines at the time restricted stock, a performance
award, or other stock unit award is granted under either of the 2001 incentive
plans to a participant who is, or is likely to be, as of the end of the tax year
in which AT&T would claim a tax deduction in connection with such award, a
"covered employee" under Section 162(m) of the Code, then the committee may
provide as to such award that the lapsing of restrictions thereon and the
distribution of cash, shares, or other property pursuant thereto, as applicable,
shall be subject to the achievement of one or more objective performance goals
established by the committee, which will be based on the achievement of
specified levels of one or any combination of the following: net cash provided
by operating activities, earnings per share from continuing operations,
operating income, revenues, cash flow, return on investment, gross margin,
return on operating assets, return on equity, economic value added, stock price
appreciation, total shareholder return, or cost control of AT&T or the affiliate
or division of AT&T for or within which the participant is primarily employed.
Performance goals also may be based on achievement of specified levels of AT&T
performance, or performance of the applicable affiliate or division of AT&T,
including of AT&T Broadband Group or of AT&T Consumer Services Group, under one
or more of the measures described above relative to the performance of other
corporations.
The 2001 incentive plans provide that, subject to any adjustments described
above, no participant may be granted options and/or SARs in any
-calendar-year period with respect to more than million shares of
AT&T Broadband Group tracking stock and more than million shares of AT&T
Consumer Services Group tracking stock, respectively, and that the maximum
dollar value payable with respect to other performance units or other stock unit
awards that are valued with reference to property other than shares of AT&T
Broadband Group tracking stock or AT&T Consumer Services Group tracking stock,
respectively, and granted to any participant in any one calendar year is
.
CHANGE OF CONTROL
Each of the 2001 incentive plans will contain provisions requiring or
permitting the vesting of awards or the acceleration of options and similar
adjustments in the event of a change of control.
199
210
TAX ASPECTS OF THE PLANS
We believe that under present law, the following are the federal tax
consequences generally arising with respect to awards granted under the 2001
incentive plans. The grant of an option or SAR will create no tax consequences
for an employee or AT&T. The employee will have no taxable income upon
exercising an ISO (except that the alternative minimum tax may apply), and AT&T
will receive no deduction when an ISO is exercised. Upon exercising an SAR or an
option other than an ISO, the employee must recognize ordinary income equal to
the difference between the exercise price and the fair market value of the stock
on the date of exercise; AT&T will be entitled to a deduction for the same
amount. The treatment to an employee of a disposition of shares acquired through
the exercise of an option depends on how long the shares have been held and if
such shares were acquired by exercising an ISO or by exercising an option other
than an ISO. Generally, there will be no tax consequence to AT&T in connection
with a disposition of shares acquired under an option, except that AT&T may be
entitled to a deduction in the case of a disposition of shares acquired under an
ISO before the applicable ISO holding periods have been satisfied.
With respect to other awards granted under the 2001 incentive plans that
are settled either in cash or in stock or other property that is either
transferable or not subject to substantial risk of forfeiture, the participant
must recognize ordinary income equal to the cash or the fair market value of
shares or other property received; AT&T will generally be entitled to a
deduction for the same amount. With respect to awards that are settled in stock
or other property that is restricted as to transferability and subject to
substantial risk of forfeiture, the participant must recognize ordinary income
equal to the fair market value of the shares or other property received at the
first time the shares or other property become transferable or not subject to
substantial risk of forfeiture, whichever occurs earlier; AT&T will generally be
entitled to a deduction for the same amount.
BOARD ADJUSTMENT TO OUTSTANDING STOCK-BASED AWARDS
On the date of the contemplated spin-off of AT&T Communications Services
Inc., existing stock-based awards outstanding under the 1997 incentive plan, the
2001 incentive plans and the additional compensation plans would be adjusted in
accordance with the provisions of the plans in a manner intended to preserve the
intrinsic value of the original awards immediately before and after the
contemplated split-off. The adjustments would be effected by means of one or
more of (1) an adjustment to the exercise price or the number of shares, or
both, of stock-based awards related to any class of security, (2) the grant of
additional or replacement awards of a different class or classes of securities,
or (3) other appropriate adjustments including cash payments.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS HAS APPROVED THE INCENTIVE PLAN PROPOSALS AND
RECOMMENDS THAT YOU VOTE FOR THE INCENTIVE PLAN PROPOSALS.
200
211
EMPLOYEE STOCK PURCHASE PLAN PROPOSAL
GENERAL
AT&T's 1996 Employee Stock Purchase Plan was initially adopted in 1996 and
authorized the issuance of 50,000,000 shares of AT&T common stock (which was
later adjusted for the Company's three-for-two stock split paid on April 15,
1999). The plan was restated effective July 1, 2001 authorizing an additional
30,000,000 shares for issuance under this plan. Our board of Directors has
approved, subject to shareholder approval, an AT&T Amended 1996 Employee Stock
Purchase Plan. If approved by shareholders this plan will provide eligible
employees with an opportunity to purchase AT&T common stock, and effective
January 1, 2002, AT&T Broadband Group common stock and AT&T Consumer Services
Group tracking stock, through payroll deductions. This plan is intended to
assist eligible employees in acquiring a stock ownership interest in AT&T
pursuant to a plan that is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code. This plan also includes a component not
intended to qualify under Section 423 of the Code, or the "Non-423 Component,"
which will permit participation by certain eligible employees based outside the
United States. A description of this plan is outlined below.
SHARES RESERVED FOR THIS PLAN
The aggregate number of shares of AT&T common stock, which may be purchased
under the plan during the period from July 1, 2001 through June 30, 2006, will
not exceed 30 million, subject to adjustment. Additionally, any shares remaining
as of June 30, 2001 of the shares previously reserved to the AT&T 1996 Employee
Stock Purchase Plan will continue to be available for issuance under this plan
through June 30, 2006. On January 1, 2001, 18,474,247 shares remained available
for issuance under the AT&T 1996 Employee Stock Purchase Plan. Of the 30 million
shares which were newly authorized effective July 1, 2001, one million are
reserved for the Non-423 Component.
The aggregate amount of shares of AT&T Broadband Group tracking stock which
may be purchased under this plan during the period of January 1, 2002 through
June 30, 2006, will not exceed $ million per year. Of the newly authorized
shares of AT&T Broadband Group tracking stock, % are reserved for the
Non-423 Component.
The aggregate amount of shares of AT&T Consumer Services Group tracking
stock which may be purchased under the plan during the period of January 1, 2002
through June 30, 2006, will not exceed $ million per year. Of the
newly authorized shares of AT&T Consumer Services Group tracking stock,
% are reserved for the Non-423 Component.
Shares issued under this plan may consist, in whole or in part, of
authorized and unissued shares, treasury shares, or shares bought on the market.
ELIGIBLE PARTICIPANTS
All employees of AT&T (and those of a subsidiary designated by AT&T) are
eligible if they meet certain conditions. To be eligible, the employee must have
completed one month of continuous employment. Part-time employees are eligible
to participate.
Approximately 160,000 employees would have been eligible to participate as
of December 31, 2000.
On the first day of each month beginning July 1, 2001, except as otherwise
determined by the committee, AT&T will grant options as permitted under this
plan. The term of each option will end on the last day of the month containing
the date on which the option was granted.
Each eligible employee on a date of exercise will be entitled to purchase
shares of common stock at a purchase price equal to 85% of the average of the
reported highest and lowest sale prices of
201
212
shares of common stock on the NYSE on the applicable date of exercise. Dates of
exercise will take place on the last day of each month common stock is traded on
the NYSE during the applicable option period. The eligible employee will elect
the allocation of AT&T common stock, AT&T Broadband Group tracking stock and
AT&T Consumer Services Group tracking stock to be purchased.
Payment for shares of common stock purchased under this plan will be made
by authorized payroll deductions from an eligible employee's total regular
compensation payable from AT&T or a participating subsidiary of AT&T during an
option period or, when authorized by the Committee, an eligible employee may pay
an equivalent amount for such shares.
Eligible employees who elect to participate in this plan will designate a
stated whole percentage equaling at least 1%, but no more than 10% of their
eligible compensation, to be deposited into a periodic deposit account. On each
date of exercise, the entire periodic deposit account of each participant in the
plan is used to purchase whole and/or fractional shares of common stock. AT&T
will maintain a stock purchase account for each participant to reflect the
shares of common stock purchased under the plan by each participant. No
participant in this plan is permitted to purchase common stock under this plan
at a rate that exceeds $25,000 in fair market value of common stock, determined
at the time options are granted, for each calendar year. For purposes of making
this determination, all of the AT&T common stock, AT&T Broadband Group tracking
stock, and AT&T Consumer Services Group tracking stock purchased by a
participant will be aggregated.
All funds received by AT&T from the sale of common stock under this plan
may be used for any corporate purpose.
NEW PLAN BENEFITS
It is not possible to determine how many eligible employees will
participate in this plan in the future. Therefore, it is not possible to
determine with certainty the dollar value or number of shares of common stock
that will be distributed under this plan. On the average, approximately 5
million shares of AT&T common stock have been distributed annually during the
prior five-year term of this plan.
The following table sets forth certain information with respect to shares
purchased under the 1996 AT&T Employee Stock Purchase Plan during 2000 by the
only one of the five most highly compensated executive officers who participated
in this plan, all current executive officers as a group, and all employees as a
group (excluding executive officers).
NUMBER OF
SHARES
NAME AND POSITION DOLLAR VALUE(1) PURCHASED
----------------- --------------- -------------
Daniel E. Somers, President and CEO, AT&T Broadband...... $ 7,661.00 451.444
All current executive officers as a group................ $ 38,120.32 2,246.336
All employees as a group (excluding current executive
officers).............................................. $84,874,074.73 5,001,418.664
-------------------------
(1)Based upon $16.97 per share, the fair value of AT&T common stock on December
29, 2000.
TAX TREATMENT
This plan (other than the Non-423 Component) is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Code.
Under the Code, an employee who elects to participate in an offering under this
plan will not realize income at the time the offering commences or when the
shares purchased under this plan are transferred to him or her. If an employee
disposes of such shares after two years from the date the offering of such
shares commences and after one year from the date of the transfer of such shares
to him or her, the
202
213
employee will be required to include in income, as compensation for the year in
which such disposition occurs, an amount equal to the lesser of (i) the excess
of the fair market value of such shares at the time of disposition over the
purchase price, or (ii) 15% of the fair market value of such shares at the time
the offering commenced. The employee's basis in the shares disposed of will be
increased by an amount equal to the amount so includable in his or her income as
compensation, and any gain or loss computed with reference to such adjusted
basis which is recognized at the time of the disposition will be a capital gain
or loss, either short-term or long-term, depending on the holding period for
such shares. In such event, AT&T (or the subsidiary by which the employee is
employed) will not be entitled to any tax deduction from income.
If any employee disposed of the shares purchased under this plan within
such two-year or one-year period, the employee will be required to include in
income, as compensation for the year in which such disposition occurs, an amount
equal to the excess of the fair market value of such shares on the date of
purchase over the purchase price. The employee's basis in such shares disposed
of will be increased by an amount equal to the amount includable in his or her
income as compensation, and any gain or loss computed with reference to such
adjusted basis which is recognized at the time of disposition will be a capital
gain or loss, either short-term or long-term, depending on the holding period
for such shares. In the event of a disposition within such two-year or one-year
period, AT&T (or the subsidiary by which the employee is employed) will be
entitled to a tax deduction from income equal to the amount the employee is
required to include in income as a result of such disposition.
An employee who is a nonresident of the United States will generally not be
subject to the U.S. federal income tax rules described above with respect to the
shares of common stock purchased under this plan.
PLAN ADMINISTRATION AND TERMINATION
The board of directors of AT&T, or its delegate, will appoint a committee,
which will be composed of one or more employees, to administer the plan on
behalf of AT&T. This committee may delegate any or all of the administrative
functions under the plan to such individuals, subcommittees, or entities, as the
committee considers appropriate. The committee may adopt rules and procedures
not inconsistent with the provisions of this plan for its administration. The
committee's interpretation and construction of this plan is final and
conclusive.
The board may at any time, or from time to time, alter or amend this plan
in any respect, except that, without approval of the shareholders of AT&T, no
amendment may increase the number of shares reserved for purchase, or reduce the
purchase price per share under this plan, other than as described above.
The board will have the right to terminate this plan or any offering at any
time for any reason. The plan may continue in effect through June 30, 2006.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
ADOPTION OF THIS PROPOSAL REQUIRES AN AFFIRMATIVE VOTE OF A MAJORITY OF THE
VOTES CAST. OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE
AT&T AMENDED 1996 EMPLOYEE STOCK PURCHASE PLAN.
203
214
THE SPIN-OFF PROPOSAL
GENERAL
As part of AT&T's restructuring plan, within about a year after we issue
AT&T Broadband Group tracking stock, we plan to spin off AT&T Communications
Services, Inc., which will consist of both AT&T Business Services Group and AT&T
Consumer Services Group. Following the spin-off, AT&T will change its name to
"AT&T Broadband Corp." and AT&T Communications Services, Inc. will change its
name to "AT&T Corp." Approval of the spin-off proposal will also constitute
approval of the proposed name changes.
We expect that the spin-off will be accomplished through the following
steps, any or all of which may be effected simultaneously:
- Transfer all of the assets and liabilities of AT&T Consumer Services
Group and AT&T Business Services Group to AT&T Communications Services,
Inc., to the extent such assets and liabilities are not already held by
AT&T Communications Services, Inc.
- Distribute on a pro rata basis to holders of AT&T common stock as a
dividend shares of AT&T Communications Services, Inc. common stock.
- Mandatorily redeem, in accordance with the terms of our charter, all
issued and outstanding shares of AT&T Consumer Services Group tracking
stock for shares of the new Consumer Services Group tracking stock of
AT&T Communications Services, Inc. The new Consumer Services Group
tracking stock will continue to be intended to reflect the financial
performance and economic value of AT&T Consumer Services Group, but will
be a class of stock of AT&T Communications Services, Inc., not of AT&T.
After the mandatory redemption is completed, holders of AT&T Consumer
Services Group tracking stock that do not hold shares of AT&T common stock no
longer will be shareholders of AT&T (which will be renamed "AT&T Broadband
Corp.") and will have no interest in that entity, but instead will be
shareholders of AT&T Communications Services, Inc. through their ownership of a
new Consumer Services Group tracking stock, which is a class of common stock of
AT&T Communications Services, Inc.
The specific terms and conditions of the spin-off of AT&T Communications
Services, Inc. are expected to be governed by the separation and distribution
agreement to be entered into among AT&T and AT&T Communications Services, Inc.
The material expected terms of the separation and distribution agreement are
summarized below.
In addition, we expect that AT&T and AT&T Communications Services, Inc.
will enter into a number of other agreements in connection with the spin-off. We
expect these agreements to include:
- brand license agreement, including brand assignment,
- network services agreements,
- employee benefits agreement,
- intellectual property agreement, including intellectual property
assignment, and
- interim and other services agreements.
The material expected terms of these agreements are described below.
However, other than possible assignments concerning AT&T's brands or other
intellectual property, we do not expect that any of these agreements will be
entered into until immediately before the spin-off, and each of AT&T and AT&T
Communications Services, Inc. reserves the right to materially change the terms
of these agreements.
204
215
SEPARATION AND DISTRIBUTION AGREEMENT
The separation and distribution agreement will set forth the agreements
among AT&T and AT&T Communications Services, Inc. with respect to the principal
corporate transactions required to effect the spin-off, and a number of other
agreements governing the relationship between AT&T and AT&T Communications
Services, Inc. following the spin-off. We only expect to enter into the
separation and distribution agreement, and to complete the spin-off, if our
board of directors determines that it is in AT&T's best interests to do so,
considering all factors at the time, and if specified conditions are met. These
conditions include, among others, continued effectiveness of a favorable ruling
on the spin-off from the Internal Revenue Service, receipt of shareholder
approval, and any other material consents. The continued effectiveness of this
ruling in all material respects is a non-waivable condition to the spin-off. For
this purpose, this condition will continue to be satisfied even if a
supplemental ruling that does not materially alter the conclusions of our ruling
is issued.
While we currently intend to complete the spin-off, our board of directors
may decide not to proceed with the spin-off due to future market conditions,
financial performance or superior alternatives or the occurrence of other
factors that make it inadvisable to proceed with the spin-off, even if the
specified conditions are met. Additionally, other events or circumstances,
including litigation, could occur and could affect the timing or terms of the
spin-off and/or our ability or plans to complete it. As a result, the spin-off
may not occur, and, if it does occur, it may not occur on the terms or in the
manner described, or in the time frame contemplated. See "Risk Factors Relating
to AT&T's Restructuring Plan -- AT&T's restructuring plan is subject to change
and may not be completed as planned or at all."
THE SEPARATION
We will agree pursuant to the separation and distribution agreement to
transfer, or to cause our subsidiaries to transfer, to AT&T Communications
Services, Inc.:
- all assets allocated to AT&T Consumer Services Group or AT&T Business
Services Group by our charter that are not then held by AT&T
Communications Services, Inc.;
- all assets reflected in the most recent balance sheets of each of AT&T
Consumer Services Group and AT&T Business Services Group that are not
then held by AT&T Communications Services, Inc.;
- contracts to the extent relating to AT&T Consumer Services Group or the
AT&T Business Services Group as will be described in the separation and
distribution agreement; and
- any other assets of AT&T that are not part of AT&T Broadband Group.
AT&T Communications Services, Inc. also will agree to assume or fulfill:
- all liabilities allocated to AT&T Consumer Services Group or AT&T
Business Services Group by our charter to which AT&T Communications
Services, Inc. or its subsidiaries are not then subject;
- all liabilities reflected in the most recent balance sheet of each of
AT&T Consumer Services Group and AT&T Business Services Group to which
AT&T Communications Services, Inc. is not then subject;
- liabilities resulting from the spin-off as will be described in the
separation and distribution agreement; and
- all other liabilities of AT&T, including contingent liabilities, that are
not expressly allocated to AT&T Broadband Group.
205
216
AT&T Broadband Corp. will also be assigned some contingent liabilities as
will be described in the separation and distribution agreement.
