-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RfaXcla5V48y102YN7YmzzXLMVXRqPSArap4G+A/iIXkAbYj6jPG+Qk5SKzfokej KXltwkP6LHJ80SVVdtpAsQ== 0000005907-00-000014.txt : 20000329 0000005907-00-000014.hdr.sgml : 20000329 ACCESSION NUMBER: 0000005907-00-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01105 FILM NUMBER: 580154 BUSINESS ADDRESS: STREET 1: 32 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2123875400 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K REPORT FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _________ to _________ Commission File Number 1-1105 AT&T CORP. A NEW YORK I.R.S. EMPLOYER CORPORATION NO. 13-4924710 32 Avenue of the Americas, New York, New York 10013-2412 Telephone Number 212-387-5400 Securities registered pursuant to Section 12(b) of the Act: See attached SCHEDULE A. Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes....x.... No........ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not con-tained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At February 29, 2000, the aggregate market value of voting stock held by non-affiliates was approximately $157 billion. At February 29, 2000, 3,194,755,604 shares of AT&T common stock, 1,181,420,568 shares of Class A Liberty Media Group tracking stock and 103,117,226 shares of Class B Liberty Media Group tracking stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's annual report to shareholders for the year ended December 31, 1999 (Part II) (2) Portions of the registrant's definitive proxy statement dated March 27, 2000 issued in connection with the annual meeting of shareholders (Part III) SCHEDULE A Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Shares # New York, Boston, Chicago, (Par Value $1 Per Share) #### Philadelphia and Pacific # Stock Exchanges # # Class A Liberty Media Group Tracking # Shares (common, Par Value $1 Per Share) # #### New York Stock Exchange Class B Liberty Media Group Tracking # Shares (common, Par Value $1 Per Share) # # # # Thirty-Five Year 5-1/8% Debentures, due # April 1, 2001 # # Ten Year 7-1/8% Notes, due January 15, 2002 # # Three Year 61/2% Notes due September 15, 2002 # # Five Year 5 5/8% Notes due March 15, 2004 # # Ten Year 6-3/4% Notes, due April 1, 2004 # # Ten Year 7% Notes, due May 15, 2005 # # Twelve Year 7-1/2% Notes, due June 1, 2006 ###### New York Stock Exchange # Twelve Year 7-3/4% Notes, due March 1, 2007 # # Ten Year 6% Notes due March 15, 2009 # # Thirty Year 8-1/8% Debentures, due # January 15, 2022 # # Thirty Year 8.35% Debentures, due # January 15, 2025 # # Thirty-Two Year 8-1/8% Debentures, due # July 15, 2024 # # Thirty Year 61/2% Notes due March 15, 2029 # # Forty Year 8-5/8% Debentures, due # December 1, 2031 # TABLE OF CONTENTS PART I Item Description Page 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 36 4. Submission of Matters to a Vote of Security-Holders . . . . . . . . 37 PART II Description 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 39 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 39 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 39 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . 39 PART III Description 10. Directors and Executive Officers of the Registrant . . . . . . . . . 39 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 39 12. Security Ownership of Certain Beneficial Owners and Management . . . 39 13. Certain Relationships and Related Transactions . . . . . . . . . . . 39 PART IV Description 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . 40 See page 38 for "Executive Officers of the Registrant." PART I ITEM 1. BUSINESS. GENERAL AT&T Corp. was incorporated in 1885 under the laws of the State of New York and has its principal executive offices at 32 Avenue of the Americas, New York, New York 10013-2412 (telephone number 212-387-5400). On March 9, 1999, AT&T completed the acquisition of Tele-Communications, Inc. (TCI) in a merger. In the merger, AT&T acquired all the business and assets of the TCI Group (now referred to as AT&T Broadband), which consisted primarily of TCI's domestic cable and telecommunications operations, as well as TCI's interest in At Home Corporation (@Home) in exchange for approximately 664 million shares of Common Stock. AT&T Common Stock continues to represent an interest in the business and assets of the historical AT&T together with those assets acquired in the merger. In addition, at the time of the merger TCI combined Liberty Media Group, its programming arm, and TCI Ventures Group, its technology investments unit, to form the new Liberty Media Group. The shareowners of the new Liberty Media Group were issued separate tracking stock rather than traditional Common Stock by AT&T Corp. in exchange for the shares held in Liberty Media Group and TCI Ventures Group. Under the tracking stock arrangement, the Liberty Media Group's earnings and losses will be excluded from earnings available to the holders of Common Stock and the Liberty Media Group's businesses and assets will be managed by a separate operating Board of Directors. As a result, although the Liberty Media Group is wholly owned by AT&T Corp., it is accounted for as an investment under the equity method of accounting in the consolidated financial statements of AT&T Corp. since AT&T does not have a "controlling financial interest" in the Liberty Media Group. Consequently, throughout this document, references to AT&T or the Company refer to the businesses, results or assets attributable to the Common Stock; references to Liberty Media refer to the businesses, results or assets attributable to the Liberty Media Group tracking stock; and references to AT&T Corp. refer to the combined legal entity. References herein to AT&T Common Shares, Common Shares, AT&T Common Stock or Common Stock excludes the Liberty Media Group tracking stock. On March 14, 2000 the AT&T shareholders approved amendments to the AT&T certificate of incorporation that would permit AT&T to create a separate class of its common stock, the AT&T Wireless Group tracking stock, which would track the performance of our wireless business. As of the date of filing this Form 10-K, no shares of the AT&T Wireless Group tracking stock were outstanding. AT&T AT&T is among the world's communications leaders, providing voice, data and video communications services to large and small businesses, consumers and government entities. AT&T and its subsidiaries furnish domestic and international long distance, regional, local and wireless communications services, cable television and Internet communications services. AT&T also provides billing, directory, and calling card services to support its communications business. AT&T's primary lines of business are business services; consumer services; broadband services; and wireless services. In addition, AT&T's other lines of business include network management and professional services through AT&T Solutions and international operations and ventures. Internet users can access information about AT&T and its services at www.att.com. Our web site is not a part of this Form 10-K. DEVELOPMENT OF BUSINESS Separation During 1999 AT&T continued the transformation of its business begun in 1996 when AT&T separated its business into three publicly held stand-alone companies: the current AT&T, focused on communications and information services; Lucent Technologies Inc. (Lucent), focused on communications systems and technology; and NCR Corporation (NCR), focused on transaction-intensive computing. AT&T distributed to its shareowners all of the shares AT&T owned of Lucent on September 30, 1996 and all of the shares of NCR on December 31, 1996. Asset Sales Following the separation, AT&T focused on its core businesses and disposed of assets and businesses that were not strategic. In October 1996, AT&T completed the sale of its majority interest in AT&T Capital Corporation (leasing services business). In 1997, AT&T completed the sales of AT&T Skynet (satellite services), AT&T Tridom (satellite data and video communications services), and its submarine systems business, as well as its investment in DirectTV (direct-broadcast television service and DSS equipment business). In addition, in 1998 AT&T sold AT&T Universal Card Services, Inc. (credit card services business), American Transtech Inc. (customer care services), its investment in LIN Television Corporation (commercial television broadcasting), and its investment in SmarTone Telecommunications Holdings Limited (a wireless joint venture in Hong Kong). In 1999, AT&T sold its interest in Wood-TV (commercial television broadcasting), AT&T Language Line Services (over the phone interpretation business) and ACC Corp.'s operations in Europe (telecommunications services). TCG Acquisition During 1998, AT&T engaged in a series of transactions to further transform the Company from one dominated by a single product, domestic long distance telecommunications, to a fully integrated, any distance, broadband communications service provider. In July 1998, AT&T completed the merger with Teleport Communications Group (TCG) pursuant to which each share of TCG was exchanged for AT&T Common Stock in an all-stock transaction. TCG was the largest competitive local exchange carrier (CLEC) in the United States, offering comprehensive telecommunications services in major metropolitan markets throughout the United States. TCG provides a broad array of telecommunications services, including basic local exchange services, enhanced switch services, Internet services, disaster avoidance services and video channel transmission services, aimed at addressing high-volume business customers. TCI Acquisition In the TCI merger, which closed on March 9, 1999, AT&T issued AT&T Common Stock for each share of TCI Group Series A tracking stock and TCI Group Series B tracking stock. In addition, AT&T Corp. issued newly created Liberty Media Group Class A or Class B tracking stock for each outstanding TCI Liberty Media Group Class A or Class B tracking stock and each outstanding TCI Ventures Group Class A or Class B tracking stock. In the merger, AT&T also exchanged AT&T Common Stock or Liberty Media Group tracking stock for shares of TCI convertible preferred stock and made a cash payment in lieu of any fractional AT&T Common Share or Liberty Media Group tracking share. IBM Global Network Acquisition On April 30, 1999, AT&T completed the first phase of its acquisition of the IBM Global Network business (renamed AT&T Global Network Services or AGNS) by obtaining the IBM Global Network assets in the United States. Under the terms of the agreement, AT&T acquired the global network of IBM for approximately $5 billion, and the two companies entered into outsourcing agreements with each other. IBM is outsourcing a significant portion of its global networking needs to AT&T, and AT&T is outsourcing certain applications-processing and data-center-management operations to IBM. AGNS serves the networking needs of several hundred large global companies, tens of thousands of mid-sized businesses and more than one million individual Internet users in 59 countries. About 5,300 IBM employees joined AT&T as part of the acquisition. AGNS has more than 1,300 dial-up points of presence and dedicated access from more than 850 cities in 59 countries. AGNS offers business customers innovative services and worldwide operations and support, including in-country, native-language support personnel. The acquisition occurred in phases throughout 1999 as legal and regulatory requirements were met in each of the countries in which the business operates. As of December 31, 1999, operations in over 70 countries have been transferred from IBM to AT&T, representing more than 99% of the contract revenue. We are awaiting regulatory approval in the remaining countries and expect to be providing service to customers operating in over 80 countries by the end of the first quarter of 2000. Vanguard Acquisition On May 3, 1999, AT&T acquired Vanguard Cellular Systems, Inc. (Vanguard), an independent operator of wireless telephone systems in the United States with over 700,000 subscribers and which operates in markets with a population of approximately 6.9 million. Vanguard served 26 markets in the Eastern United States. Consummation of the acquisition resulted in the issuance of approximately 12.6 million shares of AT&T common stock and the payment of approximately $485 million in cash. Comcast Corporation Exchange On May 4, 1999, AT&T and Comcast announced an agreement to exchange various cable systems, which are designed to improve each company's geographic coverage by better clustering its systems. The agreement will result in a net addition to Comcast of approximately 750,000 subscribers. Because Comcast will receive more subscribers than it is contributing in the exchange, it will pay AT&T consideration having a value of approximately $4,500 per added subscriber for a total value of $3.0 billion to $3.5 billion. Comcast has also agreed to offer AT&T-branded telephony in all of its markets, subject to certain conditions. The foregoing agreements are subject to completion of the proposed AT&T/MediaOne merger and other regulatory and legal approvals. MediaOne Group, Inc. Acquisition On May 6, 1999, AT&T and MediaOne Group, Inc. (MediaOne) entered into a definitive merger agreement. October 21, 1999, shareholders of MediaOne voted in favor of the proposed merger between AT&T and MediaOne. Under the agreement, each MediaOne shareholder is entitled to elect to receive either cash or AT&T common stock in exchange for their MediaOne shares, subject to the limitation that the aggregate consideration will consist of $30.85 per share in cash plus 0.95 of a share of AT&T stock for every MediaOne share. In addition, the cash portion of the AT&T offer will be increased to offset up to a 10% decline in AT&T's closing stock price of $57 per share on April 21, 1999, the date the offer was extended. This will maintain a value of $85 per share for every MediaOne share, provided AT&T's stock trades between $57 per share and $51.30 per share. The additional amount of cash that may be received is limited to $5.42 per share. AT&T estimates that we will issue approximately 600 million shares in the transaction. The merger, which remains subject to regulatory and other approvals, is expected to close in the second quarter of 2000. MetroNet Merger On June 1, 1999, AT&T Canada Corp. merged with MetroNet Communications Corp., Canada's largest competitive local exchange carrier. Under the terms of the merger agreement, AT&T received 31 percent of the equity interest and 23 percent of the voting interest in the combined entity in exchange for AT&T Canada Corp. and ACC TelEnterprises Ltd. In addition, AT&T agreed to purchase all of the remaining shares at the greater of the then appraised fair market value or the accreted minimum price, which initially is C$37.50 per share accreting after June 30, 2000 at a rate of 16% per annum, compounded quarterly. If the acquisition is not completed by June 30, 2003, those shares, along with AT&T's shares, would be sold through an auction process and AT&T will make whole the other shareholders for the amount they would have been entitled to if AT&T had purchased the shares. The completion of the acquisition is subject to the condition that AT&T is permitted to acquire the shares under Canada's foreign ownership restrictions. AT&T may acquire the shares prior to a change in the ownership restrictions by developing a structure that addresses such ownership restrictions. Cox Communications, Inc. Exchange On July 6, 1999, AT&T and Cox Communications, Inc. (Cox) signed an agreement whereby AT&T would redeem approximately 50.3 million shares of AT&T common stock held by Cox in exchange for cable television systems serving approximately 312,000 customers, our interest in certain investments and approximately $750 million in other consideration, including cash. Based on the closing price of AT&T's stock on July 6, 1999, the transaction is valued at approximately $2.8 billion. The transaction closed in March 2000. AT&T/BT Joint Investments On August 16, 1999, AT&T completed its sale to BT of 30% of AT&T's stake in AT&T Canada for C$600 million. In addition, BT has agreed to purchase 30% of the shares AT&T will be acquiring from the other stockholders in connection with the MetroNet merger, subject to BT's right to cap its purchase at C$1.65 billion. In addition, on August 16, 1999, AT&T and BT completed their joint purchase of 33.3% of the equity interest and 30.6% of the voting interest in Rogers Cantel Mobile Communications Inc., Canada's largest mobile company serving more than two million customers coast to coast, for a total purchase price of C$1.4 billion. AT&T and BT hold their ownership position through a newly established and jointly owned entity. BT Joint Venture On January 6, 2000 AT&T and British Telecommunications plc (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, named Concert, is owned equally by AT&T and BT and combined transborder assets and operations of each company, including their existing international networks, their international traffic, their transborder products for business customers - -- including an expanding set of Concert services -- and AT&T and BT's multinational accounts in selected industry sectors. BUSINESS SERVICES Business Services provides a variety of global communications services including long distance, local and data and IP networking to large domestic and multinational businesses, small and medium-sized businesses, and government agencies. Business units within this group provide regular and custom long distance and local communications services, data transmission and Internet services, 500 services, toll-free or 800 and 888 services, 900 services, private line services, software defined network services (SDN), asynchronous transfer mode (ATM) and Internet protocol (IP) technology based services, integrated services digital network (ISDN) technology based services, electronic mail, electronic data interchanges, and enhanced facsimile services. AT&T also provides special long distance services, including AT&T Calling Card services, special calling plans and the Company's domestic and international operator services. AT&T provides communications services internationally, including transaction services, global networks, network management and value added network services (i.e., services offered over communications transmission facilities that employ computer processing applications). Business Services has a dedicated sales force through which it markets its voice and data communication services. Sales forces are divided into geographic markets, and in each market focus on large, multinational corporations, small businesses, government markets, and value-added resellers and other wholesalers. Business Services employs full service support teams to provide significant customer support and service to ensure customer satisfaction and retention. Business Services offers its regulated services in accordance with applicable tariffs filed with the Federal Communications Commission (FCC) and various states. Rates can vary by a number of factors, particularly the volume of usage and the day and time that calls are made. AT&T Business Services offers voice and data services individually and in combination with other offerings. Through combined offerings, AT&T provides customers with benefits such as single billing, unified services for multilocation companies and customized calling plans. Voice Services Long distance voice services. Business Services' voice communication offerings include the traditional "one plus" dialing of domestic and international long distance for customers that select AT&T as their primary long distance carrier. Business Services' dedicated services include private line and special access services that use high-capacity digital circuits to carry voice, data and video (or multimedia) transmission from point-to-point in multiple configurations. These services provide high-volume customers with a direct connection to an AT&T switch instead of switched access shared by many users. These services permit customers to create internal computer networks, access external computer networks and the Internet, as well as reduce originating access costs. Business Services also offers toll free (800, 888 or 877) inbound service, where the receiving party pays for the call. This is used in a wide variety of applications, many of which generate revenue for the user (such as reservation centers or customer service centers). AT&T offers a variety of features to enhance customers toll free service, including call routing by origination point and time of day routing. Business Services also offers a variety of calling cards which allow the user to place calls from virtually anywhere in the world. Additional features include prepaid calling cards, conference calling, international origination, information service access (such as weather or stock quotes), speed dialing and voice messaging. Business Local Services. Local carriers provide local exchange, exchange access, toll, and resold services; sell, install and maintain customer premises equipment; and provide operator and directory services. The market for local exchange services consists of a number of distinct service components. These service components are defined by specific regulatory tariff classifications including: (i) local network services, which generally include basic dial tone charges and private line services; (ii) network access services, which consist of access charges received by local exchange carriers (LECs) from long distance carriers for the local transport and termination portion of long distance telephone calls; (iii) long distance network services, which include the variable portion of charges received by local exchange carriers for intra-LATA long distance calls; and (iv) additional value added services such as caller identification, call waiting, call forwarding, three way calling and voice mail. AT&T Business Local's customers are principally telecommunications-intensive businesses, healthcare, and educational institutions, governmental agencies, long distance carriers and resellers, Internet service providers, disaster recovery service providers and wireless communications and financial services companies. AT&T Business Local's centrally managed customer care and support operations are designed to facilitate the installation of new services and the processing of orders for changes and upgrades in customer services. With a direct sales force in each of its markets, AT&T Business Local initially targets the large telecommunications-intensive businesses concentrated in the major metropolitan markets served by its networks. AT&T Business Local also targets small- and medium-sized business customers in office buildings or multiple dwelling units already served by its network. AT&T Business Local generally offers its services in accordance with applicable tariffs filed with state regulatory agencies (for intrastate services). AT&T Business Local typically offers local service as part of a package of services, which can include any combination of other AT&T offerings. Customers also choose among analog, digital voice-only and ISDN Centrex telephone lines to their desktops. AT&T owns, houses, manages and maintains the switch, while customers retain control over network configurations, allowing customers to add, delete and move lines as needed. For local service, customers are billed a fixed charge plus usage. Data and Internet Services Enhanced Data Communications. Enhanced data services consist of interexchange data networks utilizing packet switching and transmission technologies and application services, such as Internet access and Web Site hosting and management, which utilize the frame relay network. Enhanced data services enable customers to economically and securely transmit large volumes of data typically sent in bursts from one site to another. Enhanced data services are utilized for local area network (LAN) interconnection, remote site, point of sale and branch office communications solutions. AT&T utilizes both IP and ATM systems. Both technologies offer significant efficiencies over circuit switched systems which use a single, dedicated circuit to complete each transmission. ATM switching is also a more efficient method of switching and transmitting comingled or multimedia information. The packet switching technology breaks up a transmission into short pieces, or packets, which are encoded and transmitted with other packets on the same circuit, and reassembled at the desired destination. ATM differs from IP in that the data packets used in ATM (called cells) are one size (53 bytes) whereas in IP the data packets vary in length. Also, whereas ATM establishes virtual circuits to ensure that the information sent is reassembled at its destination in its proper sequence, IP ships each packet of information to its destination by a different path. While AT&T will continue to have both circuit and packet switching and transmission technologies for some time, significant future capital expenditures are not scheduled for circuit switching. ISDN services provide customers with multiple voice and data communications services over a single telecommunications line. The Company's ISDN services allow customers to perform multiple functions such as simultaneous voice and computer links, and enable the Company to offer customers value-added features. High speed ISDN applications include desk top video conferencing, interconnection of LANs and Internet access. AT&T Business Internet Services. AT&T WorldNet Business Services provides IP connectivity and IP value-added services, messaging, and electronic commerce services to businesses. AT&T offers Managed Internet Service, which gives customers dedicated, high-speed access to the public Internet for business applications at a variety of speeds and types of access, as well as Business Dial Service, a dial-up version of Internet access designed to meet the needs of small- and medium-sized businesses. AT&T Virtual Private Network (VPN) Service allows businesses to obtain remote access to e-mail, order entry systems, employee directories, human resources and other databases, or to create an Intranet and extranets with their clients, suppliers and business partners, and enables customers to tailor their VPNs to accommodate specific business applications, performance requirements or the need to integrate with existing data networks. AT&T Web Services are a family of hosting and transaction services and platforms serving the web needs of thousands of businesses. Offers include AT&T Shared Hosting Services, an economical way for businesses to establish a presence on the World Wide Web, and AT&T Enhanced Web Development Package for businesses that want to create web sites that require higher performance and greater user demand. AT&T Dedicated Hosting Service provides customizable and pre-packaged Web hosting solutions. AT&T SecureBuySM Service provides the backoffice infrastructure required to electronically process credit card transactions online, high-speed links into two of the leading credit card processing services, and management reports that measure a site's success. Other IP services AT&T offers let Web site visitors click on a "call me now" icon if they wish to speak to a customer service agent; connect enterprise networks that use host or LAN-based and browser-based e-mail systems to AT&T's value-added messaging services such as e-mail and fax; and enhanced fax services. Transport Business Services is one of the leaders in providing wholesale networking services to other carriers, providing both network capacity and switched services. AT&T offers a combination of high-volume transmission capacity, conventional dedicated line services and dedicated switched services to Internet service providers (ISPs) and Tier 1 and Tier 2 carriers on a national or regional basis, as well as switchless resale services to Tier 3 carriers. Wholesale networking service is typically provided pursuant to long-term service agreements for terms of one year or longer. These agreements generally provide for payments at fixed rates based on the capacity and length of the circuit used. Customers are typically billed on a monthly basis and also may incur an installation charge or certain ancillary charges for equipment. After contract expiration, the contracts may be renewed or the services may be provided on a month-to-month basis. Switched services agreements are generally offered on a month-to-month basis and the service is billed on a minutes-of-use basis. More recently, AT&T has also sold network capacity through indefeasible rights of use agreements under which capacity is furnished for contract terms as long as 25 years. CONSUMER SERVICES Long Distance Voice AT&T is the leading provider of domestic and international long distance service to residential consumers in the United States. AT&T provides regular and custom long distance communications services which it offers individually and in combination with other services. AT&T provides interstate and intrastate long distance telecommunications services throughout the continental United States and provides, or joins in providing with other carriers, telecommunications services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international telecommunications services to and from virtually all nations and territories around the world. Consumers can use AT&T domestic and international long distance services by the traditional "one plus" dialing of the desired call destination, by dial-up access or through the use of AT&T calling cards. AT&T both delivers and receives international traffic pursuant to its operating agreements with foreign carriers throughout the world. The terms of most switched voice operating agreements, as well as established FCC policy, require that inbound switched voice traffic from the foreign carrier to the United States be routed to United States international carriers, like AT&T, in proportion to the percentage of United States outbound traffic routed by that United States international carrier to the foreign carrier. AT&T's revenues and costs of sales are sensitive to changes in international settlement rates and international traffic routing patterns. In the continental United States, AT&T provides long distance telecommunications services over AT&T's backbone network. International telecommunications services are provided by submarine cable systems in which AT&T holds investment positions, satellites and facilities of other domestic and foreign carriers. AT&T markets its consumer long distance services in a variety of ways, including by means of television advertising, direct mail solicitations and telephonic solicitations, as well as through brand awareness. AT&T charges customers based on applicable tariffs filed with the FCC and individual states. Customers select different services and from various rate plans which determine the price per minute that they pay on their long distance calls. Rates typically vary based on a variety or factors, particularly the volume of usage and the day and time that calls are made. Consumer Local Services Local carriers provide local exchange, exchange access, toll, and resold services; and provide operator and directory services. By the end of 1997, AT&T offered resold local service to residential customers in 8 states. Notwithstanding its substantial efforts, AT&T experienced significant difficulty in entering local markets. AT&T's ability to purchase combined network elements from the incumbent LECs (ILECs), one of the primary methods by which AT&T intended to provide local service to residential customers, was severely limited by, among other factors, ILEC-sponsored regulatory and judicial actions, and a lack of operating interfaces necessary to process network element orders with ILECs. In spite of strong demand, in the fourth quarter of 1997 AT&T stopped actively marketing resold local service to residential customers in most of the areas in which it offered such service because of limitations on ILECs' ability to handle anticipated demand and because the wholesale rates AT&T received from ILECs on the sale of such service were insufficient to make resale a viable method of offering service. AT&T intends to pursue local entry by transforming the cable footprint of one-way cable plant into a two-way, broadband network capable of meeting the full spectrum of communication needs of the residential customer. AT&T intends to deploy a variety of services over the upgraded cable plant, including a richly featured all distance (i.e., local, long distance, international) voice telephony offering. AT&T has used existing circuit-switched technology to pilot telephony service offers over the cable plant beginning in 1999. However, AT&T expects to begin to transition to an integrated Internet protocol (IP) packet data architecture by the end of 2000 that affords cost and feature benefits over the older circuit-switched technology. In addition, AT&T will pursue other transport options, including: o Expanding AT&T's ability to offer the full range of consumer services our existing cable footprint through a variety of partnership and investment initiatives; o Continued investment in alternative narrowband, wideband and broadband access technologies, including the fixed wireless technology that AT&T is currently testing in select markets, and the construction of dedicated, high-capacity access facilities to serve the broadband communication needs of residential customers living in multiple dwelling units (MDUs); and o Using combinations of ILEC unbundled network elements, as well as ILEC unbundled loops (which can be combined with switching, transport and other network elements) to support differentiated voice and data services. AT&T intends to use the AT&T Broadband sales force actively to solicit cable customers as local service customers. In these areas, AT&T intends to offer cable and local telephony as a bundle of services. AT&T will market local service in other areas as it rolls out its local telephony capabilities. For local service, customers are billed a fixed charge plus usage. AT&T intends to offer rates competitive with those offered by LECs, as well as discounted offers for certain bundles of services. AT&T WorldNet(R) Consumer Services AT&T offers dial-up Internet access to consumers through its AT&T WorldNet Services, a leading provider of direct Internet access service in the United States. At December 31, 1999, AT&T WorldNet service had approximately 1.479 million customers. In 1998, AT&T WorldNet Services entered into agreements with Yahoo!, Excite and Lycos to offer co-branded access services to the portals' customers. For example, a Yahoo! customer may subscribe to Internet access through Yahoo! Online Powered by AT&T WorldNet Services. In these cases AT&T WorldNet Services supplies the underlying access, billing and customer care, while the portal provides the content in the form of a personalizable start page and other popular features. In 1999, AT&T WorldNet Services began offering members an AT&T branded search engine as part of redesign of the Company's web site, and enhanced several other subscriber features, including increasing the disk storage space for personal web pages to 10 megabytes for each e-mail id (six e-mail ids per account, 60 megabytes of disk storage) and providing a template that helps members build personal web pages quickly and easily. AT&T WorldNet Services entered into a co-marketing arrangement with Sega, providing Internet access via Sega's new Dreamcast game machine, and it received recognition as the top ISP in the industry from PC Week, PC Magazine and Smart Money. AT&T WorldNet Services generates revenues principally through subscription and usage fees, as well as from electronic commerce and advertising revenues. AT&T WorldNet Service offers a variety of pricing plan options, including bundled options. Generally, customers are charged a flat rate for a certain number of hours with charges for each additional hour of usage. AT&T WorldNet Services' marketing programs are designed to attract and retain profitable customers. AT&T seeks to build brand recognition and customer loyalty and to make it easy for consumers to try, and stay with, AT&T WorldNet Services. In addition to direct marketing through brand name advertising, direct mail and magazine insert promotions and bundling offers, AT&T WorldNet service maintains a large indirect channel marketing effort. Through this indirect channel AT&T WorldNet service software is bundled in new computers produced by major manufacturers, and is included on millions of software titles published by independent software vendors. BROADBAND SERVICES AT&T Broadband offers a variety of services through its cable broadband network, including traditional analog video and new services such as digital cable and AT&T@Home, which offers high-speed cable Internet access service. Also included in AT&T Broadband are the operations associated with developing and refining the infrastructure that will support broadband telephony. Cable television systems receive video, audio and data signals transmitted by nearby television and radio broadcast stations, terrestrial microwave relay services and communications satellites. Such signals are then amplified and distributed by coaxial cable and optical fiber to the premises of customers who pay a fee for the service. In many cases, cable television systems also originate and distribute local programming. At December 31, 1999, approximately 74% of AT&T Broadband's cable television systems had bandwidth capacities ranging from 450 megahertz to 750 megahertz. The Company's cable television systems generally carry up to 80 analog channels. Compressed digital video technology converts on average twelve analog signals (now used to transmit video and voice) into a digital format and compresses such signals (which is accomplished primarily by eliminating the redundancies in television imagery) into the space normally occupied by one analog signal. The digitally compressed signal is uplinked to a satellite, which retransmits the signal to a customer's satellite dish or to a cable system's headend to be distributed, via optical fiber and coaxial cable, to the customer's home. At the home, a set-top video terminal converts the digital signal into analog channels that can be viewed on a normal television set. Domestic Basic-TV cable customers served by AT&T Broadband are summarized as follows (amounts in millions): Basic-TV customers at December 31, ----------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Managed through AT&T Broadband's operating divisions 11.3 11.4 14.2 13.4 11.9 Other non-managed subsidiaries of AT&T Broadband 0.1 0.5 0.2 0.5 0.6 ------ ------ ------ ------ ------ 11.4 11.9 14.4 13.9 12.5 ====== ====== ====== ====== ====== During 1999, AT&T Broadband completed two transactions in which it contributed cable television systems serving in the aggregate approximately 863,000 customers to two separate joint ventures in exchange for non-controlling ownership interests in such joint ventures, and the assumption and repayment by the joint ventures of indebtedness. The decline in total Basic-TV customers between 1997 and 1998 is attributable to certain contribution transactions entered into in 1998. In the most significant of these transactions, on March 4, 1998, AT&T Broadband contributed to Cablevision Systems Corporation (CSC) certain of its cable television systems serving approximately 830,000 customers in exchange for approximately 48.9 million newly issued CSC Class A common shares (the CSC Transaction) and the assumption of indebtedness. In addition to the CSC Transaction, during 1998 AT&T Broadband also completed eight transactions whereby AT&T Broadband contributed cable television systems serving in the aggregate approximately 1,924,000 customers to eight separate joint ventures (collectively, the 1998 Joint Ventures) in exchange for non-controlling ownership interests in each of the 1998 Joint Ventures, and the assumption and repayment by the 1998 Joint Ventures of indebtedness. AT&T Broadband had approximately 1.8 million digital customers and 200,000 AT&T@Home customers at December 31, 1999. AT&T Broadband operates cable television systems throughout the United States. Service Charges. AT&T Broadband offers a limited "basic service" (Basic-TV) (primarily comprised of local broadcast signals and public, educational and governmental (PEG) access channels) and an "expanded tier" (primarily comprised of specialized programming services, in such areas as health, family entertainment, religion, news, weather, public affairs, education, shopping, sports and music). The monthly fee for basic service generally ranges from $9.50 to $15.00, and the monthly service fee for the expanded tier generally ranges from $15.00 to $21.50. AT&T Broadband offers "premium services" (referred to in the cable television industry as "Pay-TV" and "pay-per-view") to its customers. Such services consist principally of feature films, as well as live and taped sports events, concerts and other programming. AT&T Broadband also offers Pay-TV services for a monthly fee. Charges are usually discounted when multiple Pay-TV services are ordered. Customers may also elect to subscribe to digital video services comprised of up to 80 additional video channe;s and between 10 and 30 additional audio channels featuring additional specialized programming and premium services at an average incremental monthly charge of $10.00. As further enhancements to their cable services, for a monthly charge customers may generally rent converters or converters with remote control devices, as well as purchase a channel guide. Also a nonrecurring installation charge is usually charged. Monthly fees for Basic-TV and Pay-TV services to commercial customers vary widely depending on the nature and type of service. Except under the terms of certain contracts to provide service to commercial accounts, customers are free to discontinue service at any time without penalty. AT&T Broadband also offers AT&T@Home, a high speed cable Internet access service, in some markets. Monthly charges for AT&T@Home range from $29.95 to $39.95. The Cable Television Consumer Protection and Competition Act of 1992 (the 1992 Cable Act) and the Telecommunications Act of 1996 (the Telecommunications Act, together with the 1992 Cable Act, the Cable Acts), established rules under which AT&T Broadband's basic service and expanded tier service rates and equipment and installation charges are regulated if a complaint is filed or if the appropriate franchise authority is certified. Local Franchises. Cable television systems generally are constructed and operated under the authority of nonexclusive permits or "franchises" granted by local and/or state governmental