Generally, neither AT&T nor AT&T Communications Services, Inc. will make
any representation or warranty as to:
- the assets, businesses or liabilities transferred or assumed;
- any consents or approvals required in connection with that transfer or
assumption;
- the value or freedom from any lien or other security interest of any of
the assets; and
- the absence of any defenses or freedom from counterclaims relating to any
claim of any person, or as to the legal sufficiency of any assignment,
document or instrument delivered to convey title to any asset
transferred.
In addition, all assets are being transferred on an "as is, where is"
basis, and AT&T Communications Services, Inc. will agree to bear the economic
and legal risks that the conveyance is insufficient to vest good and marketable
title, free and clear of any lien or other security interest.
AT&T and AT&T Communications Services, Inc. generally also will agree to
terminate all agreements, understandings and arrangements among AT&T and AT&T
Communications Services, Inc., other than the separation and distribution
agreement and the other intercompany agreements entered into by the groups in
contemplation of the establishment of the tracking stock arrangements or
subsequent separation and other than as may be provided in the agreements.
RELEASES AND INDEMNIFICATION
The separation and distribution agreement generally will provide for a full
and complete release and discharge, as of the date of the completion of the
mandatory exchange, of all liabilities existing or arising from all acts and
events occurring or failing to occur or alleged to have occurred or to have
failed to occur and all conditions existing or alleged to have existed on or
before the date of the completion of the mandatory exchange between or among
AT&T and its affiliates, on the one hand, and AT&T Communications Services, Inc.
and its affiliates, on the other hand, including any contractual agreements or
arrangements existing or alleged to exist between or among them on or before
that date, other than the separation and distribution agreement and the other
intercompany agreements entered into by the groups in contemplation of the
establishment of the tracking stock arrangements or subsequent separation.
AT&T Communications Services, Inc. will agree to indemnify, defend and hold
harmless AT&T and its affiliates, and each of their directors, officers and
employees, from and against all liabilities relating to, arising out of or
resulting from:
- the failure of AT&T Communications Services, Inc. or its affiliates, or
any other persons, to pay, perform or otherwise promptly discharge any of
the liabilities of AT&T Communications Services, Inc.;
- any liabilities of AT&T Communications Services, Inc.; and
- any breach by AT&T Communications Services, Inc. or its affiliates of the
separation and distribution agreement or any of the other agreements
entered into in connection with the separation and distribution
agreement.
206
217
AT&T will agree to indemnify, defend and hold harmless AT&T Communications
Services, Inc. and its affiliates, and each of their directors, officers and
employees, from and against all liabilities relating to, arising out of or
resulting from:
- the failure of AT&T or its affiliates or any other person to pay, perform
or otherwise promptly discharge any liabilities of AT&T, other than
liabilities of AT&T Communications Services, Inc.;
- any liabilities of AT&T, other than liabilities of AT&T Communications
Services, Inc.; and
- any breach by AT&T or its affiliates of the separation and distribution
agreement or any of the other agreements entered into in connection with
the separation and distribution agreement.
The separation and distribution agreement also specifies procedures for
claims for indemnification made under the provisions described above.
TERMINATION
The separation and distribution agreement will provide that it may be
terminated at any time before the completion of the distribution by AT&T in its
sole discretion. If AT&T terminates the separation and distribution agreement,
neither party will have any liability or further obligation to any other party.
AMENDMENTS AND WAIVERS
The separation and distribution agreement will provide that no provisions
of it or any related agreement will be deemed waived, amended, supplemented or
modified by any party unless the waiver, amendment, supplement or modification
is in writing and signed by the authorized representative of the party against
whom that waiver, amendment, supplement or modification is sought to be
enforced.
BRAND LICENSE AGREEMENT
AT&T and AT&T Communications Services, Inc. expect to enter into a brand
license agreement, including brand assignment, unless the assignment of AT&T's
brands is effected prior to the spin-off. At or before the spin-off, all rights,
title and interest in all of AT&T's brands (including all trademarks, service
marks, trade names, trade dress, etc.), the registrations and applications
therefor throughout the world, and the goodwill they symbolize, together with
all associated license agreements (including the brand agreements with AT&T
Broadband Group and AT&T Consumer Services Group), will be transferred to AT&T
Communications Services, Inc. or a company to be held by AT&T Communications
Services, Inc. In addition, all agreements with third parties that grant to AT&T
licenses to use any other brands will, as permitted by those agreements, be
transferred to AT&T Communications Services, Inc.
NETWORK SERVICE AGREEMENTS
AT&T and AT&T Communications Services, Inc. expect to enter into network
services agreements substantially similar to those described under "Relationship
among AT&T Groups -- Relationships with AT&T -- Commercial Transactions between
Groups."
EMPLOYEE BENEFITS AGREEMENT
AT&T and AT&T Communications Services, Inc. expect to enter into an
employee benefits agreement which will cover a wide range of compensation and
benefit issues. In general, AT&T Communications Services, Inc. will be
responsible for all obligations and liabilities relating to employees and former
employees of AT&T Communications Services, Inc. and their dependents and
beneficiaries after the spin-off date, and AT&T will be responsible for the
obligations and liabilities before the spin-off date. We refer to individuals
who were employees of AT&T or its affiliates and are transferred to AT&T
Communications Services, Inc. or its affiliates as transferred individuals.
207
218
AT&T Communications Services, Inc.'s plans will fully recognize and fully
credit transferred individuals with their full service with AT&T or its
affiliates. Transferred individuals' account balances under AT&T defined
contribution plans will vest on the spin-off date and they will be allowed to
make a one-time election to transfer their accounts to the AT&T Communications
Services, Inc. 401(k) Plan. Each transferred individual will vest in his accrued
benefit under the AT&T pension plans on the spin-off date. Transferred
individuals will also be entitled to a distribution of their accounts under the
AT&T Employee Stock Ownership Plan.
INTELLECTUAL PROPERTY AGREEMENTS
AT&T and AT&T Communications Services, Inc. expect to enter into an
intellectual property agreement, including intellectual property assignment,
unless the assignment of AT&T's intellectual property is effected prior to the
spin-off. At or before the spin-off, all rights, title and interest in AT&T's
patents, patent applications, copyrights, trade secrets and other intellectual
property rights, together with all associated license agreements (including the
intellectual property agreements with AT&T Broadband Group and AT&T Consumer
Services Group), will be transferred to AT&T Communications Services, Inc. or a
company to be held by AT&T Communications Services, Inc. In addition, all
agreements with third parties that grant intellectual property rights to AT&T
will, as permitted by those agreements, be transferred to AT&T Communications
Services, Inc.
SERVICES AGREEMENT
AT&T and AT&T Communications Services, Inc. expect to enter into a services
agreement providing for various transitional and similar services on specified
terms.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS HAS APPROVED THE SPIN-OFF PROPOSAL AND RECOMMENDS
THAT YOU VOTE FOR THE SPIN-OFF PROPOSAL.
EFFECT OF THE SPIN-OFF ON AT&T CONSUMER SERVICES GROUP AND ON AT&T CONSUMER
SERVICES GROUP TRACKING STOCK
AT&T Consumer Services Group is part of the larger AT&T Communications
Services, Inc., which also includes AT&T Business Services Group. Consequently,
if we complete the spin-off of AT&T Communications Services, Inc., all of the
assets and liabilities of AT&T Consumer Services Group will be spun off as well
and be part of the new entity. As mentioned above, we intend that, in connection
with the spin-off, all of the outstanding shares of AT&T Consumer Services
tracking stock will be redeemed for shares of the new Consumer Services Group
tracking stock of AT&T Communications Services, Inc. The new Consumer Services
Group tracking stock will generally have terms substantially similar to AT&T
Consumer Services Group tracking stock, but will be stock of AT&T Communications
Services, Inc. as opposed to AT&T, and the per share voting rights of the new
Consumer Services Group tracking stock will be based on the ratio, over a fixed
measurement period, of the initial trading prices of the new Consumer Services
Group tracking stock to the trading prices of AT&T Communications Services, Inc.
common stock. See "The Consumer Services Charter Amendment Proposal -- Terms of
the Consumer Services Group Tracking Stock Amendment -- Redemption."
EFFECT OF THE SPIN-OFF ON AT&T BROADBAND GROUP AND ON AT&T BROADBAND GROUP
TRACKING STOCK
Following the spin-off of AT&T Communications Services, Inc., we expect
that AT&T will consist only of AT&T Broadband Group. For this reason, following
the spin-off, we expect to redeem all outstanding shares of AT&T Broadband Group
tracking stock for shares of AT&T common stock as permitted by the terms of the
Broadband Group tracking stock amendment. See "The Broadband Charter Amendment
Proposal -- Terms of the Broadband Group Tracking Stock Amendment --
Redemption."
208
219
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
We summarize below the material U.S. federal income tax consequences
relating to the spin-off. The summary is based on the Code, the Treasury
regulations promulgated thereunder, judicial opinions, published positions of
the Internal Revenue Service, and all other applicable authorities, all of which
are subject to change (possibly with retroactive effect). Any such change could
alter the tax consequences to us and the holders of AT&T Consumer Services Group
tracking stock or AT&T common stock.
This summary does not discuss all tax considerations that may be relevant
to stockholders in light of their particular circumstances, nor does it address
the consequences to stockholders subject to special treatment under the U.S.
federal income tax laws (such as tax-exempt entities, non-resident alien
individuals, foreign entities, foreign trusts and estates and beneficiaries
thereof, persons who acquire our common stock pursuant to the exercise of
employee stock options or otherwise as compensation, insurance companies, and
dealers in securities.) In addition, this summary does not address the U.S.
federal income tax consequences to stockholders who do not hold their AT&T
common stock or AT&T Consumer Services Group tracking stock as a capital asset.
This summary does not address any state, local or foreign tax consequences.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL,
STATE AND LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE SPIN-OFF TO YOU.
U.S. FEDERAL INCOME TAX CONSEQUENCES
It is a condition to the spin-off that AT&T has obtained a private letter
ruling from the Internal Revenue Service which confirms, among other things,
that the spin-off will qualify as tax-free to AT&T and its shareholders under
Section 355 of the Code. We received this ruling on June 27, 2001. To the extent
this summary describes the federal income tax consequences of the distribution
and the redemption, such consequences have been set forth in the Internal
Revenue Service ruling. Although the ruling relating to the qualification of the
redemption and distribution as a tax-free transaction is generally binding on
the Internal Revenue Service, the continuing validity of the ruling is subject
to factual representations and assumptions. We are not aware of any facts or
circumstances that would cause such representations and assumptions to be
untrue. The continued effectiveness of this ruling in all material respects is a
non-waivable condition of the spin-off. For this purpose, this condition will
continue to be satisfied even if a supplemental ruling that does not materially
alter the conclusions of our ruling is issued.
DISTRIBUTION
Subject to the discussion below relating to the receipt of cash instead of
fractional shares, and assuming the continued effectiveness of the private
letter ruling from the Internal Revenue Service, for U.S. federal income tax
purposes the tax consequences of the distribution of AT&T Communications
Services, Inc. common stock to holders of AT&T common stock are as follows:
- no gain or loss will be recognized by, and no amount will be included in
the income of, AT&T upon the distribution;
- no gain or loss will be recognized by, and no amount will be included in
the income of, stockholders upon their receipt of shares of AT&T
Communications Services, Inc. common stock in the distribution;
- a holder of AT&T common stock will apportion the tax basis for such
holder's AT&T common stock on which AT&T Communications Services, Inc.
common stock is distributed between AT&T common stock and AT&T
Communications Services, Inc. common stock received in the distribution
(including any fractional shares of AT&T Communications Services, Inc.
common stock deemed received) in proportion to the relative fair market
values
209
220
of such AT&T common stock and AT&T Communications Services, Inc. common
stock on the date of the distribution; and
- the holding period of shares of AT&T Communications Services, Inc. common
stock received by a holder of AT&T common stock in the distribution will
include the period during which such holder held AT&T common stock on
which AT&T Communications Services, Inc. common stock is distributed.
REDEMPTION
Subject to the discussion below relating to the receipt of cash instead of
fractional shares, and assuming the continued effectiveness of the private
letter ruling from the Internal Revenue Service, for U.S. federal income tax
purposes the tax consequences of the redemption of AT&T Consumer Services Group
tracking stock are as follows:
- no gain or loss will be recognized by, and no amount will be included in
the income of, AT&T upon the redemption of AT&T Consumer Services Group
tracking stock for new Consumer Services Group tracking stock;
- no gain or loss will be recognized by, and no amount will be included in
the income of, stockholders upon their receipt of shares of new Consumer
Services Group tracking stock in the redemption;
- the aggregate tax basis of the shares of new Consumer Services Group
tracking stock received by stockholders in the redemption will be the
same as the aggregate tax basis of the shares of AT&T Consumer Services
Group tracking stock exchanged therefor; and
- the holding period of the shares of new Consumer Services Group tracking
stock received by stockholders in the redemption will include the holding
period of the shares of AT&T Consumer Services Group tracking stock with
respect to which the shares of new Consumer Services Group tracking stock
were received.
RECEIPT OF CASH INSTEAD OF FRACTIONAL SHARES
No fractional shares of new Consumer Services Group tracking stock or AT&T
Communications Services, Inc. common stock will be issued in the distribution or
the redemption. All fractional shares resulting from the distribution and the
redemption will be aggregated and sold by the exchange agent and the proceeds
will be distributed to the owners of such fractional shares.
A stockholder who receives cash instead of a fractional share interest in
the redemption or the distribution will generally recognize gain or loss in an
amount equal to the difference between the amount of cash received and the
portion of such stockholder's tax basis allocable to such fractional share
interest. Such gain or loss will be treated as capital gain or loss. For
taxpayers who are individuals, if their fractional share interest has a holding
period for U.S. federal income tax purposes of more than one year, any gain will
generally be subject to a stated maximum rate of 20%. In general, for purposes
of the spin-off, a person's holding period for a fractional share interest will
include the period during which such person held AT&T common stock or the period
during which such person held AT&T Consumer Services Group tracking stock, as
the case may be, with respect to which such fractional share interest was
received.
Under the Code, if you receive cash in lieu of a fractional share interest,
you may be subject, under certain circumstances, to backup withholding at a 31%
rate with respect to such cash unless you provide proof of an applicable
exemption or a correct taxpayer identification number, and otherwise comply with
applicable requirements of the backup withholding rules. The letter of
transmittal provides instructions on how to provide us with information to
prevent backup withholding with respect to cash received in the spin-off in lieu
of a fractional share interest. Any amounts withheld under the backup
withholding rules are not an additional tax and may be refunded or
210
221
credited against your U.S. federal income tax liability, provided you furnish
the required information to the Internal Revenue Service.
Holders who have blocks of AT&T common stock or AT&T Consumer Services
Group tracking stock with different per share tax bases are urged to consult
their tax advisors regarding the possible tax basis consequences to them of the
spin-off.
Current Treasury Regulations require each holder who receives new Consumer
Services Group tracking stock or AT&T Communications Services, Inc. common stock
pursuant to the spin-off to attach to his or her federal income tax return for
the year in which the spin-off occurs, a detailed statement setting forth such
data as may be appropriate in order to show the applicability of Section 355 of
the Code to the spin-off. AT&T will provide the appropriate information to each
stockholder of record.
STOCK EXCHANGE OR QUOTATION SYSTEM LISTING
Application will be made to have both AT&T Communications Services, Inc.
common stock issued in the spin-off and the new Consumer Services Group tracking
stock approved for listing on a national securities exchange or quotation
system.
ACCOUNTING TREATMENT
Upon receipt of necessary approvals, AT&T will report AT&T Communications
Services, Inc. as Discontinued Operations, in accordance with APB 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" (APB 30). For accounting purposes, the split-off of
AT&T Consumer Services Group is considered a non pro rata distribution and is
expected to be recorded at fair value resulting in the recognition of a gain on
the remaining AT&T entity upon the distribution date. The spin-off of AT&T
Business Services Group will be a pro rata distribution and therefore recorded
at historical cost.
DIVIDENDS
Following the spin-off, it is expected that the aggregate dividend payable
to holders of AT&T Communications Services, Inc. common stock and holders of new
Consumer Services Group tracking stock would be the same as that payable to
holders of AT&T common stock and AT&T Consumer Services Group tracking stock
before the spin-off. The declaration of dividends by AT&T Communications
Services, Inc. and the amount thereof will, however, be in the discretion of
AT&T Communications Services, Inc.'s board of directors and will depend upon
each of its group's financial performance, the dividend policies and capital
structures of comparable companies, each group's ongoing capital needs and AT&T
Communications Services, Inc.'s results of operations, financial condition, cash
requirements and future prospects and other factors deemed relevant by its board
of directors. Following the spin-off, AT&T Broadband Corp. does not expect to
pay any dividends.
211
222
DESCRIPTION OF AT&T COMMUNICATIONS SERVICES, INC.
The description below of AT&T Communications Services, Inc. reflects our
current plans regarding the operation of AT&T Communications Services, Inc.
These plans may change from time to time prior to the spin-off.
AT&T Communications Services, Inc. is intended to consist of AT&T Consumer
Services Group and AT&T Business Services Group. We refer you to "Description of
AT&T Consumer Services Group" for more information on AT&T Consumer Services
Group and to "-- Description of AT&T Business Services Group" for more
information on AT&T Business Services Group. For more information on various
agreements that will affect the businesses of AT&T Communications Services,
Inc., see "The Spin-off Proposal." For financial information about AT&T
Communications Services, Inc., see "Summary -- Selected Historical Financial
Data -- of AT&T Communications Services, Inc." and "AT&T Communications
Services, Inc. Management's Discussion and Analysis of Financial Condition and
Results of Operations." Please also see the combined financial statements of
AT&T Communications Services, Inc., which are included in Appendix D to this
document.
DESCRIPTION OF AT&T BUSINESS SERVICES GROUP
The description below of AT&T Business Services Group reflects our current
plans regarding the operation of AT&T Business Services Group. These plans may
change from time to time prior to or after the spin-off.