authorities. Federal law, including the Cable Communications Policy Act of 1984 (the 1984 Cable Act) and the 1992 Cable Act, limits the power of the franchising authorities to impose certain conditions upon cable television operators as a condition of the granting or renewal of a franchise. Franchises contain varying provisions relating to construction and operation of cable television systems, such as time limitations on commencement and/or completion of construction; quality of service, including (in certain circumstances) requirements as to the number of channels and broad categories of programming offered to customers; rate regulation; provision of service to certain institutions; provision of channels for public access and commercial leased-use; and maintenance of insurance and/or indemnity bonds. AT&T Broadband's franchises also typically provide for periodic payments of fees, not to exceed 5% of revenue, to the governmental authority granting the franchise. Additionally, many franchises require payments to the franchising authority for the funding of PEG access channels. Franchises usually require the consent of the franchising authority prior to a transfer of the franchise or a transfer or change in ownership or operating control of the franchisee. Subject to applicable law, a franchise may be terminated prior to its expiration date if the cable television operator fails to comply with the material terms and conditions thereof. Under the 1984 Cable Act, if a franchise is lawfully terminated, and if the franchising authority acquires ownership of the cable television system or effects a transfer of ownership to a third party, such acquisition or transfer must be at an equitable price or, in the case of a franchise existing on the effective date of the 1984 Cable Act, at a price determined in accordance with the terms of the franchise, if any. In connection with a renewal of a franchise, the franchising authority may require the cable operator to comply with different and more stringent conditions than those originally imposed, subject to the provisions of the 1984 Cable Act and other applicable federal, state and local law. The 1984 Cable Act, as supplemented by the renewal provisions of the 1992 Cable Act, establishes an orderly process for franchise renewal which protects cable operators against unfair denials of renewals when the operator's past performance and proposal for future performance meet the standards established by the 1984 Cable Act. AT&T Broadband believes that its cable television systems generally have been operated in a manner which satisfies such standards and allows for the renewal of such franchises; however, there can be no assurance that the franchises for such systems will be successfully renewed as they expire. Most of AT&T Broadband's present franchises had initial terms of approximately 10 to 15 years. The duration of AT&T Broadband's outstanding franchises presently varies from a period of months to an indefinite period of time. Approximately one thousand of AT&T Broadband's franchises expire within the next five years. This represents approximately 25% percent of the franchises held by AT&T Broadband and involves over 4 million basic customers. Cable Telephony. AT&T Broadband's telephony pilot market initiatives progressed on schedule in 1999. As of December 31, 1999, AT&T Broadband had introduced broadband telephony service to customers in 16 cities within nine pilot markets and had nearly 8,300 broadband telephony customers. The markets include the California Bay Area (including Fremont), Chicago, Dallas, Denver, Pittsburgh, Seattle, Salt Lake City, St. Louis and Portland, Oregon. WIRELESS SERVICES The AT&T Wireless Group Tracking Stock On March 14, 2000 the AT&T shareholders approved amendments to the AT&T certificate of incorporation that would permit AT&T to create a separate class of its common stock, the AT&T Wireless Group tracking stock, which would track the performance of our wireless business. As of the date of filing this Form 10-K, no shares of the AT&T Wireless Group tracking stock were outstanding. The AT&T Wireless Group includes the results of certain assets and liabilities which were not managed as part of the Wireless Services segment in 1999. AT&T Wireless Group tracking stock is designed to reflect the separate economic performance of the AT&T Wireless Group. Except as described below, we attribute all of AT&T's current wireless operations to the AT&T Wireless Group, including: o all mobile and fixed wireless licenses, o all wireless networks, operations, cell sites, retail operations, wireless customer care facilities and customer location assets, and o interests in partnerships and affiliates providing wireless mobile communications in the United States and internationally. The AT&T Common Stock Group retains: o existing and future wireless activities that stem from country-specific joint venture relationships that are predominantly non-wireless, and o incidental wireless capabilities or links in any backbone or other communications network that is predominantly non-wireless. We currently intend to include all future wireless activities in the AT&T Wireless Group. Our board of directors may, however, in its discretion, but subject to the AT&T Wireless Group policy statement, direct new businesses and assets to the AT&T Wireless Group or the AT&T Common Stock Group or dispose of or transfer businesses or assets of either group. Business of the AT&T Wireless Group The AT&T Wireless Group is one of the largest wireless service providers in the United States, based on approximately $7.6 billion in revenues for the year ended December 31, 1999. Including its partnership markets, the AT&T Wireless Group had over 12 million total subscribers as of December 31, 1999. The AT&T Wireless Group operates one of the largest U.S. digital wireless networks. The AT&T Wireless Group, including its partnership and affiliate markets, currently holds 850 megahertz and 1900 megahertz licenses to provide wireless services covering 94% of the U.S. population, with approximately 81% of the U.S. population covered by at least 30 megahertz of wireless spectrum as of December 31, 1999. As of December 31, 1999, the AT&T Wireless Group's built network, including partnership and affiliate markets, covered 65% of the U.S. population. This includes operations in 42 of the 50 largest U.S. metropolitan areas. The AT&T Wireless Group supplements its own operations with roaming agreements that allow its subscribers to use other providers' wireless services in regions where the AT&T Wireless Group does not have operations. Through these roaming agreements, the AT&T Wireless Group is able to offer its customers wireless services covering over 95% of the U.S. population. Services and products The AT&T Wireless Group offers a variety of services for both voice and data communications. Service can include wireless voice transmission as well as custom calling services for digital services, such as voicemail, call forwarding, call waiting, caller ID, three-way calling, no-answer and busy transfer. The AT&T Wireless Group also offers a variety of other enhanced features, including display messaging, which allows a cellular phone to receive and store short alphanumeric messages and pages and to provide subscribers with notification of voicemail messages, even if the handset is in use or switched off, extended battery life and enhanced directory assistance, which enables callers to be connected to the party whose number was sought without hanging up and redialing. As a packet-switched network, the AT&T Wireless Group's cellular digital packet data (CDPD) network takes advantage of the fact that with many data applications, data is sent in bursts with intermittent quiet periods, which allows many users to share the network channel. As a result, relative to data services carried over circuit-switched analog or digital wireless networks, the AT&T Wireless Group's packet-switched CDPD service is a significantly more cost-effective means of sending data for the majority of applications because it allows a channel to be shared by many users. For example, for many applications, the AT&T Wireless Group's packet-switched CDPD network allows it to offer its customers unlimited, always-on usage, most often for a flat monthly fee. This makes its CDPD network service attractive for a variety of new applications. In the future, the AT&T Wireless Group expects a number of additional applications will be developed, including e-commerce and shopping services and services that are enhanced by information about the user's location. By providing or facilitating such applications, the AT&T Wireless Group believes it can generate new revenue streams, as well as develop personalized relationships with its customers. The AT&T Wireless Group offers a variety of products as complements to its wireless service, including handsets and accessories, such as chargers, headsets, belt clips, faceplates and batteries. As part of its basic service offering, the AT&T Wireless Group provides easy-to-use, interactive menu-driven handsets that can be activated over the air. These handsets primarily feature word prompts and menus rather than numeric codes to operate handset functions. Some handsets allow mobile access to the Internet. In addition, the AT&T Wireless Group offers tri-mode handsets, which are handsets compatible with PCS, digital cellular and analog cellular frequencies and service modes. Tri-mode handsets permit customers to roam across a variety of wireless networks and incorporates AT&T's intelligent roaming data base (IRDB) system. The AT&T Wireless Group offers its customers use of Nokia, Ericsson, Mitsubishi and Motorola handsets. The AT&T Wireless Group markets its wireless services in its managed markets under the AT&T brand name. It markets wireless services to business and residential customers through a direct sales force of 2,100, through sales points of presence in approximately 390 AT&T company-owned stores located in 36 states, and kiosks and other customer points of presence, including the Internet and inbound call centers, and through local and national non-affiliated retailers throughout the United States. The AT&T Common Stock Group sales force also sells wireless services to business and residential customers as part of bundled offerings with services of the AT&T Common Stock Group. The AT&T Wireless Group also relies upon dealers to market its services in some locations. The AT&T Wireless Group charges may include fees for service activation, monthly access, per-minute airtime and customer-calling features, which may include a fixed number of minutes or packets of data per month at a set price and generally offers a variety of pricing options, most of which combine a fixed monthly access fee for a fixed number of minutes or packets of data and additional charges for usage in excess of those allotted. Customers may also incur long distance and roaming fees. Fixed Wireless Fixed wireless service provides customers with high speed broadband access coupled with wireline quality voice access. Fixed wireless provides a high speed packet data channel which can be used by up to five data devices simultaneously (for example, five personal computers simultaneously accessing the Internet) at download speeds of up to 512 kilobits per second. The service is expected to be capable of speeds of up to one megabit per second by mid 2000. In addition, fixed wireless can provide up to four lines of wireline quality voice telephony, including custom calling features (e.g., call waiting, caller ID, three-way calling) available today over wireline networks. Fixed wireless was reported within the Consumer Services segment in 1999, but will be included in the AT&T Wireless Group in 2000. Other assets The AT&T Wireless Group also possesses certain other assets not described above. The most significant of these assets include a number of equity interests in domestic and international wireless operations and an air-to-ground wireless operation. Domestically, the AT&T Wireless Group has joint ventures with or interests in a number of wireless operators, including Telecorp PCS, Triton PCS and Tritel Inc.. Internationally, the AT&T Wireless Group owns one half of the 33.3% equity stake in Rogers Cantel it holds jointly with British Telecommunications. The AT&T Wireless Group is the operating partner in wireless ventures in Colombia, India and Taiwan. In 2000 the AT&T Wireless Group was also allocated one half the interest that AT&T possesses in Japan Telecom. In addition, subject to existing agreements or commitments, to the extent that AT&T acquires any international wireless investments in connection with its merger with MediaOne, AT&T intends to allocate those investments to the AT&T Wireless Group in exchange for fair and reasonable consideration. The Aviation Communications Division (ACD) of the AT&T Wireless Group provides air-to-ground communications services. A minority ownership interest in ACD is held by Rogers Cantel. ACD owns and operates a network of ground-based and airborne telecommunications equipment and related assets that deliver digital telephone service to commercial and private aircraft in North America. Wireless network The AT&T Wireless Group's ownership position in U.S. markets was obtained through FCC auctions and the FCC lottery and settlement process as well as through acquisitions of, and purchases and exchanges of, licenses with other cellular providers. Mobile voice network Coverage. As of December 31, 1999, the AT&T Wireless Group's built network, including partnership and affiliate markets, covered 65% of the U.S. population, including operations in 42 of the 50 largest U.S. metropolitan areas. The AT&T Wireless Group provides virtually seamless services over its wireless network, which operates using both 850 megahertz and 1900 megahertz licenses. Where agreements are in place, the AT&T Wireless Group is able to offer service to customers of other wireless providers when they travel through its service area, and AT&T Wireless Group subscribers can roam through other wireless providers' service areas. Analog and digital technologies. The AT&T Wireless Group offers both analog and digital service in its 850 megahertz markets and digital service in its 1900 megahertz markets. The AT&T Wireless Group believes that digital technology offers many advantages over analog technology, including substantially increased network capacity, greater call privacy, enhanced services and features, lower operating costs, reduced susceptibility to fraud and the opportunity to provide improved data transmissions. Moving customers to digital service has been a key component of the AT&T Wireless Group's overall wireless strategy. Digital service enables the AT&T Wireless Group to provide added benefits and services to its customers, including extended battery life, caller ID, text messaging and voicemail with message waiting indicator. TDMA network. The AT&T Wireless Group has chosen time division multiple access (TDMA) technology for its digital network. TDMA permits the use of advanced tri-mode handsets that allow for roaming across analog and digital systems and across 850 megahertz and 1900 megahertz spectrums. TDMA digital technology allows for enhanced services and features, such as short alphanumeric message service, extended battery life, added call security and improved voice quality. TDMA's hierarchical cell structure enables the AT&T Wireless Group to enhance network coverage with lower incremental investment through the deployment of micro and pico, as opposed to macro, cell sites. This enables the AT&T Wireless Group to offer customized billing options and to track billing information per individual cell site, which is practical for advanced wireless applications such as fixed wireless and wireless office applications. TDMA served an estimated 35 million subscribers worldwide and 18 million subscribers in North America as of December 31, 1999, according to the Universal Wireless Communications Consortium, an association of TDMA service providers and manufacturers. TDMA equipment is available from leading telecommunication vendors such as Lucent, Ericsson and Nortel Networks Corporation. A number of other wireless service providers have chosen code division mobile access (CDMA) or global system for mobile communications (GSM) as their digital wireless technology. CDPD network. The AT&T Wireless Group's CDPD network currently covers 89 million POPs, which represents over 60% of its built network, and its CDPD customers can roam on the CDPD networks of other wireless providers, which, together, cover an additional 72 million POPs. CDPD is an industry standard using Internet Protocol, which allows most applications written for the Internet as well as many corporate applications to run efficiently over the network without modification. Using CDPD, data files and transactions are divided into small packets and sent on a dedicated wireless channel. In many data applications, data is sent in bursts with intermittent quiet periods. Packet transmission technologies take advantage of this fact and allow user data to be efficiently carried on the same network channel. As a result, relative to data services carried over circuit-switched analog or digital wireless networks, the AT&T Wireless Group's packet-switched CDPD service is a significantly more cost-effective means of sending data for the majority of applications because it allows many users to share the same channel. OTHER BUSINESSES AT&T Solutions AT&T Solutions, established in 1995, provides outsourcing, consulting and networking integration services to large businesses. AT&T Solutions provides clients with a broad array of professional services to satisfy clients complete networking technology needs. AT&T Solutions' offerings include operational and networking management services for a broad range of computing platforms, including mainframe, mid-range computers, personal computer and network environments, such as local-area networks and wide-area networks. Most customers execute long-term contracts for AT&T Solutions networking services. AT&T Solutions' customers are generally within the top 2000 multinational corporations in the world. AT&T Solutions' sales force engages in direct solicitation of those customers as well as referrals from other units of AT&T. International AT&T has established a number of international alliances to increase the reach and scope of AT&T's services and network over time and has invested in certain countries in order to increase the range of services AT&T offers in those countries. International operations include international carrier services businesses, international online services, as well as consolidated foreign operations such as frame relay services in the United Kingdom. AT&T also has a number of international joint ventures and alliances, such as Alestra in Mexico, AT&T Canada Corp., and Japan Telecom. On January 6, 2000 AT&T and British Telecommunications plc (BT) created a global venture to serve the communications needs of multinational companies and the international calling needs of businesses around the world. The venture, called Concert and owned equally by AT&T and BT, combined transborder assets and operations of each company, including their existing international networks, their international traffic, their transborder products for business customers - -- including an expanding set of Concert services -- and AT&T and BT's multinational accounts in selected industry sectors. On June 1, 1999, AT&T Canada Corp. merged with MetroNet Communications Corp., Canada's largest competitive local exchange carrier. Under the terms of the merger agreement, AT&T received 31 percent of the equity interest and 23 percent of the voting interest in the combined entity in exchange for AT&T Canada Corp. and ACC TelEnterprises Ltd. In addition, AT&T agreed to purchase all of the remaining shares at the greater of the then appraised fair market value or the accreted minimum price, which initially is C$37.50 accreting after June 30, 2000 at a rate of 16% per annum, compounded quarterly. If the acquisition is not completed by June 30, 2003, those shares, along with AT&T's shares, would be sold through an auction process and AT&T will make whole the other shareholders for the amount they would have been entitled to if AT&T had purchased the shares. The completion of the acquisition is subject to the condition that AT&T is permitted to acquire the shares under Canada's foreign ownership restrictions. AT&T may acquire the shares prior to a change in the ownership restrictions by developing a structure that addresses such ownership restrictions. LEGISLATIVE AND REGULATORY DEVELOPMENTS Telecommunications Act of 1996 In February 1996, the Telecommunications Act became law. The Telecommunications Act, among other things, was designed to foster local exchange competition by establishing a regulatory framework to govern new competitive entry in local and long distance telecommunications services. The Telecommunications Act will permit the Regional Bell Operating Companies (RBOCs) to provide interexchange services originating in any state in its region after demonstrating to the FCC that such provision is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. In August 1996, the FCC adopted rules and regulations, including pricing rules (the "Pricing Rules") to implement the local competition provisions of the Telecommunications Act, including with respect to the terms and conditions of interconnection with LEC networks and the standards governing the purchase of unbundled network elements and wholesale services from LECs. These implementing rules rely on state public utilities commissions (PUCs) to develop the specific rates and procedures applicable to particular states within the framework prescribed by the FCC. On July 18, 1997, the United States Court of Appeals for the 8th Circuit issued a decision holding that the FCC lacks authority to establish pricing rules to implement the sections of the local competition provisions of the Telecommunications Act applicable to interconnection with LEC networks and the purchase of unbundled network elements and wholesale services from LECs. Accordingly, the Court vacated the rules that the FCC had adopted in August 1996, and which had been stayed by the Court since September 1996. On October 14, 1997, the 8th Circuit Court of Appeals vacated an FCC Rule that had prohibited incumbent LECs from separating network elements that are combined in the LEC's network, except at the request of the competitor purchasing the elements. This decision increased the difficulty and costs of providing competitive local service through the use of unbundled network elements purchased from the incumbent LECs. On January 25, 1999, the Unites States Supreme Court issued a decision reversing the 8th Circuit Court of Appeal's holding that the FCC lacks jurisdiction to establish pricing rules applicable to interconnection and the purchase of unbundled network elements, and the Court of Appeal's decision to vacate the FCC's rule prohibiting incumbent LECs from separating network elements that are combined in the LEC's network. The effect of the Supreme Court's decision is to reinstate the FCC's rules governing pricing and the separation of unbundled network elements. The 8th Circuit Court of Appeals will now consider the incumbent LECs' claims that although the FCC has jurisdiction to adopt pricing rule, the rules it adopted are not consistent with the applicable provisions of the Act. The Supreme Court also vacated the FCC's rule identifying and defining the unbundled network elements that incumbent LECs are required to make available to new entrants, and directed the FCC to reexamine this issue in light of the standards mandated by the Act. In response to the Supreme Court's decision, the FCC completed its re-examination of and released an order identifying and defining the unbundled network elements that incumbent LECs are required to make available to new entrants. That order re-adopted the original list of elements, with certain exceptions. An association of incumbent LECs has appealed the FCC's order to the United States Court of Appeals for the District of Columbia Circuit, and asked the Court to hear the appeal on an expedited basis. A number of parties, including AT&T and other incumbent LECs, have petitioned the FCC to reconsider and/or clarify its order. The FCC has moved to hold the appeal in abeyance pending its disposition of the reconsideration petitions. In view of the proceedings pending before the 8th Circuit, DC Circuit, FCC and state PUCs, there can be no assurance that the prices and other conditions established in each state will provide for effective local service entry and competition or provide AT&T with new market opportunities. In December 1999, Bell Atlantic obtained approval to offer long distance telecommunications service in New York state, the first time an RBOC had received this approval under the Telecommunications Act. Bell Atlantic began offering combined local and long distance service in January 2000. In January 2000, SBC Communications, Inc. filed with the FCC an application for authorization to offer long distance telecommunications service in Texas. Under the Telecommunications Act, the FCC is required to issue a decision on the application by April 2000. Modification of Final Judgment of 1982 Prior to 1996, AT&T and the RBOCs were subject to the provisions of the Modification of Final Judgment of 1982 (MFJ) since its implementation. The Telecommunications Act effectively superseded future operation of the MFJ. Consequently, on April 11, 1996, Judge Harold Greene issued an order terminating the MFJ. Regulation of Rates AT&T is subject to the jurisdiction of the FCC with respect to interstate and international rates, lines and services, and other matters. From July 1989 to October 1995, the FCC regulated AT&T under a system known as "price caps" whereby AT&T's prices, rather than its earnings, were limited. On October 12, 1995, recognizing a decade of enormous change in the long distance market and finding that AT&T lacked market power in the interstate long distance market, the FCC reclassified AT&T as a "non-dominant" carrier for its domestic interstate services. As a result, AT&T became subject to the same regulations as its long distance competitors for such services. Thus, AT&T was no longer subject to price cap regulation for these services, was able to file tariffs that are presumed lawful on one day's notice, and was free of other regulations and reporting requirements that apply only to dominant carriers. In addition, on October 31, 1996, the FCC issued an order that would have prohibited non-dominant carriers, including AT&T, from filing tariffs for their domestic interstate services. AT&T and other parties have filed an appeal of the FCC's order with the United States Court of Appeals for the D.C. Circuit. In February 1997, the D.C. Circuit stayed the effectiveness of the FCC's order pending appeal. Oral argument has not yet been scheduled. If the Court affirms the FCC's order and lifts the stay, non-dominant carriers, including AT&T, will have to utilize mechanisms other than tariffs to establish the terms and conditions that apply to domestic, interstate telecommunications services. Furthermore, in May 1997, the FCC adopted three orders relating to Price Caps, Access Reform, and Universal Service that substantially revised the level and structure of access charges that AT&T as a long distance carrier pays to incumbent LECs. AT&T has agreed to pass through to consumers any savings to AT&T as a result of access charge reform. AT&T began implementing these reductions July 15, 1997. Consequently, AT&T's results after June 1997 reflects lower revenue per minute of usage and lower access and other interconnection costs per minute of usage. The Price Cap Order requires LECs to reduce their price cap indices by 6.5 percent annually, less an adjustment for inflation, which is likely to result in a reduction in the interstate access charges that long distance carriers, such as AT&T, pay to LECs. The Access Charge Reform Order restructured access charges so that certain costs that do not vary with usage will be recovered on a flat-rate basis and permitted increased flat-rate assessments on multiline business customers and on residential lines beyond the primary telephone line. This restructuring allows a reduction in access charges assessed on long distance carriers on a usage basis. Finally, the Universal Service Order (which represents an FCC mandated contribution to support schools and libraries and rural health care programs, high cost support and low income support mechanisms which are paid to the Universal Service Administrative Company) adopts a new mechanism for funding universal service which expands the set of carriers that must contribute to support universal service from only long distance carriers to all carriers, including LECs, that provide interstate telecommunications services. Similarly, the set of carriers eligible for the universal service support has been expanded from only LECs to any eligible carrier providing local service to a customer, including AT&T as a new entrant in local markets. The Universal Service Order also adopted measures to provide discounts on telecommunications services, Internet access and inside wire to eligible schools and libraries and rural health carrier providers. AT&T remains subject to the statutory requirements of Title II of the Communications Act. AT&T must offer service under rates, terms and conditions that are just, reasonable and not unreasonably discriminatory; it is subject to the FCC's complaint process, and it must give notice to the FCC and affected customers prior to discontinuance, reduction, or impairment of service. AT&T has also made certain commitments that address concerns that had been raised with regard to the potential impact of declaring AT&T to be non-dominant, including a three-year rate assurance for low income and low usage residential users and a three-year limit on, and 5 days advance notice for, rate increases on 800 directory assistance and analog private line services. AT&T's international private line services have been classified as non-dominant for several years. AT&T's switched international services have become subject to increased competition, similar to its domestic services and on May 9, 1996, the FCC adopted an order reclassifying AT&T as a non-dominant carrier for such services. AT&T has made certain voluntary commitments that address issues raised in that proceeding, including commitments: (i) to maintain its annual average revenue per minute for international residential calls at or below the 1995 level through May 9, 1999, and in the event of a significant change that substantially raises AT&T's costs, to provide the FCC five business days notice prior to implementing rate increases that would raise the annual average revenue per minute for such calls above the 1995 level; and (ii) to maintain certain discount calling plans providing at least a 15% discount off basic pricing schedules until May 9, 1999. AT&T also made voluntary commitments relating to its operation of international cable facilities, its negotiation of settlement agreements with foreign carriers and its relationship with foreign partners. In addition to the matters described above with respect to the Telecommunications Act, state public service commissions or similar authorities having regulatory power over intrastate rates, lines and services and other matters regulate AT&T's local and intrastate communications services. The system of regulation used in many states is rate-of-return regulation. In recent years, many states have adopted different systems of regulation, such as: complete removal of rate-of-return regulation, pricing flexibility rules, price caps and incentive regulation. Wireless Regulatory Environment The FCC regulates the licensing, construction, operation, acquisition, sale and resale of wireless systems in the United States pursuant to the Communications Act of 1934 and the associated rules, regulations and policies promulgated by the FCC. Licensing of wireless services systems The AT&T Wireless Group owns protected geographic service area licenses granted by the FCC to provide cellular service and PCS. It also owns licenses granted by the FCC to provide point-to-multi-point communications services in various bands, including significant licenses in the 37 to 39 gigahertz bands. A cellular system operates on one of two 25 megahertz frequency blocks that the FCC allocates for cellular radio service. Cellular systems generally are used for two-way mobile voice applications, although they may be used for data applications and fixed wireless services as well. Cellular license areas are issued for either metropolitan service areas or rural service areas. Initially, one of the two cellular licenses available in each metropolitan service area or rural service area was awarded to a local exchange telephone company by the FCC, while the other license was awarded either through competitive processes or lotteries. Licenses were issued beginning in 1983, and over the years numerous license transfers and corporate reorganizations have obscured the original pattern of distributing one set of licenses to local telephone company affiliates and the other to companies that do not have local exchange service in the license area. A PCS system operates on one of six frequency blocks allocated for personal communications services. PCS systems generally are used for two-way voice applications although they may carry two-way data communications as well. Narrowband PCS systems, in contrast, are for non-voice applications such as paging and data service and are separately licensed. For the purpose of awarding PCS licenses, the FCC has segmented the United States into 51 large regions called major trading areas, which are comprised of 493 smaller regions called basic trading areas. The FCC awarded two PCS licenses for each major trading area and four licenses for each basic trading area. Thus, generally, six licensees are authorized to compete in each area. The two major trading area licenses authorize the use of 30 megahertz of spectrum. One of the basic trading area licenses is for 30 megahertz of spectrum, and the other three are for 10 megahertz each. The FCC permits licensees to split their licenses and assign a portion, on either a geographic or frequency basis or both, to a third party. The FCC awarded initial PCS licenses by auction. Auctions began with the 30 megahertz major trading area licenses and concluded in 1998 with the last of the basic trading area licenses. However, in March 1998, the FCC adopted an order that allows troubled entities that won PCS 30 megahertz C-Block licenses at auction to obtain financial relief from their payment obligations and to return some or all of their C-Block licenses to the FCC for reauctioning. The FCC completed the reauction of the returned licenses in April 1999. In addition, certain of the C-block licenses are currently in bankruptcy proceedings, and these licenses may be returned to the FCC for reauction. Under the FCC's current rules specifying spectrum aggregation limits affecting wireless licensees, no entity may hold attributable interests, generally 20% or more of the equity of, or an officer or director position with, the licensee, in licenses for more than 45 megahertz of PCS, cellular and certain specialized mobile radio services where there is significant overlap in any geographic area. Significant overlap will occur when at least 10% of the population of the PCS licensed service area is within the cellular and/or specialized mobile radio service area(s). The FCC recently increased this limit to 55 megahertz in situations in which a 25 megahertz cellular rural service area is attributed to a 30 megahertz PCS license. These spectrum aggregation rules are subject to a pending FCC proceeding that could revise or eliminate them. All wireless licenses have a 10-year term, at the end of which term they must be renewed. The FCC will award a renewal expectancy to a wireless licensee that has provided substantial service during its past license term, and has substantially complied with applicable FCC rules and policies and the Communications Act. Licenses may be revoked for cause and license renewal applications denied if the FCC determines that a renewal would not serve the public interest. FCC rules provide that competing renewal applications for licenses will be considered in comparative hearings, and establish the qualifications for competing applications and the standards to be applied in hearings. All wireless licenses must satisfy specified coverage requirements. Cellular licenses were required, during the five years following the grant of the license, to construct their systems to provide service (at a specified signal strength) to the territory encompassed by their service area. Failure to provide such coverage resulted in reduction of the relevant license area by the FCC. All A and B block PCS licensees must construct facilities that offer coverage to one-third of the population of the service area within five years of the original license grants and to two-thirds of the population within ten years. All D and E block PCS licensees must construct facilities that offer coverage to one-fourth of the population of the licensed area or "make a showing of substantial service in their license area" within five years of the original license grants. Licensees that fail to meet the coverage requirements may be subject to forfeiture of the license. For a period of up to five years after the grant of a PCS license, subject to extension, a licensee will be required to share spectrum with existing licensees that operate certain fixed microwave systems within its license area under circumstances where interconnection is not available through the local exchange carrier or the competitive local exchange carrier. In an effort to balance the competing interests of existing microwave users and newly authorized PCS licensees, the FCC has adopted a transition plan to relocate such microwave operators to other spectrum blocks and a cost sharing plan so that if the relocation of an incumbent benefits more than one PCS licensee, those licensees will share the cost of the relocation. Initially, this transition plan allowed most microwave users to operate in the PCS spectrum for a voluntary two-year negotiation period and an additional mandatory one-year negotiation period. For public safety entities that dedicate a majority of their system communications to police, fire or emergency medical services operations, the voluntary negotiation period is three years, with an additional mandatory two-year negotiation period. In 1998, the FCC shortened the voluntary negotiation period by one year, without lengthening the mandatory negotiation period, for non-public safety PCS licensees in the C, D, E and F Blocks. Parties unable to reach agreement within these time periods may refer the matter to the FCC for resolution, but the incumbent microwave user is permitted to continue its operations until final FCC resolution of the matter. The transition and cost sharing plans expire on April 4, 2005, at which time remaining microwave incumbents in the PCS spectrum will be responsible for the costs of relocating to alternate spectrum locations. Wireless systems are subject to certain FAA regulations governing the location, lighting and construction of transmitter towers and antennas and are subject to regulation under federal environmental laws and the FCC's environmental regulations. State or local zoning and land use regulations also apply to tower siting and construction activities. We expect to use common carrier point-to-point microwave facilities to connect certain wireless cell sites, and to link them to the main switching office. The FCC licenses these facilities separately and they are subject to regulation as to technical parameters and service. The Communications Act preempts state and local regulation of the entry of, or the rates charged by, any provider of private mobile radio service or of commercial mobile radio service, which includes PCS and cellular service. The FCC does not regulate commercial mobile radio service or private mobile radio service rates. However, commercial mobile radio service providers are common carriers and are required under the Communications Act to offer their services to the public without unreasonable discrimination. The FCC's rules currently require providers to permit others to resell their services for a profit; however, these rules will expire in 2002. Transfers and assignments of cellular and PCS licenses The Communications Act and FCC rules require the FCC's prior approval of the assignment or transfer of control of a license for a PCS or cellular system. In addition, the FCC has established transfer disclosure requirements that require licensees who assign or transfer control of a PCS license within the first three years of their license terms to file associated sale contracts, option agreements, management agreements or other documents disclosing the total consideration that the licensee would receive in return for the transfer or assignment of its license. Non-controlling interests in an entity that holds an FCC license generally may be bought or sold without FCC approval subject to the FCC's spectrum aggregation limits. However, notification and expiration or earlier termination of the applicable waiting period under Section 7A of the Clayton Act by either the Federal Trade Commission or the Department of Justice may be required, as well as approval by state or local regulatory authorities having competent jurisdiction, if we sell or acquire PCS or cellular interests over a certain size. Foreign ownership Under existing law, no more than 20% of an FCC licensee's capital stock may be owned, directly or indirectly, or voted by non-U.S. citizens or their representatives, by a foreign government or its representatives or by a foreign corporation. If an FCC licensee is controlled by another entity, as is the case with our ownership structure, up to 25% of that entity's capital stock may be owned or voted by non-U.S. citizens or their representatives, by a foreign government or its representatives or by a foreign corporation. Foreign ownership above the 25% level may be allowed should the FCC find such higher levels not inconsistent with the public interest. The FCC has ruled that higher levels of foreign ownership, even up to 100%, are presumptively consistent with the public interest with respect to investors from certain nations. If our foreign ownership were to exceed the permitted level, the FCC could revoke our FCC licenses, although we could seek a declaratory ruling from