OVERVIEW
AT&T Business Services Group is one of the nation's largest business
services telecommunications providers, providing a variety of global
communications services to large domestic and multinational businesses, small
and medium-sized businesses, and government agencies. Business units within this
group provide regular and custom voice services (including local, long distance,
and international outbound, 800, 877 and 888 and 900 services), data and IP
services (including private line, frame relay, asynchronous transfer mode
services) as well as hosting, outsourcing and other consulting services. AT&T
Business Services Group operates one of the largest telecommunications networks
in the United States.
AT&T BUSINESS SERVICES GROUP
Following the issuance of AT&T Broadband Group tracking stock and AT&T
Consumer Services Group tracking stock and prior to the spin-off, AT&T common
stock will represent AT&T Business Services Group, which is expected to be
comprised of all assets and liabilities of AT&T not attributable to AT&T
Broadband Group or AT&T Consumer Services Group. The AT&T common stock will also
represent the retained portion of value in AT&T Broadband Group. The primary
operating asset of AT&T Business Services Group is the AT&T Business Services
business, and except as described elsewhere in this document, we attribute all
of AT&T's current Business Services operations to AT&T Business Services Group,
including:
- Business Services business telecommunications customers,
- the AT&T telecommunications network,
- Business Services support infrastructure, including ordering,
provisioning, billing and care,
- AT&T Labs,
- AT&T brands,
- AT&T intellectual property,
212
223
- our $3 billion ownership interest in AT&T Wireless Services, Inc., and
- a number of joint ventures and investments, including Concert, AT&T Latin
America, AT&T Canada, Alestra and Alascom.
INDUSTRY OVERVIEW
The communications services industry continues to change, both domestically
and internationally, providing significant opportunities and risks to the
participants in these markets. Factors that have been driving this change
include:
- technological advances, such as the Internet,
- rapid development of new services and products,
- the Telecommunications Act,
- deregulation of communications services markets in selected countries
around the world, and
- entry of new competitors in existing and emerging markets.
Each of these factors is impacted by the rapid development of data
services. The development of frame relay, asynchronous transfer mode and IP
networks as modes of transmitting information electronically has dramatically
transformed the array and breadth of services offered by telecommunications
carriers.
Use of the Internet, including intranets and extranets, has grown rapidly
in recent years. This growth has been driven by a number of factors, including
the large and growing installed base of personal computers, improvements in
network architectures, increasing numbers of network-enabled applications,
emergence of compelling content and commerce-enabling technologies, and easier,
faster and cheaper Internet access. Consequently, the Internet has become an
important new global communications and commerce medium. The Internet represents
an opportunity for enterprises to interact in new and different ways with both
existing and prospective customers, employees, suppliers and partners.
Enterprises are responding to this opportunity by substantially increasing their
investment in Internet connectivity and services to enhance internal
productivity as well as market competitiveness.
The market for data communications and Internet access and related products
is characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions.
Developments in technology are further increasing the capacity and lifespan of
previously deployed network infrastructure.
In the United States, the Telecommunications Act has had a significant
impact on AT&T Business Services Group's business by establishing a statutory
framework for opening the local service markets to competition and by allowing
RBOCs to provide in-region long distance services. In addition, prices for long
distance minutes and other basic communications services have declined as a
result of competitive pressures, introduction of more efficient networks and
advanced technologies, product substitution, and deregulation. Competition in
these segments is based more on price and less on other differentiating factors
that appeal to the larger business market customers, including range of services
offered, bundling of products, customer service, and communications quality,
reliability and availability.
STRATEGY
The strategy of AT&T Business Services Group is to use the advantages of
its existing customer base, network and technical personnel to continue to be
the market leader in evolving telecommunications connectivity services for
business customers. AT&T Business Services Group intends to leverage its
position as a connectivity leader to become a leader in added value managed
213
224
telecommunications services as well as telecommunication outsourcing solutions.
The following areas are critical to this transformation.
PROVIDE SEAMLESS SERVICE TO CUSTOMERS
AT&T Business Services Group believes that a key element to its success in
the provision of the services to business customers is to provide a seamless
experience for those customers in all stages of service provision. Customers
will have one point of contact for their entire AT&T Business Services Group
relationship, from contracting to service delivery, whether located domestically
or internationally. AT&T Business Services Group believes this will
substantially enhance its customers' reliance on its services and improve
customer satisfaction, retention levels and migration to new, advanced services.
END-TO-END CONNECTIVITY
In connection with providing seamless service to customers, AT&T Business
Services Group believes it must provide its customers with end-to-end
connectivity, meaning its customers can expect AT&T Business Services Group
service at each stage of the communication, in order to ensure the high level of
service that AT&T Business Services Group customers expect. AT&T Business
Services Group plans to increase the use of its own facilities to complete
customer communications on its own network assets. The ability to offer local
connections is expected to reduce access costs and to provide AT&T Business
Services Group with the ability to offer more bundled services and improve
customer experience.
COMPATIBILITY OF MULTIPLE SERVICES OR PLATFORMS ON OUR NETWORK
To transmit information over its network, AT&T Business Services Group
utilizes circuit switched, IP and asynchronous transfer mode systems. While AT&T
will continue to have both circuit and packet switching and transmission
technologies for some time, significant future capital expenditures are not
scheduled for circuit switching. As AT&T Business Services Group continues to
enhance the capabilities of its network, its goal is to ensure that the
utilization of multiple systems or platforms over its network will have no
effect on customers using the network.
TECHNOLOGICAL LEADERSHIP
AT&T Business Services Group has one of the most advanced networks in the
world. In addition, through AT&T Labs, AT&T Business Services Group has
demonstrated its ability to develop new applications for business communications
customers.
MANAGED SERVICE OPTIONS
AT&T Business Services Group intends to decrease its reliance on
traditional voice services that are experiencing intense pricing pressures, and
primarily focus on high-growth and high-value-added data services. AT&T Business
Services Group managed services offerings, including AT&T outsourcing solutions,
lead the market in providing businesses with managed solutions to communications
needs. AT&T Business Services Group intends to expand its target market for
managed services offerings from large multinational corporations to mid-size
companies by customizing a number of its offers to satisfy certain targeted
markets. In addition, AT&T Business Services Group intends to expand its web
hosting and managed data capabilities through platform consolidations and the
introduction of a number of new services.
BUILD NEW APPLICATIONS ON VOICE/IP TRANSPORT PLATFORMS
AT&T Business Services Group intends to remain at the forefront of IP
implementation. IP is a protocol that allows for market driven development and
deployment of new services and applications. AT&T Business Services Group expect
IP services such as IP Virtual Private Networks to proliferate
214
225
and will use its tradition of pioneering innovative Internet infrastructure
services to continuously expand its Internet value-added services.
SERVICES AND PRODUCTS
VOICE SERVICES
Long distance voice services. AT&T Business Services Group's voice
communication offerings include the traditional "one plus" dialing of domestic
and international long distance for customers that select AT&T Business Services
Group as their primary long distance carrier.
AT&T Business Services Group's data services include private line and
special access services that use high-capacity digital circuits to carry voice,
data and video (or multimedia) transmission from point-to-point in multiple
configurations. These services provide high-volume customers with a direct
connection to an AT&T Business Services Group switch instead of switched access
shared by many users. These services permit customers to create internal
computer networks, to access external computer networks and the Internet, as
well as to reduce originating access costs.
AT&T Business Services Group also offers toll-free (800, 888 or 877)
inbound service, where the receiving party pays for the call. This is used in a
wide variety of applications, many of which generate revenue for the user (such
as reservation centers or customer service centers). AT&T Business Services
Group offers a variety of features to enhance customers' toll-free service,
including call routing by origination point and time-of-day routing.
AT&T Business Services Group also offers a variety of calling cards that
allow the user to place calls from virtually anywhere in the world. Additional
features include prepaid phone cards, conference calling, international
origination, information service access (such as weather or stock quotes), Speed
Dialing and voice messaging.
Business Local Services. Local carriers provide local exchange, exchange
access, toll and resold services; sell, install and maintain customer premises
equipment; and provide operator and directory services. The market for local
exchange services consists of a number of distinct service components. These
service components are defined by specific regulatory tariff classifications
including: (1) local network services, which generally include basic dial tone
charges and private line services; (2) network access services, which consist of
access charges received by local exchange carriers from long distance carriers
for the local transport and termination portion of long distance telephone
calls; (3) long distance network services, which include the variable portion of
charges received by local exchange carriers for intraLATA long distance calls;
and (4) additional value-added services, such as Caller Identification, Call
Waiting, Call Forwarding, 3-Way Calling and Voice Mail.
AT&T Business Local's customers principally are
telecommunications-intensive businesses, health care and educational
institutions, governmental agencies, long distance carriers and resellers, ISPs,
disaster recovery service providers and wireless communications and financial
services companies. AT&T Business Local's centrally managed customer care and
support operations are designed to facilitate the installation of new services
and the processing of orders for changes and upgrades in customer services.
AT&T Business Local generally offers its services in accordance with
applicable tariffs filed with state regulatory agencies (for intrastate
services). AT&T Business Local typically offers local service as part of a
package of services, which can include any combination of other AT&T Business
Services Group offerings. Customers also choose among analog, digital voice-only
and ISDN Centrex telephone lines to their desktops. AT&T Business Services Group
owns, houses, manages and maintains the switch, while customers retain control
over network configurations, allowing customers to add, delete and move lines as
needed. For local service, customers are billed a fixed charge plus usage.
215
226
DATA AND INTERNET SERVICES
Enhanced data services. Enhanced data services consist of data networks
utilizing packet switching and transmission technologies and application
services, such as Internet access and web site hosting and management, which
utilize the frame relay network as a mode of data transmission. Enhanced data
services enable customers economically and securely to transmit large volumes of
data typically sent in bursts from one site to another. Enhanced data services
are utilized for local area network interconnection, remote site, point of sale
and branch office communications solutions.
AT&T Business Internet Services. AT&T Business Services Group provides IP
connectivity and IP value-added services, messaging, and electronic commerce
services to businesses. AT&T offers Managed Internet Services, which gives
customers dedicated, high-speed access to the public Internet for business
applications at a variety of speeds and types of access, as well as Business
Dial Service, a dial-up version of Internet access designed to meet the needs of
small- and medium-sized businesses.
AT&T Virtual Private Network Service allows businesses to obtain remote
access to e-mail, order entry systems, employee directories, human resources and
other databases, or to create an intranet and extranets with their clients,
suppliers and business partners, and enables customers to tailor their Virtual
Private Networks to accommodate specific business applications, performance
requirements or the need to integrate with existing data networks.
AT&T Web Services consist of a family of hosting and transactional services
and platforms serving the web needs of thousands of businesses. Offers include
AT&T Small Business Hosting Services, an economical way for small businesses to
establish a presence on the world wide web. In addition, Dedicated Hosting
Offers include Business Ready Dedicated Hosting Services and AT&T Dedicated
Hosting (Business-Managed, where AT&T both provides and services the equipment
involved, and Hybrid-Managed, where AT&T may or may not provide the equipment
involved) Services. AT&T Dedicated Hosting Service provides customizable and
pre-packaged web-hosting solutions. These Hosting Offers also include a range of
business tools to assist in the ongoing maintenance of web sites and e-commerce
stores as well as other managed services such as security, storage, media and
professional services.
TRANSPORT
AT&T Business Services Group is one of the leaders in providing wholesale
networking services to other carriers, providing both network capacity and
switched services. AT&T offers a combination of high-volume transmission
capacity, conventional dedicated line services and dedicated switched services
on a regional and national basis to ISPs and facility-based and switchless
resellers.
Wholesale networking service typically is provided pursuant to long-term
service agreements for terms of one year or longer. These service agreements
generally provide for payments at fixed rates based on the capacity and length
of the circuit used. Customers typically are billed on a monthly basis and also
may incur an installation charge or certain ancillary charges for equipment.
After the expiration of a service agreement, the service agreement may be
renewed or the services may be provided on a month-to-month basis. Switched
service agreements generally are offered on a month-to-month basis and the
service is billed on a minutes-of-use basis. More recently, AT&T Business
Services Group also has sold network capacity through indefeasible rights-of-use
agreements under which capacity is furnished for contract terms as long as 25
years.
MANAGED SERVICES AND OUTSOURCING SOLUTIONS
AT&T Business Services Group provides clients with a broad array of managed
and professional services to satisfy clients' complete networking technology
needs. AT&T Business Services Group's professional services range from
consulting to outsourcing and management of highly complex global data networks.
AT&T Business Services Group designs, engineers and implements seamless
solutions for clients that are designed to maximize the competitive advantage of
networking-based electronic
216
227
commerce applications. Working with qualified partners, AT&T Business Services
Group also provides a full range of custom, managed e-infrastructure, web
hosting and high-availability services.
AT&T Business Services Group's Global Enterprise Management System platform
offers global, end-to-end networking management capabilities that extend all the
way to the applications domain. It also enables AT&T to consult with clients in
setting quality of service expectations and developing customized service level
agreements based on performance requirements for individually managed
applications, as well as the total networking environment.
INTERNATIONAL
AT&T Business Services Group has established a number of international
alliances to increase the reach and scope of AT&T Business Services Group's
services and network over time and has made strategic investments in order to
seek to increase the range of services AT&T Business Services Group offers in
those countries. These investments have included Alestra in Mexico and Japan
Telecom in Japan. On February 26, 2001, AT&T entered into an agreement to sell
its interest in Japan Telecom to Vodafone. This sale was completed in April
2001.
On January 5, 2000, AT&T and BT created a global venture to serve the
communications needs of multinational companies and the international calling
needs of businesses around the world. The venture, called Concert and owned
equally by AT&T Business Services Group and BT, combined transborder assets and
operations of each company, including their existing international networks,
their international traffic, their transborder products for business
customers -- including an expanding set of Concert services -- and AT&T Business
Services Group's and BT's multinational accounts in selected industry sectors.
AT&T and BT are discussing ways to improve the performance of the business.
These discussions include a variety of strategic alternatives to the Concert
joint venture, including an acquisition of, or a business combination of our
business services unit, upon its planned separation from the remainder of AT&T,
with, BT's business services operations. Such a transaction could include all or
a substantial portion of BT's business services operations, including BT Ignite
and BT's interest in Concert, in exchange for some mixture of cash, equity
and/or other instruments in the combined business. These discussions may or may
not lead to any acquisition or other business combination and may or may not
lead to any change in the existing alliance arrangements. As possible
alternatives to such a transaction, we have also been considering a narrowing of
Concert's business scope, as well as its termination as a joint venture. There
can be no assurances, however, that an agreement could be reached with BT with
regard to either of such alternatives. We cannot tell you whether these
discussions will continue, whether any of these transactions, or other
transactions, will be completed, or the timing or terms of any possible
transaction.
On June 1, 1999, AT&T Canada Corp. merged with MetroNet Communications
Corp., Canada's largest competitive local exchange carrier. Under the terms of
the merger agreement, AT&T Business Services Group received 31% of the equity
interest and 23% of the voting interest in AT&T Canada, Inc., or AT&T Canada, in
exchange for AT&T Canada Corp. and ACC TelEnterprises Ltd. In addition, AT&T
Business Services Group agreed to purchase all of the remaining shares of AT&T
Canada at the greater of the then appraised fair market value or the accreted
minimum price, which initially was C$37.50 accreting after June 30, 2000 at a
rate of 16% per annum, compounded quarterly. If the acquisition is not completed
by June 30, 2003, those shares, along with AT&T Business Services Group's
shares, would be sold through an auction process and AT&T Business Services
Group will make whole the other shareholders for the amount they would have been
entitled to if AT&T Business Services Group had purchased all of the remaining
shares of AT&T Canada. The completion of the acquisition is subject to the
condition that AT&T Business Services Group is permitted to acquire the shares
under Canada's foreign ownership restrictions. AT&T Business Services Group may
acquire the shares prior to a change in the ownership restrictions by developing
a structure that addresses these ownership restrictions. On August 16, 1999,
AT&T Business Services Group completed its sale to BT of 30% of AT&T Business
Services Group's stake in AT&T Canada. In addition, BT has agreed to purchase
30% of the shares of AT&T Canada that AT&T Business
217
228
Services Group will be acquiring from the other stockholders, subject to BT's
right to cap its purchase at $1.65 billion.
On August 28, 2000, AT&T Business Services Group established AT&T Latin
America in connection with the merger of Netstream, a competitive local exchange
carrier in Brazil, and FirstCom Corporation, a publicly traded company with
competitive telecommunications operations in Chile, Colombia and Peru. AT&T
Business Services Group owns 58% of AT&T Latin America; SL Participacoes, an
affiliate of Promon Tecnologia, which is the former owner of Netstream, owns 7%
of AT&T Latin America, and the former FirstCom shareholders own 34% of AT&T
Latin America, on a fully diluted basis. Promon Tecnologia and the former
FirstCom shareholders own AT&T Latin America Class A shares, which have one vote
per share, and AT&T Business Services Group owns AT&T Latin America Class B
shares, which have 10 votes per share.
MARKETING AND SALES
AT&T Business Services Group has a dedicated sales force through which it
markets its voice and data communication services. The sales force predominantly
is divided into geographic markets, and in each market focuses on large,
multinational corporations, small businesses, government markets, and
value-added resellers and other wholesalers. AT&T Business Services Group
employs full service support teams to provide significant customer support and
service to help increase customer satisfaction and retention. A number of AT&T
Business Services Group's larger global accounts are served directly by Concert,
with AT&T Business Services Group as an underlying supplier of specified
services to Concert.
RATES AND BILLING
AT&T Business Services Group offers its regulated services in most cases in
accordance with applicable tariffs filed with the FCC and various states. Rates
can vary due to a number of factors, including the volume and nature of service
committed to AT&T Business Services Group. AT&T Business Services Group expects
to offer its interstate services on a detariffed basis after July 2001. AT&T
Business Services Group offers voice and data services individually and in
combination with other offerings. Through combined offerings, AT&T Business
Services Group provides customers with benefits such as single billing, unified
services for multilocation companies and customized calling plans.