the FCC allowing the foreign ownership or take other actions to reduce our foreign ownership percentage in order to avoid the loss of our licenses. We have no knowledge of any present foreign ownership in violation of these restrictions. Recent regulatory developments The FCC has announced rules for making emergency 911 services available by cellular, PCS and other commercial mobile radio service providers, including enhanced 911 services that provide the caller's telephone number, location and other useful information. The original timetable required commercial mobile radio services providers to be able to process and transmit 911 calls without call validation, including those from callers with speech or hearing disabilities, by late 1997. Additionally, commercial mobile radio service providers are required to take actions enabling them to relay a caller's automatic number identification and cell site if requested to do so by a public safety dispatch agency that agreed to reimburse the provider for the additional expenses incurred to provide those services. In October 1999, the FCC revised its rules to eliminate any requirement that such agencies reimburse wireless providers. In a companion order issued earlier in the fall of 1999, the FCC also modified rules requiring commercial mobile radio service providers to provide information on the location of a 911 call. The modified rules allow providers to use either network or handset-based technologies to provide such information. However, providers are not permitted to recover their costs of deploying such technologies from dispatch agencies. The FCC has granted waivers of the requirement to provide 911 service to users with speech or hearing disabilities to various providers, and we have obtained a waiver. On June 9, 1999, the FCC also adopted rules designed to ensure that analog cellular calls to 911 are completed. These rules, which do not apply to digital cellular service or to PCS, give each cellular provider a choice of three ways to meet this requirement. State actions incompatible with the FCC rules are subject to preemption. On August 8, 1996, the FCC released its order implementing the interconnection provisions of the Telecommunications Act. Although many of the provisions of this order were struck down by the U.S. Court of Appeals for the Eighth Circuit, on January 25, 1999, the U.S. Supreme Court reversed the Eighth Circuit and upheld the FCC in all respects material to our operations. On June 10, 1999, the Eighth Circuit issued an order requesting briefs on certain issues it did not address in its earlier order, including the pricing regime for interconnection. While appeals have been pending, the rationale of the FCC's order has been adopted by many states' public utility commissions, with the result that the charges that cellular and PCS operators pay to interconnect their traffic to the public switched telephone network have declined significantly from pre-1996 levels. In its implementation of the Telecommunications Act, the FCC established federal universal service requirements that affect commercial mobile radio service operators. Under the FCC's rules, commercial mobile radio service providers are potentially eligible to receive universal service subsidies for the first time; however, they are also required to contribute to the federal universal service fund and can be required to contribute to state universal funds. Many states also are moving forward to develop state universal service fund programs. A number of these state funds require contributions, varying greatly from state to state, from commercial mobile radio service providers. The FCC's universal service order was modified on appeal in the U.S. Court of Appeals for the Fifth Circuit. The court's ruling has had the effect of reducing commercial mobile radio service provider support payments required for the federal universal service programs. On August 1, 1996, the FCC released a report and order expanding the flexibility of cellular, PCS and other commercial mobile radio service providers to provide fixed as well as mobile services. These fixed services include, but need not be limited to, wireless local loop services, for example, to apartment and office buildings, and wireless backup services to private branch exchange or switchboards and local area networks, to be used in the event of interruptions due to weather or other emergencies. The FCC has not yet decided whether fixed services provided on a co-primary basis to mobility services should be subjected to universal service obligations, or how such fixed services should be regulated, but it has proposed a presumption that they be regulated as commercial mobile radio service services. If the fixed services are provided as an ancillary service to a carrier's mobility services, the FCC has decided that such fixed services should be regulated as commercial mobile radio services. The FCC has adopted rules on telephone number portability that will enable customers to migrate their landline and cellular telephone numbers to cellular or PCS providers and from a cellular or PCS provider to another service provider. On February 8, 1999, the FCC extended the deadline for compliance with this requirement to November 24, 2002, subject to any later determination that number portability is necessary to conserve telephone numbers. The FCC has also adopted rules requiring cellular and PCS providers to provide functions to facilitate electronic surveillance by law enforcement officials by June 30, 2000, and has proposed to adopt certain additional obligations furthering provision of these functions. Representatives of the cellular and PCS industry are challenging the surveillance rules. Additionally, it is not clear that commercial mobile radio service providers will be able to comply with the rules' compatibility requirements by the current deadline of June 30, 2000; nor is it clear whether the FCC will grant waivers to extend the deadline or what the scope of penalties for failing to comply may be. The FCC has determined that the interstate, interexchange offerings, commonly referred to as long distance, of commercial mobile radio service providers are subject to the interstate, interexchange rate averaging and integration provisions of the Communications Act. Rate averaging requires us to average our interstate long distance commercial mobile radio service rates between high cost and urban areas. The FCC has delayed implementation of the rate integration requirements with respect to wide area rate plans we offer pending further reconsideration of its rules. The FCC also delayed the requirement to integrate commercial mobile radio service long distance rates among commercial mobile radio service affiliates. On December 31, 1998, the FCC reaffirmed, on reconsideration, that its interexchange rate integration rules apply to interexchange commercial mobile radio service services. The FCC announced it would initiate a further proceeding to determine how integration requirements apply to typical commercial mobile radio service offerings, including one-rate plans. Until this further proceeding is concluded, the FCC will enforce long distance rate integration on our services only where we separately state a long distance toll charge and bill to our customers. To the extent that the AT&T Wireless Group offers services subject to the FCC's rate integration and averaging requirements, these requirements generally reduce its pricing flexibility. We cannot assure you that the FCC will decline to impose rate integration or averaging requirements on the AT&T Wireless Group or decline to require it to integrate its commercial mobile radio service long distance rates across its commercial mobile radio service affiliates. The FCC recently adopted new rules limiting the use of customer proprietary network information by telecommunications carriers in marketing a broad range of telecommunications and other services to their customers and the customers of affiliated companies. The rules were struck down by the federal circuit court in 1999, and their effectiveness has been stayed pending the court's review of a petition to the FCC for reconsideration. Even if the rules are reinstated, the AT&T Wireless Group does not anticipate that they will result in a significant adverse impact on its financial position, results of operation or liquidity. In addition, state commissions have become increasingly aggressive in their efforts to conserve numbering resources. These efforts may impact wireless service providers disproportionately by imposing additional costs or limiting access to numbering resources. Examples of state conservation methods include: number pooling, number rationing and code sharing. A number of states have petitioned the FCC for authority to adopt "technology specific" overlays that would require wireless providers to obtain telephone numbers out of a separate area code and may require wireless providers to change their customers' telephone numbers. The FCC approval and the states' subsequent implementation of such "technology specific overlays" could increase wireless providers' cost of doing business and impact their ability to market services. On June 2, 1999, the FCC released a notice of proposed rulemaking soliciting comments on a variety of administrative and technical measures that would promote more efficient allocation and use of numbering resources. Adoption of some of the proposed methods could have a disproportionate impact on commercial mobile radio services providers. The FCC is also considering adopting rules to govern customer billing by commercial mobile radio services providers and applied a number of these rules to commercial mobile radio service providers. The FCC adopted detailed billing rules for landline telecommunications service providers and is considering whether to extend the remaining rules to commercial mobile radio services providers. The FCC may require that more billing detail be provided to consumers, which could add to the expense of the billing process as systems are modified to conform to any new requirements. The FCC also is considering whether carriers that decide to pass through their mandatory universal service contributions to their customers should be required to provide a full explanation of the program, and whether to ensure that the carriers that pass through their contribution do not recover amounts greater than their mandatory contributions from their customers. Adoption of some of the FCC's proposals could increase the complexity of our billing processes and restrict our ability to bill customers for services in the most commercially advantageous way. The FCC has adopted an order that determines the obligations of telecommunications carriers to make their services accessible to individuals with disabilities. The order requires telecommunications services providers to offer equipment and services that are accessible to and useable by persons with disabilities. While the rules exempt telecommunications carriers from meeting general disability access requirements if such results are not readily achievable, it is not clear how liberally the FCC will construe this exemption. Accordingly, the rules require us to make material changes to our network, product line, or services at our expense. In June 1999, the FCC initiated an administrative rulemaking proceeding to help facilitate the offering of calling party pays as an optional wireless service. Under the calling party pays service, the party placing the call to a wireless customer pays the wireless airtime charges. Most wireless customers in the United States now pay both to place calls and to receive them. Adoption of a calling party pays system on a widespread basis could make commercial mobile radio service providers more competitive with traditional landline telecommunications providers for the provision of regular telephone service. State regulation and local approvals State and local governments are preempted from regulating either market entry by, or the rates of, wireless operators. However, state governments can regulate other terms and conditions of wireless service and several states have imposed (or have proposed legislation that will impose) various consumer protection regulations on the wireless industry. States also may impose their own universal service support regimes on wireless and other telecommunications carriers, similar to the requirements that have been established by the FCC. At the local level, wireless facilities typically are subject to zoning and land use regulation. State and local jurisdictions may also impose some conditions on a driver's use of wireless technology while operating a motor vehicle. However, under the federal Telecommunications Act, neither local nor state governments may categorically prohibit the construction of wireless facilities in any community. 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 removes barriers to competition in both the cable television market and the local telephone market and reduces the scope of cable rate regulation. The Telecommunications Act required the FCC to implement numerous rulemakings, the final outcome of which cannot yet be determined due to court challenges. Moreover, Congress and the FCC have frequently revisited the subject of cable television regulation and may do so again. Future legislative and regulatory changes could adversely affect AT&T Broadband's operations. This section briefly summarizes key laws and regulations currently affecting the growth and operation of AT&T Broadband's cable systems. Cable Rate Regulation. The 1992 Cable Act imposed an extensive rate regulation regime on the cable television industry, which limited the ability of cable companies to increase subscriber fees. Under that regime, all cable systems were subjected to rate regulation, unless they faced "effective competition" in their local franchise area. Federal law now defines "effective competition" on a community-specific basis as requiring satisfaction of conditions rarely satisfied in the current marketplace. Although the FCC establishes all cable rate rules, local government units (commonly referred to as local franchising authorities or LFAs) are primarily responsible for administering the regulation of the lowest level of cable -- the basic service tier (BST), which typically contains local broadcast stations and PEG access channels. Before an LFA begins BST rate regulation, it must certify to the FCC that it will follow applicable federal rules, and many LFAs have voluntarily declined to exercise this authority. LFAs also have primary responsibility for regulating cable equipment rates. Under federal law, charges for various types of cable equipment must be unbundled from each other and from monthly charges for programming services, and priced no higher than the operator's actual cost, plus an 11.25% rate of return. The FCC historically administered rate regulation of any cable programming service tiers (CPST), which typically contain satellite-delivered programming. Under the Telecommunications Act, the FCC's ability to regulate CPST rates expired on March 31, 1999. The FCC has taken the position that it will adjudicate pending CPST complaints but will strictly limit its review and possible refund orders to the time period predating March 31, 1999. Cable Entry Into Telecommunications. The Telecommunications Act provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection. State and local governments also retain their authority to manage the public rights-of-way. Although the Telecommunications Act clarifies that traditional cable franchise fees may be based only on revenues related to the provision of cable television services, it also provides that LFAs may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service. In 1999, there were several conflicting and inconclusive federal court decisions that addressed the issues of lawful "management of the right-of-ways" and "competitively neutral compensation." The Telecommunications Act prohibits LFAs from requiring cable operators to provide telecommunications service or facilities as a condition of a franchise grant, renewal or transfer, except that LFAs argue they can seek "institutional networks" as part of such franchise negotiations. The favorable pole attachment rates afforded cable operators under federal law can be increased by utility companies owning the poles during a five year phase-in period beginning in 2001, if the cable operator provides telecommunications service, as well as cable service, over its plant. The FCC has clarified that a cable operator's provision of Internet service does not affect the favorable pole rates. Cable entry into telecommunications will be affected by the regulatory landscape now being fashioned by the FCC and state regulators. One critical component of the Telecommunications Act intended to facilitate the entry of new telecommunications providers (including cable operators) is the interconnection obligation imposed on all telecommunications carriers. This requires, for example, that the incumbent local telephone company must allow new competing telecommunications providers to connect to the local telephone distribution system. In a January 1999 decision, the United States Supreme Court upheld the FCC's fundamental interconnection requirements. Cable Systems Providing Internet Service. 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 Internet service providers and online service providers. Additionally, some local franchising authorities are considering the imposition of mandatory Internet access requirements as part of cable franchise renewals or transfers. A federal district court in Portland, Oregon recently upheld the legal ability of local franchising authorities to impose such conditions, but an appeal was filed with the Ninth Circuit Court of Appeals, oral argument has been held and the parties are awaiting a decision. Other local authorities have imposed or may impose mandatory Internet access requirements on cable operators. Finally, several states are considering legislation that would require mandatory access for unafffiliated Internet service providers. These developments could, if they become widespread, burden the capacity of cable systems and complicate and delay plans for providing Internet service. 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 dialtone regulations. This will allow LECs, including the RBOCs, to compete with cable operators both inside and outside their telephone service areas. Because of their resources, LECs could be formidable competitors, and certain LECs have begun offering cable service. Under the Telecommunications Act, a LEC or other entity providing video programming to customers will be regulated as a traditional cable operator (subject to local franchising and federal regulatory requirements), unless it elects to provide its programming via an "open video system" (OVS). It was anticipated that the primary benefit of using an OVS regulatory model was to avoid the need to obtain a local franchise prior to providing services. However, a January 1999 federal court of appeals decision held that OVS providers can be required to obtain such a franchise. To be eligible for OVS status, the provider cannot occupy more than one-third of the system's activated channels when demand for channels exceeds supply. Nor can it discriminate among programmers or establish unreasonable rates, terms or conditions for service. Although LECs and cable operators can now expand their offerings across traditional service boundaries, the general prohibitions remain on LEC buyouts (i.e., any ownership interest exceeding 10 percent) of co-located cable systems, cable operator buyouts of co-located LEC systems, and joint ventures among cable operators and LECs in the same market. The Telecommunications Act provides a few limited exceptions to this buyout prohibition. Electric Utility Entry Into Telecommunications/Cable Television. The Telecommunications Act provides that registered utility holding companies and subsidiaries may provide telecommunications services, information services, and other services or products subject to the jurisdiction of the FCC, notwithstanding the Public Utilities Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and must apply to the FCC for operating authority. Again, because of their resources, electric utilities could be formidable competitors. Cable Television Ownership Restrictions. Pursuant to the 1992 Cable Act, the FCC adopted regulations establishing a 30% limit on the number of homes 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 the appeal of a September 16, 1993 decision by the United States District Court for the District of Columbia which, among other things, found unconstitutional the provision of the 1992 Cable Act requiring the FCC to establish such ownership limits. If the ownership limits are determined on appeal to be constitutional, they may affect AT&T Broadband's ability to acquire attributable interests in additional cable systems including the pending MediaOne Merger. The FCC recently completed its reconsideration of both the national subscriber cap formula and the manner in which cable ownership is attributed. Although the new FCC formula increased the number of subscribers AT&T Broadband may "own", it is not yet clear under the new attribution rules whether the pending MediaOne Merger will be considered compliant with the new ownership cap. The FCC previously adopted regulations limiting carriage by the cable operator of national programming services in which that operator holds an attributable interest to 40% of the activated channels on each of the cable operator's systems. The rules provide for the use of two additional channels or a 45% limit, whichever is greater, provided that the additional channels carry minority controlled programming services. The regulations also grandfather existing carriage arrangements which exceed the channel limits, but require new channel capacity to be devoted to unaffiliated programming services until the system achieves compliance with the regulations. These channel occupancy limits apply only up to 75 activated channels on the cable system, and the rules do not apply to local or regional programming services. 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 Satellite Master Antenna Television (SMATV) and multi-channel multi-point distribution systems (MMDS) facilities, but lifts those restrictions where the cable operator is subject to effective competition. In January 1995, however, the FCC adopted regulations which permit cable operators to own and operate SMATV systems within their franchise area, provided that such operation is consistent with local cable franchise requirements. Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years between requiring a cable system to carry the station ("must carry") or negotiating for payments for granting permission to the cable operator to carry the station ("retransmission consent"). Less popular stations typically elect must carry, and more popular stations typically elect retransmission consent. Must carry requests can dilute the appeal of a cable system's programming offerings, and retransmission consent demands may require substantial payments or other concessions (e.g. a requirement that the cable system also carry the local broadcaster's affiliated cable programming service). Either option has a potentially adverse effect on AT&T Broadband's business. The burden associated with must-carry obligations could dramatically increase if television broadcast stations proceed with planned conversions to digital transmissions and if the FCC determines in a pending rulemaking that cable systems must carry all analog and digital signals transmitted by the television stations. Access Channels. LFAs can include franchise provisions requiring cable operators to set aside certain channels for PEG access programming. Federal law also requires a cable system with 36 or more channels to designate a portion of its activated channel capacity (either 10% or 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. In February of 1997, the FCC released revised rules which mandated a modest rate reduction that has made commercial leased access a more attractive option for third party programmers, particularly for part-time leased access carriage. "Anti-Buy Through" Provisions. Federal law requires each cable system to permit customers to purchase premium or pay-per-view video programming offered by the operator on a per-channel or a per-program basis without the necessity of subscribing to any tier of service (other than the basic service tier) unless the system's lack of addressable converter boxes or other technological limitations does not permit it to do so. The statutory exemption for cable systems that do not have the technological capability to comply expires in October 2002, but the FCC may extend that period if deemed necessary. Access to Programming. To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes satellite video programmers affiliated with cable operators from favoring cable operators over competing multichannel video programming distributors (such as DBS and MMDS distributors). This provision limits the ability of vertically integrated satellite cable programmers to offer exclusive programming arrangements to AT&T Broadband. Both Congress and the FCC have considered proposals that would expand the program access rights of cable's competitors, including the possibility of subjecting both terrestrially delivered video programming and video programmers who are not affiliated with cable operators to all program access requirements. Inside Wiring; Subscriber Access. In an order issued in 1997, the FCC established rules that require an incumbent cable operator upon expiration or termination of an MDU service contract to sell, abandon, or remove "home run" wiring that was installed by the cable operator in a MDU building. These inside wiring rules are expected to assist building owners in their attempts to replace existing cable operators with new programming providers who are willing to pay the building owner a higher fee, where such a fee is permissible. The FCC has also proposed abrogating all exclusive MDU contracts held by incumbent cable operators, but allowing such 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 MDU argreements which otherwise prohibit, for example, placement of digital broadcast satellite receiver antennae in MDU areas under the exclusive occupancy of a renter. These developments may make it more difficult for AT&T Broadband to provide service in MDUs. Other FCC Regulations. In addition to the FCC regulations noted above, there are other FCC regulations covering such areas as equal employment opportunity, customer privacy, programming practices (including, among other things, syndicated program exclusivity, 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, 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 could then be satisfied by third party vendors. 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 federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenue to a federal copyright royalty pool (such percentage varies depending on the size of the system and the number of distant broadcast television signals carried), cable operators can obtain blanket permission to retransmit copyrighted material on broadcast signals. The possible modification or elimination of this compulsory copyright license is subject to continuing review and could adversely affect AT&T Broadband's ability to obtain desired broadcast programming. In addition, the cable industry pays music licensing fees to Broadcast Music, Inc. and is negotiating a similar arrangement with the American Society of Composers, Authors and Publishers. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. State and Local Regulation. Cable television systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity. The Telecommunications Act clarified that the need for an entity providing cable services to obtain a local franchise depends solely on whether the entity crosses public rights of way. Federal law now prohibits franchise authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system's service area. Cable franchises generally are granted for fixed terms and in many cases are terminable if the franchisee fails to comply with material provisions. Non-compliance by the cable operator with franchise provisions may also result in monetary penalties. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction. Each franchise generally contains provisions governing cable operations, service rates, franchise fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies. Although LFAs have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, LFAs cannot insist on franchise fees exceeding 5% of the system's gross revenue, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming. Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the franchise authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and services or increased franchise fees and funding for PEG channels as a condition of renewal. Similarly, if a franchise authority's consent is required for the purchase or sale of a cable system or franchise, such authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, franchises have been renewed for cable operators that have provided satisfactory services and have complied with the terms of their franchises. Proposed Changes in Regulation. The regulation of cable television systems at the federal, state and local levels is subject to the political process and has been in constant flux over the past decade. Material changes in the law and regulatory requirements must be anticipated and there can be no assurance that AT&T Broadband's business will not be affected adversely by future legislation, new regulation or deregulation. COMPETITION Competition in communications services is based on price and pricing plans, the types of services offered, customer service, access to customer premises, and communications quality, reliability and availability, as well as, for business customers, the ability to provide high quality data communication services and technical support. AT&T's principal competitors include MCIWorldcom, Inc., Sprint Corporation, the RBOCs and GTE Corporation. AT&T also experiences significant competition in long distance from dial around resellers. The ILECs have very substantial capital and other resources, long standing customer relationships and extensive existing facilities and network rights-of-way and are AT&T's primary competitors in the local services market. 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. Some of these potential competitors have substantial financial and other resources. AT&T will also compete in the local services market with a number of CLECs, a few of which have existing local networks and significant financial resources. Competition for subscribers among wireless service providers is based principally upon the services and features offered, call quality, customer service, system coverage and price. The AT&T Wireless Group's ability to compete successfully will depend, in part, on its ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and pricing strategies. The AT&T Wireless Group's primary competitors are Vodafone AirTouch, BellSouth, Bell Atlantic, GTE, Nextel Communications, Inc., SBC, VoiceStream Communications and Sprint. In addition, the wireless communications industry has been experiencing significant consolidation and the AT&T Wireless Group expects that this consolidation will continue. The previously announced mergers or joint ventures of Bell Atlantic/GTE/Vodafone/AirTouch, MCIWorldCom/Sprint and SBC/Ameritech will create large, well-capitalized competitors with substantial financial, technical, marketing and other resources to respond to the AT&T Wireless Group's offerings. Assuming these mergers or ventures were completed today, the AT&T Wireless Group estimates that its ranking would decline to second in U.S. revenue, third in U.S. subscriber share and fourth in terms of U.S. population covered by licenses, or POPs. As a result, these competitors may be able to offer nationwide services and plans more quickly and more economically than the AT&T Wireless Group and to obtain roaming rates that are more favorable than those obtained by the AT&T Wireless Group, and may be better able to respond to offers of the AT&T Wireless Group. The AT&T Wireless Group's cellular operations have always experienced direct competition from the second cellular licensee in each market. Beginning in 1997, the AT&T Wireless Group began experiencing competition from as many as six license holders in certain markets. Competition from new providers in the AT&T Wireless Group's markets will continue to increase as the networks of license holders are built out over the next several years. In addition, the FCC is likely to offer additional spectrum for wireless mobile licenses in the future using existing or new technologies. Cable television competes for customers in local markets with other providers of entertainment, news and information. The competitors in these markets include broadcast television and radio, newspapers, magazines and other printed material, motion picture theatres, video cassettes and other sources of information and entertainment including directly competitive cable television operations and internet service providers. The Cable Acts are designed to increase competition in the cable television industry. There are alternative methods of distributing the same or similar video programming offered by cable television systems. These include DBS (allowing the subscriber to receive video services directly via satellite using a relatively small dish), telephone networks (whether it is through wireless cable, or through upgraded telephone networks), utility company networks, MMDS (which deliver programming services over microwave channels received by customers with special antennas), competitive, non-exclusive franchises, city provided cable services, SMATV systems (which provide multichannel program services directly to hotel, motel, apartment, condominium and similar multi-unit complexes within a cable television system's franchise area, generally free of any regulation by state and local governmental authorities). In addition to competition for customers, the cable television industry competes with broadcast television, radio, the print media and other sources of information and entertainment for advertising revenue. Additionally, as AT&T begins to offer new services such as high speed Internet access and telephone services, there will be significant competition from both the local telephone companies and new providers of such services. AT&T currently faces significant competition and expects that the level of competition will continue to increase. As competitive, regulatory and technological changes occur, including those occasioned by the Telecommunications Act, AT&T anticipates that new and different competitors will enter and expand their position in the communications services markets. These may include entrants from other segments of the communications and information services industry or global competitors seeking to expand their market opportunities. Many such new competitors are likely to enter with a strong market presence, well recognized names and pre-existing direct customer relationships. The Telecommunications Act has already impacted the competitive environment. Anticipating changes in the industry, non-RBOC LECs, which are not required to implement the Telecommunications Act's competitive checklist prior to offering long distance in their home markets, have begun integrating their local service offerings with long distance offerings in advance of AT&T offering combined local and long distance service in these areas, adversely affecting AT&T's revenues and earnings in these service regions. In addition, the Telecommunications Act will permit RBOCs to provide interLATA interexchange services after demonstrating to the FCC that such provision is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. The RBOCs have petitioned the FCC for permission to provide interLATA interexchange services in one or more states within their home market; to date the FCC granted only one petition. In December 1999, Bell Atlantic became the first RBOC to obtain approval to provide long distance in a state within its home territory, in New York. In January 2000 Southwestern Bell applied to the FCC for authorization to provide long distance service in Texas; by law, the FCC is required to rule on the application in April 2000. To the extent that the RBOCs obtain in-region interLATA authority before the Telecommunications Act's checklist of conditions have been fully or satisfactorily implemented and adequate facilities-based local exchange competition exists, there is a substantial risk that AT&T and other interexchange service providers would be at a disadvantage to the RBOCs in providing both local service and combined service packages. Because it is widely anticipated that substantial numbers of long distance customers will seek to purchase local, interexchange and other services from a single carrier as part of a combined or full service package, any competitive disadvantage, inability to profitably provide local service at competitive rates or delays or limitations in providing local service or combined service packages could adversely affect AT&T's future revenue and earnings. In any event, the simultaneous entrance of numerous new competitors for interexchange and combined service packages is likely to adversely affect AT&T's future long distance revenue and could adversely affect future earnings. Furthermore, in February 1997, a General Agreement on Trade in Services (GATS) was reached under the World Trade Organization. The GATS, which became effective January 1, 1998, is designed to open each country's domestic telecommunications markets to foreign competitors. The GATS, and future trade agreements, may accelerate the entrance into the U.S. market of foreign telecommunications providers, certain of whom are likely to possess dominant home market positions in which there is not effective competition. The GATS may also permit AT&T's entrance into other markets as only a small number of countries refused to eliminate their foreign ownership restrictions. In addition to the matters referred to above, various other factors, including technological hurdles, market acceptance, start-up and ongoing costs associated with the provision of new services and local conditions and obstacles, could adversely affect the timing and success of AT&T's entrance into the local exchange services market and AT&T's ability to offer combined service packages that include local service. EMPLOYEE RELATIONS At December 31, 1999 AT&T employed approximately 148,000 persons in its operations, approximately 96.5% of whom are located domestically. About 28% of the domestically located employees of AT&T are represented by unions. Of those so represented, about 94% are represented by the Communications Workers of America (CWA), which is affiliated with the AFL-CIO; about 5% by the International Brotherhood of Electrical Workers (IBEW), which is also affiliated with the AFL-CIO. In addition, there is a very small remainder of domestic employees represented by other unions. Labor agreements with most of these unions extend through May 2002. SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION For information about the Company's research and development expense, see Note 2 to the Consolidated Financial Statements. For information about the consolidated operating revenues contributed by the Company's major classes of products and services, see the revenue tables and descriptions on pages 14 and 19 through 25 of the Company's annual report to shareholders for the year ended December 31, 1999. All such information is incorporated herein by reference pursuant to General Instruction G(2). LIBERTY MEDIA GROUP The economic performance of the Liberty Media Group are reflected in the Liberty Media Group tracking stock. A description of the Liberty Media Group is included as Exhibit 99 to this Form 10-K. FORWARD LOOKING STATEMENTS This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, competitive positions, growth opportunities for existing products, benefits from new technology, plans and objectives of management, and other matters. Statements in this Form 10-K that are not historical facts are hereby identified as "forward looking statements" for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or Form 8-K of AT&T may include forward looking statements. In addition, other written or oral statements which constitute forward looking statements have been made and may in the future be made by or on behalf of AT&T, including statements concerning future operating performance, business prospects, capital needs, AT&T's share of new and existing markets, AT&T's short- and long-term revenue and earnings growth rates, general industry growth rates and AT&T's performance relative thereto. These forward looking statements are necessarily estimates reflecting the best judgment of senior management that rely on a number of assumptions concerning future events, many of which are outside of AT&T's control, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this Form 10-K. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation: - the adoption and implementation of balanced and effective rules and regulations by the FCC and state regulatory agencies to implement the provisions of the Telecommunications Act; the outcome of litigation relative thereto; and the impact of regulatory changes relating to access reform, the unbundling of cable facilities and international settlement reform; - success and market acceptance for new initiatives, including cable telephony and fixed wireless, many of which are untested; the level and timing of the growth and profitability of new initiatives; start-up costs associated with entering new markets, including advertising and promotional efforts; successful deployment and technological implementation of new systems and applications to support new initiatives; the ability to address the needs of customers for broadband and Internet access; and local conditions and obstacles; - competitive pressures, including pricing pressures, alternative routing developments, and the ability to offer combined service packages that include local service; technological developments, including the rate of technological advances in, and implementation of, internet telephony services that compete with traditional telephony services; the extent and pace at which different competitive environments develop for each segment of the telecommunications industry; the extent at and duration for which competitors from each segment of the telecommunications industry are able to offer combined or full service packages prior to AT&T being able to; and the degree to which AT&T experiences material competitive impacts to its traditional service offerings prior to achieving adequate local service entry; - the availability, terms and deployment of capital; the impact of regulatory and competitive developments on capital outlays; the ability to achieve cost savings and realize productivity improvements; the ability to effectively integrate operations of acquired entities with AT&T, the timing of approval of, and any conditions imposed on, the completion of the MediaOne merger; the ability to realize cost-saving and revenue synergies from the MediaOne merger; the ability to successfully implement cable telephony joint ventures; the ability to expand the cable footprint and the wireless footprint in an economical and expeditious manner; and the ability to enter into agreements which provide for reasonable roaming rates for wireless services; and - the ability to attract and retain qualified management employees in all key areas of the business; general economic conditions, government and regulatory policies, and business conditions in the communications industry. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this Form 10-K and throughout the other documents incorporated herein by reference. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. AT&T undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 2. PROPERTIES. The properties of AT&T Corp. consist primarily of plant and equipment used to provide long distance and wireless telecommunications services and cable television services and administrative office buildings. AT&T's owns and leases properties to support its offices, facilities and equipment. Telecommunications plant and equipment consists of: central office equipment, including switching and transmission equipment; connecting lines (cables, wires, poles, conduits, etc.); wireless cell sites, antennas and wireless switching facilities; land and buildings; and miscellaneous properties (work equipment, furniture, plant under construction, etc.). The majority of the connecting lines are on or under public roads, highways and streets and international and territorial waters. The remainder are on or under private property. Physical cable television properties, which are located throughout the United States, consist of system components, motor vehicles, miscellaneous hardware, spare parts and other components. AT&T also operates a number of sales offices, customer care centers, and other facilities, such as research and development laboratories. AT&T continues to manage the deployment and utilization of its assets in order to meet its global growth objectives while at the same time ensuring that these assets are generating value for the shareholder. AT&T will continue to manage its asset base consistent with globalization initiatives, marketplace forces, productivity growth and technology change. ITEM 3. LEGAL PROCEEDINGS. In the normal course of business, AT&T Corp. is subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, AT&T Corp. is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 1999. While these matters could affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to AT&T Corp. beyond that provided for at year-end would not be material to AT&T Corp.'s annual consolidated financial position or results of operations. On July 6, 1997, MCI Telecommunications Corp. and Ronald A. Katz Technology Licensing, L.P. filed suit in United States District Court in Philadelphia, Pennsylvania against AT&T. The suit alleges that a number of AT&T services infringe patents owned by Katz but licensed to MCI for enforcement against AT&T. This matter is currently in discovery. Based on review to date, it is management's opinion that the claims do not present any material monetary liability or financial impact to AT&T that is not subject to patent indemnity agreements with third-party equipment vendors. AT&T is also a named party in a number of environmental actions, none of which is material to the consolidated financial statements or business of the Company. In addition, pursuant to the Separation and Distribution Agreement by and among AT&T, Lucent, and NCR, dated as of February 1, 1996, and amended and restated as of March 29, 1996, Lucent has assumed liability, subject to the liability sharing provisions of that agreement, for a number of actions in which AT&T remains a named party. AT&T is working to be released as a party to these actions, although there can be no assurance that it will be successful in this regard. There are four environmental proceedings which are required to be reported pursuant to Instruction 5.C. of Item 103 of Regulation S-K. In September 1997, the government of the U.S. Virgin Islands filed suit in the federal district court of the Virgin Islands against the Company, AT&T Submarine Systems International ("SSI International"), A&L Underground, Inc., a contractor for SSI International at that time, and other entities. In connection with the purported 1996 release of non-toxic bentonite drilling mud within the coastal region of St. Croix by the contractor, the suit seeks penalties for violations of various federal and Virgin Island statutes; damages under several statutory and common law theories; removal of the mud (which has since been completed to the satisfaction of the federal agency that ordered the cleanup); and restitution of response costs allegedly incurred by the Virgin Islands. SSI International was a wholly owned subsidiary of AT&T at the time of the alleged violation. On December 31, 1998 the Government of the U.S. Virgin Islands filed an administrative complaint against AT&T of the Virgin Islands, Inc., seeking $23 million in penalties (primarily for the release of drilling mud in 1996 in conjunction with the construction of the St. Croix cable landing station). The foregoing environmental proceeding is not material to the consolidated financial statements or business of the Company and would not be reported but for Instruction 5 C. of Item 103 of Regulation S-K, which requires disclosure of such matters. In addition, three proceedings involve matters for which Lucent has assumed liability, as described above. On July 31, 1991, the United States Environmental Protection Agency Region III issued a complaint pursuant to Section 3008a of the Resource Conservation and Recovery Act alleging violations of various waste management regulations at the Company's Richmond Works, Richmond, Virginia. The complaint seeks a total of $4.2 million in penalties. In addition, on July 31, 1991, the United States Environmental Protection Agency filed a civil complaint in the U.S. District Court for the Southern District of Illinois against the Company and nine other parties seeking enforcement of its Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") Section 106 cleanup order, issued in November 1990 for the NL Granite City Superfund site, Granite, Illinois, past costs, civil penalties of $25,000 per day and treble damages related to certain United States' costs. Finally, during 1994, AT&T Nassau Metals Corporation ("Nassau"), a wholly owned subsidiary of AT&T, and the New York State Department of Environmental Conservation ("NYSDEC") were engaged in negotiations over a study and cleanup of the Nassau plant located on Richmond Valley Road in Staten Island, New York. During these negotiations, in June 1994, NYSDEC presented Nassau with a draft consent order which included not only provisions relating to site investigation and remediation but also a provision for payment of a $3.5 million penalty for alleged violations of hazardous waste management regulations. No formal proceeding has been commenced by NYSDEC. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report. Executive Officers of the Registrant (as of March 17, 2000) Became AT&T Name Age Executive Officer On - ---- --- -------------------- C. Michael Armstrong* . 61 Chairman of the Board and Chief Executive Officer . . . . . . 10-97 Harold W. Burlingame. . 59 Executive Vice President, Communications and Human Resources, AT&T Wireless Group . . 9-86 James Cicconi . . . . . 47 Executive Vice President-Law & Government Affairs and General Counsel . . . . . . . . . . 12-98 Mirian Graddick . . . . 45 Executive Vice President, Human Resources . . . . . . . . . . 3-99 Mohan Gyani . . . . . . 48 Executive Vice President and President & CEO, AT&T Wireless Services . . . . . . . . . . . . . 1-00 Frank Ianna . . . . . . 50 Executive Vice President and President, AT&T Network Services. . 3-97 Michael G. Keith. . . . 51 Executive Vice President - AT&T Wireless Group . . . . . . . . . . 12-98 Richard J. Martin . . . 53 Executive Vice President, Public Relations and Employee Communication . . . . . . . . . . . 11-97 John C. Malone**. . . . 59 Chairman of the Board, Liberty Media Corporation . . . . . . . . . 3-99 David C. Nagel. . . . . 55 President, AT&T Labs & Chief Technology Officer . . . . . . . . 3-97 Charles H. Noski. . . . 47 Senior Executive Vice President and Chief Financial Officer . . . . 12-99 John C. Petrillo. . . . 50 Executive Vice President, Corporate Strategy and Business Development . 1-96 Richard Roscitt . . . . 48 Executive Vice President and President, AT&T Business Services . 9-97 Daniel E. Somers. . . . 52 President and CEO, AT&T Broadband . . 5-97 John D. Zeglis**. . . . 52 President, AT&T, and Chairman and Chief Executive Officer, AT&T Wireless Group . . . . . . . . . . 9-86 - ----------- *Chairman of the Board of Directors and Chairman of the Executive and Proxy Committees. **Member of the Board of Directors. All of the above executive officers have held high level managerial positions with AT&T or its affiliates for more than the past five years, except Messrs. Armstrong, Cicconi, Guyani, Malone, Nagel, Noski and Somers. Prior to joining AT&T in October 1997, Mr. Armstrong was Chairman and Chief Executive Officer of Hughes Electronics from 1991. Prior to joining AT&T in September 1998 as Senior Vice President-Law and Government Affairs, Mr. Cicconi was a Partner at the law firm of Akin, Gump, Strauss, Houer and Feld, L.L.P. from 1991. Prior to joining AT&T in January 2000, Mr. Gyani was Executive Vice President and Chief Financial Officer of Airtouch Communications from 1995 to 1999, and following the merger of Vodafone and Airtouch, was head of strategy and corporate development at Vodafone Airtouch plc. Prior to joining AT&T, Dr. Malone was President, Chairman and Chief Executive Officer of TCI from 1994. In addition, Dr. Malone served as director of TCI Pacific Communications, Inc. since 1996. Prior to joining AT&T in April 1996, Mr. Nagel was with Apple Computer, serving as Senior Vice President from 1995 and General Manager from 1988 through 1995. Prior to joining AT&T in December 1999, Mr. Noski was president and chief operating officer of Hughes Electronics Corporation. Prior to joining AT&T in May 1997, Mr. Somers was Chairman and Chief Executive Officer for Bell Cablemedia, plc, of London for two years and from 1992 to 1995, Mr. Somers was Executive Vice President and Chief Financial Officer for Bell Canada International. PART II Items 5. through 8. The information required by these items is included in pages 12 through 55 and the inside back cover of the Company's annual report to shareholders for the year ended December 31, 1999. Such information is incorporated herein by reference, pursuant to General Instruction G(2). The referenced information from the Company's annual report to shareholders has been filed as Exhibit 13 to this document. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There have been no changes in independent accountants and no disagreements with independent accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the last two years. PART III Items 10. through 13. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure in Part I of this report because the Company did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A. The other information required by Items 10 through 13 is included in the Company's definitive proxy statement dated March 27, 2000: the third and fourth paragraphs on page 7, the first and second paragraphs on page 8, the first full paragraph on page 9 through the first full paragraph on page 21 and the fourth paragraph on page 40 through page 71. Such information is incorporated herein by reference, pursuant to General Instruction G(3). PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. (a) Documents filed as a part of the report: (1) Financial Statements: Pages ----- Report of Management ....................... * Report of Independent Accountants .......... * Statements: Consolidated Statements of Income .......... * Consolidated Balance Sheets ................ * Consolidated Statements of Changes in Shareowners' Equity ...................... * Consolidated Statements of Cash Flows ...... * Notes to Consolidated Financial Statements . * (2) Financial Statement Schedule: Report of Independent Accountants .......... 47 Schedule: II -- Valuation and Qualifying Accounts .... 48 Separate financial statements of Liberty Media Group, which is a "significant subsidiary" pursuant to the provisions of Regulation S-X, Article 3-9, are included as Exhibit 99. (3) Exhibits: Exhibits identified in parentheses below, on file with the Securities and Exchange Commission ("SEC"), are incorporated herein by reference as exhibits hereto. Exhibit Number: (3)a Restated Certificate of Incorporation of the registrant filed January 10, 1989, Certificate of Correction of the registrant filed June 8, 1989, Certificate of Change of the registrant filed March 18, 1992, Certificate of Amendment of the registrant filed June 1, 1992, Certificate of Amendment of the registrant filed April 20, 1994, Certificate of Amendment filed June 8, 1998 and Certificate of Amendment filed March 9, 1999 (Exhibit (3)a to Form 10-K for 1998, File No. 1-1105). - ------------ *Incorporated herein by reference to the appropriate portions of the Company's annual report to shareholders for the year ended December 31, 1999. (See Part II.) (3)b By-Laws of the registrant, as amended March 17, 1999 (Exhibit (3)b to Form 10-K for 1998, File No. 1-1105). (4) No instrument which defines the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Form of Separation and Distribution Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)1 to Form 10-K for 1996, File No. 1-1105). (10)(i)2 Form of Distribution Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (Exhibit (10)(i)2 to Form 10-K for 1996, File No. 1-1105). (10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)3 to Form 10-K for 1996, File No. 1-1105). (10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)4 to Form 10-K for 1996, File No. 1-1105). (10)(i)5 Form of Employee Benefits Agreement, dated as of November 20, 1996, between AT&T Corp. and NCR Corporation (Exhibit (10)(i)5 to Form 10-K for 1996, File No. 1-1105). (10)(ii)(B)1 General Purchase Agreement between AT&T Corp. and Lucent Technologies Inc., dated February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(ii)(B)1 to Form 10-K for 1996, File No. 1-1105). (10)(ii)(B)2 Form of Volume Purchase Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (Exhibit (10)(ii)(B)2 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (Exhibit (10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17, 1997 (Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as amended March 3, 1998 (Exhibit (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor Protection Plan, as amended and restated effective January 1, 1995 (Exhibit (10)(iii)(A)4 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated December 29, 1994 (Exhibit (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993 (Exhibit (10) (iii)(A)6 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as amended March 2, 1998 (Exhibit (10)(iii)(A)1 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident Insurance (Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105). (10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996 (Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (Exhibit (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as amended January 21, 1998 (Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No. 1-1105). (10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1, 1988 (Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File No. 1-1105) including AT&T Mid-Career Pension Plan, as amended and restated July 1, 1999. (10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended through March 14, 2000 (10)(iii)(A)14 Form of Indemnification Contract for Officers and Directors (Exhibit (10)(iii)(A)6 to Form SE, dated March 25, 1987, File No.1-1105). (10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised February 20, 1989 (Exhibit 10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)16 AT&T Corp. Senior Management Basic Life Insurance Program, as amended February 27, 1998 (Exhibit (10)(iii)(A)16 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)17 Form of AT&T Benefits Protection Trust Agreement as amended and restated as of November 1993, including the first amendment thereto dated December 23, 1997. (10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9, 1997, as amended October 30, 1997 (Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna dated October 30, 1997 (Exhibit (10)(iii)(A)19 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)20 Form of Pension Agreement between AT&T Corp. and John C. Petrillo dated October 30, 1997 (Exhibit (10)(iii)(A)21 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)21 Form of Pension Agreement between AT&T Corp. and John Zeglis dated May 7, 1997 (Exhibit (10)(iii)(A)22 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)22 Form of Employment Agreement between AT&T Corp. and C. Michael Armstrong dated October 17, 1997 (Exhibit (10)(iii)(A)23 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)23 Form of Employment Agreement between AT&T Corp. and Daniel E. Somers dated April, 1997 (Exhibit (10)(iii)(A)23 to Form 10-K for 1998, File No. 1-1105). (10)(iii)(A)24 Liberty Media 401(K) Savings Plan (Incorporation herein by reference to Exhibit 99.1 to Post-Effective Amendment No. 2 on Form S-8 to the Registration Statement on Form S-4 of AT&T Corp. (Commission File No. 333-70279) filed March 10, 1999). (12) Computation of Ratio of Earnings to Fixed Charges. (13) Specified portions (pages 12 through 55 and the inside back cover) of the Company's Annual Report to Shareholders for the year ended December 31, 1999. (21) List of subsidiaries of AT&T. (23)a Consent of PricewaterhouseCoopers, LLP (23)b Consent of KPMG, LLP (24) Powers of Attorney executed by officers and directors who signed this report. (27) Financial Data Schedules. (99) Supplemental Information regarding Liberty Media Group. AT&T will furnish, without charge, to a shareholder upon request a copy of the annual report to shareholders and the proxy statement, portions of which are incorporated herein by reference thereto. AT&T will furnish any other exhibit at cost. (b) Reports on Form 8-K: During the fourth quarter 1999, Form 8-K dated October 29, 1999 was filed pursuant to Item 5 (Other Events), Form 8-K dated November 16, 1999 was filed pursuant to Item 5 (Other Events) and Form 8-K dated December 6, 1999 was filed pursuant to Item 5 (Other Events). REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of AT&T Corp.: Our audits of the consolidated financial statements referred to in our report dated March 9, 2000 appearing in the 1999 Annual Report to Shareholders of AT&T Corp. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP New York, New York March 9, 2000 Schedule II--Sheet 1 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars) - ------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------ Charged to Balance at Costs and Balance Beginning Expenses at End Description of Period and Other Deductions(a) of Period - ------------------------------------------------------------------------------ Year 1999 Allowances for doubtful accounts (b) $1,106 $1,416 $ 962 $1,560 Deferred tax asset valuation allowance (c) $ 278 $ 124 $ 171 $ 231 Year 1998 Allowances for doubtful accounts (b) $1,037 $1,389 $1,320 $1,106 Deferred tax asset valuation allowance (c) $ 361 $ 23 $ 106 $ 278 The Notes on Sheet 2 are an integral part of this Schedule. Schedule II--Sheet 2 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars) - ------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------ Charged to Balance at Costs and Balance Beginning Expenses at End Description of Period and Other Deductions(a) of Period - ------------------------------------------------------------------------------ Year 1997 Allowances for doubtful accounts (b) $1,000 $1,522 $1,485 $1,037 Deferred tax asset valuation allowance (c) $ 220 $ 142 $ 1 $ 361 - ------------ (a) Amounts written off as uncollectible, net of recoveries and reclassifications. (b) Includes allowances for doubtful accounts on long-term receivables of $53, $46 and $49 at December 31, 1999, 1998 and 1997, respectively (included in other assets in the Consolidated Balance Sheets). (c) End of period balances at December 31, 1998 and 1997, include $18 and $14, respectively, which represent the current portion of the deferred tax valuation allowance. There was no current portion at December 31, 1999. The increase in the deferred tax asset valuation allowance in 1999 is due to the acquisition of Tele-Communications, Inc. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AT&T Corp. /s/ M. J. Wasser ------------------------------ By: M. J. Wasser Vice President - Law and Secretary March 27, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officers: # # C. Michael Armstrong Chairman of the Board # and Chief Executive # Officer # # John Zeglis President and Director # # Principal Financial Officer: # # Charles H. Noski Senior Executive Vice # President and Chief # Financial Officer # # Principal Accounting Officer: # # Nicholas S. Cyprus Vice President and # Controller ## By M. J. Wasser # (attorney-in-fact)* Directors: # # March 27, 2000 Kenneth T. Derr # M. Kathryn Eickhoff # Walter Y. Elisha # George M. C. Fisher # Donald V. Fites # Amos B. Hostetter, Jr. # Ralph S. Larsen # John C. Malone # Donald F. McHenry # Michael I. Sovern # Sanford I. Weill # Thomas H. Wyman # EX-10 2 EXHIBIT (10) Exhibit (10)(iii)(A)12 - Mid-Career Pension Plan Executive Vice President - Human Resources Approval Under Delegation of Board of Directors AT&T MID-CAREER PENSION PLAN Approval of Plan Language for Certain Amendments Adopted on April 16, 1997 and December 17, 1997 by the Board of Directors On April 16, 1997, the Board of Directors of the Company adopted resolutions amending the AT&T Mid-Career Pension Plan (the "Plan"), among other things, to: o Freeze benefit accruals as of December 31, 1996; o Provide for payment of a single life annuity if the executive elects the cash payment option under the AT&T Management Pension Plan; o Provide that benefits under the Plan may be forfeited if the Executive Vice President - Human Resources determines that the Employee has violated the AT&T Non-Competition Guideline; o Provide for a transfer of the liability for the benefit under this Plan for Executives above E-band effective January 1, 1998. Pursuant to the delegations from the Board of Directors and the Committee, the Executive Vice President - Human Resources approves the following Plan language reflecting these amendments: * 1. Amendment to freeze Term of Employment as of December 31, 1996 in the calculation of Mid-Career Pension Credits. Effective August 1, 1997, add to end of Section 2.15(a) as follows: Mid-Career Pension Credits for Eligible Executives hired or rehired by a Participating Company at E-band or above, and all of whose Term of Employment is at E-band or above, is determined as if the Eligible Executive had actually terminated employment as of December 31, 1996. 2. Amendment to freeze Term of Employment as of December 31, 1996 in the calculation of Mid-Career Pension Credits. Effective August 1, 1997, add to end of Section 2.15(b) as follows: The numerator and denominator set forth in this Section 2.15(b) above is determined as if the Eligible Executive had actually terminated employment as of December 31, 1996. Further, for any Eligible Executive on the active roll as of August 29, 1991, he shall be deemed to have terminated employment as of December 31, 1996. 3. Amendment to establish eligibility for Participant status. Effective August 1, 1997, add to end of Section 4.1 as follows: An individual is an Eligible Executive in this Plan if the individual is eligible for the Special Update, within the meaning of the Pension Plan, and satisfies the requirements set forth in this Section 4.1(a) through (d) above if he had terminated employment as of December 31, 1996, provided, however, that any individual hired in 1996 shall be deemed to have satisfied the requirement set forth in Section 4.1(c) above if he satisfies such requirement no later than December 31, 1997. 4. Amendment to establish eligibility for the benefit under the Plan as an Employee. Effective January 1, 1998, add to end of Section 4.2(a) as follows: Only Eligible Executives, as defined in Section 4.1 above, who are E-bands, will be considered Employees, provided, however, that for purposes of satisfying the requirement in this Section 4.2(a) of completing a Term of Employment of at least five years at E-band or above at termination of employment, all Eligible Executives will be considered Employees, if otherwise considered an Employee pursuant to this Section 4.2(a). 5. Amendment to eliminate concept of service, disability pension or deferred pension benefits. Effective August 1, 1997, replace Sections 4.2(b) and (c) in their entirety as follows: (b) Service and Disability Benefit Any Employee shall be eligible for a service benefit or disability benefit pursuant to this Plan if he or she has retired with a service or disability pension before January 1, 1997 under the Pension Plan, including an Employee who was eligible for a service pension as a result of a Transition Leave of Absence or a Transition to Retirement as set forth in the Pension Plan. (c) Mid-Career Pension Benefit Any Employee is eligible for a Mid-Career Pension Benefit pursuant to this Plan if the Employee in not eligible for a service or disability benefit under this Plan as set forth in Section 4.2(b). 6. Amendment to the Plan's Formula to eliminate references to Post-Base Period and explicitly provide the base formula multiplier amount. Effective August 1, 1997, replace Section 4.3(a)(i) with the following: The annual benefit amount will equal: A * [(B * C) + (D * E)] Where: A = Mid-Career Pension Credits; B = .008 C = Average Base Period Compensation x Term of Employment to the end of the Base Period divided by Total Term of Employment; D = .008 E = NQPP Average Base Period Compensation x Term of Employment to the end of the Base Period divided by Total Term of Employment. 7. Amendment to the definition of "Base Period" to correspond to the new Base Period in the Pension Plan. Effective August 1, 1997, Section 4.3(a)(iii) is amended in its entirety as follows: For purposes of determining C in Section 4.3(a)(i), "Base Period" shall be the pay base averaging period as is set forth in the Pension Plan effective August 1, 1997. For purposes of determining E in Section 4.3(a)(i), "Base Period" shall be the Base Period as is set forth in the Basic Formula of the NQPP effective August 1, 1997. 8. Effective August 1, 1997, delete Section 4.3(a)(iv), 4.3(a)(vii) and 4.3(a)(viii) in their entirety and renumber Section 4.3(a) accordingly. 9. Amendment to the definition of "Total Term of Employment" to freeze Term of Employment as of December 31, 1996. Effective August 1, 1997, replace Section 4.3(a)(vi) in its entirety as follows: For purposes of determining C and E in Section 4.3(a)(i), "Total Term of Employment" shall be the Employee's Term of Employment as of December 31, 1996. 10. Amendment to the calculation of the monthly benefit under the Plan to change the definition of Term of Employment. Effective August 1, 1997, add a new Section 4.3(a)(ix) as follows: (ix) Term of Employment Effective August 1, 1997, for purposes of determining C and E in Section 4.3(a)(i), "Term of Employment" shall equal the lesser of (1) Term of Employment, as defined in Section 2.22, as of December 31, 1996, plus 1 or (2) 105% of Term of Employment, as defined in Section 2.22, as of December 31, 1996. 11. Amendment to clarify that, for purposes of determining the early retirement discount, if any, the discount is calculated in the same manner as the discount applicable to the Special Update Benefit in the Pension Plan. Effective August 1, 1997, replace Section 4.3(b) in its entirety as follows: Effective August 1, 1997, where an Employee terminates employment under the age of 55 years and commences a pension under the Pension Plan, his or her monthly benefit shall be reduced in the same manner as set forth in the Pension Plan for the Special Update Benefit, within the meaning of the Pension Plan. 12. Amendment relating to the elimination of the concept of a deferred benefit. Effective August 1, 1997, any references in Section 4.3(c) to a "deferred benefit amount" or "deferred benefit" shall be replaced with the term "Mid-Career Pension Benefit." 13. Amendment to provide for special increases in service and disability payments only for those Employees eligible for service and disability pension benefits. Section 4.3(e) shall be replaced in its entirety as follows: Section 4.3(e) Special Increases Monthly service and disability benefit payments for retired Employees, eligible as set forth in Section 4.2(b), shall be increased by the same percentage and pursuant to the same terms and conditions as are set forth in the Pension Plan. 14. Amendment relating to commencement and duration of benefits. Effective for monthly benefits commencing on or after August 1, 1997, replace Sections 4.5(a) and (b)(i) in their entirety as follows: (a) Service or Disability Benefit Payment of a service or disability benefit under this Plan shall commence to an Employee at the same time as the Employee's service or disability pension benefits commence under the Pension Plan and shall continue to the last day of the month in which the death of the Employee occurs, or, in the case of a disability benefit, until termination of disability pension payments under the Pension Plan, if earlier, subject to Section 4.4 of this Plan, provided, however, that if the Employee elects the cash payment option pursuant to the Pension Plan, payment of a service or disability benefit under this Plan shall be paid in the form of a single life annuity. (b) Mid-Career Pension Benefit (i) Payment of a Mid-Career Pension benefit under this Plan shall commence to an Employee at the same time as the Employee's pension benefits commence under the Pension Plan and shall continue to the last day of the month in which the death of the Employee occurs, subject to Section 4.4 of this Plan, provided, however, that if the Employee elects the cash payment option pursuant to the Pension Plan, payment of a Mid-Career Pension benefit under this Plan shall be paid in the form of a single life annuity. 15. Amendment to Section 4.6(a)(iii) to be consistent with amendment to AT&T Non-Competition Guideline. Effective December 17, 1997, Section 4.6(a)(iii) is amended in its entirety as follows: (iii) If the Executive Vice President - Human Resources of the Company determines, pursuant to the AT&T Non-Competition Guideline, determines that the Employee has violated the AT&T Non-Competition Guideline. 16. Amendment to provide for a transfer of liability for certain Employees to the AT&T Non-Qualified Pension Plan. Effective January 1, 1998, add a new Section 4.7 as follows: Section 4.7 Transfer of Liability Effective January 1, 1998, the liability for the monthly benefit under this Plan of Eligible Executives, as defined in Section 4.1, who are above the level of E-band, shall be transferred to the AT&T Non-Qualified Pension Plan, effective January 1, 1998. Solely for purposes of determining eligibility for the monthly benefit under this Plan to be transferred, an Eligible Executive who is above the level of E-band shall be considered an Employee who has completed a Term of Employment of at least 5 years at E-band or above as of December 31, 1997. Signature: /s/ Hal W. Burlingame -------------------------------- By: Hal W. Burlingame Executive Vice President - Human Resources - --------------------- * Each amendment is preceded by a brief explanation. Exhibit (10)(iii)(A)13 - AT&T 1997 LTIP AT&T 1997 LONG TERM INCENTIVE PROGRAM (as amended May 19, 1999 and March 14, 2000) SECTION 1. PURPOSE. The purposes of the AT&T 1997 Long Term Incentive Program (the "Plan") are to encourage selected employees and Non-Employee Directors of AT&T Corp. (the "Company") and its Affiliates to acquire a proprietary and vested interest in the growth and performance of the Company, to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of shareholders, and to enhance the ability of the Company and its Affiliates to attract and retain individuals of exceptional managerial talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) any Person that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company or (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Performance Share, Performance Unit, Dividend Equivalent, Other Stock Unit Award, or any other right, interest, or option relating to Shares or other property granted pursuant to the provisions of the Plan. (c) "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award granted by the Committee hereunder, which may, but need not, be executed or acknowledged by both the Company and the Participant. (d) "Board" shall mean the Board of Directors of the Company. (e) "Change in Control" shall mean the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13 (d) (3) or 14 (d) (2) of the Exchange Act) (an "Entity") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding AT&T Shares (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(e); (ii) A change in the composition of the Board such that the individuals who, as of the effective date of the Plan, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the effective date of the Plan, whose election, or nomination for election, by the Company's stockholders was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided, further however, that any such individual whose initial assumption of office occurs as a result of or in connection with either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall not be so considered as a member of the Incumbent Board; (iii) The approval by the stockholders of the Company of a merger, reorganization or consolidation or sale or other disposition of all or substantially all of the assets of the Company (each, a "Corporate Transaction") or, if consummation of such Corporate Transaction is subject, at the time of such approval by stockholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding however, such a Corporate Transaction pursuant to which (A) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation or other Person which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries (a "Parent Company")) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Entity (other than the Company, any employee benefit plan (or related trust) of the Company, such corporation resulting from such Corporate Transaction or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, such Parent Company) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors unless such ownership resulted solely from ownership of securities of the Company prior to the Corporate Transaction, and (C) individuals who were members of the Incumbent Board will immediately after the consummation of the Corporate Transaction constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction (or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, of the Parent Company); or (iv) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (f) "Change in Control Price" means, with respect to an AT&T Share or a Wireless Group Share, as the case may be, the higher of (A) the highest reported sales price, regular way, of such Share in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such Shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change in Control or (B) if the Change in Control is the result of a tender or exchange offer or a Corporate Transaction, the highest price per such Share paid in such tender or exchange offer or Corporate Transaction; provided however, that in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, the Change in Control Price shall be the Fair Market Value of such Share on the date such Incentive Stock Option or Stock Appreciation Right is exercised or deemed exercised pursuant to Section 11(b). To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (h) "Committee" shall mean the Compensation and Employee Benefits Committee of the Board, or any successor to such committee, composed of no fewer than two directors each of whom is a Non-Employee Director and an "outside director" within the meaning of Section 162(m) of the Code, or any successor provision thereto. (i) "Company" shall mean AT&T Corp., a New York corporation. (j) "Covered Employee" shall mean a "covered employee" within the meaning of Section 162(m)(3) of the Code, or any successor provision thereto. (k) "Employee" shall mean any employee of the Company or of any Affiliate. Unless otherwise determined by the Committee in its sole discretion, for purposes of the Plan, an employee shall be considered to have terminated employment and to have ceased to be an Employee if his or her employer ceases to be an Affiliate, even if he or she continues to be employed by such employer. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" shall mean, with respect to any property, the market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. (n) "Incentive Stock Option" shall mean an Option granted under Section 6 hereof that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (o) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3) promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor definition adopted by the Securities and Exchange Commission. (p) "Nonstatutory Stock Option" shall mean an Option granted under Section 6 hereof that is not intended to be an Incentive Stock Option. (q) "Option" shall mean any right granted to a Participant under the Plan allowing such Participant to purchase Shares at such price or prices and during such period or periods as the Committee shall determine. (r) "Other Stock Unit Award" shall mean any right granted to a Participant by the Committee pursuant to Section 10 hereof. (s) "Participant" shall mean an Employee or Non-Employee Director who is selected by the Committee to receive an Award under the Plan. (t) "Performance Award" shall mean any Award of Performance Shares or Performance Units pursuant to Section 9 hereof. (u) "Performance Period" shall mean that period established by the Committee at the time any Performance Award is granted or at any time thereafter during which any performance goals specified by the Committee with respect to such Award are to be measured. (v) "Performance Share" shall mean any grant pursuant to Section 9 hereof of a unit valued by reference to a designated number of Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, Shares, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter. (w) "Performance Unit" shall mean any grant pursuant to Section 9 hereof of a unit valued by reference to a designated amount of property other than Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, Shares, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter. (x) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, or government or political subdivision thereof. (y) "Restricted Stock" shall mean any Share issued with the restriction that the holder may not sell, transfer, pledge, or assign such Share and with such other restrictions as the Committee, in its sole discretion, may impose (including, without limitation, any restriction on the right to vote such Share, and the right to receive any cash dividends), which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate. (z) "Restricted Stock Award" shall mean an award of Restricted Stock under Section 8 hereof. (Aa) "Senior Manager" shall mean any Employee of the Company or any Affiliate holding a position above E band or any future salary band that is the equivalent thereof. (Bb) "Shares" shall mean, collectively or as the case may be, (i)the shares of AT&T Common Stock of the Company, $1.00 par value ("AT&T Shares"), and (ii) the shares of Wireless Group Common Stock of the Company, $1.00 par value ("Wireless Group Shares"). "Outstanding Wireless Group Shares" shall mean, as at any date of determination, the sum of (i) the total issued and outstanding Wireless Group Shares, plus (ii) the number of Wireless Group Shares represented by the inter-group interest held by the "AT&T Common Stock Group" (as described the Company's Proxy Statement dated January 26, 2000). The numbers of AT&T Shares referred to in the Plan have been adjusted to reflect the Company's 3 for 2 stock split effective April 15, 1999. (Cc) "Stock Appreciation Right" shall mean any right granted to a Participant pursuant to Section 7 hereof to receive, upon exercise by the Participant, the excess of (i) the Fair Market Value of one Share on the date of exercise or, if the Committee shall so determine in the case of any such right other than one related to any Incentive Stock Option, at any time during a specified period before the date of exercise over (ii) the grant price of the right on the date of grant, or if granted in connection with an outstanding Option on the date of grant of the related Option, as specified by the Committee in its sole discretion, which, except in the case of Substitute Awards or in connection with an adjustment provided in Section 4(e), shall not be less than the Fair Market Value of one Share on such date of grant of the right or the related Option, as the case may be. Any payment by the Company in respect of such right may be made in cash, Shares, other property, or any combination thereof, as the Committee, in its sole discretion, shall determine. (Dd) "Subsidiary" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. (Ee) "Substitute Awards" shall mean Awards granted or Shares issued by the Company in assumption of, or in substitution or exchange for, awards previously granted, or the right or obligation to make future awards, by a company acquired by the Company or with which the Company combines. SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, to: (i) select the Employees of the Company and its Affiliates and Non-Employee Directors of the Company to whom Awards may from time to time be granted hereunder; (ii) determine the type or types of Award to be granted to each Participant hereunder; (iii) determine the number of Shares to be covered by each Award granted hereunder; (iv) determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Award granted hereunder; (v) determine whether, to what extent and under what circumstances Awards may be settled in cash, Shares or other property or canceled or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares and other property and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the Participant; (vii) interpret and administer the Plan and any instrument or agreement entered into under the Plan; (viii) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. Decisions of the Committee shall be final, conclusive and binding upon all persons, including the Company, any Participant, any shareholder, and any employee of the Company or of any Affiliate. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings. Notwithstanding the foregoing or anything else to the contrary in the Plan, any action or determination by the Committee specifically affecting or relating to an Award to a Non-Employee Director shall be approved and ratified by the Board. SECTION 4. SHARES SUBJECT TO THE PLAN. (a) Subject to adjustment as provided in Section 4(e), a total of twenty-two and one half (22.5) million AT&T Shares shall be available for a one time grant of Options to substantially all Employees during 1997. Shares available for such one time grant of Options, but not used for such Options, shall be available for other Awards under the Plan, in 1997 or later years. (b) In addition to the number of AT&T Shares available under Section 4(a), and subject to adjustment as provided in Section 4(e), a total of (i) one hundred twenty-seven and one half (127.5) million AT&T Shares, and (ii) a number of Wireless Group Shares equal to 5.00% of the number of Outstanding Wireless Group Shares shall be available for Awards granted under the Plan; provided that, commencing on January 1, 2000 and on each subsequent January 1 throughout the term of the Plan, an additional number of AT&T Shares shall be added to the number of AT&T Shares available for Awards granted under the Plan, which additional number of AT&T Shares shall be calculated by multiplying (x) the number of AT&T Shares outstanding on such January 1, by (y) 1.75%; provided, further, that the number of AT&T Shares available for Awards other than Options and/or Stock Appreciation Rights shall not exceed thirty-seven and one half (37.5) million; and provided further that, commencing on January 1, 2001 and on each subsequent January 1 throughout the term of the Plan, an additional number of Wireless Group Shares shall be added to the number of Wireless Group Shares available for Awards granted under the Plan, which additional number of Wireless Group Shares shall be calculated by multiplying (x) the number of Outstanding Wireless Group Shares on such January 1, by (y) 2.00%; provided, further, that the number of Wireless Group Shares available for Awards other than Options and/or Stock Appreciation Rights shall not exceed 1.25% of the number of Outstanding Wireless Group Shares; and provided, further, that if any Shares subject to an Award or to an award under the Company's 1987 Long Term Incentive Program or 1984 Stock Option Plan (the "Prior Plans") are forfeited or if any Award or award under the Prior Plans based on Shares is settled for cash, or expires or otherwise is terminated without issuance of such Shares, the Shares subject to such Award shall to the extent of such cash settlement, forfeiture or termination again be available for Awards under the Plan. In the event that any Option or other Award granted hereunder is exercised through the delivery of Shares or in the event that withholding tax liabilities arising from such Option or other Award are satisfied by the withholding of Shares by the Company, the number of Shares available for Awards under the Plan shall be increased by the number of Shares so surrendered or withheld. In addition, Substitute Awards shall not reduce the Shares available for grants under the Plan or to a Participant in any calendar year. (c) In addition to the number of Wireless Group Shares available under Section 4(b), and subject to adjustment as provided in Section 4(e), such additional number of Wireless Group Shares as are required for Awards as an adjustment to existing Awards under the Plan based upon AT&T Shares as the result of any distribution of Wireless Group Shares to holders of AT&T Shares as more fully described in the Company's Proxy Statement dated January 26, 2000. (d) Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares, treasury shares, or shares purchased in the open market or otherwise. (e) In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, reverse stock split, spin-off or similar transaction or other change in corporate structure affecting the Shares, such adjustments and other substitutions shall be made to the Plan and to Awards as the Committee in its sole discretion deems equitable or appropriate, including without limitation such adjustments in the aggregate number, class and kind of securities which may be delivered under the Plan, in the aggregate or to any one Participant, in the number, class, kind and option or exercise price of securities subject to outstanding Options, Stock Appreciation Rights or other Awards granted under the Plan, and in the number, class and kind of securities subject to Awards granted under the Plan (including, if the Committee deems appropriate, the substitution of similar options to purchase the shares of, or other awards denominated in the shares of, another company) as the Committee may determine to be appropriate in its sole discretion, provided that the number of Shares subject to any Award shall always be a whole number. SECTION 5. ELIGIBILITY. Any Employee or Non-Employee Director shall be eligible to be selected as a Participant, provided, however, that Incentive Stock Options shall only be awarded to Employees of the Company. SECTION 6. STOCK OPTIONS. Options may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan. Any Option granted under the Plan shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. Any such Option shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable: (a) OPTION PRICE. The purchase price per Share purchasable under an Option shall be determined by the Committee in its sole discretion; provided that, except in the case of Substitute Awards or in connection with an adjustment provided for in Section 4(e), such purchase price shall not be less than the Fair Market Value of the Share on the date of the grant of the Option. (b) OPTION PERIOD. The term of each Option shall be fixed by the Committee in its sole discretion; provided that no Option shall be exercisable after the expiration of ten years from the date the Option is granted. (c) EXERCISABILITY. Options shall be exercisable at such time or times as determined by the Committee at or subsequent to grant. (d) METHOD OF EXERCISE. Subject to the other provisions of the Plan, any Option may be exercised by the Participant in whole or in part at such time or times, and the Participant may make payment of the option price in such form or forms, including, without limitation, payment by delivery of cash, Shares or other consideration (including, where permitted by law and the Committee, Awards) having a Fair Market Value on the exercise date equal to the total option price, or by any combination of cash, Shares and other consideration as the Committee may specify in the applicable Award Agreement. (e) INCENTIVE STOCK OPTIONS. In accordance with rules and procedures established by the Committee, and except as otherwise provided in Section 11, the aggregate Fair Market Value (determined as of the time of grant) of the Shares with respect to which Incentive Stock Options held by any Participant which are exercisable for the first time by such Participant during any calendar year under the Plan (and under any other benefit plans of the Company or any Subsidiary) shall not exceed $100,000 or, if different, the maximum limitation in effect at the time of grant under Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. Incentive Stock Options shall be granted only to participants who are employees of the Company or a Subsidiary of the Company. The terms of any Incentive Stock Option granted hereunder shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. The aggregate number of Shares with respect to which Incentive Stock Options may be granted under the Plan shall not exceed (i) seventy-five (75) million in the case of AT&T Shares, and (ii) 50.00% of the aggregate number of all Wireless Group Shares available for Awards under the Plan in the case of Wireless Group Shares. (f) FORM OF SETTLEMENT. In its sole discretion, the Committee may provide, at the time of grant, that the Shares to be issued upon an Option's exercise shall be in the form of Restricted Stock or other similar securities, or may reserve the right so to provide after the time of grant. SECTION 7. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan and may, but need not, relate to a specific Option granted under Section 6. The provisions of Stock Appreciation Rights need not be the same with respect to each recipient. Any Stock Appreciation Right related to a Nonstatutory Stock Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. Any Stock Appreciation Right related to an Incentive Stock Option must be granted at the same time such Option is granted. In the case of any Stock Appreciation Right related to any Option, the Stock Appreciation Right or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of Shares covered by a related Option shall not be reduced until the exercise or termination of the related Option exceeds the number of Shares not covered by the Stock Appreciation Right. Any Option related to any Stock Appreciation Right shall no longer be exercisable to the extent the related Stock Appreciation Right has been exercised. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate, provided that no Stock Appreciation Right shall have a term that is longer than ten (10) years. SECTION 8. RESTRICTED STOCK. (a) ISSUANCE. A Restricted Stock Award shall be subject to restrictions imposed by the Committee during a period of time specified by the Committee (the "Restriction Period"). Restricted Stock Awards may be issued hereunder to Participants, for no cash consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The provisions of Restricted Stock Awards need not be the same with respect to each recipient. (b) REGISTRATION. Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee in its sole discretion shall deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of shares of Restricted Stock awarded under the Plan, such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award. (c) FORFEITURE. Except as otherwise determined by the Committee at the time of grant or thereafter, upon termination of employment for any reason during the restriction period, all Shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and reacquired by the Company. Unrestricted Shares, evidenced in such manner as the Committee shall deem appropriate, shall be issued to the grantee promptly after the period of forfeiture, as determined or modified by the Committee, shall expire. (d) MINIMUM VESTING CONDITION. The minimum Restriction Period applicable to any Restricted Stock Award that is not subject to performance conditions restricting transfer shall be three (3) years from the date of grant; provided, however, that a Restriction Period of less than three (3) years may be approved under the Plan for such Awards with respect to (i) up to twelve (12) million AT&T Shares, and (ii) up to 0.50% of the Outstanding Wireless Group Shares. SECTION 9. PERFORMANCE AWARDS. Performance Awards may be issued hereunder to Participants, for no cash consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The performance criteria to be achieved during any Performance Period and the length of the Performance Period shall be determined by the Committee upon the grant of each Performance Award. Except as provided in Section 11, Performance Awards will be distributed only after the end of the relevant Performance Period. Performance Awards may be paid in cash, Shares, other property or any combination thereof, in the sole discretion of the Committee at the time of payment. The performance levels to be achieved for each Performance Period and the amount of the Award to be distributed shall be conclusively determined by the Committee. Performance Awards may be paid in a lump sum or in installments following the close of the Performance Period or, in accordance with procedures established by the Committee, on a deferred basis. SECTION 10. OTHER STOCK UNIT AWARDS. (a) STOCK AND ADMINISTRATION. Other Awards of Shares and other Awards that are valued in whole or in part by reference to, or are otherwise based on, Shares or other property ("Other Stock Unit Awards") may be granted hereunder to Participants, either alone or in addition to other Awards granted under the Plan. Other Stock Unit Awards may be paid in Shares, cash or any other form of property as the Committee shall determine. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees of the Company and its Affiliates and Non-Employee Directors to whom and the time or times at which such Awards shall be made, the number of Shares to be granted pursuant to such Awards, and all other conditions of the Awards. The provisions of Other Stock Unit Awards need not be the same with respect to each recipient. (b) TERMS AND CONDITIONS. Subject to the provisions of this Plan and any applicable Award Agreement, Awards and Shares subject to Awards made under this Section 10, may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the Shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. For any Award or Shares subject to any Award made under this Section 10 the transferability of which is conditioned only on the passage of time, such restriction period shall be a minimum of three (3) years. Shares (including securities convertible into Shares) subject to Awards granted under this Section 10 may be issued for no cash consideration or for such minimum consideration as may be required by applicable law. Shares (including securities convertible into Shares) purchased pursuant to a purchase right awarded under this Section 10 shall be purchased for such consideration as the Committee shall in its sole discretion determine, which, except in the case of Substitute Awards, shall not be less than the Fair Market Value of such Shares or other securities as of the date such purchase right is awarded. SECTION 11. CHANGE IN CONTROL PROVISIONS. (a) IMPACT OF EVENT. Notwithstanding any other provision of the Plan to the contrary, unless the Committee shall determine otherwise at the time of grant with respect to a particular Award, in the event of a Change in Control: (i) any Options and Stock Appreciation Rights outstanding as of the date such Change in Control is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; (ii) the restrictions and deferral limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant; (iii) all Performance Awards shall be considered to be earned and payable in full, and any deferral or other restriction shall lapse and such Performance Awards shall be immediately settled or distributed; and (iv) The restrictions and deferral limitations and other conditions applicable to any Other Stock Unit Awards or any other Awards shall lapse, and such Other Stock Unit Awards or such other Awards hall become free of all restrictions, limitations or conditions and become fully vested and transferable to the full extent of the original grant. (b) CHANGE IN CONTROL CASH-OUT. Notwithstanding any other provision of the Plan, during the 60-day period from and after a Change in Control (the "Exercise Period"), if the Committee shall determine at, or at any time after, the time of grant, a Participant holding an Option or Stock Appreciation Right shall have the right, whether or not the Option or Stock Appreciation Right is fully exercisable and in lieu of the payment of the purchase price for the Shares being purchased under the Option or Stock Appreciation Right and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Option or Stock Appreciation Right to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change in Control Price per Share on the date of such election shall exceed the purchase price per Share under the Option or Stock Appreciation Right (the "Spread") multiplied by the number of Shares granted under the Option or Stock Appreciation right as to which the right granted under this Section 11(b) shall have been exercised. (c) Notwithstanding any other provision of this Plan, if any right granted pursuant to this Plan would make a Change in Control transaction ineligible for pooling-of-interests accounting under APB No. 16, that (after giving effect to any other actions taken to cause such transaction to be eligible for such pooling-of-interests accounting treatment) but for the nature of such right would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute for the cash payable pursuant to such right Shares with a Fair Market Value equal to the cash that would otherwise be payable pursuant thereto. SECTION 12. CODE SECTION 162(m) PROVISIONS. (a) Notwithstanding any other provision of this Plan, if the Committee determines at the time Restricted Stock, a Performance Award or an Other Stock Unit Award is granted to a Participant who is then a Senior Manager or an E band employee that such Participant is, or is likely to be as of the end of the tax year in which the Company would claim a tax deduction in connection with such Award, a Covered Employee, then the Committee may provide that this Section 12 is applicable to such Award. (b) If an Award is subject to this Section 12, then 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 shall be based on the attainment 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, gross margin, return on operating assets, return on equity, economic value added, stock price appreciation, total stockholder return, or cost control, of the Company or the Affiliate or division of the Company for or within which the Participant is primarily employed. Such performance goals also may be based upon the achievement of specified levels of Company performance (or performance of applicable Affiliate or division of the Company) under one or more of the measures described above relative to the performance of other corporations. Such performance goals shall be set by the Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m) of the Code, or any successor provision thereto, and the regulations thereunder. (c) Notwithstanding any provision of this Plan other than Section 11, with respect to any Award that is subject to this Section 12, the Committee may adjust downwards, but not upwards, the amount payable pursuant to such Award, and the Committee may not waive the achievement of the applicable performance goals except in the case of the death or disability of the Participant. (d) The Committee shall have the power to impose such other restrictions on Awards subject to this Section 12 as it may deem necessary or appropriate to ensure that such Awards satisfy all requirements for "performance-based compensation" within the meaning of Section 162(m) (4) (C) of the Code, or any successor provision thereto. (e) Notwithstanding any provision of this Plan other than Section 4(e), commencing with calendar year 1999, no Participant may be granted Options and/or SARs in any calendar year period with respect to more than three million (3,000,000) AT&T Shares, or more than three million (3,000,000) Wireless Group Shares and the maximum dollar value payable with respect to Performance Units and/or Other Stock Unit Awards that are valued with reference to property other than Shares and granted to any Participant in any one calendar year is $10,000,000. SECTION 13. AMENDMENTS AND TERMINATION. The Board may amend, alter, suspend, discontinue or terminate the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without (i) shareholder approval if such approval is necessary to qualify for or comply with any tax or regulatory requirement for which or with which the Board deems it necessary or desirable to qualify or comply or (ii) the consent of the affected Participant, if such action would impair the rights of such Participant under any outstanding Award. Notwithstanding anything to the contrary herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform to local rules and regulations in any jurisdiction outside the United States. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without his or her consent. Notwithstanding any provision of this plan, the Committee may not amend the terms of any Option to reduce the option price nor may the Committee, without prior shareholder approval, cancel any outstanding Option and replace it with a new Option with a lower option price, where the economic effect would be the same as reducing the option price of the canceled Option. SECTION 14. GENERAL PROVISIONS. (a) Unless the Committee determines otherwise at the time the Award is granted or thereafter: (i) no Award, and no Shares subject to Awards described in Section 10 which have not been issued or as to which any applicable restriction, performance or deferral period has not lapsed, may be sold, assigned, transferred, pledged or otherwise encumbered, except by will or by the laws of descent and distribution; provided that, if so determined by the Committee, a Participant may, in the manner established by the Committee, designate a beneficiary to exercise the rights of the Participant with respect to any Award upon the death of the Participant; and (ii) each Award shall 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. (b) The term of each Award shall be for such period of months or years from the date of its grant as may be determined by the Committee; provided that in no event shall the term of any Stock Option or any Stock Appreciation Right exceed a period of ten (10) years from the date of its grant. (c) No Employee or Participant shall have any claim to be granted any Award under the Plan and there is no obligation for uniformity of treatment of Employees or Participants under the Plan. (d) The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless such recipient shall have executed an agreement or other instrument evidencing the Award and delivered a copy thereof to the Company, and otherwise complied with the then applicable terms and conditions. (e) Except as provided in Section 12, the Committee shall 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 the Company or its financial statements or changes in applicable laws, regulations or accounting principles. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry it into effect. In the event the Company shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of or combination with another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate. (f) The Committee shall have full power and authority to determine whether, to what extent and under what circumstances any Award shall be canceled or suspended. In addition, all outstanding Awards to any Participant shall be canceled if the Participant, without the consent of the Company, while employed by the Company or after termination of such employment, establishes a relationship with a competitor of the Company or engages in activity which is in conflict with or adverse to the interest of the Company, as determined under the AT&T Non-Competition Guideline. (g) All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (h) No Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject. (i) The Committee shall be authorized to establish procedures pursuant to which the payment of any Award may be deferred. Subject to the provisions of the Plan and any Award Agreement, the recipient of an Award (including, without limitation, any deferred Award) may, if so determined by the Committee, be entitled to receive, currently or on a deferred basis, cash dividends, or cash payments in amounts equivalent to cash dividends on Shares ("dividend equivalents"), with respect to the number of Shares covered by the Award, as determined by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested. (j) Except as otherwise required in any applicable Award Agreement or by the terms of the Plan, recipients of Awards under the Plan shall not be required to make any payment or provide consideration other than the rendering of services. (k) The Committee may delegate to one or more Senior Managers or a committee of Senior Managers the right to grant Awards to Employees who are not officers or directors of the Company and to cancel or suspend Awards to Employees who are not officers or directors of the Company. (l) The Company shall be authorized to withhold from any Award granted or payment due under the Plan the amount of withholding taxes due in respect of an Award or payment hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Committee shall be authorized to establish procedures for election by Participants to satisfy such obligations for the payment of such taxes by delivery of or transfer of Shares to the Company, or by directing the Company to retain Shares otherwise deliverable in connection with the Award. (m) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (n) The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of New York and applicable Federal law. (o) If any provision of this Plan is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, it shall be stricken and the remainder of the Plan shall remain in full force and effect. (p) Awards may be granted to Participants who are foreign nationals or employed outside the United States, or both, on such terms and conditions different from those applicable to Awards to Employees employed in the United States as may, in the judgment of the Committee, be necessary or desirable in order to recognize differences in local law or tax policy. The Committee also may impose conditions on the exercise or vesting of Awards in order to minimize the Company's obligation with respect to tax equalization for Employees on assignments outside their home country. SECTION 15. EFFECTIVE DATE OF PLAN. The Plan shall be effective as of June 1, 1997. SECTION 16. TERM OF PLAN. No Award shall be granted pursuant to the Plan after May 31, 2004, but any Award theretofore granted may extend beyond that date. EX-12 3 COMPUTATION OF RATION OF EARNINGS TO FIXED CHARGES AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) For the years ended December 31, 1999 1998 1997 1996 1995 Income from continuing operations before income taxes $6,685 $8,307 $6,972 $8,697 $4,925 Less interest capitalized during the period 143 197 254 193 107 Add equity investment losses, net of distributions of less than 50% owned affiliates 966 288 144 155 205 Add fixed charges 2,387 872 846 855 730 Total earnings from continuing operations before income taxes and fixed charges $9,895 $9,270 $7,708 $9,514 $5,753 Fixed Charges: Total interest expense including capitalized interest $1,794 $ 624 $ 562 $ 610 $ 508 Interest portion of rental expense 276 248 284 245 222 Dividend requirements on subsidiary preferred stock and interest on trust preferred securities 317 - - - - Total fixed charges $2,387 $ 872 $ 846 $ 855 $ 730 Ratio of earnings to fixed charges 4.1 10.6 9.1 11.1 7.9 EX-13 4 SPECIFIED PORTIONS OF COMPANY'S ANNUAL REPORT Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS INTRODUCTION In 1999, we made significant strides to transform AT&T and deliver growth. We finalized many of the strategic acquisitions we announced in 1998 and made additional investments to further support our facilities-based growth strategy. We continued to maintain the execution-focused culture of the new AT&T. One of the most dynamic areas in 1999 was our wireless business. Increasing demand for wireless services and the continued appeal of our Digital One Rate (sm) plans drove Wireless Services revenue to grow approximately 40% for the year. Throughout 1999 we continued to expand our national footprint. In the second quarter, we completed the acquisition of Vanguard Cellular Systems, which was announced in 1998; in August we closed the acquisition of Honolulu Cellular; and in October we announced the acquisition of American Cellular Corp. through a newly created joint venture between AT&T and Dobson Communications. We capped off the year by proposing the creation of a new class of tracking stock that will reflect the economic performance of the AT&T Wireless Group. While the Wireless Group will remain part of AT&T, the separate tracking stock will provide current shareowners and future investors with a security tied directly to the performance of this business. As we worked to grow our wireless businesses in 1999, we also started putting the bricks and mortar around our broadband plans - a key component of our overall growth strategy. We completed our $52 billion merger with Tele-Communications, Inc. (TCI) in March, and quickly accelerated the upgrade of the TCI cable plant, which will enable us to develop additional revenue streams from any-distance cable telephony, high-speed data, and digital video. By the end of 1999, TCI, renamed AT&T Broadband, was offering cable telephony in 16 cities within nine pilot markets, digital-video subscribers totaled approximately 1.8 million, and more than 200,000 customers had signed up for high-speed data service. To expand our national cable network beyond AT&T Broadband's systems, we announced in May the $57 billion merger with MediaOne. When the merger is completed in 2000, we will significantly increase our presence in major metropolitan markets across the country with owned and operated cable systems passing more than 26 million homes. In addition to the accomplishments in our domestic growth initiatives, we also made significant progress in our global strategy. Most notably, we launched Concert - a leading global telecommunications company created through AT&T's joint venture with British Telecommunications plc (BT). Concert represents the core of our global strategy and began serving multinational business customers, international carriers and Internet service providers in January 2000. As part of our relationship with Concert and BT, we also made several in-country facility-based investments during 1999, including AT&T Canada Corp., Rogers Cantel in Canada, and Japan Telecom. We also completed the purchase of IBM Global Network Services and now provide data networking services to businesses around the world as AT&T Global Network Services (AGNS). [Included in the 1999 Annual Report are pie charts entitled "Revenue Diversification by Product." These charts depict revenue by product for 1998 and 1999.] In addition to delivering on our domestic and global strategic objectives for 1999, we also achieved the aggressive financial targets we set for the year. We delivered revenue growth of 6.2% on a pro forma basis for the acquisitions of AT&T Broadband and AGNS, hitting our targeted range of 5% to 7%. The majority of the increase came from our growth businesses, showing the success of our investment strategy as it begins to shift our revenue base away from long distance voice revenue. Just one year ago, long distance voice revenue was 75% of our total revenue; in 1999 it dropped to 62%. While long distance is increasingly becoming a commodity, as evidenced by the continued pricing pressures in the industry, its current profitability supports investments in growth businesses. These growth businesses in turn will support the long distance business as we include long distance as a component of a bundle of competitively priced services. In order to become truly competitive, we must become the low-cost provider in the industry, and therefore, we are continuing our efforts to reduce our cost structure. A year ago, we committed to reducing our 1999 selling, general and administrative (SG&A) expenses to 23% of revenue. We beat that target, delivering an SG&A expense-to-revenue ratio of 21.7% for the year, which translates into approximately $830 million of SG&A expense savings compared with our targets. The fourth quarter came in at just 21.2%. That's a dramatic improvement from 1997, when the SG&A expense-to-revenue ratio for the year was 27.9%. While we've been successful in driving costs out of the business, we still have more to do. We will continue to attack costs and have committed to cutting $2 billion in costs by the end of 2000 by continuing to streamline our SG&A expenses and by lowering our network costs by moving more data, voice and wireless traffic onto our expanding network of global facilities. Not surprisingly, our success in growing revenue and shrinking costs allowed us to deliver strong cash flow results in 1999, with cash from operations growing to $11.6 billion - up 13.9% from 1998. In 1999, we generated $18.3 billion of reported EBITDA [earnings, including other income (expense), before interest, taxes, depreciation and amortization]. As anticipated, the positive impact of our revenue growth and cost controls on earnings per share was more than offset by the impact of shares issued and the franchise, goodwill and other purchased intangibles amortization associated with our investments and acquisitions. As a result, earnings per diluted share were 10.3% below 1998. We undertook an aggressive stock buyback program to help offset some of the dilutive impacts of these acquisitions, and since the second half of 1998 we've repurchased nearly 220 million shares, at a cost of approximately $10 billion. In 2000, we plan to repurchase another 50 million shares from Cox Communications, Inc., in exchange for cable properties and cash. We've come a long way in 1999. As the following pages present in further detail, we've made solid progress in our strategy to transform AT&T, and we've delivered on our commitments for growth and expense control. There is still much to be done, but we finished 1999 with pride in our accomplishments and confidence in our ability to sustain the momentum and further accelerate our growth in 2000. OVERVIEW AT&T is among the world's communications leaders, providing voice, data and video telecommunications services to large and small businesses, consumers and government agencies. We provide domestic and international long distance, regional, local and wireless communications services, cable television and Internet communication services. AT&T also provides billing, directory and calling-card services to support our communications business. MERGER WITH TCI We completed the merger with TCI, renamed AT&T Broadband (Broadband), on March 9, 1999, in an all-stock transaction valued at approximately $52 billion. We issued approximately 664 million shares, of which 149 million were treasury shares that were repurchased in anticipation of the Broadband merger. The merger was recorded under the purchase method of accounting and, accordingly, the results of Broadband have been included with the financial results of AT&T since the date of acquisition. Periods prior to the merger were not restated to include the results of Broadband. In connection with this transaction, we also issued a separate tracking stock to reflect the economic performance of Liberty Media Group (LMG), Broadband's former programming and technology investment businesses. We issued 1,140 million shares of Liberty Media Group Class A tracking stock (including 60 million shares related to the conversion of convertible notes) and 110 million shares of Liberty Media Group Class B tracking stock. We do not have a controlling financial interest in Liberty Media Group for financial accounting purposes; therefore, our ownership in LMG is reflected as an investment accounted for under the equity method in the AT&T consolidated financial statements. The amounts attributable to LMG are reflected as separate line items "Equity losses from Liberty Media Group" and "Investment in Liberty Media Group and related receivables, net" in the accompanying consolidated financial statements. Broadband's cable and certain other operations, including its ownership interest in At Home Corporation (Excite@Home) and Cablevision Systems Corp. (Cablevision), but excluding LMG, were combined with the existing operations of AT&T to form the AT&T Common Stock Group (AT&T Group), the economic performance of which is represented by AT&T common stock. References to AT&T common stock do not include the LMG tracking stock. Ownership of shares of AT&T common stock or Liberty Media Class A or B tracking stock does not represent a direct legal interest in the assets and liabilities of either of the groups, but an ownership of AT&T in total. Each of these shares represents an interest in the economic performance of the net assets of each of these groups. Accordingly, the earnings and losses related to LMG are excluded from earnings available to AT&T Group, and earnings and losses related to AT&T Group are excluded from earnings available to LMG. Because we account for LMG as an equity investment, revenue, operating expenses, other income (expense), interest expense and provision for taxes for AT&T Group are the same as consolidated AT&T. The discussion and analysis that follows provides information management believes is relevant to an assessment and understanding of AT&T's consolidated results of operations for the years ended December 31, 1999, 1998 and 1997, and financial condition as of December 31, 1999 and 1998. FORWARD-LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained herein constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements concerning future operating performance, AT&T's share of new and existing markets, AT&T's short- and long-term revenue and earnings growth rates, and general industry growth rates and AT&T's performance relative thereto. These forward-looking statements rely on a number of assumptions concerning future events, including the adoption and implementation of balanced and effective rules and regulations by the Federal Communications Commission (FCC) and the state public regulatory agencies, and AT&T's ability to achieve a significant market penetration in new markets. These forward-looking statements are subject to a number of uncertainties and other factors, many of which are outside AT&T's control, that could cause actual results to differ materially from such statements. AT&T disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. CONSOLIDATED RESULTS OF OPERATIONS For the Years Ended December 31, 1999 1998 1997 Dollars in millions (except per share amounts) Operating income $10,859 $7,487 $6,836 Operating income margin 17.4% 14.1% 13.3% Income from continuing operations $3,428 $5,235 $4,249 Net income $3,428 $6,398 $4,415 Per AT&T Group common share - basic: Income from continuing operations $ 1.77 $ 1.96 $ 1.59 Income from discontinued operations - - 0.03 Gains on sales of discontinued operations - 0.48 0.03 Extraordinary loss - 0.05 - AT&T Group earnings $ 1.77 $ 2.39 $ 1.65 Per AT&T Group common share - diluted: Income from continuing operations $ 1.74 $ 1.94 $ 1.59 Income from discontinued operations - - 0.03 Gains on sales of discontinued operations - 0.48 0.03 Extraordinary loss - 0.05 - AT&T Group earnings $ 1.74 $ 2.37 $ 1.65 Liberty Media Group loss per share: Basic and diluted $ 1.61 $ - $ - Our results include certain items that affect comparability from year to year. We quantify the impact of these items in order to explain our results on a comparable basis. These items include the 1999 acquisitions of Broadband and AT&T Global Network Services (AGNS), net restructuring and other charges, significant gains on sales of businesses [discussed in other income (expense) discussion] and the impact of a change in tax rules. The net restructuring and other charges, gains on sales of businesses, change in tax rules and the impact of our investments in Excite@Home and Cablevision are collectively referred to as "restructuring and other charges, and certain gains and losses." We discuss our results excluding the impact of our investments in Excite@Home and Cablevision since these businesses have financial information publicly available and their results can be reviewed independently of AT&T's results. Following is a summary of the approximate diluted earnings per share (EPS) impact of the above items for 1999 and 1998: ..Net restructuring and other charges of $0.37 in 1999 and $0.59 in 1998; ..Gains on sales of businesses of $0.07 in 1999 and $0.18 in 1998; ..A loss of $0.18 reflecting the earnings impact of our investments in Excite@Home and Cablevision in 1999; and ..A $0.02 benefit in 1999 from changes in tax rules with respect to the utilization of acquired net operating losses. Operating income, on a reported basis, increased 45.0% in 1999 compared with 1998; excluding net restructuring and other charges, operating income increased 23.6%. Operating income margin (operating income as a percent of revenue) was 17.4% in 1999 compared with 14.1% in 1998. Operating income margin, excluding net restructuring and other charges, was 19.8% in 1999 compared with 18.8% in 1998. These operational improvements were due to revenue growth and operating expense efficiencies. EPS from continuing operations attributable to AT&T 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 Broadband and AGNS acquisitions, including the impact of shares issued and equity losses of Excite@Home and Cablevision. Partially offsetting these declines was increased income from the remaining operations due to revenue growth and operating expense efficiencies as well as lower net restructuring and other charges. Excluding the restructuring and other charges, and certain gains and losses, EPS was $2.20 per diluted share in 1999, a decrease of 6.4%, or $0.15, over the prior year. The decrease in operational earnings in 1999 was primarily due to the impacts of the acquisitions of Broadband and AGNS. Excluding the impacts of both Broadband and AGNS, operational EPS for 1999 was $3.08, an increase of 31.1%, or $0.73, compared with 1998. The increase was primarily due to higher revenue combined with improving margins resulting from cost efficiencies. Operating income, on a reported basis, increased 9.5% in 1998 compared with 1997; excluding net restructuring, exit and other charges, in 1998 and 1997, operating income increased 42.2%. Results for 1997 include net restructuring and other charges, and a gain from a sale of a business, which resulted in an approximate $0.01 EPS benefit on a diluted basis. In addition, 1998 included a benefit from the 1998 adoption of a new accounting standard related to the capitalization of internal-use software. EPS from continuing operations was $1.94 per diluted share in 1998, an increase of 22.0% from 1997. Excluding the impact of the 1998 and 1997 restructuring and other charges, and certain gains and losses, EPS was $2.30 per diluted share in 1998, an increase of $0.72, or 45.6%, compared with 1997. Cost control initiatives and higher revenue were the primary drivers of the operational increases. For the Years Ended December 31, 1999 1998 1997 Dollars in millions REVENUE Business Services $25,102 $23,611 $22,331 Consumer Services 21,972 22,885 23,690 Wireless Services 7,627 5,406 4,668 Broadband 4,871 - - Other and Corporate 2,819 1,321 888 Total revenue $62,391 $53,223 $51,577 Total revenue increased 17.2%, or $9,168 million, in 1999 compared with the prior year. Revenue for 1999 included Broadband and AGNS revenue from their respective dates of acquisition. Excluding the impact of these acquisitions, 1999 revenue increased 5.8% to $56,307 million. This increase was fueled by growth in wireless, business data, business domestic long distance voice and outsourcing revenue, partially offset by the continued decline of consumer long distance voice revenue. Adjusting 1999 and 1998 to reflect the revenue of Broadband and AGNS for a full year in both periods, 1999 pro forma revenue increased 6.2% to $64,141 million from $60,394 million in 1998. Long distance voice revenue as a percent of total revenue declined to approximately 62% in 1999, compared with approximately 75% and 79% in 1998 and 1997, respectively. We expect this percentage to continue to decline as data, Internet, wireless and outsourcing revenue continue to grow and as long distance prices continue to decrease, resulting in a more diversified portfolio. Total revenue in 1998 increased $1,646 million, or 3.2%, compared with 1997, led by business data, wireless and outsourcing revenue. Improvements in these areas were partially offset by a decline in consumer long distance revenue and reduced revenue due to the sale of AT&T Solutions Customer Care (ASCC) in 1998. Revenue by segment is discussed in more detail in the segment results section. OPERATING EXPENSES For the year, operating expenses totaled $51,532 million, an increase of 12.7% from $45,736 million in 1998. In 1998, operating expenses increased 2.2% from $44,741 million in 1997. Operating expenses for 1999 reflect Broadband and AGNS expenses from their respective dates of acquisition. In addition, operating expenses in 1999 and 1998 included $1,506 million and $2,514 million, respectively, of net restructuring and other charges. Operating expenses in 1997 included a $160 million charge to exit the two-way messaging business and a $100 million benefit from the reversal of pre-1995 restructuring reserves. Excluding the impact of the acquisitions of Broadband and AGNS and net restucturing and other charges, 1999 operating expenses increased $198 million, or 0.5%, and 1998 operating expenses decreased 2.8%. [Included in the 1999 Annual Report are pie charts entitled "Margin and Expenses as a Percent of Revenue." These charts depict margin and expenses (excluding net restructuring and other charges) as a percent of revenue for 1997 and 1999.] For the Years Ended December 31, 1999 1998 1997 Dollars in millions Access and other interconnection $14,686 $15,328 $16,350 Access and other interconnection expenses are the charges we pay to connect calls on the facilities of local exchange carriers and other domestic service providers, and fees we pay foreign telephone companies (international settlements) to connect calls made to foreign countries. These charges represent payments to these carriers for shared and dedicated facilities and switching equipment used to connect our network with their networks. These costs declined $642 million, or 4.2%, in 1999 and $1,022 million, or 6.3%, in 1998 compared with the prior year. These declines were primarily driven by mandated reductions in per-minute access rates in 1999 and 1998 and 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 volume growth, increased per-line charges (Primary Interexchange Carrier Charges) and Universal Service Fund contributions. Since most of these charges are passed through to the customer, the per-minute access-rate reductions and the increases in per-line charges and the Universal Service Fund have generally resulted in an offsetting impact on revenue. Broadband and AGNS do not have any access and other interconnection expenses, therefore the results are the same excluding Broadband and AGNS. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Network and other costs of services $14,385 $10,495 $10,038 Network and other costs of services expenses 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), the provision for uncollectible receivables, programming and licensing costs for cable services, costs of wireless handsets sold and other service-related costs. These costs increased $3,890 million, or 37.1%, in 1999 compared with 1998, largely due to the Broadband and AGNS acquisitions. Excluding these acquisitions, network costs increased $428 million, or 4.1%, in 1999, a slight improvement compared with the 4.5% increase in 1998. The growing wireless subscriber base primarily drove the increase in both years, largely attributable to the success of AT&T Digital One Rate service, which has resulted in higher off-network roaming charges, costs of handsets and provision for uncollectible receivables. The increase in costs of handsets reflects not only the higher number of handsets sold, but the increased cost per unit as customers migrate or sign up for digital service. Costs to support growth in outsourcing contracts also contributed to the increase. Partially offsetting the 1999 increase were network cost-control initiatives, lower per-call compensation expense due to a favorable FCC ruling in 1999, lower provision for uncollectible receivables in Consumer and Business Services and lower gross receipts and property taxes. The 1998 increase was partially offset by lower provision for uncollectible receivables in Business Services, lower expenses as a result of the sale of ASCC in the first quarter of 1998 and the impact of a 1997 charge to write-down the two-way messaging business. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Selling, general and administrative $13,516 $12,770 $14,371 Selling, general and administrative (SG&A) expenses increased $746 million, or 5.8%, in 1999 compared with 1998. This increase was due to the Broadband and AGNS acquisitions. Excluding these expenses, SG&A expenses declined $529 million, or 4.2%. Reductions in consumer long distance acquisition-program spending resulted in lower marketing and sales expenses. In 1999 we continued our efforts to achieve a best-in-class cost structure with companywide cost-control initiatives, which yielded an improving cost structure. These decreases were partially offset by increased costs in Wireless Services to support the growing subscriber base. SG&A expenses as a percent of revenue were 21.7% in 1999, 24.0% in 1998 and 27.9% in 1997. We expect SG&A expenses as a percent of revenue to continue to decline as we continue to focus on controlling our expenses and prioritizing our spending. In addition, we expect to realize a larger pension credit in 2000 resulting from a higher pension trust asset base and an increase in the discount rate used to measure the pension and postretirement obligations. [Included in the 1999 Annual Report is a bar graph entitled "Cost Structure Improvements - SG&A Expenses as a Percent of Revenue" showing SG&A expenses as a percent of revenue for the eight quarters ended December 31, 1999.] SG&A expenses declined $1,601 million, or 11.1%, in 1998 compared with 1997. The decrease was primarily due to savings from cost-control initiatives, such as headcount reductions and a $221 million SG&A expense benefit from the 1998 adoption of a new accounting pronouncement related to the capitalization of internal-use software (Statement of Position 98-1). Also contributing to the decrease in SG&A expenses was a decline in marketing and sales costs relating to lower customer acquisition costs in Consumer Services. These declines were partially offset by increases in wireless customer acquisition and migration costs and increased costs associated with preparing our computer systems for conversion of the calendar to the Year 2000 (Y2K project). Also included in SG&A expenses were $550 million, $513 million and $633 million of research and development (R&D) expenses in 1999, 1998 and 1997, respectively. R&D expenditures are mainly for work on advanced communications services and projects aimed at Internet protocol (IP) services. The increase in R&D expenses in 1999 was due to costs associated with launching Concert, the acquisition of Broadband and development spending on business data services and IP. These increases were largely offset by lower R&D spending on development projects for consumer products. The decline in R&D expenses in 1998 was mainly due to the redeployment of resources in support of the Y2K project. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Depreciation and other amortization $6,138 $4,378 $3,728 Depreciation and other amortization expenses increased $1,760 million, or 40.2%, in 1999. Approximately one-half of the increase was due to the acquisitions of Broadband and AGNS. Excluding these acquisitions, depreciation and other amortization expenses increased $879 million, or 20.1%, in 1999. Depreciation and other amortization expenses increased $650 million, or 17.4%, in 1998 compared with 1997. Growth in the depreciable asset base resulting from continued infrastructure investment drove the increase in both years. Total capital expenditures for 1999, 1998 and 1997 were $13.5 billion, $8.0 billion and $7.7 billion, respectively. Approximately three-quarters of 1999 capital expenditures focused on our growth businesses of broadband, data, wireless, local and AT&T Solutions. More than half of the capital expenditures in 1998 were related to the long distance network, including the completion of the SONET (Synchronous Optical Network) buildout. These expenditures expanded network capacity, reliability and efficiency. In addition, in 1998 we invested in our local network to expand our switching and transport capacity and invested to expand our wireless footprint. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Amortization of goodwill, franchise costs and other purchased intangibles $1,301 $ 251 $ 254 Amortization of goodwill, franchise costs and other purchased intangibles increased $1,050 million in 1999 compared with 1998 primarily due to the acquisition of Broadband and, to a lesser extent, AGNS. Franchise costs represent the value attributable to the agreement with local authorities that allow access to homes in Broadband's service areas. Other purchased intangibles arising from business combinations primarily included customer lists and licenses. In addition to the amortization of goodwill reflected here, we also have amortization of goodwill associated with our nonconsolidated investments recorded as a component of other income (expense). This amortization totaled $495 million, $52 million and $66 million in 1999, 1998 and 1997, respectively. Net Restructuring and Other Charges During 1999, we recorded $1,506 million of net restructuring and other charges, which had an approximate $0.37 impact on earnings per diluted share. A $594 million in-process research and development charge was recorded reflecting the estimated fair value of research and development projects at Broadband, as of the date of the acquisition, which had not yet reached technological feasibility or that have no alternative future use. The projects identified related to Broadband's efforts to offer voice over IP, product-integration efforts for advanced set-top devices, cost-savings efforts for cable telephony implementation and in-process research and development related to Excite@Home. We 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 the acquisition. Current voice over IP equipment does not yet support many of the features required to connect customer premises equipment to traditional phone networks. Further technical development is also needed to ensure voice quality that is comparable to conventional circuit-switched telephony and to reduce the power consumption of the IP telephony equipment. We anticipate that we will test IP telephony equipment for field deployment in late 2000. The charge associated with Broadband's 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 acquisition. 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 mid 2000 for next-generation digital services. The charge associated with Broadband's cost-savings efforts for cable telephony implementation was $101 million as of the date of the acquisition. Telephony cost reductions primarily consist of cost savings from the development of a "line of power switch," which allows Broadband 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. The device currently requires further development in order to reach an acceptable level of reliability. We expect to test and deploy devices by the end of 2000. Additionally, the in-process research and development charge related to Excite@Home was valued at $154 million. During the second quarter of 1999, we ceased to consolidate Excite@Home and began to account for our investment under the equity method of accounting due to certain corporate governance changes, which resulted in AT&T no longer holding a controlling financial interest. Accordingly, we will no longer report on the in-process research and development projects of Excite@Home. Although there are significant technological issues to overcome in order 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, then 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 primarily recorded in association with the planned disposal of wireless network equipment resulting from a program to increase capacity and operating efficiency of our wireless network. As part of a multivendor program, contracts are being executed with certain vendors to replace significant portions of our wireless infrastructure equipment in the western United States and the metropolitan New York markets. The program will provide Wireless Services with the newest technology available and allow us to evolve to new, third-generation digital technology, with high-speed data capabilities. The planned disposal of the existing wireless infrastructure equipment required an evaluation of asset impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" to write-down these assets to their fair value, which was estimated by discounting the expected future cash flows of these assets through the date of disposal. Since the assets will remain in service from the date of the decision to dispose of these assets to the disposal date, the remaining net book value of the assets will be depreciated over this period. A $145 million charge for restructuring and exit costs was recorded as part of AT&T's initiative to reduce costs by $2 billion by the end of 2000. The restructuring and exit plans primarily focus 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 the 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 related to involuntary terminations and approximately 1,100 related to voluntary terminations. Nearly 80% of the affected employees have left their positions as of December 31, 1999, and the remaining employees will leave the company in early 2000. Termination benefits of $40 million were paid in the fourth quarter of 1999. This cash outlay was primarily funded through cash from operations. The balance of the cash termination payments are expected to be paid in the first quarter of 2000. The restructuring initiative is projected to yield cash savings of approximately $250 million per year, as well as EBIT [earnings, including other income (expense), before interest and taxes] savings of approximately $200 million in 2000 and nearly $400 million per year thereafter. We expect increased spending in growth businesses will largely offset these cash and EBIT savings. The EBIT savings, primarily attributable to reduced personnel-related expenses, will be realized in SG&A expenses and network and other costs of services. EBIT savings in 2000 are expected to be partially offset by accelerated depreciation expense. However, depreciation expense in subsequent years will be lower related to the 1999 write-off of Wireless Services' assets. In addition, our continuing efforts to reduce costs by $2 billion by the end of 2000 and the planned merger with MediaOne may require further charges for exit and separation plans, which we expect to have finalized in the first half of 2000. 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 requires Broadband to satisfy certain liabilities owed by Phoenixstar and its subsidiaries. The remaining obligation under this contribution agreement is $26 million. 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 $2,514 million of net restructuring and other charges, which had an approximate $0.59 impact on earnings per diluted share. The bulk of the charge was associated with a plan to reduce headcount by 15,000 to 18,000 over two years as part of our overall cost-reduction program. In connection with this plan, the VRIP was offered to eligible management employees. Approximately 15,300 management employees 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 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 in which the carrying value is 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 in 1998 was a $92 million reversal of the 1995 restructuring reserve. This reversal reflects reserves that were 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, 1999 1998 1997 Dollars in millions Other income (expense) $(501) $1,247 $443 Other income (expense) was an expense of $501 million in 1999 compared with income of $1,247 million in 1998. The significant decrease is due to higher net losses from investments, largely due to Excite@Home and Cablevision, and lower gains on sales. Gains on sales in 1999 included $153 million from Language Line Services, $88 million from WOOD-TV and $110 million from the sale of a portion of our ownership interest in AT&T Canada. Gains on sales in 1998 included $350 million from AT&T Solutions Customer Care, $317 million from LIN Television Corp. (LIN-TV) and $103 million from SmarTone Telecommunications Holdings Limited (SmarTone). Distributions on trust preferred securities in 1999 and higher interest income in 1998 as a result of the proceeds received from the sale of Universal Card Services (UCS) also contributed to the decrease. Other income (expense) increased $804 million in 1998 due primarily to gains on sales in 1998 as well as increased interest income on our higher cash balance. These increases were partially offset by lower earnings from equity investments and a gain in 1997 on the sale of AT&T Skynet Satellite Services (Skynet) of $97 million. For the Years Ended December 31, 1999 1998 1997 Dollars in millions EBIT $10,358 $8,734 $7,279 EBIT increased $1,624 million, or 18.6%, in 1999. EBIT was impacted by restructuring and other charges, and certain gains and losses, as well as the acquisitions of Broadband and AGNS. Excluding these items, EBIT increased $2,805 million, or 26.8%, to $13,283 million in 1999. The improvement in EBIT was due to increased revenue combined with an improving cost structure. EBIT for 1998 increased $1,455 million, or 20.0%. Excluding restructuring and other charges, and certain gains and losses, EBIT increased $3,037 million, or 41.9%. This increase in EBIT was driven by higher revenue, the benefit of our SG&A expense cost-cutting initiatives and lower international settlement rates. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Interest expense $1,651 $427 $307 Interest expense increased $1,224 million in 1999 due to a higher average debt balance associated with our acquisitions, including debt outstanding for Broadband at the date of acquisition. Interest expense increased $120 million in 1998. After the sale of UCS on April 2, 1998, interest expense associated with debt previously attributed to UCS was reclassified from discontinued operations to continuing operations since we did not retire all of this debt. This reclassification is the primary reason for the increase in 1998. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Provision for income taxes $3,257 $3,072 $2,723 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 48.7% in 1999, 37.0% in 1998 and 39.0% in 1997. The effective income tax rate for AT&T Group was 37.4% in 1999, 37.0% in 1998 and 39.0% in 1997. The 1999 effective tax rate for AT&T Group was impacted by the in-process research and development charge, which was not tax deductible, and a change in the net operating loss utilization tax rules that resulted in a $75 million reduction in the valuation allowance and the income tax provision. In addition, the 1999 effective tax rate reflects tax benefits associated with investment dispositions, legal entity restructurings and other tax planning strategies. The effective tax rate for 1998 was impacted by the pooling of 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. 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 dispositions of UCS, which was sold on April 2, 1998, and AT&T's submarine systems business (SSI), which was sold on July 1, 1997, as discontinued operations. Accordingly, the revenue, costs and expenses, and cash flows of these businesses have been excluded from the respective captions in the Consolidated Statements of Income and Consolidated Statements of Cash Flows, and have been reported through their respective dates of disposition as "Income from discontinued operations," net of applicable income taxes; and as "Net cash provided by (used in) discontinued operations." As of December 31, 1998, all businesses previously reported as discontinued operations have been disposed of; therefore, there was no impact to the Consolidated Balance Sheets presented. Gains associated with these sales are recorded as "Gains on sales of discontinued operations," net of applicable taxes. Extraordinary Items In August 1998, AT&T extinguished $1,046 million 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. [Included in the 1999 Annual Report is a bar graph entitled "Revenue by Segment." The graph depicts revenue of Business Services, Consumer Services, Wireless Services, and Other and Corporate for the three-years ended December 31, 1999. It also depicts the revenue of Broadband for 1999.] SEGMENT RESULTS In support of the services we provide, we segment our results by the business units that support our primary lines of business: Business Services, Consumer Services, Wireless Services and Broadband. A fifth category, Other and Corporate, comprises the results of all other units of AT&T Group, including corporate staff functions. We supplementally discuss AT&T Solutions and International Operations and Ventures, which are both included in the Other and Corporate category. Although not a segment, we also discuss the results of LMG. The discussion of segment results includes revenue; earnings, including other income (expense), before interest and taxes (EBIT); earnings, including other income (expense), before interest, taxes, depreciation and amortization (EBITDA); total assets; and capital additions. The discussion of EBITDA for Wireless Services and Broadband is modified to exclude other income (expense). Total assets for each segment include all assets, except intercompany receivables. Prepaid pension assets and corporate-owned or leased real estate are generally held at the corporate level and therefore are included in the Other and Corporate group. Shared network assets are allocated to the segments and reallocated each January, based on two years of volumes. Capital additions for each segment include capital expenditures for property, plant and equipment, acquisitions of licenses, additions to nonconsolidated investments, increases in franchise costs and additions to internal-use software. EBIT is the primary measure used by AT&T's chief operating decision makers to measure AT&T's operating results and to measure segment profitability and performance. AT&T calculates EBIT as operating income plus other income (expense). In addition, management also uses EBITDA as a measure of segment profitability and performance, and is defined as EBIT plus depreciation and amortization. Interest and taxes are not factored into the profitability measure used by the chief operating decision makers; therefore, trends for these items are discussed on a consolidated basis. Management believes EBIT is meaningful to investors because it 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 AT&T. Our calculation of EBIT and EBITDA may or may not be consistent with the calculation of these measures by other public companies. EBIT and EBITDA should not be viewed by investors as an alternative to generally accepted accounting principles (GAAP) measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. In addition, EBITDA does not take into account changes in certain assets and liabilities that can affect cash flow. Reflecting the dynamics of our business, we continually review our management model and structure. In 2000, we anticipate changes to our segments as follows: The Business Services segment will be expanded to include the results of AT&T Solutions, and Broadband results will be expanded to include the operations of MediaOne upon the completion of the merger. The Wireless Services segment will be expanded to include fixed wireless technology and certain international wireless investments. 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). For the Years Ended December 31, 1999 1998 1997 Dollars in millions External revenue $23,540 $22,706 $21,520 Internal revenue 1,562 905 811 Total revenue 25,102 23,611 22,331 EBIT 6,131 5,007 4,047 EBITDA 9,079 7,395 5,902 Capital additions 7,145 5,952 4,547 At December 31, 1999 1998 Total assets $25,107 $21,415 REVENUE In 1999, Business Services revenue grew $1,491 million, or 6.3%, driven by data and IP services, domestic long distance voice services and local services. Total calling volumes increased approximately 25% for the year. Revenue in 1998 increased $1,280 million, or 5.7%, led by growth in data services. Data services, which is the transportation of data rather than voice along our network, grew at a high-teens rate in 1999 and at a mid-teens rate for 1998. Growth in each period was led by the continued strength of frame relay and high-speed private line, both of which are high-speed data-transmission services. On average in 1999, we added approximately 230 more net frame ports per month as compared with 1998. Also contributing to the revenue increase in 1999 was significant growth in IP services, such as AT&T WorldNet Services and virtual private network (VPN) services. Long distance voice revenue grew at a low single-digit rate in both 1999 and 1998. The continued strength of volumes, as evidenced by a high-teens growth rate for 1999 and a near-teens growth rate for 1998, was largely mitigated by a declining average price per minute. The average price per minute has declined due to competitive forces within the industry that are expected to continue. Also impacting the average price per minute was a change in product mix, which in 1999 was largely attributable to an increase in our wholesale business sales, which had a lower rate per minute. Revenue in 1998 was also impacted by reductions in access costs that were passed on to customers in the form of lower rates. Local voice service revenue grew more than 50% in 1999. During 1999, AT&T added more than 626,000 access lines, with the total reaching 1.3 million by the end of the year. 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 36,000 buildings in 89 metropolitan statistical areas (MSAs), with just over 5,800 of the buildings on-network (buildings where AT&T owns the fiber that runs into the building). At the end of 1998, we served approximately 20,000 buildings in 83 MSAs, with about 5,200 buildings on-network. [Included in the 1999 Annual Report is a bar graph entitled "Access Lines." The graph depicts the number of access lines for the eight quarters ended December, 31 1999.] Business Services internal revenue increased $657 million, or 72.5%, in 1999. The increase is the result of greater sales of business long distance services to other AT&T units, primarily AT&T Solutions (including the impact of AGNS) and Wireless Services, which resell such services to their external customers. EBIT/EBITDA EBIT rose $1,124 million, or 22.5%, and EBITDA grew $1,684 million, or 22.8%, in 1999. Excluding 1999 restructuring and exit costs, EBIT increased 24.4% to $6,226 million and EBITDA increased 24.1% to $9,174 million. 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. EBIT increased $960 million, or 23.7%, and EBITDA increased $1,493 million, or 25.3%, in 1998. The increases were driven by growth in revenue and the benefits reaped from cost-cutting initiatives. Partly offsetting the increase in EBIT and EBITDA in 1998 was the gain on the sale of Skynet, recorded in 1997. In addition, the EBIT improvements were partially offset by increased depreciation and amortization expenses correlated to the continued high levels of capital expenditures. OTHER ITEMS Capital additions increased $1,193 million and $1,405 million in 1999 and 1998, respectively. Spending in all periods reflects Business Services' portion of AT&T's investment to enhance our long distance network (including the data network) and spending on AT&T's local network. Total assets increased $3,692 million, or 17.2%, at December 31, 1999, compared with December 31, 1998. The increase was primarily due to net increases in property, plant and equipment as a result of capital additions. CONSUMER SERVICES Our Consumer Services segment provides to residential customers 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 prepaid calling-card and operator-handled calling services. Local phone service is also provided in certain areas. The costs associated with the development of fixed wireless technology are included in the Consumer Services segment results. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Revenue $21,972 $22,885 $23,690 EBIT 7,968 6,568 4,922 EBITDA 8,845 7,298 5,694 Capital additions 859 526 1,010 At December 31, 1999 1998 Total assets $ 6,823 $ 6,561 REVENUE In 1999, Consumer Services revenue decreased $913 million, or 4.0%, on a mid single-digit decline in volumes. Revenue in 1998 fell $805 million, or 3.4%, on a low single-digit decline in volumes. Excluding AT&T WorldNet Services, revenue decreased 4.4% for 1999 and was down 3.8% in 1998. The declines in both years reflect the ongoing competitive nature of the consumer long distance industry, which has resulted in pricing pressures and a loss of customers. Also negatively impacting revenue growth was product substitution and market migration away from direct dial and calling card to rapidly growing wireless services. The entry of the Regional Bell Operating Companies (RBOCs) into the long distance market is expected to increase competitive pressures in 2000. Demonstrating our commitment to providing customers with choice, simplicity and competitive rates, we introduced in August 1999 the AT&T One Rate(R) 7 cents offer, a simple, convenient calling plan that allows customers to make long distance calls 24 hours a day, seven days a week for 7 cents a minute. The offer has been extremely well received. At the end of 1999, we had enrolled more than 5.0 million customers, with more than 60% of those customers electing to bundle their 7-cent long distance with AT&T's local toll service. Approximately one-third of the customers enrolled in the 7-cent plan were new AT&T long distance customers. AT&T WorldNet Services revenue increased 41.2% to $301 million in 1999, and 78.9% to $213 million in 1998. AT&T WorldNet Services served 1.5 million residential customers as of December 31, 1999, an increase of 29.5% over 1998. At December 31, 1998, AT&T WorldNet Services served 1.1 million residential customers, an increase of 22.3% over 1997. EBIT/EBITDA EBIT grew $1,400 million, or 21.3%, and EBITDA grew $1,547 million, or 21.2%, in 1999. Adjusted to exclude the 1999 gain on the sale of the Language Line Services business and 1999 restructuring and exit costs, EBIT increased 19.1% to $7,823 million, and EBITDA increased 19.2% to $8,700 million. On this basis, EBIT margin improved to 35.6% in 1999 from 28.7% in the prior year. The EBIT and EBITDA growth for the year is reflective of ongoing cost-reduction efforts, particularly in marketing spending, as well as lower negotiated settlement rates. For 1998, EBIT increased $1,646 million, or 33.4%, and EBITDA increased $1,604 million, or 28.2%. These increases were primarily driven by reduced SG&A expenses, largely due to AT&T's focus on high-value customers, which has led to lower spending on customer-acquisition and retention programs. OTHER ITEMS Capital additions increased $333 million, or 63.3%, in 1999, primarily due to increased spending on internal-use software to add more functionality to our services, in support of AT&T WorldNet Services subscriber growth and for fixed wireless equipment. In 1998, capital additions declined $484 million, or 47.9%. The decrease was primarily due to a decrease in the allocation of shared network assets due to lower consumer volumes as a percent of total volumes. Total assets grew $262 million, or 4.0%, during 1999. The increase in total assets was primarily associated with the purchase of SmarTalk Tele-Services, Inc., in 1999. Also contributing to the growth were capital additions, offset somewhat by lower accounts receivable, as a result of lower revenue. WIRELESS SERVICES Our Wireless Services segment offers wireless voice and data services and products to customers in our 850 megahertz (cellular) and 1900 megahertz (Personal Communications Services, or PCS) markets. Wireless Services also includes certain interests in partnerships and affiliates that provide wireless services in the United States and internationally, aviation communications services and the results of our messaging business through the October 2, 1998, date of sale. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Revenue $ 7,627 $ 5,406 $ 4,668 EBIT (474) 182 366 EBITDA excluding other income (expense) 640 947 964 Capital additions 2,598 2,321 2,071 At December 31, 1999 1998 Total assets $22,478 $19,115 REVENUE Wireless Services revenue grew $2,221 million, or 41.1%, in 1999 compared with 1998. Wireless Services' 1999 results include Vanguard Cellular Systems, Inc. (Vanguard), since its acquisition in May 1999, and 1998 results include Wireless' messaging business until its sale on October 2, 1998. Adjusted to exclude both Vanguard and the messaging business, revenue grew to $7,304 million, up 39.0% for the year. The strength in revenue was driven by consolidated subscriber growth and higher average monthly revenue per user (ARPU), which demonstrates the continued successful execution of AT&T's wireless strategy of targeting and retaining high-value subscribers, expanding our national wireless footprint, focusing on digital service and offering simple rate plans. AT&T Digital One Rate service, the first national, one-rate wireless service plan that eliminated separate roaming and long distance charges, significantly contributed to the increases in both subscribers and ARPU. For 1999, ARPU was approximately $66, an increase of 14.2% over 1998. Consolidated subscribers grew 33.4% to approximately 9.6 million at December 31, 1999. This included approximately 700,000 subscribers from our acquisition of Vanguard and 125,000 subscribers from our August 1999 acquisition of Honolulu Cellular Telephone Company (Honolulu). Total subscribers, including partnership markets in which AT&T does not own a controlling interest, were nearly 12.2 million at the end of 1999. We continue to rapidly migrate customers to digital service, which we believe improves capital efficiency, lowers network operating costs and allows us to offer higher quality services. At the end of 1999, 79.2% of consolidated subscribers were being provided digital service, compared with 60.7% at the end of 1998. Including partnership markets, digital subscribers represented 77.1% of customers, compared with 54.9% at the end of 1998. [Included in the 1999 Annual Report is bar graph entitled "Average Monthly Revenue per User (ARPU) and Consolidated Subscribers." The graph depicts ARPU and consolidated subscribers for each quarter of 1998 and 1999.] Wireless Services revenue grew $738 million, or 15.8%, in 1998. Adjusted to exclude the messaging business, 1998 revenue increased 17.2% compared with 1997. The increase was primarily driven by the strong response to AT&T Digital One Rate service, which was rolled out in May 1998, and a full-year impact in 1998 of eight new 1900 megahertz markets that were launched in the second half of 1997. As of December 31, 1998, we had 7.2 million consolidated subscribers, an increase of 20.3% from December 31, 1997. Digital subscribers represented 60.7% of the consolidated subscribers, up from 29.3% at December 31, 1997. Including partnership markets, 54.9% of the 9.6 million total subscribers were being provided digital service at December 31, 1998. EBIT/EBITDA During 1999, EBIT decreased $656 million. Excluding a $529 million asset impairment charge recorded in 1999, and the gain on the sale of SmarTone in 1998, EBIT decreased $24 million, or 31.4%, for the year. This decline was primarily driven by higher network operations costs, principally off-network roaming expenses as well as greater customer-acquisition and customer-care costs associated with the rapid growth of subscribers. Higher depreciation and amortization of a larger wireless asset base, coupled with lower earnings from our equity investments, also contributed to the EBIT decline. These impacts to EBIT were partly offset by revenue growth. EBITDA, excluding other income (expense), decreased $307 million in 1999. EBITDA, excluding other income (expense) and the asset impairment charge, increased $222 million, or 23.4%. On this basis, EBITDA was favorably impacted by revenue growth, partially offset by higher off-network roaming expenses, as well as the rise in customer-acquisition and customer-care spending related to subscriber growth. Off-network roaming expenses continue to negatively impact AT&T Wireless Services' results. However, compared with 1998, our average incollect rate per minute has declined 18.2%. The decline in incollect rates is expected to continue in 2000. Initiatives have been introduced to address off-network costs, including aggressively capturing more minutes on the AT&T network through capital expansion within existing and new markets, acquisitions and affiliate launches. Intercarrier roaming rates have declined significantly as a result of renegotiated roaming agreements and the deployment of Intelligent Roaming Database (IRDB) technology, which assists in identifying favorable roaming partners in areas not included in our wireless network. In 1998, EBIT decreased 50.1%, and EBITDA, excluding other income (expense), fell 1.8%. Adjusted to exclude the 1998 gain on the sale of SmarTone and a charge in 1997 related to the write-down of our two-way messaging business, EBIT fell $447 million, or 84.8%. The decline in EBIT was primarily attributable to higher costs associated with a growing subscriber base, higher depreciation and amortization expenses due to our growing asset base and lower earnings from our equity investments. These declines were partially offset by growth in revenue. EBITDA, excluding other income (expense) and the 1997 two-way messaging charge, declined $97 million, or 9.3%, primarily due to greater costs associated with a growing subscriber base partially offset by revenue growth. OTHER ITEMS Capital additions increased by $277 million in 1999 and $250 million in 1998. The buildout of the 1900 megahertz markets was substantially completed in 1997. Since then, spending has focused on increasing the capacity and quality of our national wireless network in existing markets as well as the expansion of our national footprint. Total assets increased $3,363 million, or 17.6%, from December 31, 1998. This increase was primarily due to increases in goodwill, licensing costs, and property, plant and equipment associated with our acquisitions of Vanguard and Honolulu. Capital expenditures and increased accounts receivable resulting from the growth in revenue also contributed to the 1999 increase in total assets. BROADBAND Our Broadband segment offers a variety of services through our cable broadband network, including traditional analog video and new services such as digital cable and AT&T@Home, our high-speed cable Internet access service. Also included in this segment are the operations associated with developing and installing the infrastructure that supports broadband telephony. For the 10 Months Ended December 31, 1999 Dollars in millions Revenue $ 4,871 EBIT (2,276) EBITDA excluding other income (expense) 645 Capital additions 4,759 At December 31, 1999 Total assets $56,536 REVENUE From the date of acquisition through December 31, 1999, Broadband revenue was $4,871 million. Broadband ended the year with 11.4 million basic cable customers, passing approximately 19.7 million homes, and had approximately 1.8 million digital-cable customers. Broadband's high-speed cable Internet service, AT&T@Home, ended 1999 with approximately 207,000 customers. Broadband's telephony pilot market initiatives are progressing on schedule. As of the end of 1999, we had introduced broadband telephony service to customers in 16 cities within nine pilot markets and had nearly 8,300 broadband telephony customers. The markets include the California Bay Area (including Fremont), Chicago, Dallas, Denver, Pittsburgh, Seattle, Salt Lake City, St. Louis and Portland, Oregon. EBIT/EBITDA Since the date of acquisition, EBIT for 1999 was a deficit of $2,276 million and EBITDA, excluding other income (expense), was $645 million. Included in Broadband's results was a $594 million in-process research and development charge and a $50 million charge relating to a contribution agreement entered into by Broadband to satisfy certain liabilities of Phoenixstar. In addition, our equity ownership in Excite@Home and Cablevision negatively impacted Broadband's 1999 EBIT by $942 million. OTHER ITEMS Broadband's capital additions for 1999, since the date of acquisition, were $4,759 million. In 1999, spending was largely directed toward cable-distribution systems, focusing on the upgrade of cable plants. Capital additions also included contributions to various nonconsolidated investments. OTHER AND CORPORATE This group reflects the results of AT&T Solutions, our outsourcing and network management business, International Operations and Ventures, other corporate operations, corporate staff functions and elimination of transactions between segments. Included in AT&T Solutions are the results of AGNS, which was acquired for cash in phases throughout 1999. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Revenue $ 2,819 $ 1,321 $ 888 EBIT (991) (3,023) (2,056) EBITDA (273) (2,547) (1,587) Capital additions 1,798 779 1,055 At December 31, 1999 1998 Total assets $20,002 $12,459 REVENUE For 1999, revenue increased $1,498 million, or 113.4%. Excluding the results of AGNS, the majority of which was acquired in April 1999, revenue for the year increased $285 million, or 21.5%. The increase was primarily driven by the continued strength of AT&T Solutions' outsourcing business, and growth in International Operations and Ventures. These increases were partially offset by the increase in the elimination of intercompany revenue and the sale of AT&T Solutions Customer Care (ASCC) in 1998. The elimination of revenue and profit generated by the sale of services between segments is primarily the result of sales of business long distance services to other AT&T units. For the year, intercompany revenue eliminated was $1,585 million, an increase of 62.5% from 1998. This increase can be attributed to the rise in Business Services' sales to AT&T Solutions (including the impact of AGNS) and Wireless Services. Revenue increased $433 million, or 48.8%, in 1998. This revenue growth was primarily due to increases in International Operations and Ventures, and AT&T Solutions, partially offset by revenue of ASCC, which we sold in 1998. EBIT/EBITDA EBIT and EBITDA deficits in 1999 improved $2,032 million, or 67.2%, and $2,274 million, or 89.3%, respectively. Adjusted to exclude the impacts of gains on sales of AT&T Canada and WOOD-TV in 1999 and ASCC and LIN-TV in 1998, and net restructuring and other charges in both 1999 and 1998, EBIT improved $217 million, or 18.6%, to a deficit of $959 million in 1999. On the same basis, EBITDA improved $460 million, or 65.8%, to a deficit of $240 million. The increases can be attributed to improvements in the operating performance of International Operations and Ventures, benefits from ongoing cost-control initiatives and the sales of miscellaneous investments. Negatively impacting the improvements in EBIT and EBITDA was less interest income due to a lower cash balance and distributions on trust preferred securities. In 1998, the EBIT and EBITDA deficits increased 47.1% and 60.8%, respectively, over 1997. Adjusted to exclude restructuring and other charges recorded in 1998, gains on the 1998 sales of ASCC and LIN-TV and the 1997 restructuring reserve reversal, EBIT improved $980 million, or 45.4%, to a deficit of $1,176 million, and EBITDA improved $987 million, or 58.4%, to a deficit of $700 million in 1998. This was primarily due to lower corporate overhead related to headcount reductions and lower employee benefit costs, higher interest income associated with a larger cash balance, and improvements in the operating performance of AT&T Solutions and International Operations and Ventures. OTHER ITEMS Capital additions increased $1,019 million in 1999 and decreased $276 million in 1998. Additional spending in 1999 reflected increased international equity investments that support our global strategy. The decrease in 1998 reflected fewer international equity investments compared with 1997. Total assets increased $7,543 million at December 31, 1999, primarily due to the acquisition of AGNS. SUPPLEMENTAL DISCLOSURES AT&T SOLUTIONS AT&T Solutions is composed of the Solutions outsourcing unit, the internal AT&T Information Technology Services unit and the recently acquired AT&T Global Network Services (AGNS). The results of AT&T Solutions are included in the Other and Corporate group. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Revenue $3,120 $1,098 $ 824 EBIT (12) 31 (151) EBITDA 482 307 135 Capital additions 384 280 289 At December 31, 1999 1998 Total assets $7,064 $ 1,023 REVENUE AT&T Solutions revenue for 1999 rose $2,022 million, or 184.1%. Adjusted to exclude the impact of the acquisition of AGNS, revenue grew $531 million, or 48.3%, to $1,629 million. For 1998 revenue grew 33.2% to $1,098 million. Throughout both 1999 and 1998, revenue strength was associated with the signing of new contracts as well as the expansion of services provided to existing clients. AT&T Solutions, with more than 30,000 clients, including IBM, CitiGroup, Bank One, McGraw-Hill, United Health Group, Textron, JP Morgan, Merrill Lynch, MasterCard International and the State of Texas General Services Commission, has the potential for more than $11 billion in outsourcing revenue over the life of signed contracts. During the fourth quarter of 1999, AT&T Solutions signed multimillion dollar contracts with General Motors and Delphi Automotive Systems. Also, in January 2000, AT&T Solutions signed a contract with Acer, the world's third-largest manufacturer of personal computers, its first global agreement with a non-U.S.-based multinational corporation. EBIT/EBITDA For 1999, EBIT declined $43 million and EBITDA improved $175 million. Adjusted to exclude the impact of AGNS, EBIT improved $61 million, or 192.0%, and EBITDA improved $85 million, or 27.4%. For 1998, EBIT improved $182 million, or 120.7%, and EBITDA improved $172 million, or 127.7%. For both periods, revenue growth combined with margin improvement resulting from ongoing cost-control initiatives drove the EBIT and EBITDA improvements. OTHER ITEMS Capital additions increased $104 million in 1999 and declined slightly in 1998. Increased spending in 1999 related to AGNS' purchases of client-support equipment. Spending in 1998 and 1997 was directed primarily toward the AT&T information-technology infrastructure. Total assets increased $6,041 million, or 590.4%, at December 31, 1999, primarily due to goodwill and other intangible assets associated with the purchase of AGNS and increased accounts receivable. INTERNATIONAL OPERATIONS AND VENTURES International Operations and Ventures includes AT&T's consolidated foreign operations such as frame relay services in the United Kingdom, international carrier services and international online services. However, bilateral international long distance traffic is not included here; it is included in our Business and Consumer Services segments. The earnings or losses of AT&T's nonconsolidated international joint ventures and alliances, such as Alestra in Mexico, AT&T Canada Corp., Rogers Cantel in Canada and Japan Telecom, are also included. The results of International Operations and Ventures are included in the Other and Corporate group. For the Years Ended December 31, 1999 1998 1997 Dollars in millions Revenue $1,228 $1,083 $ 712 EBIT (316) (333) (399) EBITDA (252) (264) (338) Capital additions 1,095 155 496 At December 31, 1999 1998 Total assets $2,777 $1,915 REVENUE International Operations and Ventures revenue grew $145 million, or 13.5%, during 1999 and $371 million, or 52.1%, in 1998. International carrier services and frame relay services volume increases drove revenue growth in both years. In addition, nearly one-half of the revenue growth in 1998 can be attributed to the 1998 purchase of ACC Corp. During 1998, we streamlined our operations by divesting certain nonstrategic businesses. Such streamlining, which continued in 1999, along with the exit from additional businesses that would have competed directly with Concert, negatively impacted our revenue growth in 1999. EBIT/EBITDA EBIT and EBITDA improved $17 million and $12 million, respectively, during 1999. Excluding restructuring and other charges, and certain gains and losses in 1999 and 1998, EBIT improved $131 million, or 52.9%, to a deficit of $117 million, and EBITDA improved $126 million, or 70.5%, to a deficit of $53 million, for the year. Such improvements can be attributed to the continued restructuring of international operations, which included the disposition of certain nonstrategic investments. Also contributing to the growth was the improving financial performance in other ventures and alliances, international carrier services and frame relay services. Negatively impacting EBIT and EBITDA were costs incurred during 1999 related to the launch of Concert. EBIT improved $66 million and EBITDA improved $74 million in 1998 compared with 1997. Excluding an asset impairment charge recorded in 1998, EBIT improved $151 million, or 38.0%, to a deficit of $248 million, and EBITDA improved $159 million, or 47.1%, to a deficit of $179 million, compared with 1997. The EBIT and EBITDA improvements were primarily due to revenue increases and AT&T's efforts to streamline its international operations and exit nonstrategic and unprofitable businesses. OTHER ITEMS Capital additions in 1999 increased $940 million over 1998, to $1,095 million, driven by increased investments in nonconsolidated subsidiaries, such as AT&T Canada and Japan Telecom. Capital additions decreased $341 million in 1998 compared with 1997. The decrease was primarily due to the high level of spending in 1997, which was directed toward the funding of start-up ventures. Total assets were $2,777 million at December 31, 1999, compared with $1,915 million at December 31, 1998. The increase was primarily due to investments in nonconsolidated subsidiaries, partially offset by the divestment of certain nonstrategic businesses. LIBERTY MEDIA GROUP 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 $2,022 million from the date of acquisition through December 31, 1999. LIQUIDITY For the Years Ended December 31, 1999 1998 1997 Dollars in millions CASH FLOW OF CONTINUING OPERATIONS: Provided by operating activities $11,635 $10,217 $ 8,501 (Used in) provided by investing activities (27,043) 3,582 (6,755) Provided by (used in) financing activities 13,272 (11,049) (1,540) EBITDA $18,292 $13,415 $11,327 In 1999, net cash provided by operating activities of continuing operations increased $1,418 million. The increase was primarily driven by an increase in net income excluding the noncash impact of depreciation and amortization, restructuring and other charges, and the impact of losses from our equity investments. Partially offsetting this source was an increase in accounts receivable, driven by higher revenue, and an increase in our 1999 tax payments primarily related to the 1998 gain on the sale of UCS. The increase in net cash provided by operating activities in 1998 was primarily due to an increase in operational net income from continuing operations. AT&T's investing activities resulted in a net use of cash of $27,043 million for 1999, compared with a net source of cash of $3,582 million for 1998. During 1999, AT&T used $14.3 billion for capital expenditures and other additions, contributed $5.5 billion of cash to LMG, purchased AGNS for $4.9 billion and loaned $1.5 billion to MediaOne to pay termination fees to Comcast Corporation (Comcast). During 1998, we received $5.7 billion as settlement of a receivable in conjunction with the sale of UCS as well as $3.5 billion in proceeds from the sale. Also in 1998, we received a total of $1.6 billion in proceeds from the sales of LIN-TV, ASCC and SmarTone. Our capital spending of $7.8 billion partially offset these 1998 sources of cash. During 1997, the primary use of cash was in connection with capital spending of $7.6 billion. During 1999, net cash provided by financing activities was $13,272 million compared with cash used in financing activities of $11,049 million for 1998. During 1999, AT&T received $8.4 billion in cash from 1999 bond issuances, $10.2 billion from the issuance of commercial paper and short-term debt, and $5.0 billion from the issuance of convertible securities and warrants to Microsoft Corporation (Microsoft). Significant uses of cash were $3.9 billion for the repurchase of AT&T common stock, $2.8 billion to retire long-term debt, and $2.7 billion to pay dividends on common stock. In 1998, cash used in financing activities was largely attributable to the pay down of commercial paper and debt, and the repurchase of approximately $3 billion of AT&T common stock. The AT&T common stock repurchased in 1998 and 1999 was reissued in connection with the Broadband acquisition. Cash used in financing activities in 1997 was primarily for the payment of dividends on common stock. AT&T has $4.6 billion of registered notes and warrants to purchase notes available for public sale under a registration statement filed with the Securities and Exchange Commission. AT&T may sell notes under this registration statement based on market conditions. The board of directors recently authorized us to increase our long-term borrowing capacity by $10 billion. This would bring total notes available for public or private sale to $14.6 billion. Proceeds from the potential sale of private or publicly-placed notes and warrants will be used for funding investments in subsidiary companies, acquisitions of licenses, assets or businesses and general corporate purposes. In addition, we will receive funds from the initial public offering of AT&T Wireless tracking stock, which is expected to take place in the first half of 2000. In 2000, we expect cash generated from operations to be the primary source of funding for our dividend requirements and capital expenditures. Since the majority of debt maturing within one year is commercial paper and debt with an original maturity of one year or less, we expect to fund repayments of these with other short-term borrowings. At December 31, 1999, we had a 364-day, $7 billion revolving-credit facility with a consortium of 42 lenders. We also had additional 364-day, revolving- credit facilities of $3 billion. These lines were for commercial paper back-up and were unused at December 31, 1999. In addition, we had a $20 billion commitment from multiple lenders with credit agreements to be finalized upon consummation of the proposed merger with MediaOne. In February 2000, we negotiated the syndication of a new 364-day, $10 billion facility. As a result, the $3 billion credit facilities and the commitments associated with the $20 billion syndication terminated. Also in February 2000, the $7 billion revolving-credit facility expired. [Included in the 1999 Annual Report is a chart entitled "EBITDA." The chart depicts EBITDA on an as reported basis and an operational basis, which excludes restructuring and other charges, and certain gains and losses, over the eight quarters ended December 31, 1999.] EBITDA [earnings, including other income (expense), before interest, taxes, depreciation and amortization] is a measure of our ability to generate cash flow and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with generally accepted accounting principles. EBITDA increased $4,877 million, or 36.4%, to $18,292 million in 1999 compared with 1998. EBITDA increased $2,088 million, or 18.4%, to $13,415 million in 1998 compared with 1997. Excluding Broadband, AGNS, restructuring and other charges, and certain gains and losses, EBITDA increased 24.5% to $18,873 million in 1999 from $15,159 million in 1998. The increase was primarily due to increased revenue and an improving cost structure. Excluding restructuring and other charges, and certain gains and losses, EBITDA increased 33.2% in 1998 compared with 1997, primarily as a result of our cost-reduction efforts coupled with higher revenue. 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. 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 December 31, 1999 and 1998, the fair value of interest rate swaps and the underlying hedged debt would have changed by $3 million in both periods. Assuming a 10% downward shift in interest rates at December 31, 1999 and 1998, the fair value of unhedged debt would have increased by $938 million and $290 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 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. In addition, we are also subject to foreign exchange risk related to other foreign-currency-denominated transactions. As of December 31, 1999, we had a net unrealized loss on forward contracts of $27 million. As of December 31, 1998, we had a net unrealized gain on forward contracts of $9 million. Unrealized gains and losses are calculated based on the difference between the contract rate and the rate available to terminate the contracts. 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, 1999 and 1998, the fair value of these contracts would have resulted in additional unrealized losses of $29 million and $20 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 of affiliated companies. Assuming a 10% decrease in equity prices of affiliated companies, the fair value of the equity hedge would have decreased by $81 million. 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. The changes in fair value, as discussed above, assume the occurrence of certain adverse market conditions. They do not consider the potential effect of favorable changes in market factors and do not represent projected losses in fair value that we expect to incur. Future impacts would be based on actual developments in global financial markets. We do not foresee any significant changes in the strategies used to manage interest rate risk, foreign currency rate risk or equity price risk in the near future. EURO CONVERSION On January 1, 1999, certain members of the European Union established fixed conversion rates between their existing currencies and the European Union's currency (Euro). The transition period is anticipated to extend through July 1, 2002. We have assessed the impact of the conversion on information- technology systems, currency exchange rate risk, derivatives and other financial instruments, continuity of material contracts as well as income tax and accounting issues. To date, the conversion has not had, nor do we expect the conversion during the transition period to have, a material effect on our consolidated financial statements. FINANCIAL CONDITION At December 31, 1999 1998 Dollars in millions Total assets $169,406 $59,550 Total liabilities 81,762 33,919 Total shareowners' equity 78,927 25,522 Total assets increased $109,856 million, or 184.5%, at December 31, 1999, primarily due to the impact of the Broadband acquisition, which resulted in franchise costs; increased other investments including Cablevision, Excite@Home and Lenfest Communications, Inc.; and the addition of property, plant and equipment. Property, plant and equipment also increased due to capital expenditures made during the year. In addition, assets increased due to Liberty Media Group, which is recorded as an equity investment, and the AGNS acquisition, which resulted in increased goodwill. These increases were partially offset by a net decrease in cash, which was used to partially fund capital expenditures, the common stock repurchases and the purchase of AGNS. [Included in the 1999 Annual Report is a bar graph entitled "Capital Investments Support Growth Opportunities." The graph depicts our capital investments for 1998 and 1999 for data/IP, wireless, broadband, local and long distance.] Total liabilities at December 31, 1999, increased $47,843 million, or 141.0%, primarily due to the impact of the Broadband acquisition, particularly debt and deferred income taxes. In addition, we issued $8.5 billion of long-term debt and $10.2 billion of short-term debt to fund acquisitions, capital expenditures and the common stock repurchases. These increases were partially offset by the retirement of $2.8 billion of long-term debt. At the time of the acquisition, TCI had mandatorily redeemable preferred securities that were issued through a subsidiary trust and preferred stock outstanding. In June 1999, Microsoft Corporation purchased $5.0 billion of quarterly convertible income preferred securities, which AT&T issued through a subsidiary trust. These securities are reflected between liabilities and shareowners' equity in the balance sheet. The preferred stock is recorded within minority interest in equity of consolidated subsidiaries. Total shareowners' equity was $78,927 million at December 31, 1999. Total shareowners' equity includes the equity attributable to both AT&T common stock and Liberty Media tracking stock. The AT&T common stock equity at December 31, 1999, was $40,406 million, an increase of 58.3% from $25,522 million at December 31, 1998. This increase was primarily due to the issuance of shares related to Broadband, partially offset by shares repurchased. Liberty Media Group equity at December 31, 1999, was $38,521 million. The ratio of total debt to total AT&T Group capital (debt divided by debt plus equity of AT&T Group) at December 31, 1999, was 44.3% compared with 20.9% at December 31, 1998. For purposes of this calculation, debt included $1.6 billion of redeemable preferred securities issued through a subsidiary trust of TCI, and equity included $5.0 billion of convertible preferred securities issued through a subsidiary trust of AT&T. The increase was primarily due to higher debt partially offset by a higher equity base. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date for this standard was delayed via the issuance of SFAS No. 137. The effective date for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. For AT&T, this means that the standard must be adopted no later than January 1, 2001. Based on the types of derivatives we currently have, we do not expect the adoption of this standard will have a material impact on AT&T's results of operations, financial position or cash flows. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which must be adopted by March 31, 2000. We are currently assessing the impact of SAB 101 on our results of operations. YEAR 2000 AT&T's Year 2000 (Y2K) program addressed the use of two-digit, instead of four-digit, year fields in computer systems. If computer systems could not distinguish between the year 1900 and the year 2000, system failures or other computer errors could have resulted. The potential for failures and errors spanned all aspects of our business, including computer systems, voice and data networks, and building infrastructures. We also needed to address our interdependencies with our suppliers, connecting carriers and major customers, all of whom faced the same concern. All computer systems were tested and repaired as of December 31, 1999, and no major Y2K-related problems were reported as the calendars rolled to January 1, 2000. The cost of AT&T's Y2K program was $725 million since inception in 1997. Total costs for 1999 were $275 million, of which approximately $45 million represented capital spending for upgrading and replacing noncompliant computer systems. Less than half of the 1999 costs represent internal information technology resources that were redeployed from other projects and are expected to return to these projects in 2000. SUBSEQUENT EVENTS On January 5, 2000, AT&T and British Telecommunications plc (BT) announced financial closure of Concert. Concert began operations in 2000 as the leading global telecommunications company serving multinational business customers, international carriers and Internet service providers worldwide. On January 18, 2000, we sold our ownership in Lenfest Communications, Inc. (Lenfest), to a subsidiary of Comcast. In connection with the sale, we received 48,555,280 shares of Comcast Class Special A common stock, which had a value of $2,510 million at the date of disposition. On February 3, 2000, a registration statement was filed with the SEC for an initial public offering of AT&T Wireless Group tracking stock. The new tracking stock will provide current shareowners and future investors with a security tied directly to the economic performance of AT&T's Wireless business. AT&T Wireless Group will include voice and data mobility, fixed wireless and certain international wireless investments. At a special shareowner meeting in March, a proposal to create the tracking stock was approved. We intend to conduct an initial public offering of AT&T Wireless Group tracking stock in the second quarter. A distribution, which may be in the form of a dividend, exchange offer, or a combination of these, of the AT&T Wireless Group tracking stock is intended to be made to shareowners of AT&T common stock sometime thereafter. Holders of Liberty Media Group tracking stock will not be entitled to this distribution. In February 2000, AT&T entered into an agreement with TeleCorp PCS, Inc., to swap certain licenses that we currently own in the midwestern United States as well as cash of approximately $100 million in exchange for licenses in several New England markets. The transaction is expected to close in the fourth quarter of 2000. STOCK INFORMATION AT&T (ticker symbol "T") is listed on the New York Stock Exchange, as well as the Boston, Chicago, Cincinnati, Pacific and Philadelphia exchanges in the United States, and on stock exchanges in Brussels, London, Paris and Geneva. As of December 31, 1999, AT&T had 3.2 billion shares outstanding, held by more than 4.2 million shareowners. Liberty Media Group Class A and Class B common stock (ticker symbols "LMG.A" and "LMG.B"), tracking stock of AT&T, are listed on the New York Stock Exchange. As of December 31, 1999, Liberty Media Class A had 1.2 billion shares outstanding, held by 5,902 shareowners; Liberty Media Class B had 108.4 million shares outstanding, held by 417 shareowners. EX-21 5 EXHIBIT 21 - SUBSIDIARY LIST List of Subsidiaries of AT&T Corp. As of 3/23/00 Jurisdiction of Incorporation ACC Corp.................................................Delaware Alascom, Inc.............................................Alaska AT&T Communications, Inc.................................Delaware AT&T Communications of California, Inc...................California AT&T Communications of Delaware, Inc.....................Delaware AT&T Communications of Hawaii, Inc.......................Hawaii AT&T Communications of Illinois, Inc.....................Illinois AT&T Communications of Indiana, Inc......................Indiana AT&T Communications of Maryland, Inc.....................Maryland AT&T Communications of Michigan, Inc.....................Michigan AT&T Communications of the Midwest, Inc..................Iowa AT&T Communications of the Mountain States, Inc..........Colorado AT&T Communications of Nevada, Inc.......................Nevada AT&T Communications of New England, Inc..................New York AT&T Communications of New Hampshire, Inc................New Hampshire AT&T Communications of New Jersey, Inc...................New Jersey AT&T Communications of New York, Inc.....................New York AT&T Communications of Ohio, Inc.........................Ohio AT&T Communications of the Pacific Northwest, Inc........Washington AT&T Communications of Pennsylvania, Inc.................Pennsylvania AT&T Communications of the South Central States, Inc.....Delaware AT&T Communications of the Southern States, Inc..........New York AT&T Communications of the Southwest, Inc................Delaware AT&T Communications of Virginia, Inc.....................Virginia AT&T Communications of Washington D.C., Inc..............New York AT&T Communications of West Virginia, Inc................West Virginia AT&T Communications of Wisconsin, Inc....................Wisconsin AT&T Communications Services International Inc...........Delaware AT&T Global Communications Services Inc..................Delaware AT&T Istel...............................................United Kingdom AT&T Solutions Inc.......................................Delaware AT&T Global Network Services Inc.........................Delaware AT&T of Puerto Rico, Inc.................................New York AT&T Wireless Services, Inc..............................Delaware LIN Broadcasting Corporation.............................Delaware Teleport Communications Group Inc........................Delaware Tele-Communications, Inc.................................Delaware EX-23 6 CONSENT Exhibit 23a CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements on Form S-3 for the Shareowner Dividend Reinvestment and Stock Purchase Plan (Registration No. 333-00573), Forms S-8 for the AT&T Long Term Savings and Security Plan (Registration Nos. 333-47257 and 33-34265), Forms S-8 for the AT&T Long Term Savings Plan for Management Employees (Registration Nos. 33-34264, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement Savings and Profit Sharing Plan (Registration No. 33-39708), Forms S-8 for Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program (Registration Nos. 333-47251 and 33-56643), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees (Registration No. 33-50819), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan (Registration No. 33-50817), and Post-Effective Amendment No. 1 on Form S-8 to Form S-8 Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee Stock Purchase Plan, Form S-8 for the AT&T Shares for Growth Program (Registration No. 333-47255), Form S-8 for the AT&T 1997 Long Term Incentive Program (Registration No. 33-28665), Form S-3 for the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares (Registration No. 33-57745), and in Post-Effective Amendment Nos. 1, 2 and 3 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-42150) for the NCR Corporation 1989 Stock Compensation Plan (Registration No. 33-42150-01), the NCR Corporation 1984 Stock Option Plan (Registration No. 33-42150-02) and the NCR Corporation 1976 Stock Option Plan (Registration No. 33-42150-03), respectively, and the Post-Effective Amendment Nos. 1, 2, 3 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan (Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987 Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03) and the McCaw Cellular Communications, Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively, and Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-45302) for the Teradata Corporation 1987 Incentive and Other Stock Option Plan (Registration No. 33-45302-01), Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. (Registration No. 33-63195), and in Post Effective Amendment Nos. 1, 2, 3, 4 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 333-49419) for the Teleport Communications Group Inc. 1993 Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC Corp. Employee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp. Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and Form S-8 for AT&T Wireless Services, Inc. Employee Stock Purchase Plan (Registration No. 333-52757), and in Post-Effective Amendment Nos. 1 and 2 on Form S-8 and Post-Effective Amendment No. 3 to Form S-4 Registration Statement (Registration No. 333-70279) for the Tele-Communications, Inc. 1998 Incentive Plan, the Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan, the Tele-Communications International, Inc., the 1996 Nonemployee Director Stock Option Plan, the Tele-Communications International, Inc. 1995 Stock Incentive Plan (Registration No. 333-70279-01), the Liberty Media 401(K) Savings Plan, the TCI 401(K) Stock Plan (Registration No. 333-70279-02), Form S-3 for the $13,080,000 Debt Securities and Warrants to Purchase Debt Securities (Registration No. 333-71167) and Form S-4 for Vanguard Cellular Systems, Inc. (Registration No. 333-75083) of AT&T Corp., and Form S-4 for Media One Corp. (Registration No. 333-86019) of AT&T Corp., and Form S-4 for Four Media Corp. (Registration No. 333-30250) of AT&T Corp., and Form S-8 for AT&T Long Term Savings (Registration No. 333-87935) of AT&T Corp., of our report dated March 9, 2000 relating to the consolidated financial statements of AT&T Corp. and its subsidiaries, which appears in the 1999 Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 9, 2000 relating to the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP New York, New York March 27, 2000 Exhibit 23b CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following AT&T Corp. registration statements of our report dated February 29, 2000, relating to the combined balance sheets of Liberty Media Group ("New Liberty" or "Successor") as of December 31, 1999, and of Liberty Media Group ("Old Liberty" or "Predecessor") as of December 31, 1998, and the related combined statements of operations and comprehensive earnings, combined equity and cash flows for the period from March 1, 1999 to December 31, 1999 (Successor period) and from January 1, 1999 to February 28, 1999 and for each of the years in the two-year period ended December 31, 1998 (Predecessor periods), which appears as an exhibit to this AT&T Corp. 1999 Annual Report on Form 10-K:
Registration Form Statement No. Description - ---- ------------- ----------- S-3 333-00573 Shareowner Dividend Reinvestment and Stock Purchase Plan S-8 333-47257 and 33-34265 AT&T Long Term Savings and Security Plan S-8 33-34264, 33-29256 and 33-21937 AT&T Long Term Savings Plan for Management Employees S-8 33-39708 AT&T Retirement Savings and Profit Sharing Plan S-8 333-47251 and 33-56643 Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program S-8 33-50819 AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees S-8 33-50817 AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan S-8 33-54797 (Post-Effective Amendment No. 1) AT&T 1996 Employee Stock Purchase Plan S-8 333-47255 AT&T Shares for Growth Program S-8 33-28665 AT&T 1997 Long Term Incentive Program S-4 33-57745 AT&T 7,500,000 Common Shares S-8 33-42150 (Post-Effective Amendment No. 1 to NCR Corporation 1989 Stock Compensation Plan Form S-4, (33-42150-01)) S-8 33-42150 (Post-Effective Amendment No. 2 to NCR Corporation 1984 Stock Option Plan Form S-4, (33-42150-02))
Registration Form Statement No. Description - ---- ------------- ----------- S-8 33-42150 (Post-Effective Amendment No. 3 to NCR Corporation 1976 Stock Option Plan Form S-4, (33-42150-03)) S-8 33-52119 (Post-Effective Amendment No. 1 to McCaw Cellular Communications, Inc. 1983 Non-Qualified Form S-4, (33-52119-01) Stock Option Plan S-8 33-52119 (Post-Effective Amendment No. 2 to McCaw Cellular Communications, Inc. 1987 Stock Option Form S-4, (33-52119-02) Plan S-8 33-52119 (Post-Effective Amendment No. 3 to McCaw Cellular Communications, Inc. Equity Purchase Form S-4, (33-52119-03) Plan S-8 33-52119 (Post-Effective Amendment No. 5 to McCaw Cellular Communications, Inc. Employee Stock Form S-4, (33-52119-05) Purchase Plan S-8 33-45302 (Post-Effective Amendment No. 1 to Teradata Corporation 1987 Incentive and Other Stock Form S-4, (33-45302-01)) Option Plan S-8 33-63195 AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. S-8 333-49419 (Post-Effective Amendment No. 1 to Teleport Communications Group Inc. 1993 Stock Option Form S-4, (333-49419-01)) Plan S-8 333-49419 (Post-Effective Amendment No. 2 to Teleport Communications Group Inc. 1996 Equity Form S-4, (333-49419-02)) Incentive Plan S-8 333-49419 (Post-Effective Amendment No. 3 to ACC Corp. Employee Long Term Incentive Plan Form S-4, (333-49419-03)) S-8 333-49419 (Post-Effective Amendment No. 4 to ACC Corp. Non-Employee Directors' Stock Option Plan Form S-4, (333-49419-04)) S-8 333-49419 (Post-Effective Amendment No. 5 to ACC Corp. 1996 UK Sharesave Scheme Form S-4, (333-49419-05)) S-8 333-52757 AT&T Wireless Services, Inc. Employee Stock Purchase Plan S-8 333-70279 (Post-Effective Amendments Nos. 1 Tele-Communications, Inc. 1998 Incentive Plan and 3 to Form S-4, (333-70279-01)) Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan Tele-Communications International, Inc. 1996 Nonemployee Director Stock Option Plan Tele-Communications International, Inc. 1995 Stock Incentive Plan
Registration Form Statement No. Description - ---- ------------- ----------- S-8 333-70279 (Post-Effective Amendments No. 2 to Liberty Media 401(K) Savings Plan Form S-4, (333-70279-02)) TCI 401(K) Stock Plan S-3 333-71167 $13,080,000 Debt Securities and Warrants to Purchase Debt Securities S-4 333-75083 Vanguard Cellular Systems, Inc. S-4 333-86019 Media One Corp. S-4 333-30250 Four Media Corp. S-8 333-87935 AT&T Long Term Savings
KPMG LLP Denver, Colorado March 27, 2000 EX-24 7 POWERS OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is both a director and an officer of the Company, as indicated below his signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorney for him and in his name, place and stead, and in his capacity as both a director and an officer of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ C. Michael Armstrong ----------------------------- C. Michael Armstrong Chairman of the Board and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is both a director and an officer of the Company, as indicated below his signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him and in his name, place and stead, and in his capacity as an officer of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ J. D. Zeglis ----------------------------- J. D. Zeglis President and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is an officer of the Company, as indicated below his signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him and in his name, place and stead, and in his capacity as an officer of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Charles H. Noski ----------------------------- Charles H. Noski Senior Executive Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is an officer of the Company, as indicated below her signature: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER, and each of them, as attorneys for her and in her name, place and stead, and in her capacity as an officer of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Nicholas S. Cyprus ----------------------------- Nicholas S. Cyprus Vice President and Controller POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Kenneth T. Derr ----------------------------- Kenneth T. Derr Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ M. Kathryn Eickhoff ----------------------------- M. Kathryn Eickhoff Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Walter Y. Elisha ----------------------------- Walter Y. Elisha Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ George M. C. Fisher ----------------------------- George M. C. Fisher Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Donald V. Fites ----------------------------- Donald V. Fites Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Amos B. Hostetter, Jr. ----------------------------- Amos B. Hostetter, Jr. Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Ralph S. Larsen ----------------------------- Ralph S. Larsen Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ John C. Malone ----------------------------- John C. Malone Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Donald F. McHenry ----------------------------- Donald F. McHenry Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Michael I. Sovern ----------------------------- Michael I. Sovern Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Sanford I. Weill ----------------------------- Sanford I. Weill Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2000. /s/ Thomas H. Wyman ----------------------------- Thomas H. Wyman Director EX-27 8 12 MOS. ENDED 12-31-99
5 This schedule contains summary financial information extracted from the consolidated balance sheet of AT&T Corp. at December 31, 1999, and the consolidated statement of income for the twelve-month period ended December 31, 1999, and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1,024 0 11,960 1,507 0 13,884 69,675 30,057 169,406 28,207 21,591 6,326 0 4,461 74,466 169,406 0 62,391 0 51,532 0 1,416 1,651 6,685 3,257 3,428 0 0 0 3,428 1.77 1.74
EX-27 9 9 MOS. ENDED 09-30-99
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at September 30, 1999, and the unaudited consolidated statement of income for the nine-month period ended September 30, 1999, and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 0 0 12,117 1,488 0 13,040 65,361 28,886 161,806 23,515 22,073 6,346 0 4,461 70,302 161,806 0 46,057 0 37,639 0 1,077 1,108 6,158 2,679 3,479 0 0 0 3,479 1.41 1.39
EX-27 10 6 MOS. ENDED 06-30-99
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at June 30, 1999, and the unaudited consolidated statement of income for the six-month period ended June 30, 1999, and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 418 0 11,257 1,227 0 12,946 62,574 27,580 145,238 21,577 22,152 6,354 0 4,461 69,027 145,238 0 29,787 0 24,758 0 733 649 3,854 1,791 2,063 0 0 0 2,063 0.90 0.88
EX-27 11 3 MOS. ENDED 03-31-99
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at March 31, 1999, and the unaudited consolidated statement of income for the three-month period ended March 31, 1999, and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1,463 0 10,526 1,143 0 13,245 59,539 26,524 135,635 19,443 22,488 1,660 0 3,807 66,555 135,635 0 14,096 0 11,980 0 386 190 2,017 999 1,018 0 0 0 1,018 0.39 0.38
EX-27 12 12 MOS. ENDED 12-31-98
5 This schedule contains summary financial information extracted from the consolidated balance sheet of AT&T Corp. at December 31, 1998, and the consolidated statement of income for the twelve-month period ended December 31, 1998, and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 3,160 0 10,115 1,060 0 14,118 52,277 25,374 59,550 15,442 5,556 0 0 2,630 22,892 59,550 0 53,223 0 45,736 0 1,389 427 8,307 3,072 5,235 1,300 (137) 0 6,398 2.39 2.37
EX-27 13 9 MOS. ENDED 09-30-98
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at September 30, 1998, and the unaudited consolidated statement of income for the nine-month period ended September 30, 1998, and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 4,190 0 10,412 1,029 0 15,563 49,811 24,718 58,318 14,723 6,079 0 0 2,631 21,533 58,318 0 39,695 0 35,394 0 1,050 322 5,148 1,901 3,247 1,300 (137) 0 4,410 1.64 1.62
EX-27 14 6 MOS. ENDED 06-30-98
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at June 30, 1998, and the unaudited consolidated statement of income for the six-month period ended June 30, 1998, and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 7,845 123 10,297 1,044 0 19,179 48,059 23,815 61,085 14,725 7,161 0 0 2,709 23,027 61,085 0 26,042 0 25,097 0 714 208 1,750 626 1,124 1,300 0 0 2,424 0.90 0.89
EX-27 15 3 MOS. ENDED 03-31-98
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at March 31, 1998, and the unaudited consolidated statement of income for the three-month period ended March 31, 1998, and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 328 245 14,783 1,020 0 16,215 46,663 23,084 59,467 15,844 7,342 0 0 2,683 21,611 59,467 0 12,831 0 11,427 0 362 80 2,030 745 1,285 10 0 0 1,295 0.48 0.48
EX-27 16 12 MOS. ENDED 12-31-97
5 This schedule contains summary financial information extracted from the consolidated balance sheet of AT&T Corp. at December 31, 1997, and the consolidated statement of income for the twelve-month period ended December 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 318 307 15,347 988 0 16,777 46,436 22,233 61,095 17,317 7,857 0 0 2,684 20,994 61,095 0 51,577 0 44,741 0 1,522 307 6,972 2,723 4,249 166 0 0 4,415 1.65 1.65