Domestic and international business services originating in the United
States primarily are billed in six-second increments, while other business
services are billed in partial minutes rounded to the next minute. Switched
voice services originating in international markets are billed in increments,
subject to local market conditions and interconnect agreements. Switched long
distance and local services are billed in arrears, with monthly billing
statements itemizing date, time, duration and charges. Data services generally
are billed on a fixed per line and variable trunk rate. Data service rates are
based on the speed of transmission, and, depending on the service type, may be
billed in arrears or in advance. Private line services are billed monthly in
advance, with the invoice indicating applicable rates by circuit. AT&T Business
Services Group's rates generally are designed to be competitive with those
charged by other long distance and local carriers.
OTHER ASSETS
AT&T Business Services Group has a number of interests in other entities,
including:
- $3 billion ownership interest in AT&T Wireless Services, Inc. (not
reflected in the financial statements), and
- joint ventures and investments, including Concert, AT&T Latin America,
AT&T Canada, Alestra and Alascom.
218
229
NETWORK
AT&T Business Services Group utilizes both IP and asynchronous transfer
mode systems to transmit information over its network. Both technologies offer
significant efficiencies over circuit switched systems, which use a single,
dedicated circuit to complete each transmission. Asynchronous transfer mode
switching also is a more efficient method of switching and transmitting
commingled or multimedia information. The packet switching technology common to
both IP and asynchronous transfer mode system breaks up a transmission into
short, digitized pieces, or packets, which are encoded and transmitted with
other packets on the same circuit, and reassembled at the desired destination.
Asynchronous transfer mode differs from IP in that the data packets used in
asynchronous transfer mode (called cells) are one size (53 bytes), whereas in IP
the data packets vary in length. Also, whereas asynchronous transfer mode
establishes virtual circuits to ensure that the information sent is reassembled
at its destination in its proper sequence, IP ships each packet of information
to its destination by a different path. While AT&T Business Services Group will
continue to have both circuit and packet switching and transmission technologies
for some time, significant future capital expenditures are not scheduled for
circuit switching.
AT&T Business Services Group's U.S. network comprises 45,000 route miles of
long-haul backbone fiber-optic cable, plus another 16,000 route miles of local
metro fiber. In addition, AT&T Business Services Group is currently installing
16,500 new route miles of the latest generation fiber-optic cable, able to carry
OC-192 (10 trillion bits, or 10 gigabits per second) traffic more efficiently
than older fiber, and capable of carrying OC-768 (40 gigabits per second) when
that standard is ready for deployment. This new next generation network
presently connects 18 of the largest U.S. cities, and will be extended to
connect the top 30 U.S. cities. AT&T Business Services Group was the first in
the industry with a coast-to-coast OC-192 backbone, connecting Boston, New York,
Chicago, St. Louis, San Francisco and Los Angeles. In addition to this
state-of-the-art 10 gigabits per second backbone, AT&T Business Services Group
also has OC-48 (2.5 gigabits per second) facilities to more than 500
points-of-presence in the continental U.S., offering high-speed data
connectivity to the majority of U.S. business centers.
This network carries more than 1000 trillion bytes (terabytes) of data each
day, in addition to 300 million voice calls every business day. AT&T Business
Services Group carries more Frame Relay and asynchronous transfer mode traffic
than any other U.S. carrier; these are the packet services used by businesses
for critical data traffic. The reliability of all services is maximized by using
Synchronous Optical Network that can reroute circuits within 150 milliseconds of
a failure on the network. On the voice network, AT&T Business Services Group's
patented Real Time Network Routing automatically completes domestic voice calls
using more than 100 possible routes. AT&T Business Services Group stands behind
its reliability claims with Service Level Agreements. For example, on its IP
backbone, AT&T Business Services Group guarantee business customers no more than
60 milliseconds of latency, or delay in the transmission of a packet of
information, and 0.7% packet loss per month.
AT&T Business Services Group has been a leader in deploying Dense
Wavelength Division Multiplexing, or DWDM, technology that divides an optical
fiber into multiple channels, each carrying up to 10 gigabits per second of
information today. AT&T Business Services Group is now deploying 64- and
80-wavelength DWDM systems, and by the end of 2001 plans to deploy 160-
wavelength systems. When installed on OC-192 facilities, a 160-wavelength DWDM
system will enable 1.6 terabits (trillion bits per second) on a single fiber
strand.
In addition to its long distance network, AT&T Business Services Group also
has an extensive local network serving business customers in 71 U.S. cities.
AT&T Business Services Group has expanded its local network so that it now
includes 109 local switches and reaches more than 6,200 buildings. This network
provides voice service to business users, as well as data connections up to
OC-48 capacity. In addition, AT&T Business Services Group is deploying Internet
Data Centers across the U.S., offering web hosting services that put data closer
to users. By the end of 2001,
219
230
AT&T Business Services Group plans to have 21 of these web hosting centers, with
two million square feet of space in the aggregate, all directly connected to
AT&T Business Services Group's high-speed IP backbone.
COMPETITION
AT&T Business Services Group faces the same competition issues applicable
generally to the communications services industry that are discussed with
respect to AT&T Consumer Services Group. See "Description of AT&T Consumer
Services Group -- Competition" and "Risk Factors Relating to AT&T Consumer
Services Group and AT&T Business Services Group -- AT&T Consumer Services Group
and AT&T Business Services Group face substantial competition that may
materially adversely impact both market share and margins."
EMPLOYEES
At December 31, 2000, AT&T Business Services Group employed approximately
66,400 individuals in its operations. Of those employees, approximately 61,900
are located domestically. About 19,400 of the domestically located employees of
AT&T Business Services Group are represented by unions. Of those so represented,
about 94% are represented by the Communications Workers of America and about 5%
are represented by the International Brotherhood of Electrical Workers, both of
which are affiliated with the AFL-CIO. In addition, there is a very small
remainder of domestic employees represented by other unions. Labor agreements
with most of these unions extend through May 2002.
LEGAL PROCEEDINGS
In the normal course of business, AT&T Business Services Group is subject
to proceedings, lawsuits and other claims, including proceedings under
government laws and regulations related to environmental and other matters. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Business Services Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at December 31, 2000. While these matters could affect
operating results of any one quarter when resolved in future periods, it is
management's opinion that after final disposition, any monetary liability or
financial impact to AT&T Business Services Group beyond that provided for at
year-end would not be material to AT&T Business Services Group's annual
consolidated financial position or results of operations.
For additional information on legal proceedings, please see the discussion
on legal proceedings under "Legal Proceedings" contained in our Annual Report on
Form 10-K for the year ended December 31, 2000, which is incorporated by
reference in this document. See "Other Information -- Where You Can Find More
Information."
LEGISLATIVE AND REGULATORY DEVELOPMENTS
Legislative and regulatory developments discussed with respect to AT&T
Consumer Services Group also apply to AT&T Business Services Group. See
"Description of AT&T Consumer Services Group -- Legislative and Regulatory
Developments."
220
231
SELECTED HISTORICAL FINANCIAL DATA OF
AT&T COMMUNICATIONS SERVICES, INC.
In the table below, we provide you with selected historical combined
financial data of AT&T Communications Services, Inc.
AT&T COMMUNICATIONS SERVICES, INC.
SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
----------------- ---------------------------
2001 2000 2000 1999 1998
------- ------- ------- ------- -------
RESULTS OF OPERATIONS
Revenue...................................... $11,127 $12,227 $47,521 $50,152 $47,890
Operating income(1).......................... 2,502 2,534 12,960 12,702 7,683
Income before extraordinary loss and
cumulative effect of accounting change..... 1,236 1,524 8,054 8,124 5,084
ASSETS AND CAPITAL
Property, plant and equipment, net........... $26,032 $26,083 $25,587 $21,780
Total assets................................. 55,591 57,013 49,893 40,136
Long-term notes payable to AT&T.............. 8,093 8,603 9,040 2,056
Total notes payable to AT&T.................. 26,454 30,749 16,205 3,139
Combined attributed net assets............... 8,339 4,415 12,560 15,112
Debt ratio(2)................................ 76.2% 87.5% 56.3% 17.2%
Gross capital expenditures................... 1,145 6,207 7,807 6,871
OTHER INFORMATION
Operating income as a percent of revenue..... 22.5% 27.3% 25.3% 16.0%
Return on average equity(3).................. 85.7% 94.9% 58.7% 41.2%
Employees.................................... 83,420 81,971 96,777 95,765
-------------------------
(1)Operating income includes $0.8 billion of net restructuring and other charges
for the three-months ended March 31, 2000. Operating income includes
$0.8 billion, $0.3 billion and $2.5 billion of net restructuring and other
charges in 2000, 1999 and 1998, respectively.
(2)Debt ratio reflects debt as a percent of total capital (debt plus equity).
The increase in 2000 compared with 1999 and 1999 compared with 1998 was due
primarily to higher debt payable to AT&T.
(3)Amount for the three months ended March 31, 2001, is based on annualized net
income.
221
232
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AT&T Communications Services, Inc. is an integrated business of AT&T and
not a stand-alone entity. The combined financial statements of AT&T
Communications Services, Inc. represent the AT&T Business Services Group and
AT&T Consumer Services Group portions of AT&T, along with certain corporate
activities. AT&T Communications Services, Inc. is among the world's
communications leaders, providing voice and data services to large and small
businesses, consumers and government agencies. AT&T Communications Services,
Inc. provides domestic and international long distance and regional, local and
Internet communication services. AT&T Communications Services, Inc. also
provides billing, directory and calling-card services to support its
communications businesses.
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.
Upon completion of the plan, AT&T Wireless Group, AT&T Broadband Group, AT&T
Business Services Group and AT&T Consumer Services Group will all be represented
by asset-based or tracking stocks.
As part of the first phase of the restructuring plan, on April 27, 2001,
AT&T began an exchange offer that will give AT&T shareholders the opportunity to
exchange any portion of their AT&T common shares for shares of AT&T Wireless
Group tracking stock, subject to proration. The exchange offer was completed on
May 25, 2001. Subject to specified conditions, AT&T plans to split-off AT&T
Wireless Group from AT&T. AT&T intends, however, to retain up to $3 billion of
shares of AT&T Wireless Services, Inc. for future sale, exchange or monetization
within six months following the split-off. Such shares will be attributed to
AT&T Communications Services, Inc. AT&T expects AT&T Wireless Services, Inc.
will become an independent, publicly-held company on July 9, 2001.
In addition to the split-off of AT&T Wireless Group, AT&T intends to fully
separate or issue separate tracking stocks intended to reflect the financial
performance and economic value of each of its other major business units. AT&T
plans to create and issue new classes of stock intended to track the financial
performance and economic value of AT&T Broadband Group and AT&T Consumer
Services Group, and expects to sell some percentage of shares of AT&T Broadband
Group tracking stock later this year, subject to market and other factors.
Within 12 months of such sale, AT&T intends to completely separate AT&T
Broadband Group from AT&T through the spin-off of AT&T Communications Services,
Inc. Some or all of the AT&T Consumer Services Group tracking stock is expected
to be distributed to AT&T shareholders later this year.
AT&T plans to effect the spin-off in two parts. First, AT&T expects to
distribute shares of AT&T Communications Services, Inc. common stock as a
dividend to holders of AT&T common stock. Second, at the same time, AT&T will
redeem all of the shares of AT&T Consumer Services Group tracking stock for a
new tracking stock issued by the newly spun-off AT&T Communications Services,
Inc.
Following the spin-off of AT&T Communications Services, Inc., the remaining
AT&T would consist of AT&T Broadband Group. After the spin-off, AT&T will change
its name to "AT&T Broadband Corp." and AT&T Communications Services, Inc. will
change its name to "AT&T Corp."
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,
222
233
including obtaining various conditions, such as Internal Revenue Service
rulings. In addition, future market conditions, financial performance or
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 currently expected
or in the timeframes that are currently contemplated, or at all. Alternative
forms of restructuring, including sales of interests in these businesses, would
reduce what is available for distribution to shareholders in the restructuring.
Debt has been allocated to AT&T Communications Services, Inc. based on the
future view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T. This allocation took into account the following
factors: prospective financing requirements, desired stand-alone credit profile,
working capital and capital expenditure requirements and comparable company
profiles. Increases in historical debt levels were, in general, driven primarily
by historical cash flows generated by this entity in relation to total AT&T.
Such cash outflows include acquisitions, dividend payments, capital
expenditures, partially offset by cash flow from operations. For purposes of
this allocation, certain "corporate" activities were deemed to be funded by this
entity by contributing proceeds to the parent. These activities included the
repurchase of common shares by AT&T and cash payments associated with the TCI
merger and the MediaOne acquisition. Similarly, certain corporate activities
that resulted in cash flow to AT&T were deemed to be attributed to AT&T
Communications Services, Inc. These activities are reflected within net
contributions (to) from AT&T in the combined statements of cash flows. At or
before the time of the spin-off, when AT&T Communications Services, Inc. is
separated from historical AT&T, we plan to seek to transfer the previously
allocated indebtedness from AT&T to AT&T Communications Services, Inc. This may
be accomplished through a variety of measures that may result in increased costs
and additional covenants on AT&T Communications Services, Inc. The historical
interest expense on the allocated debt was calculated based on a rate intended
to be equivalent to the rate AT&T Communications Services, Inc. would have
received if it were a stand-alone entity. Due to AT&T's deleveraging activities
and expected positive cash flow from operations of AT&T Communications Services,
Inc., the $26.6 billion of debt at March 31, 2001 is expected to be
significantly lower in the future. AT&T's expected deleveraging activities that
relate to AT&T Communications Services, Inc. include: $3 billion retained
portion of AT&T Wireless Services, Inc.; and $0.7 billion of gross proceeds from
the sale of AT&T Communications Services, Inc.'s investment in Japan Telecom.
Finally, AT&T has made no final determination as to the allocation of proceeds
from the sale of shares of AT&T Broadband Group tracking stock between AT&T
Communications Services, Inc. and AT&T Broadband Group.
CONSOLIDATED RESULTS OF OPERATIONS
The comparison of 2001 results with 2000 results was impacted by the
elimination of Primary Interexchange Carrier Charges (PICC or per-line charges)
by the Federal Communications Commission (FCC) on July 1, 2000. The elimination
of these per-line charges resulted in lower access expense as well as lower
revenue, since AT&T Communications Services, Inc. has historically billed its
customers for these charges.
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 1999, AT&T acquired the IBM Global Network (now AT&T Global Network Services,
or AGNS), which was included in 2000 results for a full year, but only a part of
1999 (since the respective date of acquisition). Further, AT&T 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.
On January 5, 2000, AT&T launched Concert, its global joint venture with
BT. AT&T Communications Services, Inc. contributed all of its international
cross-border assets and the
223
234
economic value of approximately 270 multinational customers specifically
targeted for direct sales by Concert. As a result, 2000 results do not include
the revenue and expenses associated with these customers and businesses, while
1999 does, and 2000 results include AT&T Communications Services, Inc.'s
proportionate share of Concert's earnings in "Net earnings (losses) from equity
investments."
Effective July 1, 2000, the FCC eliminated Primary Interexchange Carrier
Charges that AT&T Communications Services, Inc. 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
Communications Services, Inc. historically billed its customers for these
charges.
The comparison of 1999 results with 1998 was also impacted by the 1999
acquisition of AGNS, since 1999 results include this business for part of the
year and 1998 does not include it. 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.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THE THREE MONTHS ENDED MARCH
31, 2000
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
2001 2000
---------- ----------
{(DOLLARS IN MILLIONS)}
AT&T Business Services Group................................ $ 7,168 $ 7,252
AT&T Consumer Services Group................................ 4,007 5,037
Other and Corporate......................................... (48) (62)
------- -------
Total revenue............................................... $11,127 $12,227
======= =======
Total revenue decreased 9.0%, or $1.1 billion, in the first quarter of 2001
compared with the first quarter of 2000. Approximately $0.3 billion of the
decrease was due to the elimination of Primary Interexchange Carrier Charges.
The remaining $0.8 billion decrease was primarily driven by continued and
accelerating declines in long distance voice revenue, partially offset by a
growing demand for AT&T Communications Services, Inc.'s data and IP products,
local services and outsourcing services. AT&T Communications Services, Inc.
expects long distance voice revenue will continue to be negatively impacted by
ongoing competition and product substitution.
Revenue by segment is discussed in more detail in the segment results
section.
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
2001 2000
--------- ---------
{(DOLLARS IN MILLIONS)}
Access and other connection................................. $3,148 $3,505
Access and other connection expenses decreased 10.2%, to $3.1 billion in
the first quarter of 2001 compared with the first quarter of 2000. Included
within access and other connection expenses are costs that AT&T Communications
Services, Inc. pays to connect domestic calls on the facilities of other service
providers. Mandated reductions in per-minute access costs and decreased per-line
charges effective in the second half of 2000 resulted in lower costs of
approximately $0.5 billion. These decreases were partially offset by
approximately $0.2 billion of higher costs due to volume increases and higher
Universal Service Fund contributions. Since most of these charges are passed
through to the customer, the per-minute access-rate and per-line charge
reductions and the increased Universal Service Fund contributions have generally
resulted in a corresponding impact on revenue.
224
235
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Costs of services and products.............................. $2,259 $2,162
Costs of services and products include the costs of operating and
maintaining AT&T Communications Services, Inc.'s networks, costs to support AT&T
Communications Services, Inc.'s outsourcing contracts, the provision for
uncollectible receivables and other service-related costs.
These costs increased 4.5% in the first quarter of 2001 compared with the
first quarter of 2000. Cost of services and products increased approximately
$0.2 billion due to higher costs associated with AT&T Communications Services,
Inc.'s new outsourcing contracts as well as additional network costs to support
other growth businesses. These increases were partially offset by lower network
costs of approximately $0.1 associated with decreased volumes related to the
provision of long distance services.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Selling, general and administrative......................... $2,089 $2,180
Selling, general and administrative, or SG&A, expenses decreased $0.1
billion, or 4.3%, in the first quarter of 2001 compared with the first quarter
of 2000. Approximately $0.2 billion of the decrease was due to savings from
continued cost-control initiatives, partially offset by $0.1 billion of higher
costs associated with increased sales support, customer care and marketing costs
for AT&T Business Services Group.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Depreciation and amortization............................... $1,129 $1,089
Depreciation and amortization expenses increased 3.6% in the first quarter
of 2001 compared with the first quarter of 2000. The increase was primarily due
to a higher asset base resulting primarily from continued infrastructure
investment. Capital expenditures were $1.1 billion in the first quarter of 2001,
compared with $1.3 billion in the first quarter of 2000. AT&T Communications
Services, Inc. continues to focus the majority of its capital spending on its
growth businesses of data and IP and local.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Net restructuring and other charges......................... $-- $757
During the first quarter of 2000, AT&T Communications Services, Inc.
recorded $757 million of net restructuring and other charges, which included
$666 million for restructuring and exit costs associated with cost reduction
initiatives, and $91 million related to the government-mandated disposition of
AT&T Communications (U.K.) Ltd., which would have competed directly with
Concert.
225
236
The charge for restructuring and exit plans was primarily due to headcount
reductions, mainly in network operations and AT&T Business Services Group,
including the consolidation of customer-care and call centers.
Included in exit costs was $442 million of cash termination benefits
associated with the involuntary separation of approximately 6,200 employees.
Approximately one-half of the individuals were management employees and one-half
were non-management employees.
AT&T Communications Services, Inc. also recorded $62 million of network
lease and other contract termination costs associated with penalties incurred as
part of notifying vendors of the termination of these contracts during the
quarter.
Also included in restructuring and exit costs was $144 million of benefit
curtailment costs associated with employee separations as part of these exit
plans. Further, AT&T Communications Services, Inc. recorded an asset impairment
charge of $18 million related to the write-down of unrecoverable assets in
certain businesses where the carrying value is no longer supported by future
cash flows.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Operating income............................................ $2,502 $2,534
Operating income decreased 1.3% in the first quarter of 2001 compared with
the first quarter of 2000. The decrease was primarily due to lower revenue,
almost entirely offset by lower net restructuring and other charges.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Other income................................................ $176 $162
Other income was essentially flat in the first quarter of 2001 compared
with the first quarter of 2000. As a result of the adoption of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," AT&T Communications Services, Inc. recognized $90
million of income as a result of ongoing valuation activities in the first
quarter of 2001. This was offset by investment impairment charges of $61 million
and lower net gains on sales of investments of $24 million.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Interest expense............................................ $486 $271
Interest expense increased $215 million in the first quarter of 2001
compared with the first quarter of 2000. The increase was primarily due to a
higher average debt payable to AT&T as a result of net funding to AT&T.
226
237
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Provision for income taxes.................................. $866 $904
The provision for income taxes decreased $38 million to $866 million in the
first quarter of 2001 compared with $904 million in the first quarter of 2000.
The decrease was primarily due to lower income before income taxes, partially
offset by a higher effective income tax rate. The effective income tax rate is
the provision for income taxes as a percent of income before income taxes. The
effective income tax rate was 39.5% in the first quarter of 2001 compared with
37.3% in the first quarter of 2000. The effective tax rate was impacted by
higher foreign pretax losses in 2001 and tax benefits associated with asset
dispositions in the first quarter of 2000.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Minority interest income.................................... $35 $1
Minority interest income represents an adjustment to AT&T Communications
Services, Inc. income to reflect the less than 100% ownership of consolidated
subsidiaries. The increase in minority interest in the first quarter of 2001
compared with the first quarter of 2000 was primarily due to AT&T Latin America,
which began operations in the third quarter of 2000.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Net (losses) earnings from equity investments............... $(125) $2
Net (losses) earnings from equity investments were losses of $125 million
in the first quarter of 2001 compared with earnings of $2 million in the first
quarter of 2000. The decrease was primarily due to higher losses from Concert
and Net2Phone.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Cumulative effect of accounting change...................... $130 $--
Cumulative effect of accounting change, net of applicable income taxes, was
$130 million in the first quarter of 2001. It represented the fair value
adjustments related to AT&T Communications Services, Inc.'s warrant portfolio
due to the adoption of SFAS No. 133.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Net income.................................................. $1,366 $1,524
Net income decreased $0.2 billion, or 10.4%, in the first quarter of 2001
compared with the first quarter of 2000. The decrease was primarily due to lower
revenue, higher interest expense and greater
227
238
losses on equity investments, partially offset by lower net restructuring and
other charges, and income related to the cumulative effect of adopting SFAS No.
133.
SEGMENT RESULTS
In support of the services AT&T Communications Services, Inc. provides,
AT&T Communications Services, Inc. segments its results by the business units
that support its primary lines of business: AT&T Business Services Group and
AT&T Consumer Services Group. The balance of AT&T Communications Services, Inc.
operations is included in a Corporate and Other category.
The discussion of segment results includes revenue; EBIT (earnings before
interest, taxes and the cumulative effect of accounting changes); EBITDA (EBIT
excluding depreciation and amortization and minority interest income (expense));
total assets, and capital additions. 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. Capital additions for each
segment include capital expenditures for property, plant and equipment,
additions to nonconsolidated investments and software development.
EBIT is the primary measure used by AT&T Communication Services, Inc.'s
chief operating decision makers to measure AT&T Communications Services, Inc.'s
operating results and to measure segment profitability and performance. AT&T
Communications Services, Inc. calculates EBIT as earnings before interest, taxes
and the cumulative effect of accounting changes. In addition, management also
uses EBITDA as a measure of segment profitability and performance, and is
defined as EBIT, excluding depreciation and amortization and minority interest
income (expense). 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 the AT&T Communications
Services, Inc.'s chief operating decision makers and provides a return on total
capitalization measure. AT&T Communications Services, Inc. believes EBITDA is
meaningful to investors as a measure of each segment's liquidity consistent with
the measure utilized by AT&T Communications Services, Inc.'s chief operating
decision makers. In addition, AT&T Communications Services, Inc. believes that
both EBIT and EBITDA allow investors a means to evaluate the financial results
of each segment in relation to total AT&T Communications Services, Inc. EBIT for
AT&T Communications Services, Inc. was $2.5 billion, for the first quarter of
2001 and $2.7 billion for the first quarter of 2000. EBITDA for AT&T
Communications Services, Inc. was $3.6 billion for the first quarter of 2001 and
$3.8 billion for the first quarter of 2000. AT&T Communications Services, Inc.'s
calculation of EBIT and EBITDA may or may not be consistent with the calculation
of these measures by other companies. EBIT and EBITDA should not be viewed by
investors as an alternative to generally accepted accounting principles 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.
AT&T BUSINESS SERVICES GROUP
AT&T Business Services Group 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. AT&T Business Services Group is also a provider of voice,
data and IP transport to service resellers (wholesale services).
AT&T Business Services Group 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
228
239
global network. AT&T Business Services Group also includes the results of
international ventures and operations.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
External Revenue............................................ $7,098 $7,176
Internal Revenue............................................ 70 76
Total Revenue............................................... $7,168 $7,252
EBIT........................................................ 1,025 1,146
EBITDA...................................................... 2,043 2,152
Capital additions........................................... $1,287 $1,366
AT MARCH 31, AT DEC. 31,
2001 2000
------------ -----------
(DOLLARS IN MILLIONS)
Total assets........................................... $42,977 $43,186
REVENUE
AT&T Business Services Group revenue declined $0.1 billion, or 1.2%, in the
first quarter of 2001 compared with the first quarter of 2000. The decrease was
primarily due to a decline in long distance voice revenue of approximately $0.5
billion, offset by growth in data/IP of approximately $0.4 billion.
Long distance voice services revenue declined at a low-teens percentage
rate in the first quarter due to a declining average price per minute reflecting
the competitive forces within the industry that are expected to continue.
Partially offsetting this decline was a mid single-digit percentage growth rate
in minutes.
Data services, which represent the transportation of data, rather than
voice, along our network, grew at a high-teens percentage rate in the first
quarter. 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.
AT&T Solutions outsourcing revenue grew at a mid-teens percentage rate in
the first quarter primarily due to growth from new contract signings and add-on
business from existing clients.
Local voice services revenue grew at a low-teens percentage rate in the
first quarter. AT&T Communications Services, Inc. added approximately 90,000
access lines in the first quarter bringing total access lines in service as of
March 31, 2001 to almost 2.4 million, an increase of 42.5% compared with March
31, 2000. At March 31, 2001, AT&T Communications Services, Inc. served more than
6,000 buildings on-net, representing a 3.2% increase compared with March 31,
2000.
AT&T Business Services Group internal revenue was essentially flat in the
first quarter of 2001 compared with the first quarter of 2000.
EBIT/EBITDA
EBIT and EBITDA declined $0.1 billion, or 10.6% and 5.1%, respectively, in
the first quarter of 2001 compared with the same period last year. The decline
primarily reflects the impact of pricing pressure within the long distance voice
business as well as the shift from higher margin long distance services to lower
margin growth services. The decline also reflects the impact of losses recorded
for
229
240
Concert in the first quarter of $0.1 billion, representing a decrease of
approximately $0.2 billion compared with the first quarter of 2000. Mostly
offsetting the overall decrease was lower restructuring charges of $0.4 billion
in the first quarter of 2001.
OTHER ITEMS
Capital additions decreased $0.1 billion, or 5.8%, in the first quarter of
2001 compared with the first quarter of 2000.
Total assets decreased $0.2 billion, or 0.5%, at March 31, 2001, compared
with December 31, 2000.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group 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, AT&T Consumer Services Group provides transaction services, such as
prepaid calling card and operator-handled calling services. Local phone service
is also provided in certain areas.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Revenue..................................................... $4,007 $5,037
EBIT........................................................ 1,302 1,637
EBITDA...................................................... 1,349 1,693
Capital additions........................................... 22 23
AT MARCH 31, AT DEC. 31,
2001 2000
------------ -----------
(DOLLARS IN MILLIONS)
Total assets........................................... $3,036 $3,543
REVENUE
AT&T Consumer Services Group revenue declined 20.5%, or $1.0 billion, in
the first quarter of 2001 compared with the first quarter of 2000. The decline
was primarily due to a decline in traditional voice services, such as Domestic
Dial 1, reflecting the ongoing competitive nature of the consumer long distance
industry, which has resulted in pricing pressures. In addition, approximately
$0.3 billion of the decline was related to the elimination of per-lines charges
in 2000. Also negatively impacting revenue was product substitution and market
migration away from direct-dial wireline and higher priced calling-card services
to lower-priced prepaid-card services.
Calling volumes declined at a low-teens percentage rate in the first
quarter of 2001 primarily due to both competition in the long distance industry,
as well as production substitution, which we expect will continue to negatively
impact AT&T Consumer Services Group revenue.
EBIT/EBITDA
EBIT and EBITDA for AT&T Consumer Services Group declined 20.5% and 20.3%,
respectively, in the first quarter of 2001 compared with the first quarter of
2000. The declines were primarily driven by the impacts of lower revenue,
partially offset by cost-control initiatives.
230
241
OTHER ITEMS
Capital additions were essentially flat in the first quarter of 2001
compared with the first quarter of 2000.
Total assets declined $0.5 billion in the first quarter to $3.0 billion at
March 31, 2001. The decline was primarily driven by lower accounts receivables,
reflecting lower revenue.
CORPORATE AND OTHER
This group reflects the results of certain corporate staff functions and
the elimination of transactions between segments.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
------ ------
(DOLLARS IN MILLIONS)
Revenue.................................................... $(48) $(62)
EBIT....................................................... 176 (82)
EBITDA..................................................... 231 (49)
Capital additions.......................................... 88 30
AT MARCH 31, AT DEC. 31,
2001 2000
------------ -----------
Total assets........................................... $9,578 $10,284
REVENUE
Revenue for corporate and other of negative $48 million primarily includes
the elimination of intercompany revenue, which decreased $7 million in the first
quarter of 2001 compared with the first quarter of 2000.
EBIT/EBITDA
EBIT and EBITDA increased $258 million and $280 million, respectively, in
the first quarter of 2001 compared with the first quarter of 2000. The increases
were primarily due to lower net restructuring and other charges of $252 million.
OTHER ITEMS
Capital additions increased $58 million in the first quarter of 2001
compared with the first quarter of 2000. The increase was primarily driven by
increased spending on nonconsolidated investments.
Total assets decreased $0.7 billion at March 31, 2001, compared with
December 31, 2000, primarily due to higher eliminations of intercompany
receivables of approximately $0.4 billion. In addition, nonconsolidated
investments declined approximately $0.2 billion primarily due to the revaluation
of these investments, partially offset by investment acquisitions.
231
242
THREE YEARS ENDED DECEMBER 31, 2000
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
AT&T Business Services Group.............................. $28,900 $28,692 $25,357
AT&T Consumer Services Group.............................. 18,894 21,753 22,763
Other and Corporate....................................... (273) (293) (230)
------- ------- -------
Total revenue............................................. $47,521 $50,152 $47,890
======= ======= =======
Total revenue decreased 5.2%, or $2.6 billion, in 2000 compared with the
prior year. Approximately $1.5 billion of the decrease was due to the impact of
Concert, dispositions and the elimination of Primary Interexchange Carrier
Charges, partially offset by acquisitions. The remaining $1.1 billion decrease
was primarily driven by continued and accelerating declines in long distance
voice revenue, due primarily to ongoing competition and product substitution.
These factors have resulted in a loss of customers in recent years, which is
expected to continue. Partially offsetting the long distance voice revenue
decline was a growing demand for AT&T Communications Services, Inc.'s data and
IP products, and outsourcing services. AT&T Communications Services, Inc.
expects long distance voice revenue to continue to be negatively impacted by
ongoing competition and product substitution.
Total revenue in 1999 increased $2.3 billion, or 4.7%, compared with 1998.
Approximately $1.4 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 more detail in the segment results
section.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Access and other connection............................... $13,139 $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 AT&T Communications Services, Inc. pays 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 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 AT&T Communications Services,
Inc.'s international settlements as well as earns most of AT&T Communications
Services, Inc.'s foreign-billed revenue, previously incurred and earned directly
by AT&T Communications Services, Inc. In 2000, Concert billed us a net expense
composed of international settlement
232
243
(interconnection) expense and foreign-billed revenue. The amount charged by
Concert in 2000 was lower than interconnection expense incurred in 1999, since
AT&T Communications Services, Inc. recorded these transactions as revenue and
expense, as applicable. Partially offsetting the decline were costs incurred
related to Concert products that the company 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 AT&T
Communications Services, Inc.'s negotiations with international carriers.
Additionally, AT&T Communications Services, Inc. continues 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.............................. $8,588 $8,560 $8,344
Costs of services and products include the costs of operating and
maintaining AT&T Communications Services, Inc.'s networks, costs to support AT&T
Communications Services, Inc.'s outsourcing contracts, the provision for
uncollectible receivables and other service-related costs.
These costs were essentially flat in 2000 compared with 1999. Cost of
services and products expenses increased approximately $0.6 billion due to
higher costs associated with AT&T Communications Services, Inc.'s new
outsourcing contracts as well as additional network costs to support other
growth businesses. Additionally, cost of services and products expenses
increased nearly $0.3 billion due to acquisitions, net of the impact of Concert
and divestments of international businesses. 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 $0.2 billion, or 2.6%, in 1999 compared
with 1998, primarily due to acquisitions, net of international dispositions,
which accounted for approximately $0.9 billion of the increase. Higher costs
associated with new outsourcing contracts increased expenses by approximately
$0.2 billion. Partially offsetting the 1999 increases were lower expenses
related to per-call compensation expense, provision for uncollectible
receivables and gross receipts and property taxes aggregating approximately $0.6
billion as well as network cost-control initiatives of approximately $0.4
billion.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
2000 1999 1998
------ ------ -------
(DOLLARS IN MILLIONS)
Selling, general and administrative......................... $7,537 $9,601 $10,656
Selling, general and administrative, or SG&A, expenses decreased $2.1
billion, or 21.5%, 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. Additionally, approximately $0.2
billion of the decrease was associated with the impact of Concert and
international dispositions, net of acquisitions in 2000.
SG&A expenses decreased $1.1 billion, or 9.9%, in 1999 compared with 1998.
The decrease was due primarily to AT&T Communications Services, Inc.'s continued
efforts to control costs on a companywide basis, which resulted in lower SG&A
expenses of approximately $1.0 billion, including lower spending for consumer
long distance acquisition programs. Partially offsetting these decreases
233
244
was the impact of acquisitions, net of dispositions, which resulted in an
increase in SG&A expenses of approximately $0.1 billion.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Depreciation and amortization............................... $4,538 $4,519 $3,577
Depreciation and amortization expenses were essentially flat in 2000
compared with 1999 and increased $0.9 billion, or 26.3%, in 1999 compared with
1998. The impact of Concert and international dispositions, net of acquisitions,
decreased depreciation and amortization expense $0.1 billion. The increase in
1999 compared with 1998 was due primarily to a higher asset base resulting from
continued infrastructure investment, and to a lesser extent, the impact of
acquisitions, which accounted for approximately $0.2 billion of the increase.
Total capital expenditures for 2000, 1999 and 1998 were $6.2 billion, $7.8
billion and $6.9 billion, respectively. AT&T Communications Services, Inc.
continues to focus the vast majority of its capital spending on its growth
businesses of data and IP and local.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
2000 1999 1998
---- ---- ------
(DOLLARS IN MILLIONS)
Net restructuring and other charges......................... $759 $331 $2,514
During 2000, AT&T Communications Services, Inc. recorded $759 million of
net restructuring and other charges, which included $668 million for
restructuring and exit costs associated with AT&T Communications Services,
Inc.'s initiative to reduce costs by the end of 2000, and $91 million related to
the government-mandated disposition of AT&T Communications (U.K.) Ltd., which
would have competed directly with Concert.
The charge for restructuring and exit plans was primarily due to headcount
reductions, mainly in network operations and AT&T Business Services Group,
including the consolidation of customer-care and call centers.
Included in exit costs was $442 million of cash termination benefits
associated with the separation of approximately 6,200 employees. Approximately
one-half were management and one-half were nonmanagement employees.
Approximately 5,600 employee separations were related to involuntary
terminations and approximately 600 to voluntary terminations.
AT&T Communications Services, Inc. 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.
Also included in restructuring and exit costs in 2000 was $144 million of
benefit curtailment costs associated with employee separations as part of these
exit plans. Further, AT&T Communications Services, Inc. recorded an asset
impairment charge of $18 million related to the write-down of unrecoverable
assets in certain business functions in which the carrying value is no longer
supported by estimated future cash flows.
The 2000 restructuring initiatives are projected to yield cash savings of
approximately $610 million per year, as well as EBIT (earnings before interest
and taxes, including pre-tax minority interest and net pre-tax losses from other
equity investments) savings of approximately $650 million per year. The EBIT
savings, primarily attributable to reduced personnel-related expenses, will be
realized in SG&A expenses and costs of services and products.
234
245
During 1999, AT&T Communications Services, Inc. recorded $331 million of
net restructuring and other charges.
A $145 million charge for restructuring and exit costs was recorded in
conjunction with an initiative to reduce costs. The restructuring and exit plans
primarily focus on the maximization of synergies through headcount reductions in
AT&T Business Services Group 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 termination
plans and 1,100 to voluntary terminations.
AT&T Communications Services, Inc. also recorded a net loss of $307 million
related to the government-mandated disposition of certain international
businesses that would have competed directly with Concert. In addition, AT&T
Communications Services, Inc. recorded benefits of $121 million related to the
settlement of pension obligations for former employees who accepted AT&T's 1998
VRIP offer.
During 1998, AT&T Communications Services, Inc. recorded $2,514 million of
net restructuring and other charges. The bulk of the charge was associated with
an 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 curtailment
losses and $38 million of other administrative costs. AT&T Communications
Services, Inc. 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 AT&T Communications Services, Inc. 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 million of 1995
business restructuring reserves primarily resulting from the overlap of VRIP
with certain 1995 restructuring initiatives.
Also included in the 1998 net restructuring and other charges were asset
impairment charges totaling $718 million, of which $633 million was related to
AT&T Communications Services, Inc.'s decision not to pursue Total Service Resale
as a local service strategy. AT&T Communications Services, Inc. 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 estimated 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., or TCG, merger, which
was accounted for as a pooling of interests. Partially offsetting this charge
was a $92 million reversal of the 1995 restructuring reserve. This reserve
reflected reserves no longer deemed necessary. The reversal primarily included
separation costs attributed to projects completed at a cost lower than
originally anticipated. Consistent with the three-year plan, the 1995
restructuring initiatives were substantially completed by the end of 1998.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
(DOLLARS IN MILLIONS)
Operating income........................................... $12,960 $12,702 $7,683
Operating income increased $0.3 billion, or 2.0%, in 2000 compared with
1999. The increase was primarily due to cost-control initiatives and a larger
pension credit associated with AT&T
235
246
Communications Services, Inc.'s mature long distance businesses and related
support groups, partially offset by lower long distance revenue and higher net
restructuring and other charges. The continuation of competitive pressures and
customer migration to lower-margin products is expected to have a negative
impact on AT&T Communications Services, Inc.'s operating margins.
Operating income rose $5.0 billion, or 65.3%, in 1999 compared with 1998.
The increase was driven by operating expense efficiencies and lower net
restructuring and other charges.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
2000 1999 1998
------ ---- ----
(DOLLARS IN MILLIONS)
Other income................................................ $1,181 $775 $812
Other income increased $0.4 billion, or 52.3%, in 2000 compared with 1999.
This increase was primarily due to higher investment related income and greater
net gains on sales of businesses and investments. The higher gains on sales in
2000 were primarily driven by gains on investment sales, partially offset by the
sale of AT&T Communications Services, Inc.'s Language Line Services business and
a portion of AT&T Communications Services, Inc.'s ownership interest in AT&T
Canada in 1999.
Other income was essentially flat in 1999 compared with 1998. Lower
investment related income was partially offset by higher net gains on sales of
businesses and investments. In 1999, AT&T Communications Services, Inc. recorded
gains associated with the sale of AT&T Communications Services, Inc.'s Language
Line Services business and a portion of AT&T Communications Services, Inc.'s
ownership interest in AT&T Canada, as well as other gains on investments. In
1998, AT&T Communications Services, Inc. recorded gains associated with the sale
of Transtech, as well as other investment sales.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
2000 1999 1998
------ ---- ----
(DOLLARS IN MILLIONS)
Interest expense............................................ $1,643 $797 $292
Interest expense increased 106.1%, or $0.8 billion, in 2000 compared with
1999. The increase was primarily due to a higher average debt payable to AT&T as
a result of net funding to AT&T.
Interest expense increased $0.5 billion in 1999 compared with 1998, due to
higher average debt payable to AT&T associated with AT&T Communications
Services, Inc.'s acquisition of AGNS and net funding to AT&T.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Provision for income taxes.................................. $4,493 $4,508 $3,009
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 35.9% in 2000, 35.5% in 1999 and 36.7% in 1998. In 2000, the
effective tax rate was impacted by the tax benefits associated with certain
foreign legal entity restructurings and foreign investments. The effective tax
rate in 1999 was 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 as well as investment dispositions, legal entity
restructurings and other tax planning strategies. The effective tax rate for
1998 was
236
247
impacted by the pooling of the TCG's historical results, which did not include
tax benefits on preacquisition losses, and the effects of certain foreign legal
entity restructurings and investment dispositions.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Minority interest income (expense).......................... $39 $-- $(1)
Minority interest income (expense) represents an adjustment to AT&T
Communications Services, Inc. income to reflect the less than 100% ownership of
consolidated subsidiaries. The increase in minority interest in 2000 compared
with 1999 was primarily due to AT&T Latin America, which began operations in the
third quarter of 2000, of which AT&T Communications Services, Inc. owned 62.5%
at the end of 2000.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2000 1999 1998
---- ---- -----
(DOLLARS IN MILLIONS)
Net earnings (losses) from equity investments............... $10 $(48) $(109)
Net earnings (losses) from equity investments were earnings of $10 million
in 2000, a 119.8% improvement compared with 1999. This improvement was primarily
a result of equity earnings related to Concert, whose net equity earnings were
not included in 1999, as well as additional equity earnings for Japan Telecom.
Partially offsetting the higher equity earnings were equity losses for
Net2Phone, which was acquired in the third quarter of 2000.
Net losses from equity investments were $48 million in 1999 compared with
$109 million in 1998, primarily due to losses from AT&T Unisource Communications
Services, or AUCS, which was divested in the fourth quarter of 1998, and higher
equity earnings for Alestra, partially offset by lower earnings for AT&T Canada.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Income before extraordinary loss............................ $8,054 $8,124 $5,084
Income before extraordinary loss decreased $0.1 billion, or 0.9% in 2000
compared with 1999. The decrease was primarily due to higher interest expense,
partially offset by an increase in other income, primarily associated with
higher investment related income and net gains on sales of businesses and
investments. Also impacting net income from continuing operations was lower
expenses, partially offset by lower revenue associated with AT&T Communications
Services, Inc.'s mature long distance businesses.
Income before extraordinary loss increased $3.0 billion, or 59.8%, in 1999
compared with 1998. The increase was due to revenue growth and operating expense
efficiencies, as well as lower net restructuring and other charges.
237
248
Extraordinary Items
In August 1998, AT&T Communications Services, Inc. extinguished
approximately $1.0 billion of TCG's debt. The $217 million pre-tax loss on the
early extinguishment of debt was recorded as an extraordinary loss. The
after-tax impact was $137 million.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Net Income.................................................. $8,054 $8,124 $4,947
Net income decreased $0.1 billion, or 0.9%, in 2000 compared with 1999. The
decrease was primarily due to higher interest expense, partially offset by an
increase in other income, primarily associated with higher investment related
income and net gains on sales of businesses and investments. Also impacting net
income from continuing operations was lower expenses, partially offset by lower
revenue associated with AT&T Communications Services, Inc.'s mature long
distance businesses.
Net income increased $3.2 billion, or 64.2%, in 1999 compared with 1998.
The increase was due to revenue growth and operating expense efficiencies, as
well as lower net restructuring and other charges. Also impacting net income was
the $137 million extraordinary loss associated with the early extinguishment of
TCG debt.
SEGMENT RESULTS
In support of the services AT&T Communications Services, Inc. provided in
2000, AT&T Communications Services, Inc. segments its results by the business
units that support its primary lines of business: AT&T Business Services Group
and AT&T Consumer Services Group. The balance of AT&T Communications Services,
Inc. operations is included in a Corporate and Other category.
The discussion of segment results includes revenue; EBIT (earnings before
interest and taxes, including net pre-tax income (losses) of other equity
investments); EBITDA (EBIT plus depreciation, amortization and minority interest
income (expense)); total assets, and capital additions. 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. Capital
additions for each segment include capital expenditures for property, plant and
equipment, additions to nonconsolidated investments and software development.
EBIT is the primary measure used by AT&T Communication Services, Inc.'s
chief operating decision makers to measure AT&T Communications Services, Inc.'s
operating results and to measure segment profitability and performance. AT&T
Communications Services, Inc. calculates EBIT as operating income plus net
pre-tax losses from equity investments, pre-tax 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), 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 the AT&T Communications Services, Inc.'s chief
operating decision makers and provides a return on total capitalization measure.
AT&T Communications Services, Inc. believes EBITDA is meaningful to investors as
a measure of each segment's liquidity consistent with the measure utilized by
AT&T Communications Services, Inc.'s chief operating decision makers. In
addition, AT&T Communications Services, Inc. believes that both EBIT and EBITDA
allow investors a means to evaluate the financial results of each segment in
relation to total AT&T Communications Services, Inc. EBIT for AT&T
Communications Services,
238
249
Inc. was $14.1 billion, $13.4 billion and $8.3 billion for the years ended
December 31, 2000, 1999 and 1998, respectively. EBITDA for AT&T Communications
Services, Inc. was $18.7 billion, $17.9 billion and $11.9 billion for the years
ended December 31, 2000, 1999 and 1998, respectively. AT&T Communications
Services, Inc.'s calculation of EBIT and EBITDA may or may not be consistent
with the calculation of these measures by other companies. EBIT and EBITDA
should not be viewed by investors as an alternative to generally accepted
accounting principles 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.
AT&T BUSINESS SERVICES GROUP
AT&T Business Services Group 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. AT&T Business Services Group is also a provider of voice,
data and IP transport to service resellers (wholesale services).
AT&T Business Services Group includes AT&T Solutions, the company's
professional-services outsourcing business, which provides seamless solutions
that maximize the competitive advantage of
networking-based electronic applications for global clients. AT&T Solutions also
provides e-infrastructure and high-availability services to enterprise clients,
and manages AT&T's unified global network.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
External Revenue.......................................... $28,578 $28,344 $25,074
Internal Revenue.......................................... 322 348 283
Total Revenue............................................. $28,900 $28,692 $25,357
EBIT...................................................... 5,991 5,248 4,031
EBITDA.................................................... 10,200 9,468 7,389
Capital additions......................................... $ 6,839 $ 9,091 $ 6,761
AT DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Total assets................................................ $43,186 $38,081
REVENUE
In 2000, AT&T Business Services Group revenue grew $0.2 billion, or 0.7%,
compared with 1999. Strength in data and IP services as well as growth in AT&T
Communications Services, Inc.'s 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.
239
250
Data services, which represent the transportation of data, rather than
voice, along AT&T Communications Services, Inc.'s 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 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 AT&T Communications Services, Inc.'s 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 service revenue grew nearly 20% in 2000 and more than 50% in
1999. During 2000, AT&T Communications Services, Inc. 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 Communications Services, Inc. network. AT&T
Communications Services, Inc. serves more than 6,000 buildings on-network
(buildings where AT&T Communications Services, Inc. owns the fiber that runs
into the building), representing an increase of approximately 3.5% over 1999. At
the end of 1999, AT&T Communications Services, Inc. served just over 5,800
buildings on-network compared with approximately 5,200 buildings at the end of
1998.
AT&T Business Services Group internal revenue decreased $26 million, or
7.4%, in 2000 and increased $65 million, or 23.2%, in 1999. The decrease in 2000
was the result of lower sales of Network services to AT&T WorldNet Service,
which resells such services to its customers. The increase in 1999 was due to
greater sales of Network services to AT&T WorldNet Service.
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 lower costs as a
result of AT&T Communications Services, Inc.'s continued cost-control efforts
and an increase in revenue, partially offset by the formation of Concert and the
acquisition of AGNS.
In 1999, EBIT improved $1.2 billion, or 30.2%, and EBITDA improved $2.1
billion, or 28.1%, 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 AT&T
Communications Services, Inc.'s long distance network (including the data
network) and lower investment in nonconsolidated international investments. In
1999, the increase was primarily due to the additional spending for AT&T
Communications Services, Inc.'s build out of the local services Synchronous
Optical Network transport network and increased nonconsolidated international
investments that support our global strategy.
240
251
Total assets increased $5.1 billion, or 13.4%, 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.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group 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, AT&T Consumer Services Group 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...................................................... 6,822 7,543 6,190
EBITDA.................................................... 6,989 7,727 6,306
Capital additions......................................... 148 299 99
AT DECEMBER 31,
----------------
2000 1999
------ ------
Total assets................................................ $3,543 $4,072
REVENUE
AT&T Consumer Services Group 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, 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, which is expected to continue. 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. AT&T Communications
Services, Inc. expects competition and product substitution to continue to
negatively impact AT&T Consumer Services Group revenue.
In August 1999, AT&T Communications Services, Inc. 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 Communications Services, Inc. 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 Consumer Services Group as their
intraLATA provider.
AT&T Consumer Services Group any distance New York Local One Rate offer,
which combines both local and long distance service, has experienced high
customer acceptance. AT&T Consumer Services Group ended the year with nearly
760,000 customers under this plan.
In 1999, AT&T Consumer Services Group 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
241
252
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 and EBITDA declined $0.7 billion, or 9.6%, 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 AT&T Communications Services, Inc.'s cost-control initiatives, EBIT
and EBITDA margins in 2000 improved to 36.1% and 37.0%, respectively, compared
with 34.7% and 35.5%, respectively, in 1999.
EBIT grew $1.4 billion, or 21.9%, and EBITDA grew $1.4 billion, or 22.5%,
in 1999. The EBIT margin improved to 34.7% in 1999 (excluding the gain on the
sale of Language Line Services, the 1999 EBIT margin was 34.0%) from 27.2% 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 settlement rates.
OTHER ITEMS
Capital additions decreased $0.2 billion, or 50.6%, in 2000 as a result of
reduced spending on software development 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 software development to add more
functionality to AT&T Communications Services, Inc.'s services and in support of
AT&T WorldNet Service subscriber growth.
Total assets declined $0.5 billion, or 13.0%, during 2000. The decline was
primarily due to assets transferred to Concert during 2000, as well as lower
accounts receivable, reflecting lower revenue.
CORPORATE AND OTHER
This group reflects the results of certain corporate staff functions and
the elimination of transactions between segments.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ----- -------
(DOLLARS IN MILLIONS)
Revenue..................................................... $ (273) $(293) $ (230)
EBIT........................................................ 1,319 607 (1,904)
EBITDA...................................................... 1,500 723 (1,800)
Capital additions........................................... 1,596 271 310
AT DECEMBER 31,
-----------------
2000 1999
------- ------
Total assets................................................ $10,284 $7,740
REVENUE
Revenue for corporate and other of negative $0.3 billion, primarily
includes the elimination of intercompany revenue, which decreased $20 million in
2000 compared with 1999. For 1999, revenue decreased $63 million, or 27.6%. The
decline was driven primarily by the sale of AT&T Solutions Customer Care, or
ASCC, in 1998.
242
253
EBIT/EBITDA
EBIT and EBITDA in 2000 increased $0.7 billion and $0.8 billion,
respectively, to $1.3 billion and $1.5 billion, respectively. The increases were
largely due to gains on sales of investments and investment related income and
an increase in the pension credit due to a higher pension trust asset base
resulting from increased investment returns. Partially offsetting these
increases were higher net restructuring and other charges.
In 1999, EBIT and EBITDA both improved by $2.5 billion to $0.6 billion and
$0.7 billion, respectively. The improvements were driven by $2.6 billion of
lower net restructuring and other charges in 1999 compared with 1998.
OTHER ITEMS
Capital additions increased $1.3 billion in 2000. The increase was driven
by AT&T Communications Services, Inc.'s investment in 2000 in Net2Phone. 1999
capital additions were essentially flat as compared with 1998.
Total assets increased $2.5 billion at December 31, 2000, primarily due to
AT&T Communications Services, Inc.'s investment in Net2Phone and loan to
Concert.
LIQUIDITY
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
CASH FLOWS:
Provided by operating activities.......................... $ 2,184 $ 2,579
Used in investing activities.............................. (966) (2,542)
Used in financing activities.............................. (1,321) (748)
In the first quarter of 2001, net cash provided by operating activities
decreased $0.4 billion compared with the first quarter of 2000. Higher uses of
cash in 2001 included lower accounts payable and lower net income excluding the
noncash impact of net restructuring and other charges, deferred income taxes,
earnings and losses from equity investments and the cumulative effect of an
accounting change. Partially offsetting these uses of cash was lower accounts
receivable and net changes in other operating assets and liabilities.
AT&T Communications Services, Inc. investing activities resulted in a net
use of cash of $1.0 billion in the first quarter of 2001, compared with a net
use of cash of $2.5 billion in the first quarter of 2000. The decreased use of
cash in investing activities was the result of a $1.0 billion loan to Concert in
the first quarter of 2000, and higher equity investment distribution and sales
of $0.6 billion in the first quarter of 2001.
During the first quarter of 2001, net cash used in financing activities was
$1.3 billion compared with $0.7 billion in the first quarter of 2000. This
increased use of cash in financing activities in the first quarter 2001 was the
result of decreased long-term and short-term debt due to AT&T of $4.3 billion
compared with an increase in long-term and short-term debt of $1.4 billion in
the first quarter of 2000. This was partially offset by net contributions from
AT&T of $3.1 billion in the first quarter of 2001 primarily related to the
attributed funds from the investment by NTT DoCoMo, compared with net
contributions to AT&T of $1.9 billion in the first quarter of 2000.
243
254
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
------- -------- -------
(DOLLARS IN MILLIONS)
CASH FLOWS OF CONTINUING OPERATIONS:
Provided by operating activities....................... $10,454 $ 10,088 $10,090
(Used in) provided by investing activities............. (9,094) (13,454) 638
Provided by (used in) financing activities............. (2,112) 1,337 (7,907)
In 2000, net cash provided by operating activities of continuing operations
increased $0.4 billion compared with 1999. Higher sources of cash in 2000 were
primarily driven by the timing of cash payments related to other operating
assets as well as an increase in net income excluding the noncash impact of net
restructuring and other charges and the provision for uncollectibles. Partially
offsetting these sources of cash were lower accounts payables and higher
receivable due from Concert. In 1999, net cash provided by operating activities
of continuing operations was essentially flat as compared with 1998. Higher
sources of cash were due primarily to an increase in net income, excluding the
noncash impact of depreciation and amortization and net restructuring and other
charges. This increase was partially offset by the timing of cash payments
related to other operating assets, and higher receivables, due primarily to
higher revenue.
AT&T Communications Services, Inc. investing activities resulted in a net
use of cash of $9.1 billion in 2000, compared with a net use of cash of $13.5
billion in 1999. During 2000, AT&T Communications Services, Inc. spent $7.0
billion on capital expenditures and acquired Net2Phone for approximately $1.4
billion. During 1999, AT&T Communications Services, Inc. spent approximately
$8.7 billion on capital expenditures and approximately $4.9 billion on the
acquisition of AGNS. During 1998, net cash provided by investing activities was
$0.6 billion, due primarily to higher receivables from UCS and the net
dispositions of businesses, partially offset by capital expenditures of $6.8
billion.
During 2000, net cash used in financing activities was $2.1 billion,
compared with net cash provided by financing activities of $1.3 billion in 1999.
In 2000, AT&T Communications Services, Inc. contributed $13.6 billion to AT&T,
primarily to fund the MediaOne acquisition, which was partially offset by the
attributed portion of the proceeds from the AT&T Wireless Group stock offering.
AT&T Communications Services, Inc. received an additional $15.0 billion from
short-term intercompany debt. Additionally, AT&T Communications Services, Inc.
made a $3.0 billion dividend payment to AT&T. In 1999, AT&T received $7.0
billion related to an increase in long-term debt payable to AT&T and $6.1
billion from the increase of short-term debt payable to AT&T. These sources of
cash were partially offset by $9.0 billion contributed to AT&T, which includes
$4.6 billion for the acquisition of treasury shares. Additionally, AT&T
Communications Services, Inc. made a $2.7 billion dividend payment to AT&T. Cash
used in financing activities in 1998 primarily related to repayment of long-term
and short-term debt, and dividends paid to AT&T.
At March 31, 2001, AT&T Communications Services, Inc. had current assets of
$11.7 billion and current liabilities of $27.4 billion. A significant portion of
the current liabilities, $18.4 billion, relates to short-term payables to AT&T.
At December 31, 2000, AT&T Communications Services, Inc. had current assets of
$12.7 billion and current liabilities of $32.3 billion. A significant portion of
the current liabilities, $22.1 billion, relates to short-term payables to AT&T.
Financing activities of AT&T Communications Services, Inc. were managed by AT&T
on a centralized basis. The debt amount incurred by AT&T was allocated to and
reflected in the historical financial statements of AT&T Communications
Services, Inc. The historical financial statements presented reflect cash
payments to AT&T to fund "corporate" activities such as the TCI merger and the
MediaOne acquisition, and the repurchase of AT&T common stock. Similarly,
certain corporate activities that resulted in cash flow to AT&T were deemed to
be attributed to AT&T Communications Services,
244
255
Inc. such as the sale of shares to NTT DoCoMo. These activities are reflected
within net contributions (to) from AT&T in the combined statements of cash
flows. AT&T Communications Services, Inc. expects that it will repay a portion
of the short-term debt payable to AT&T in a variety of ways. Major elements of
this deleveraging plan include operating cashflow, the attribution to AT&T
Communications Services, Inc. of AT&T's retained $3 billion of AT&T Wireless
Services, Inc. stock which will be sold or monetized and $0.7 billion of gross
proceeds from the sale of AT&T Communications Services, Inc.'s investment in
Japan Telecom. In addition, AT&T retains the flexibility to allocate proceeds
from the AT&T Broadband Group tracking stock offering among the AT&T
Communications Services, Inc. and AT&T Broadband Group businesses in any manner
which it deems most appropriate.
AT&T Communications Services, Inc.'s operations have been funded by
internally generated funds, which on occasion, have been transferred to AT&T,
and are reflected within net contributions (to) from AT&T within the combined
statements of cash flows. AT&T Communications Services, Inc.'s net contributions
from (to) AT&T were $3.1 billion and $(1.9) billion for the first quarter of
2001 and the first quarter of 2000, respectively. AT&T Communications Services,
Inc. net contributions (to) from AT&T were ($13.6) billion, ($9.0) billion and
$1.1 billion, in 2000, 1999 and 1998, respectively. Future funding of the
company's operations is expected to be generated internally from cash flow from
operations, but may include the borrowing of funds, including additional
borrowing from AT&T and/or third party debt. Short- and long-term payables to
AT&T have been made at embedded interest rates experienced on AT&T debt. At or
before the time of the spin-off, when AT&T Communications Services, Inc. is
separated from historical AT&T, we plan to seek to transfer the previously
allocated indebtedness from AT&T to AT&T Communications Services, Inc. This may
be accomplished through a variety of measures, which may result in increased
costs and additional covenants on AT&T Communications Services, Inc.
In determining the initial capital structure of AT&T Communications
Services, Inc., a number of factors were considered. These factors include
prospective financing requirements, desired stand-alone credit profile, working
capital and capital expenditure requirements, expected sources of future
deleveraging, and comparable company profiles.
Also in connection with AT&T's restructuring, AT&T has reviewed its
dividend policy as it relates to each of the new businesses. On December 20,
2000, AT&T announced that the board of directors reduced AT&T's quarterly
dividend to $0.0375 per share, from $0.22 per share.
RISK MANAGEMENT
AT&T Communications Services, Inc. is exposed to market risk from changes
in foreign exchange rates and equity prices associated with affiliate companies.
On a limited basis, AT&T Communications Services, Inc. uses certain derivative
financial instruments, including options, forwards, equity hedges and other
derivative contracts, to manage these risks. AT&T Communications Services, Inc.
does not use financial instruments for trading or speculative purposes. All
financial instruments are used in accordance with board-approved policies.
AT&T Communications Services, Inc. has outstanding debt payable to AT&T,
who maintains the exposure to third parties. Hence, all interest rate swaps to
manage the impact of interest rate changes on earnings and cash flows is
maintained by AT&T.
AT&T Communications Services, Inc. uses forward and option contracts to
reduce its exposure to the risk of adverse changes in currency exchange rates.
AT&T Communications Services, Inc. is subject to foreign exchange risk for
foreign-currency-denominated transactions. In 1999 AT&T Communications Services,
Inc. was 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. AT&T Communications Services,
Inc. monitors its foreign exchange rate risk on the basis of changes in fair
value. Assuming a 10% appreciation in the U.S.
245
256
dollar at December 31, 1999, the fair value of these contracts would have
resulted in additional unrealized losses of $17 million. Because these contracts
are entered into for hedging purposes, AT&T Communications Services, Inc.
believes that these losses would be largely offset by gains on the underlying
firmly committed or anticipated transactions.
AT&T Communications Services, Inc. uses equity hedges to manage its
exposure to changes in equity prices associated with stock appreciation rights
of affiliated companies. Assuming a 10% decrease in equity prices of affiliated
companies, the fair value of the equity hedges would have decreased by $1
million and $6 million at December 31, 2000 and 1999, respectively. Because
these contracts are entered into for hedging purposes, AT&T Communications
Services, Inc. believes 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 its various financial
instruments, AT&T Communications Services, Inc. uses certain modeling
techniques, namely Black-Scholes for its SARs. AT&T Communications Services,
Inc. applies rate sensitivity changes directly to its 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 AT&T Communications Services, Inc. expects to incur. Future
impacts would be based on actual developments in global financial markets. AT&T
Communications Services, Inc. does 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 AT
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(DOLLARS IN MILLIONS)
Total assets................................................ $55,591 $57,013
Total liabilities........................................... 46,866 52,178
Combined attributed net assets.............................. 8,339 4,415
Total assets decreased $1.4 billion, or 2.5%, at March 31, 2001, compared
with December 31, 2000. This decrease was primarily due to lower receivables
resulting largely from lower revenue in AT&T Consumer Services Group and lower
nonconsolidated investments due to revaluation and equity losses recorded during
the period.
Total liabilities at March 31, 2001, decreased $5.3 billion, or 10.2%,
primarily due to lower debt payable to AT&T and lower accounts payable primarily
due to timing of payments.
Total combined attributed net assets were $8.3 billion at March 31, 2001,
an increase of 88.9% from December 31, 2000. This increase was primarily due to
net contributions from AT&T of $3.1 billion as well as net income of $1.4
billion.
The ratio of total debt to total capital (debt divided by total debt and
equity) was 76.2% at March 31, 2001, compared with 87.5% at December 31, 2000.
The decrease was primarily driven by lower debt, partially offset by higher
equity. The ratio of debt (net of cash) to annualized EBITDA was 1.82X at March
31, 2001, compared with 1.63X at December 31, 2000, due to lower annualized
EBITDA, partially offset by lower debt.
246
257
AT DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Total assets................................................ $57,013 $49,893
Total liabilities........................................... 52,178 37,288
Combined attributed net assets.............................. 4,415 12,560
Total assets increased $7.1 billion, or 14.3%, at December 31, 2000. This
increase was due to higher investments reflecting equipment contributed to
Concert, a $1.0 billion loan to Concert, and AT&T Communications Services,
Inc.'s investment in Net2Phone. Additionally, other receivables increased due to
Concert, goodwill increased due primarily to AT&T Latin America and property,
plant and equipment increased due to capital additions. Partially offsetting
these increases was lower cash.
Total liabilities at December 31, 2000, increased $14.9 billion, or 39.9%,
primarily due to higher debt payable to AT&T.
Minority interest increased $0.4 billion to $420 million, primarily
reflecting the minority interest of AT&T Communications Services, Inc.'s
ownership of AT&T Latin America, which began operations in the third quarter of
2000.
Total combined attributed net assets was $4.4 billion at December 31, 2000,
a decrease of 64.9% from December 31, 1999. This decrease was primarily due to
net contributions to AT&T and dividends, partially offset by higher net income.
The ratio of total debt to total capital, (debt divided by total debt and
equity) was 87.5% at December 31, 2000, compared with 56.3% at December 31,
1999. The increase was primarily driven by higher debt, partially offset by
lower equity. The ratio of debt (net of cash) to EBITDA was 1.63X at December
31, 2000, compared with 0.84X at December 31, 1999, also reflecting higher debt.
NEW ACCOUNTING PRONOUNCEMENTS
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 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 Communications Services, Inc.
does not expect that the adoption of SFAS No. 140 will have a material impact on
its results of operations, financial position or cash flows.
SUBSEQUENT EVENTS
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, a percentage of accounts receivable related to AT&T Business Services
will be sold on a discounted, revolving basis, to a special purpose, wholly
owned subsidiary, which assigns interests in such receivables to unrelated
third-party financing entities.
On May 25, 2001, AT&T acquired substantially all of the assets of
NorthPoint Communications Group, Inc. valued at approximately $135 million. The
acquisition includes all of NorthPoint's co-
247
258
locations nationwide, certain network equipment, systems and support software
and related assets, including two leased buildings. The purchase of these
NorthPoint Communications Group, Inc. assets was attributed to AT&T
Communications Services, Inc.
On April 27, 2001, AT&T completed the sale of its stake in Japan Telecom
Co. Ltd to Vodafone Group plc. The net pre-tax gain attributable to AT&T
Communications Services, Inc. is expected to be approximately $470 million.
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $500 million of funding. Under the
program, a small percentage of accounts receivable related to AT&T Consumer
Services Group will be sold on a discounted, revolving basis, to a special
purpose, wholly owned subsidiary, which assigns interests in such receivables to
unrelated third-party financing entities.
248
259
DESCRIPTION OF CAPITAL STOCK OF
AT&T COMMUNICATIONS SERVICES, INC.
FOLLOWING THE SPIN-OFF
GENERAL
Immediately after the spin-off, we expect AT&T Communications Services,
Inc.'s authorized capital stock to consist of shares of preferred
stock, par value $.01, shares of common stock, par value $0.01,
of which shares will be the new Consumer Services Group tracking
stock.
AT&T COMMUNICATIONS SERVICES, INC. COMMON STOCK
The holders of AT&T Communications Services, Inc. common stock will be
entitled to one vote for each share on all matters voted on by shareholders,
including elections of directors, and, except as otherwise required by law or
provided in any resolution adopted by AT&T Communications Services, Inc.'s board
of directors with respect to any series of AT&T Communications Services, Inc.
preferred stock (a "preferred stock designation"), the holders of AT&T
Communications Services, Inc. common stock and the new Consumer Services Group
tracking stock will together possess all of the voting power of AT&T
Communications Services, Inc. AT&T Communications Services, Inc.'s charter will
not provide for cumulative voting in the election of directors. Subject to any
preferential rights of any outstanding series of AT&T Communications Services,
Inc. preferred stock created by AT&T Communications Services, Inc.'s board of
directors from time to time and to the rights of the new Consumer Services Group
tracking stock, the holders of AT&T Communications Services, Inc. common stock
will be entitled to the dividends as may be declared from time to time by AT&T
Communications Services, Inc.'s board of directors from funds legally available
for dividends, and, upon liquidation, will be entitled to receive pro rata all
assets available for distribution to the holders of AT&T Communications
Services, Inc. common stock. For a more complete discussion of AT&T
Communications Services, Inc.'s expected dividend policy, see "-- Dividend
Policy."
THE NEW CONSUMER SERVICES GROUP TRACKING STOCK
If AT&T Consumer Services Group tracking stock is created prior to the
spin-off, in connection with the spin-off, we intend to redeem all outstanding
shares of AT&T Consumer Services Group tracking stock for the new Consumer
Services Group tracking stock. The new Consumer Services Group tracking stock
will be a type of common stock of AT&T Communications Services, Inc., but will
differ from AT&T Communications Services, Inc. common stock in that it would be
intended to reflect the financial performance and economic value of AT&T
Consumer Services Group, which would be part of AT&T Communications Services,
Inc. The holders of the new Consumer Services Group tracking stock will
generally be entitled to a vote on all matters voted on by holders of AT&T
Communications Services, Inc. common stock, including elections of directors,
and, except as otherwise required by law, will vote as a single class with AT&T
Communications Services, Inc. common stock. The per share voting rights of the
new Consumer Services Group tracking stock will be based on the ratio, over a
fixed measurement period, of the initial trading prices of the new Consumer
Services Group tracking stock to the trading prices of AT&T Communications
Services, Inc. common stock. The other rights of holders of the new Consumer
Services Group tracking stock will be substantially similar to the rights of
holders of AT&T Consumer Services Group tracking stock as described under "The
Consumer Services Charter Amendment Proposal -- Terms of the Consumer Services
Group Tracking Stock Amendment."
AT&T COMMUNICATIONS SERVICES, INC. PREFERRED STOCK
AT&T Communications Services, Inc.'s charter will authorize AT&T
Communications Services, Inc.'s board of directors to establish one or more
series of preferred stock and to determine, with
249
260
respect to any series of preferred stock, the terms and rights of the series,
including, but not limited to:
- the designation of the series;
- the number of shares of the series, which number AT&T Communications
Services, Inc.'s board of directors may later, except where otherwise
provided in the preferred stock designation, increase or decrease, but
not below the number of shares thereof then outstanding;
- whether dividends, if any, will be cumulative or noncumulative, and, in
the case of shares of any series having cumulative dividend rights, the
date or dates or method of determining the date or dates from which
dividends on the shares of the series having cumulative dividend rights
shall be cumulative;
- the rate of any dividends, or method of determining the dividends,
payable to the holders of the shares of the series, any conditions upon
which the dividends will be paid and the date or dates or the method for
determining the date or dates upon which the dividends will be payable;
- the redemption rights and price or prices, if any, for shares of the
series;
- the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series;
- the amounts payable on and the preferences, if any, of shares of the
series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of AT&T Communications Services, Inc.'s
affairs;
- whether the shares of the series will be convertible or exchangeable into
shares of any other class or series, or any other security, of AT&T
Communications Services, Inc. or any other entity, and, if so, the
specification of the other class or series or the other security, the
conversion or exchange price or prices or rate or rates, any adjustments
thereof, the date or dates as of which the shares will be convertible or
exchangeable and all other terms and conditions upon which the conversion
or exchange may be made;
- restrictions on the issuance of shares of the same series or of any other
class or series; and
- the voting rights, if any, of the holders of the shares of the series.
We believe that the ability of AT&T Communications Services, Inc.'s board
of directors to issue one or more series of preferred stock will provide AT&T
Communications Services, Inc. with flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs that might
arise. The authorized shares of AT&T Communications Services, Inc. preferred
stock, as well as shares of AT&T Communications Services, Inc. common stock,
will be available for issuance without further action by AT&T Communications
Services, Inc. shareholders unless required by applicable law or the rules of
any stock exchange or automated quotation system on which AT&T Communications
Services, Inc. securities may be listed or traded. Listing authorities currently
require shareholder approval as a prerequisite to listing shares in several
instances, including where the present or potential issuance of shares could
result in an increase of at least 20% in the number of outstanding shares of
common stock, or in the amount of voting securities, outstanding. If the
approval of AT&T Communications Services, Inc. shareholders is not required for
the issuance of shares of AT&T Communications Services, Inc. preferred stock or
common stock, AT&T Communications Services, Inc.'s board of directors may
determine not to seek shareholder approval.
Although we believe AT&T Communications Services, Inc.'s board of directors
will have no intention of immediately doing so, it could issue a series of
preferred stock that could, depending on the terms of the series, impede the
completion of a merger, tender offer or other takeover attempt. AT&T
Communications Services, Inc.'s board of directors will make any determination
to issue the
250
261
shares of preferred stock based on its judgment as to the best interests of AT&T
Communications Services, Inc. and its shareholders. AT&T Communications
Services, Inc.'s board of directors, in so acting, could issue preferred stock
having terms that could discourage an acquisition attempt through which an
acquiror may be able to change the composition of AT&T Communications Services,
Inc.'s board of directors, including a tender offer or other transaction that
some, or a majority, of AT&T Communications Services, Inc. shareholders might
believe to be in their best interests or in which AT&T Communications Services,
Inc. shareholders might receive a premium for their stock over the then-current
market price of AT&T Communications Services, Inc. common stock.
We expect that, as of the completion of the spin-off, shares of Series A
junior participating preferred stock, par value $.01 per share, of AT&T
Communications Services, Inc. will be reserved for issuance upon exercise of the
rights issued under AT&T Communications Services, Inc.'s rights agreement. For a
more complete discussion of AT&T Communications Services, Inc.'s rights
agreement, see "-- Rights Agreement."
DIVIDEND POLICY
Following completion of the spin-off, it is currently expected that AT&T
Communications Services, Inc. will pay a total dividend equal to the current
dividend payable on AT&T common stock, one-third of which will be allocated to
AT&T Communications Services Inc. common stock and two-thirds of which will be
allocated to the new Consumer Services Group tracking stock in a manner to be
determined by the AT&T Communications Services, Inc.'s board of directors. The
declaration of dividends by AT&T Communications Services Inc. and the amount
thereof will be in the discretion of its board of directors and will depend upon
its group's financial performance, the dividend policies and capital structures
of comparable companies and its group's ongoing capital needs, AT&T
Communications Services Inc.'s results of operations, financial condition, cash
requirements and future prospects and other factors deemed relevant by its board
of directors. Payment of dividends also may be restricted by loan agreements,
indentures and other transactions that AT&T Communications Services Inc. enters
into from time to time.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF AT&T COMMUNICATIONS SERVICES,
INC.'S CHARTER AND BY-LAWS
BOARD OF DIRECTORS
AT&T Communications Services, Inc.'s charter will provide that, except as
otherwise provided in any preferred stock designation relating to the rights of
the holders of any class or series of preferred stock to elect additional
directors under specified circumstances, the number of directors will be fixed
from time to time exclusively by a resolution adopted by a majority of the total
number of directors that AT&T Communications Services, Inc. would have if there
were no vacancies, or the whole board, but shall not be less than three. AT&T
Communications Services, Inc.'s directors, other than those who may be elected
by the holders of any class or series of AT&T Communications Services, Inc.
preferred stock having the right under a preferred stock designation to elect
additional directors under specified circumstances, will be classified into
three classes, as nearly equal in number as possible, one class originally to be
elected for a term expiring at the annual meeting of shareholders to be held in
2003, another class to be originally elected for a term expiring at the annual
meeting of shareholders to be held in 2004 and another class to be originally
elected for a term expiring at the annual meeting of shareholders to be held in
2005, with each director to hold office until his or her successor is duly
elected and qualified. Commencing with the 2003 annual meeting of shareholders,
directors elected to succeed directors whose terms then expire will be elected
for a term of office to expire at the third succeeding annual meeting of
shareholders after their election, with each director to hold office until such
director's successor is duly elected and qualified.
AT&T Communications Services, Inc.'s charter will provide that, except as
otherwise provided in any preferred stock designation relating to the rights of
the holders of any class or series of preferred
251
262
stock to elect directors under specified circumstances, newly created
directorships resulting from any increase in the number of directors and any
vacancies on AT&T Communications Services, Inc.'s board of directors resulting
from death, resignation, disqualification, removal or other cause will be filled
by the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum of AT&T Communications Services, Inc.'s board of
directors, and not by the shareholders. Any director elected in accordance with
the preceding sentence will hold office for the remainder of the full term of
the class of directors in which the new directorship was created or the vacancy
occurred and until the director's successor shall have been duly elected and
qualified. No decrease in the number of directors constituting AT&T
Communications Services, Inc.'s board of directors will shorten the term of any
incumbent director. Subject to the rights of any class or series of preferred
stock having the right under a preferred stock designation to elect directors
under specified circumstances, any director may be removed from office only for
cause by the affirmative vote of the holders of at least a majority of the
voting power of all voting stock then outstanding, voting together as a single
class.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of AT&T Communications Services,
Inc.'s board of directors by filling the vacancies created by removal with its
own nominees. Under the classified board provisions described above, it would
take at least two elections of directors for any individual or group to gain
control of AT&T Communications Services, Inc.'s board of directors. Accordingly,
these provisions could discourage a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of AT&T
Communications Services, Inc.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
We expect AT&T Communications Services, Inc.'s charter and by-laws to
provide that shareholders must effect any action required or permitted to be
taken at a duly called annual or special meeting of shareholders, and that those
actions may not be effected by any consent in writing by the shareholders.
Except as otherwise required by law or by any preferred stock designation,
special meetings of shareholders may be called only by a majority of the whole
board of directors or by AT&T Communications Services, Inc.'s Chairman. No
business other than that stated in the notice of meeting may be transacted at
any special meeting. These provisions may have the effect of delaying
consideration of a shareholder proposal until the next annual meeting unless a
special meeting of shareholders is called by AT&T Communications Services,
Inc.'s board of directors or AT&T Communications Services, Inc.'s Chairman.
ADVANCE NOTICE PROCEDURES
We expect AT&T Communications Services, Inc.'s by-laws to establish an
advance notice procedure for shareholders to make nominations of candidates for
election as directors or to bring other business before an annual meeting of
shareholders. These shareholder notice procedures will provide that only persons
who are nominated by AT&T Communications Services, Inc.'s board of directors, or
by a shareholder that was a shareholder of record at the time of giving notice
and has given timely written notice to AT&T Communications Services, Inc.'s
Secretary before the meeting at which directors are to be elected, will be
eligible for election as directors. These shareholder notice procedures also
will provide that, at an annual meeting, only the business as has been brought
before the annual meeting by AT&T Communications Services, Inc.'s board of
directors, or by a shareholder who has given timely written notice to AT&T
Communications Services, Inc.'s Secretary of the shareholder's intention to
bring the business before the annual meeting, may be conducted. Under these
shareholder notice procedures, for notice of shareholder nominations to be made
at, or for shareholders to bring other business before, an annual meeting, the
notice must be received by AT&T Communications Services, Inc.'s Secretary not
later than the close of business on the 90th calendar day nor earlier than the
close of business on the 120th calendar day before the first anniversary of the
252
263
preceding year's annual meeting, except that, if the date of the annual meeting
is more than 30 calendar days before or more than 60 calendar days after this
anniversary date, notice by the shareholder to be timely must be so delivered
not earlier than the close of business on the 120th calendar day before the
annual meeting and not later than the close of business on the later of the 90th
calendar day before the annual meeting or the 10th calendar day following the
day on which public announcement of the annual meeting date is first made by
AT&T Communications Services, Inc.
Nevertheless, if the number of directors to be elected to AT&T
Communications Services, Inc.'s board of directors is increased and there is no
public announcement by AT&T Communications Services, Inc. naming all of the
nominees for director or specifying the size of AT&T Communications Services,
Inc.'s increased board of directors at least 100 calendar days before the first
anniversary of the preceding year's annual meeting, a shareholder's notice also
will be considered timely, but only with respect to nominees for any new
positions created by the increase, if it is delivered not later than the close
of business on the 10th calendar day following the day on which the public
announcement is first made by AT&T Communications Services, Inc. Under these
shareholder notice procedures, for notice of a shareholder nomination to be made
at a special meeting at which directors are to be elected to be timely, the
notice must be received by AT&T Communications Services, Inc. not earlier than
the close of business on the 120th calendar day before the special meeting and
not later than the close of business on the later of the 90th calendar day
before the special meeting or the 10th calendar day following the day on which
public announcement is first made of the date of the special meeting and of the
nominees proposed by AT&T Communications Services, Inc.'s board of directors to
be elected at the special meeting.
In addition, under these shareholder notice procedures, a shareholder's
notice to AT&T Communications Services, Inc. proposing to nominate a person for
election as a director or relating to the conduct of business other than the
nomination of directors will be required to contain some specified information.
If the chairman of a meeting determines that an individual was not nominated, or
other business was not brought before the meeting, in accordance with AT&T
Communications Services, Inc. shareholder notice procedure, the individual will
not be eligible for election as a director, or the business will not be
conducted at the meeting, as the case may be.
AMENDMENT
We expect that AT&T Communications Services, Inc.'s charter will provide
that the affirmative vote of the holders of at least 80% of AT&T Communications
Services, Inc. voting stock then outstanding, voting together as a single class,
is required to amend provisions of AT&T Communications Services, Inc.'s charter
relating to shareholder action; the number, election and tenure of directors;
the filling of vacancies; and the removal of directors. We expect AT&T
Communications Services, Inc.'s charter to further provide that the related
by-laws described above, including the shareholder notice procedure, may be
amended only by the affirmative vote of a majority of the whole board or by the
affirmative vote of the holders of at least 80% of the voting power of the
outstanding shares of voting stock, voting together as a single class. We expect
that the affirmative vote of holders of at least 50% of the voting power of
outstanding shares of voting stock, voting as a single class, will be required
to amend AT&T Communications Services, Inc.'s by-laws.
RIGHTS AGREEMENT
We expect that AT&T Communications Services, Inc.'s board of directors may
adopt a rights agreement on or before the completion of the spin-off. The rights
have anti-takeover effects. The rights will cause substantial dilution to a
person or group of persons that attempts to acquire AT&T Communications
Services, Inc. on terms not approved by AT&T Communications Services, Inc.'s
board of directors. The rights should not interfere with any merger or other
business combination approved by AT&T Communications Services, Inc.'s board of
directors before the time that a person
253
264
or group has acquired beneficial ownership of a specified percentage of the
voting power or shares of all AT&T Communications Services, Inc. common stock
since the rights may be redeemed by AT&T Communications Services, Inc. at the
redemption price until that time.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the Delaware General Corporation Law provides that, subject
to some exceptions, an interested stockholder of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that the stockholder becomes an interested
stockholder unless:
- before the date of the business combination, the corporation's board of
directors approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding some shares; or
- on or subsequent to that date, the business combination is approved by
the corporation's board of directors and authorized at an annual or
special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Except as otherwise specified in Section 203, an "interested stockholder"
is defined to include:
- any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately
before the date of determination; and
- the affiliates and associates of the stockholder.
Under some circumstances, Section 203 makes it more difficult for a person
that would be an interested stockholder to effect various business combinations
with a corporation for a three-year period. AT&T Communications Services, Inc.
is not expected to elect to be exempt from the restrictions imposed under
Section 203. The provisions of Section 203 may encourage persons interested in
acquiring AT&T Communications Services, Inc. to negotiate in advance with AT&T
Communications Services, Inc.'s board of directors, since the stockholder
approval requirement would be avoided if a majority of the directors then in
office approves either the business combination or the transaction that results
in any person becoming an interested stockholder. These provisions also may have
the effect of preventing changes in AT&T Communications Services, Inc.'s
management. It is possible that these provisions could make it more difficult to
accomplish transactions that AT&T Communications Services, Inc. shareholders may
otherwise deem to be in their best interests.
254
265
COMPARISON OF RIGHTS OF HOLDERS OF AT&T COMMON STOCK
AND AT&T COMMUNICATIONS SERVICES, INC. COMMON STOCK
FOLLOWING THE SPIN-OFF
If you retain your shares of AT&T common stock upon completion of the
spin-off, you will be a holder of AT&T Communications Services, Inc. common
stock as well as AT&T common stock. The rights of holders of AT&T common stock
are defined and governed by our charter and by-laws and the New York Business
Corporation Law. The rights of holders of AT&T Communications Services, Inc.
common stock will be defined and governed by AT&T Communications Services,
Inc.'s charter and by-laws and the Delaware General Corporation Law.
We summarize below the material differences between the rights of holders
of AT&T common stock and AT&T Communications Services, Inc. common stock. We
refer shareholders to the New York Business Corporation Law, Delaware General
Corporation Law, our charter and by-laws and AT&T Communications Services,
Inc.'s charter and by-laws for more information. For information about how to
obtain copies of documents, see "Other Information -- Where You Can Find More
Information."
CHARTER AMENDMENTS
Under the New York Business Corporation Law, proposed charter amendments
must be authorized by a corporation's board of directors and generally must be
approved by vote of a majority of all outstanding shares entitled to vote on the
amendment at a meeting of shareholders. The approval of a majority of the votes
of all outstanding shares of any class of capital stock of a corporation, voting
separately as a class, is required to approve an amendment, whether or not the
shareholders are otherwise entitled to vote on the amendment pursuant to the
corporation's charter, that:
- would decrease the par value of the shares of the class, change any
shares of the class into a different number of shares of the same class
or into the same or a different number of shares of a different class,
alter or change the designation, relative rights, preferences or
limitations of the shares of the class or provide new conversion rights
or the alteration of any existing conversion rights, so as to affect them
adversely;
- would exclude or limit the voting rights of the shares of the class,
except as such rights may be limited by voting rights given to new shares
then being authorized of any existing or new class or series of shares;
or
- would subordinate the rights of the shares of the class by authorizing
shares having preferences superior to the rights of the existing shares.
If an amendment would have any of the effects discussed in the last
sentence of the previous paragraph only on one or more series of any class so as
to affect them adversely, but would not affect the remainder of the class, then
only the shares of the series affected by the amendment would be entitled to
vote as a separate class on the amendment. The provisions in our charter
relating to the amendment of our charter are generally consistent with those
found in the New York Business Corporation Law.
Under the Delaware General Corporation Law, unless a corporation's charter
requires a greater vote, an amendment requires an affirmative vote of a majority
of the voting power of the outstanding stock entitled to vote on the amendment
and a majority of the voting power of the outstanding stock of any class
entitled to vote on the amendment separately as a class.
Except as described below, if an amendment would change the aggregate
number of authorized shares of any class of capital stock, the par value of the
shares of any class of capital stock, or alter or change the powers, preferences
or special rights of the shares of any class of capital stock so as to affect
them adversely, the Delaware General Corporation Law requires that the amendment
be approved by the holders of a majority of the outstanding shares of the
affected class, voting separately
255
266
as a class, whether or not the class is entitled to vote on the amendment by the
corporation's charter. If an amendment would alter or change the powers,
preferences or special rights of one or more series of any class so as to affect
them adversely, but would not affect the remainder of the class, then only the
shares of the series so affected would be entitled to vote as a separate class
on the amendment. The authorized number of shares of any class of stock may be
increased or decreased (but may not be decreased below the number of outstanding
shares in the class) without a separate vote of stockholders of the class if so
provided in the corporation's original charter or in any amendment that created
the class of stock or that was adopted prior to the issuance of any shares of
the class, or in an amendment authorized by a majority vote of the holders of
shares of the class. We expect that AT&T Communications Services, Inc.'s charter
will include supermajority voting provisions with respect to some types of
amendments. For a discussion of the expected supermajority voting provisions in
AT&T Communications Services, Inc.'s charter, see "Description of the Capital
Stock of AT&T Communications Services, Inc. Following the
Spin-off -- Anti-Takeover Effects of Certain Provisions of AT&T Communications
Services, Inc.'s Charter and By-Laws -- Amendment."
BY-LAW AMENDMENTS
Under the New York Business Corporation Law, except as otherwise provided
in a corporation's charter, a corporation's by-laws may be amended, repealed or
adopted by a majority of the votes cast by the shares entitled to vote in the
election of any directors. When provided in a corporation's charter or a
corporation's by-law adopted by the shareholders, by-laws also may be amended,
repealed or adopted by the corporation's board of directors by the vote
specified, which vote may be greater than the vote otherwise prescribed by the
New York Business Corporation Law, but any by-law adopted by the corporation's
board of directors may be amended or repealed by the shareholders as provided by
the New York Business Corporation Law. Our by-laws may be amended by our
shareholders at any meeting of shareholders, or by our board of directors at any
meeting by a majority vote of our full board of directors or at two successive
meetings by a majority vote of our directors present, provided that a quorum is
present.
Under the Delaware General Corporation Law, the power to adopt, alter and
repeal a corporation's by-laws is vested in the stockholders, except to the
extent that the corporation's charter vests concurrent power in the
corporation's board of directors. AT&T Communications Services, Inc.'s charter
will vest the power to make, alter or repeal AT&T Communications Services,
Inc.'s by-laws with AT&T Communications Services, Inc.'s board of directors.
BUSINESS COMBINATIONS
Generally, under the Delaware General Corporation Law, the approval by the
affirmative vote of the holders of a majority of the outstanding stock or, if
the certificate of incorporation provides for more or less than one vote per
share, a majority of the votes of the outstanding stock, of a corporation
entitled to vote on the matter is required to complete a merger or consolidation
or sale, lease or exchange of all or substantially all the corporation's assets.
AT&T Communications Services Inc.'s charter will not contain a provision
related to voting on a merger or consolidation or sale, lease or exchange of all
or substantially all of the corporation's assets.
Under the New York Business Corporation Law, a plan of merger or
consolidation, a plan of share exchange or the sale, lease, exchange or other
disposition of all or substantially all of the assets of a corporation must be
approved:
- in the case of corporations like AT&T that were in existence on February
22, 1998 and that do not expressly provide in their certificates of
incorporation for majority approval of these transactions, by two-thirds
of the votes of all outstanding shares entitled to vote on the
transaction; and
- in the case of all other corporations, by a majority of the votes of all
outstanding shares entitled to vote on the transaction.
256
267
AT&T obtained an amendment at its 2001 Annual Meeting to its charter to
provide for majority approval of these types of transactions.
The New York Business Corporation Law also provides that the holders of
shares of a class, or series of a class, of capital stock of a corporation will
be entitled to vote together and to vote as a separate class on any merger or
consolidation in which:
- the holder's shares will remain outstanding after the merger or
consolidation or will be converted into the right to receive shares of
stock of the surviving or consolidated corporation or another
corporation; and
- the charter of the surviving or consolidated corporation or other
corporation immediately after the me