EX-99 17 EXHIBIT 99 Overview of Liberty Media Group Liberty Media Group, through Liberty Media Corporation and its subsidiaries and affiliates, owns interests in a broad range of video programming, communications and Internet businesses in the United States, Europe, South America and Asia. The principal assets in the Liberty Media Group include interests in Starz Encore Group LLC, Discovery Communications, Inc., Time Warner Inc., QVC, Inc., USA Networks, Inc., Telewest Communications, plc, TV Guide, Inc., Motorola, Inc., Sprint PCS Group, The News Corporation Limited, Teligent, Inc. and Liberty Digital, Inc. Governance Structure Substantially all of the businesses and assets included in the Liberty Media Group are held by its primary operating unit, Liberty Media Corporation. As a result of the TCI/AT&T Merger on March 9, 1999, Liberty Media Corporation and several affiliated companies which make up the Liberty Media Group, are held by wholly owned subsidiaries of AT&T. Liberty Media Group has a substantial degree of managerial autonomy from AT&T as a result of its corporate governance arrangement with AT&T, under which the board of directors and management of Liberty Media Corporation control the business and affairs of the group. Liberty Media Corporation's board of directors is controlled by persons designated by Tele-Communications, Inc. ("TCI") prior to its acquisition by AT&T, and will continue to be controlled by those persons, or others chosen by them, until at least 2006. Liberty Media Corporation's management consists of individuals who managed the businesses of TCI's Liberty Media Group and TCI Ventures Group prior to the AT&T merger. The directors and officers of Liberty Media Corporation serve in the same capacities with the affiliated companies included in the Liberty Media Group. Liberty Media Corporation has entered into agreements with AT&T which provide it with a level of financial and operational separation from AT&T, define its rights and obligations as a member of AT&T's consolidated tax group, enable it to finance its operations separately from those of AT&T and provide it with certain programming rights with respect to AT&T's cable systems. Recent Developments On March 1, 1999, United Video Satellite Group, Inc. acquired Liberty Media Group's 40% interest in Superstar/Netlink Group and its 100% interest in Netlink USA, which uplinks the signals of six Denver-based broadcast television stations, in exchange for shares of UVSG common stock. On the same date, UVSG acquired from The News Corporation Limited, in exchange for cash and shares of UVSG common stock, the stock of certain corporations that publish TV Guide Magazine and other printed television program listing guides and distribute TV Guide Online. Following this transaction UVSG, which changed its name to TV Guide, Inc., became jointly controlled by Liberty Media Group and News Corp. with each owning approximately 44% of its equity and 49% of its voting power. In October 1999, TV Guide announced that it had entered into a definitive merger agreement with Gemstar International Group Limited, pursuant to which TV Guide would become a wholly owned subsidiary of Gemstar. This transaction is subject to the approval of the shareholders of each company (which was received on March 17, 2000) as well as customary closing conditions. On March 22, 1999, Liberty Media Group entered into a seven-year "cashless collar" with a financial institution with respect to 15 million shares of Time Warner common stock, secured by 15 million shares of its approximately 114 million shares of Time Warner Series LMCN-V Common Stock. In effect, Liberty Media Group purchased a put option that gives it the right to require its counterparty to buy 15 million Time Warner shares from Liberty Media Group in approximately seven years for $67.45 per shares. Liberty Media Group simultaneously sold a call option giving the counterparty the right to buy the same shares from Liberty Media Group in approximately seven years for $158.33 per share. Since the purchase price of the put option was equal to the proceeds form the sale of the call option, the collar transaction had no cash cost to Liberty Media Group. On July 7, 1999, Liberty Media Group issued 7-7/8% Senior Notes due 2009, in the aggregate principal amount of $750 million, and 8-1/2% Senior Debentures due 2029, in the aggregate principal amount of $500 million. Liberty Media Group received net cash proceeds from these issuances of $741 million and $494 million, respectively, which were used to repay outstanding borrowings under certain credit facilities. On January 13, 2000, Liberty Media Group completed a registered exchange offer for these securities that provided tendering holders with identical securities "freely" transferable under the Securities Act of 1933. On July 15, 1999, Liberty Media Group sold to News Corp. its 50% interest in their jointly owned Fox/Liberty Networks programming venture, in exchange for 51.8 million News Corp. ADRs representing preferred limited voting ordinary shares of News Corp., valued at approximately $1.425 billion, or approximately $27.52 per ADR. In a related transaction, Liberty Media Group acquired from News Corp. 28.1 million additional ADRs representing preferred limited voting ordinary shares of News Corp. for approximately $695 million, or approximately $24.74 per ADR. As a result of these transactions and subsequent open market purchases, as of March 1, 2000, Liberty Media Group owned approximately 81.7 million ADRs representing preferred limited voting ordinary shares of News Corp. or approximately 8% of News Corp.'s ordinary shares on a fully diluted basis. On September 9,1999, TCI Music, Inc. and Liberty Media Group completed a transaction pursuant to which Liberty Media Group contributed to TCI Music substantially all of its Internet content and interactive television assets, certain rights with respect to access to AT&T cable systems for the provision of interactive active services, and a combination of cash and notes receivable equal to $150 million, in exchange for preferred and common stock of TCI Music. Following this transaction, Liberty Media Group owned 95% of TCI Music which changed its name to Liberty Digital, Inc. In addition, Liberty Media Group adopted a policy that Liberty Digital would be its primary (but not exclusive) vehicle to pursue corporate opportunities relating to interactive programming and interactive content related services in the United States and Canada, subject to certain exceptions. On September 30, 1999, Liberty Media Group purchased 9.9 million class B shares of UnitedGlobalCom, Inc. for approximately $493 million in cash. UnitedGlobalCom is a global broadband communications provider of video, voice and data services with operations in over 20 countries throughout the world. As part of the transaction, Liberty Media Group expects to form a 50/50 joint venture or similar arrangement with United Pan-Europe Communications N.V., UnitedGlobalCom's European subsidiary, to own the UnitedGlobalCom shares and to evaluate joint content and distribution opportunities in Europe. Liberty Media Group would contribute to the joint venture its 9.9 million class B shares of UnitedGlobalCom and United Pan-Europe would contribute 5.6 million class A shares of UnitedGlobalCom. Liberty Media Group expects to assign 50% of its interest in the joint venture to Microsoft Corporation. In addition to its 25% interest (after the assignment to Microsoft), Liberty Media Group would receive approximately $144 million of redeemable preferred interests in the joint venture. When formed, the joint venture would own approximately 14.5% of the total outstanding common shares of UnitedGlobalCom on a fully diluted basis. The joint venture and its members would be bound by voting and standstill agreements with UnitedGlobalCom and certain of its controlling shareholders. On November 16, 1999, Liberty Media Group issued 4% Senior Exchangeable Debentures due 2029, in the aggregate principal amount of $869 million. Liberty Media Group received net cash proceeds from this issuance of $854 million. On February 9,2000, the resale of these debentures was registered under the Securities Act of 1933. On December 6, 1999, Liberty Media Group entered into an agreement with Four Media Company with respect to a transaction pursuant to which Liberty Media Group would acquire all of the outstanding common stock of Four Media In exchange for approximately $123 million in cash, the issuance of approximately 3.2 million shares of AT&T Class A Liberty Media Group tracking stock and a warrant to purchase approximately 350,000 shares of AT&T Class A Liberty Media Group tracking stock at an exercise price of $46.00 per share. Four Media is a provider of technical and creative services to owner, producers and distributors of television programming, feature films and other entertainment products both domestically and internationally. The transaction with Four Media is subject to the approval of Four Media's shareholders, as well as other customary closing conditions and is currently expected to close in the second quarter of 2000. On December 10, 1999, Liberty Media Group entered into an agreement with the Todd-AO Corporation with respect to a transaction pursuant to which the liberty Media Group would acquire approximately 60% of the outstanding equity and 94% of the voting power of Todd in exchange for approximately 3 million shares of AT&T Class A Liberty Media Group tracking stock. Todd provides sound, video and ancillary post production and distribution services to the motion picture and television industries in the United States and Europe. The transaction with Todd is subject to the approval of Todd's shareholders, as well as other customary closing conditions and is currently expected to close in the second quarter of 2000. On December 30, 1999, Liberty Media Group entered into an agreement with Soundelux Entertainment Group, Inc. with respect to a transaction pursuant to which the Liberty Media Group would acquire approximately 55% of the outstanding equity and 92% of the voting power of Soundelux in exchange for approximately 2 million shares of AT&T Class A Liberty Media Group tracking stock. Soundelux provides video, audio, show production, design and installation services to location-based entertainment venues and provides production and post-production sound services, including content, editing, re-recording and music supervision, to the motion picture, television and interactive gaming industries. The transaction with Soundelux is subject to the approval of Soundelux's shareholders and the closing of the Todd transaction, as well as other customary closing conditions and is currently expected to close in the second quarter of 2000. Following the acquisitions of majority interests in Todd and Soundelux and 100% of the voting securities of Four Media, and subject to certain conditions, the Liberty Media Group has agreed to cause the following additional transactions to occur: (i) contribution of the Liberty Media Group's controlling interest in Todd to Soundelux, in exchange for additional shares of voting stock of Soundelux; (ii) contribution by Soundelux to Todd of 100% of the business and operations of Soundelux, in exchange for additional shares of voting stock of Todd and the assumption by Todd of 100% of the liabilities of Soundelux; and (iii) contribution by the Liberty Media Group to Soundelux, and by Soundelux to Todd, of 100% of the stock of Four Media. As a result of such transactions, the assets and operation now owned and operated by Four Media, Soundelux and Todd would be consolidated within Todd, which would change its name to Liberty Livewire, Inc. Liberty Livewire would be attributed to Liberty Media Group. On December 15, 1999, a trust for Liberty Media Group's benefit entered into a "cashless collar" with a financial institution with respect to 18 million shares of Sprint PCS stock-Series 1, secured by 18 million shares of the trust's Sprint PCS stock-Series 2. The Sprint PCS stock-Series 2 is convertible into the Sprint PCS stock-Series 1 on a one-for-one basis. The collar consists of a put option that gives the trust the right to require its counterparty to buy 18 million shares of Sprint PCS stock-Series 1 from the trust in three tranches in approximately two years for $50 per share. The counterparty has a call option giving the counterparty the right to buy the same shares from the trust in three tranches in approximately two years for $65.23 per share. The put and the call options were equally priced, resulting in no cash cost to the trust or Liberty Media Group. Share amounts and prices have been adjusted to reflect a Sprint's February two-for-one stock split. On January 5, 2000, General Instrument Corporation merged with Motorola, Inc. As a result of this merger, Liberty Media Group's 21% interest in GI was exchange for an approximate 3% interest in Motorola. On January 14, 2000, the Liberty Media Group completed its acquisition of The Associated Group, Inc. pursuant to a merger agreement among AT&T, Liberty Media Group and Associated Group. Under the merger agreement, each share of Associated Group's Class A common stock and Class B common stock was converted into 0.49634 shares of AT&T common stock and 1.20711 shares of AT&T Class A Liberty Media Group tracking stock. Prior to the merger, Associated Group's primary assets were (1) approximately 19.7 million shares of AT&T common stock, (2) approximately 23.4 million shares of AT&T Class A Liberty Media Group tracking stock, (3) approximately 5.3 million shares of AT&T Class B Liberty Media Group tracking stock, (4) approximately 21.4 million shares of common stock, representing approximately a 40% interest, of Teligent, Inc., a full-service, facilities-based communications company, and (5) all of the outstanding shares of common stock of TruePosition, Inc., which provides location services for wireless carriers and users designed to determine the location of any wireless transmitters, including cellular and PCS telephones. Immediately following the completion of the merger, all of the assets and businesses of Associated Group were transferred to Liberty Media Group. All of the shares of AT&T common stock, AT&T Class A Liberty Media Group tracking stock and AT&T Class B Liberty Media Group tracking stock previously held by Associated Group were retired by AT&T. On February 2, 2000, Liberty Media Group issued 8-1/4% Senior Debentures due 2030, in the aggregate principal amount of $1 billion. Liberty Media Group received net cash proceeds from this issuance of $983 million. Pursuant to a registration rights agreement entered into with the purchasers of these debentures, Liberty Media Group is required to effect a registered exchange offer for the debentures which will provide tendering holders with identical securities "freely" transferable under the Securities Act of 1933. On February 7, 2000, Liberty Media Group purchased 18 million shares of Cendant Corporation common stock and a warrant to purchase up to an additional approximate 29 million shares of common stock at an exercise price of $23.00 per share (subject to anti-dilution adjustments), which resulted in Liberty Media Group having an approximate 6.5% ownership interest in Cendant. Liberty Media Group paid $300 million in cash for the common stock and $100 million in cash for the warrants. Cendant is primarily engaged in the consumer and business services industries, with its principal operations in travel related services, real estate related services and alliance marketing related service. On February 10, 2000, Liberty Media Group issued 3-3/4% Senior Exchangeable Debentures due 2030, in the aggregate principal amount of $750 million. Liberty Media Group received net cash proceeds from this issuance of $735 million. On March 8, 2000, Liberty Media Group issued an additional $60 million principal amount of its 3-3/4% Senior Exchangeable Debentures due 2030. Liberty Media Group received net cash proceeds from this issuance of $59 million. Pursuant to a registration rights agreement entered into with the purchasers of these debentures, the resale of these debentures is required to be registered under the Securities Act of 1933. On February 27, 2000, Liberty Media Group entered into an agreement with ICG Communication, Inc. pursuant to which Liberty Media Group would purchase for $500 million (a) 500,000 shares of ICG Communications convertible preferred stock, which are initially convertible into 17,857,142 shares of ICG Communications common stock, and (b) warrants to purchase 6,666,667 shares of ICG Communications common stock at an initial exercise price of $34.00 per share. This transaction is subject to customer closing conditions. On February 29, 2000 Liberty Media Group commenced a cash tender offer for all of the outstanding common stock of Ascent Entertainment Group, Inc. at a price of $15.25 per share. Pursuant to a merger agreement entered into with Ascent on February 22, 2000, if a majority of the outstanding shares of Ascent are tendered in the offer and the other conditions to the offer are satisfied or waived, Liberty will acquire control of Ascent and, as soon as practicable thereafter, will acquire the remaining Ascent shares by merging a subsidiary into Ascent. This transaction is subject to approval of Ascent's shareholders, as well as other customary closing conditions. If the merger is effected, Liberty Media Group expects to pay approximately $460 million for the Ascent stock. In addition, Ascent will have approximately $295 million in indebtedness outstanding immediately after the merger. Ascent's principal business is providing pay-per-view entertainment and information services through its majority owned subsidiary, On Command Corporations. Ascent also provides satellite service to the NBC television network and owns the National Basketball Association's Denver Nuggets, the National Hockey League's Colorado Avalanche and the Pepsi Center Denver's new entertainment facility which is home to both the Nuggets and the Avalanche. If is acquires Ascent Liberty Media Group intends to seek a buyer for the sports teams and the Pepsi Center. On March 16, 2000 Liberty Media Group purchased shares of cumulative preferred stock in TCI Satellite Entertainment, Inc. ("TSAT") in exchange for Liberty Media Group's economic interest in 5,084,745 shares of Sprint Corporation PCS common stock, valued at $300 million. Liberty Media Group received 150,000 shares of TSAT Series A 12% Cumulative Preferred Stock and 150,000 shares of TSAT Series B 8% Cumulative Convertible Voting Preferred Stock. The Series A preferred stock does not have voting rights while the Series B preferred stock gives Liberty Media Group approximately 85% of the voting power of TSAT. As part of this transaction, Liberty Media Group and TSAT formed a joint venture named Liberty Satellite, LLC to hold and manage interests in entities engaged globally in the distribution of internet data and other content via satellite and related businesses. Liberty Media Group contributed its interests in XM Satellite Radio Holdings, Inc., iSKY, Inc., Astrolink International LLC and Sky Latin America in exchange for an approximately 89% interest in the joint venture. TSAT contributed its interest in JATO Communications Corp. and General Motors Class H Common Stock in exchange for an approximately 11% interest in the joint venture which will be managed by TSAT. In a related transaction, TSAT paid Liberty Media Group $60 million in the form of an unsecured promissory note in exchange for an approximately 14% interest in a limited liability company with holdings in Astrolink International LLC. The remaining 86% of the limited liability company is held by Liberty Satellite, LLC. Description of Business The following table sets forth information concerning Liberty Media Group's subsidiaries and business affiliates. Liberty Media Group's interests are held either directly or indirectly through partnerships, joint ventures, common stock investments or instruments convertible or exchangeable into common stock. Ownership percentages in the table are approximate, calculated as of March 1, 2000, and, where applicable and except as otherwise noted, assume conversion to common equity by Liberty Media Group and, to the extent known by Liberty Media Group, other holders. In some cases, Liberty Media Group's interest may be subject to buy/sell procedures, repurchase rights or, under certain circumstances, dilution.
SUBSCRIBERS AT 12/31/99 ATTRIBUTED OWNERSHIP ENTITY (000'S) YEAR LAUNCHED % AT 3/1/00 ------ ------- ------------- ----------- VIDEO PROGRAMMING SERVICES BET Holdings II, Inc. 35% BET Cable Network 58,600 1980 BET Action Pay-Per-View 10,000(1) 1990 BET on Jazz 7,000 1996 BET.com Online 1999 50% Canales n 17(2) 1998 100% Court TV 37,543 1991 50% Discovery Communications, Inc. 49% Discovery Channel 77,829 1985 The Learning Channel 72,175 1980 Animal Planet 54,018 1996 Discovery People 8,200 1997 Travel Channel 35,466 1987
SUBSCRIBERS AT 12/31/99 ATTRIBUTED OWNERSHIP ENTITY (000'S) YEAR LAUNCHED % AT 3/1/00 ------ ------- ------------- ----------- VIDEO PROGRAMMING SERVICES (CONTINUED) Discovery Digital Services 5,026(2) Discovery Civilization 1996 Discovery Health 1998 Discovery Home & Leisure 1996 Discovery Kids 1996 Discovery Science 1996 Discovery Wings 1998 Discovery en Espanol 1998 Animal Planet Asia 6,445 1998 25% Animal Planet Europe 6,328 1998 Animal Planet Latin America 6,774 1998 25% Discovery Asia 37,712 1994 Discovery India 14,100 1996 Discovery Japan(3) 1,542 1996 Discovery Europe 19,155 1989 Discovery Turkey 600 1997 Discovery Germany 1,206 1996 25% Discovery Italy/Africa 1,423 1996 Discovery Latin America 12,145 1996 Discovery Latin America Kids Network 8,490 1996 People & Arts (Latin America) 9,453 1995 25% Discovery Channel Online Online 1995 Discovery Home & Leisure (Europe) 5,911 Starz Encore Group LLC 100% Encore 13,745 1991 MOVIEplex 7,598 1995 Thematic Multiplex (aggregate units) 26,012(2) 1994 Love Stories Westerns Mystery Action True Stories WAM! America's Kidz Network STARZ! 10,240 1994 STARZ! Multiplex (aggregate units) 6,180(2) STARZ! Theater 1996 BET Movies/STARZ!3 88% STARZ! Family STARZ! cinema 1997 E! Entertainment Television 59,318 1990 10% Style 4,630 1998 Flextech p.l.c. (UK) 37% (LN(4): FLXT) Bravo 5,188 1985 37% Challenge TV 5,383 1993 37% HSN Direct International N/A 1994 42% KinderNet 5,751 1988 12% Living 6,175 1993 37% SMG N/A 1957 7% Trouble 5,164 1984 37%
SUBSCRIBERS AT 12/31/99 ATTRIBUTED OWNERSHIP ENTITY (000'S) YEAR LAUNCHED % AT 3/1/00 ------ ------- ------------- ----------- VIDEO PROGRAMMING SERVICES (CONTINUED) TV Travel Shop 7,010 1998 37% UK Arena (UKTV) 3,139 1997 18% UK Gold (UKTV) 6,279 1992 18% UK Gold Classics (UKTV) 1,993 1999 18% UK Horizons (UKTV) 4,840 1997 18% UK Style (UKTV) 3,191 1997 18% UK Play (UKTV) 2,450 1998 18% Fox Kids Worldwide, Inc. (5) International Channel 8,558 1990 90% Jupiter Programming Co., Ltd. (Japan) 50% Cable Soft Network 2,486 1989 50% CNBC Japan/Nikkei N/A 1997 10% Golf Network 2,076 1996 45% Discovery Japan 1,601 1996 49% J-Sports 697 1998 66% Shop Channel 6,800 1996 41% MacNeil/Lehrer Productions N/A N/A 67% MultiThematiques, S.A. 30% Canal Jimmy (France) 2,285 1991 Canal Jimmy (Italy) 700 1997 Cine Cinemas (France) 729 1991 Cine Cinemas (Italy) 144 1997 Cine Classics (France) 631 1991 Cine Classics (Spain) 225 1995 15% Cine Classics (Italy) 144 1997 Forum Planete (France) 1,365 1997 Planete (France) 3,119 1988 Planete (Poland) 1,944 1996 Planete (Germany) 1,206 1997 Planete (Italy) 670 1997 Seasons (France) 106 1996 Seasons (Spain) 37 1997 Seasons (Germany) 35 1997 Seasons (Italy) 46 1997 The News Corporation Limited 8% (NYSE: NWS.A; ASX(4): NCPDP) Odyssey 26,920 1988 33%(6) Pramer S.C.A. (Argentina) 100% America Sports 2,360 1990 Big Channel 2,352 1992 Canal a 2,268 1996 Cineplaneta 2,038 1997 Magic Kids 3,858 1995 P&E 781 1996 Plus Satelital (fka CV SAT) 3,925 1988
SUBSCRIBERS AT 12/31/99 ATTRIBUTED OWNERSHIP ENTITY (000'S) YEAR LAUNCHED % AT 3/1/00 ------ ------- ------------- ----------- VIDEO PROGRAMMING SERVICES (CONTINUED) The Premium Movie Partnership 890 1995 20% (Australia) QVC Inc. 43% QVC Network 66,702 1986 QVC-The Shopping Channel (UK) 7,867 1993 34% QVC-Germany 16,726 1996 iQVC Online 1995 Telemundo Network (7) 50% Telemundo Station Group (8) 25% Time Warner Inc. (NYSE: TWX) 9% Torneos y Competencias, S.A N/A N/A 40% TV Guide, Inc. (Nasdaq: TVGIA) 44%(9) TV Guide Channel 50,000 1988 TV Guide Interactive (2) 1998 TV Guide Sneak Prevue 34,000 1991 32% UVTV 57,000(10) N/A Superstar/Netlink 952 N/A 35% TV Guide Magazine 11,000(11) N/A TV Guide Online Online The Television Games Network N/A 1999 43% Infomedia SA N/A 1991 33% USA Networks, Inc. (Nasdaq: USAI) 21%(12) HSN 73,700(13) 1985 America's Store 6,800(13) 1986 Internet Shopping Network Online 1995 HSN en Espanol 2,700 11% HOT (Germany) 29,000 1996 9% Shop Channel (Japan) 3,370 1996 (3) Sci-Fi Channel 59,700 1992 USA Network 77,200 1980 USA Broadcasting 37,500(14) 1986 Ticketmaster N/A Studios USA N/A USA Films N/A Hotel Reservations Network Online 1991 (Nasdaq:ROOM) Ticketmaster Online-City Search Online 1998 11% (Nasdaq: TMCS)
HOMES IN HOMES SERVICE AREA PASSED BASIC SUBS ATTRIBUTED 12/31/99(15) 12/31/99(16) 12/31/99(17) PENETRATION OWNERSHIP ENTITY (000) (000) (000) 12/31/99 AT 3/1/00 ------ ----- ----- ----- -------- --------- CABLE AND TELEPHONY Cable Management Ireland 130 97 60 62% 100% TCI Chile L.P. 100% Metropolis-Intercom, S.A 1,600 1,092 269 25% 30% Cablevision S.A. 4,000 3,386 1,453 43% 28% (Argentina) Grupo Portatel 24% Jupiter Telecommunications Co., Ltd. (Japan) 4,830 3,709 536 14% 40% Omnipoint Communications, Inc. 3% Princes Holdings Limited (Ireland) 497 387 163 42% 50% Sprint PCS Group 5,700 24%(18) (NYSE: PCS) Liberty Cablevision of Puerto Rico, Inc. 442 288 108 38% 100% Telewest Communications plc (UK) 6,074 4,444 1,156 26% 22% (LN(4): TWT) (Nasdaq: TWSTY) Teligent, Inc. 34% (Nasdaq:TGNT) UnitedGlobalCom, Inc. 10% (Nasdaq: UCOMA)
ATTRIBUTED OWNERSHIP ENTITY BUSINESS DESCRIPTION AT 3/1/00 - ------ -------------------- --------- SATELLITE COMMUNICATIONS SERVICES Astrolink International LLC Will build a global telecom network using 4 ka-band 32% geostationary satellites to provide broadband data communications services. The first 2 satellites, to be launched in 2002, will service customers in North and South America, Europe and the Middle East. The third and fourth spacecraft will extend the network worldwide. iSKY, Inc. Will build a ka-band satellite network that will focus 19% on providing broadband services to homes and small offices in North America and Latin America. Sky Latin America Satellite delivered television platform currently 10% servicing Mexico, Brazil, Chile and Columbia TCI Satellite Entertainment, Inc. Holds interests in certain communications assets 3% (19) (Nasdaq:TSATA) including General Motors Class H stock (NYSE:GMH) which tracks the performance of Hughes Electronics Corp., owner of DirecTV XM Satellite Radio, Inc. Plans to transmit up to 100 national audio channels of 2% (Nasdaq:XMSR) music, news, talk, sports and children's programming from two satellites directly to vehicle, home and portable radios TECHNOLOGY AND MANUFACTURING Antec Corporation Manufacturer of products for hybrid fiber/coaxial (Nasdaq: ANTC) broadband networks 19% Motorola, Inc. Provider of integrated communications solutions and 3% (NYSE: MOT) embedded electronic solutions TruePosition Provider of wireless location technology and services 100%
ATTRIBUTED OWNERSHIP ENTITY BUSINESS DESCRIPTION AT 3/1/00 INTERNET/INTERACTIVE TELEVISION SERVICES Broadband NOW, Inc. Provides high-speed Internet access and customized broadband content 5% and applications to subscribers via a private IP network that can connect such subscribers via multiple broadband technologies, including DSL, cable modem, wireless and Ethernet Geocast Network Systems, Inc. Building a new network that uses digital broadcast infrastructure to deliver 8% rich media information and programming to the PC desktop Liberty Digital, Inc. A diversified new media company with investments in Internet content and 94% (Nasdaq: LDIG) infrastructure and interactive television OTHER Emmis Communications Emmis owns and operates 16 radio stations, including five in the markets 12% Corporation of New York, Chicago and Los Angeles. Emmis also operates six (Nasdaq:EMMS) television stations and six magazines. Cendant Corporation Cendant is a franchiser of hotels, rental car agencies, tax preparation 7% (NYSE:CD) services and real estate brokerage offices. In direct marketing, Cendant provides access to insurance, travel, shopping, auto and other services primarily through its buying clubs. Cendant also provides vacation time share services, mortgage services and employee relocation. It operates in over 100 countries.
- ----------------------------------- (1) Number of subscribers to whom service is available. (2) Digital services. (3) Liberty Media Group's attributed ownership interest in this entity is listed under Jupiter Programming Co., Ltd. ("Jupiter") of which Liberty Media International, Inc. owns 50%. (4) LN -- London Stock Exchange; ASX -- Australian Stock Exchange. (5) Liberty Media Group's interest consists of shares of 30-year 9% preferred stock which has a stated aggregate value of $345 million and is not convertible into common stock. (6) Odyssey will be contributed to Crown Media Holdings in exchange for an approximate 18% interest in Crown Media Holdings. (7) Telemundo Network is a 24-hour broadcast network serving 61 markets in the United States, including the 37 largest Hispanic markets. (8) Telemundo Station Group owns and operates eight full power UHF broadcast stations and 15 low power television stations serving some of the largest Hispanic markets in the United States and Puerto Rico. (9) See "General Development of Business--Video Programming Services--TV Guide, Inc." for proposed changes in ownership of TV Guide. (10) Aggregate number of units. UVTV uplinks three superstations (WGN, WPIX, KTLA) and six Denver broadcast stations. One household subscribing to six services would be counted as six "units." (11) Magazine circulation -- includes subscription and newsstand distribution. (12) Liberty Media Group owns direct and indirect interests in various USAI and Home Shopping Network, Inc. securities which may be converted or exchanged for USAI common stock. Assuming the conversion or exchange of such securities, the conversion or exchange of certain securities owned by Universal Studios, Inc. and certain of its affiliates for USAI common stock Liberty Media Group would own approximately 21% of USAI. (13) Includes broadcast households and cable subscribers. (14) A group of UHF and low power television stations which operate in 12 of the country's top 22 broadcast markets, including in 7 of the top 10 markets, which reach approximately 31% of TV households in the U.S. (15) Homes in Service Area: The number of homes to which the relevant operating company is permitted by law to offer its services. Not all service areas are granted exclusively to the respective operating company. (16) Homes Passed: Homes that can be connected to a cable distribution system without further extension of the distribution network. (17) Basic Subscribers: A subscriber to a cable or other television distribution system who receives the basic television service and who is usually charged a flat monthly rate for a specific number of channels. (18) Less than 1% of voting power. Liberty Media Group holds securities of Sprint which are exercisable for or convertible into Sprint PCS stock-Series 1, which is publicly traded. (19) On March 16, 2000, Liberty Media Group acquired 85% voting power in TCI Satellite Entertainment. BUSINESS OPERATIONS Liberty Media Group is engaged principally in three fundamental areas of business: * Programming, consisting principally of interests in video programming services: * Communications, consisting principally of interests in cable television systems and other communications systems; and * Internet services and technology. The principal assets and consolidated subsidiaries of Liberty Media Group are described in greater detail below. VIDEO PROGRAMMING SERVICES Programming networks distribute their services through a number of distribution technologies, including cable television, direct-to-home satellite, broadcast television and the Internet. Programming services may be delivered to subscribers as part of a video distributor's basic package of programming services for a fixed monthly fee, or may be delivered as a "premium" programming service for an additional monthly charge. Whether a programming service is on a basic or premium tier, the programmer generally enters into separate multi-year agreements, known as "affiliation agreements," with those distributors that agree to carry the service. Basic programming services derive their revenues principally from the sale of advertising time on their networks and from per subscriber license fees received from distributors. Premium services do not sell advertising and primarily generate their revenues from subscriber fees. Relationship with AT&T Broadband. Most of the networks affiliated with Liberty Media Group have entered into affiliation agreements with Satellite Services, Inc. ("SSI") a company within AT&T Broadband, the successor company to TCI. SSI purchases programming services from programming suppliers and then makes such services available to cable television systems owned by or affiliated with AT&T Broadband ("SSI Affiliates"). Customers served by SSI Affiliates ("SSI Subscribers") represented approximately 25% of U.S. households which received cable or satellite delivered programming at December 31, 1999. Except as described below, substantially all of the video programming services operated by Liberty's subsidiaries and business affiliates received less than 25% of their revenues from AT&T Broadband. Each of Starz Encore Group and Liberty Digital, Inc. has entered into long term, fixed rate affiliation agreements with AT&T Broadband pursuant to which AT&T Broadband pays monthly fixed amounts in exchange for unlimited access to certain programming services of such companies. For the year ended December 31, 1999, such fixed rate affiliation fees represented approximately 37% and 28% of the total revenues of Starz Encore Group and Liberty Digital, respectively. STARZ ENCORE GROUP LLC Starz Encore Group LLC provides cable and satellite-delivered premium movie networks in the United States. It currently owns and operates 13 full-time domestic movie channels, including Encore, which airs first-run movies and classic contemporary movies, STARZ!, a first-run premium movie service and its four multiplex channels, six digital movie services programmed by theme ("Encore Thematic Multiplex"), and MOVIEplex, a "theme-by-day" channel featuring a different Encore or Encore Thematic Multiplex channel each day, on a weekly rotation. Starz Encore Group currently has agreements in place with most of the major program distributors and many smaller distributors to carry its Encore Thematic Multiplex services in digital packages. Starz Encore Group currently has access to approximately 5,700 movies through long-term library licensing agreements. In addition, it has licensed the exclusive rights to first-run output from Disney's Hollywood Pictures, Touchstone and Miramax, Universal Studios, New Line and Fine Line, Sony's Columbia Pictures and Sony Classics and other major studios. Starz Encore Group also has exclusive rights to first run output from four independent studios. The output agreements expire between 2003 and 2011. Unlike vertically integrated programmers, Starz Encore Group is not committed to or dependent on any one source of film productions. As a result, it has affiliations with every major Hollywood studio, through long-term output or library agreements. Additionally, Starz Encore Group is involved in several original programming productions. PRAMER S.C.A. Pramer S.C.A. is the largest owner and distributor of cable television programming services in Argentina. Pramer currently owns eight programming services and distributes them throughout Argentina. Pramer also distributes eight additional programming services in which it does not have an ownership interest, including two of Argentina's four terrestrial broadcast stations, throughout Argentina. Of the 16 programming services owned and/or distributed by Pramer, nine of them are distributed throughout Latin America. Pramer intends to continue to develop and acquire branded programming services and to further expand the carriage of its programming to distribution networks outside Argentina. DISCOVERY COMMUNICATIONS, INC. Discovery Communications, Inc. is the largest originator of documentary, nonfiction programming in the world. Since its 1985 launch of Discovery Channel, Discovery has grown into a global media enterprise with 1999 revenues of $1.4 billion. It currently operates programming services reaching more than 160 million people across six continents. Discovery's programming, products and services derive from the following three business units: - - Discovery Networks, U.S., which is comprised of Discovery Channel, The Learning Channel, Animal Planet, The Travel Channel, Discovery Health Channel and a package of six digital services; - - Discovery Networks International, which extends Discovery's programming globally and currently reaches more than 85 million subscribers in 147 foreign countries in 24 languages; and - - Discovery Enterprises Worldwide, which includes Discovery's brand extension business in retail, online, video, multimedia, publishing, licensing and education. Terms of Ownership. Discovery is organized as a close corporation managed by its stockholders rather than a board of directors. Generally, all actions to be taken by Discovery require the approval of the holders of a majority of Discovery's shares, subject to certain exceptions, including certain fundamental actions, which require the approval of the holders of at least 80% of Discovery's shares. The stockholders of Discovery have agreed that they will not be required to make additional capital contributions to Discovery unless they all consent. They have also agreed not to own another basic programming service carried by domestic cable systems that consists primarily of documentary science and nature programming, subject to certain exceptions. Each stockholder has been granted preemptive rights on share issuances by Discovery. Any proposed transfer of Discovery shares by a stockholder will be subject to rights of first refusal in favor of the other stockholders, subject to certain exceptions, with Liberty Media Group's right of first refusal being secondary under certain circumstances. In addition, Liberty Media Group is not permitted to hold in excess of 50% of Discovery's stock unless its increased ownership results from exercises of its preemptive rights or rights of first refusal. FLEXTECH, PLC Flextech, through its subsidiaries and affiliates, creates, packages and markets entertainment and information programming for distribution on cable television, direct-to-home satellite and digital terrestrial television providers throughout the United Kingdom and parts of continental Europe. By acquiring interests in and establishing alliances among providers of a variety of entertainment programming, Flextech has been able to achieve significant economies of scale and establish itself as a major low-cost provider of European television programming. Flextech has interests in 14 cable and satellite channels, 13 of which are distributed in the United Kingdom market. In addition to managing its five wholly owned programming services, Flextech currently provides management services to two joint ventures that it has formed with BBC Worldwide Limited, which operate several subscription television channels, and to Discovery Europe, Animal Planet Europe, Discovery Home and Leisure (formerly The Learning Channel) and HSN Direct International Limited. For its management and consultancy services, Flextech receives a management fee and, in some cases, a percentage of the programming company's gross revenues. Flextech also holds interests in programming production and distribution companies and a terrestrial broadcast network. Flextech's ordinary shares trade on the London Stock Exchange under the symbol "FLXT." Terms of Ownership. Liberty Media Group has the right to appoint two members of Flextech's board of directors for so long as it owns at least 25% of Flextech's ordinary shares. In addition, the appointment of some of Flextech's senior executive officers, including its managing director and its chief executive, requires Liberty Media Group's approval. Liberty Media Group has undertaken to Flextech and BBC Worldwide Limited that it will not, subject to certain exceptions, acquire an interest in excess of 20% in any entity that competes with certain of the channels of the two joint ventures that Flextech has formed with BBC Worldwide Limited. The non-compete will terminate on March 31, 2007 or, if earlier, at such time as Liberty Media Group's contingent funding obligation to the joint ventures terminates or Liberty Media Group owns not more than 10% of the ordinary shares of Flextech. On March 7, 2000, Telewest offered to acquire Flextech at a purchase price of approximately Pounds Sterling 2.76 billion. Pursuant to the offer by Telewest, each share of Flextech would be exchanged for 3.78 new Telewest shares. Liberty Media Group owns approximately a 37% equity interest in Flextech and a 22% equity interest in Telewest. See "-Communications-Telewest Communications plc" below. The proposed acquisition is subject to approval of the shareholders of Telewest, acceptance of the offer by the shareholders of Flextech and certain other conditions. Liberty Media Group, as a shareholder of Flextech, has agreed to tender its Flextech shares, subject to certain conditions. Otherwise, Liberty Media Group has agreed with Telewest not to dispose of any of Liberty Media Group's interest in Flextech through March 31, 2000. Liberty Media Group, MediaOne and Microsoft as shareholders of approximately 51% of Telewest, in the aggregate, have agreed to vote in favor of resolutions put to Telewest shareholders in connection with the offer to the extent applicable law and stock exchange rules permit them to do so. Because of Liberty Media Group's holdings, the Listing Rules of the London Stock Exchange require a separate vote by Telewest's shareholders, excluding Liberty Media Group, to approve Telewest's acquisition of Liberty Media Group's interests in Flextech in the merger. MediaOne and Microsoft have agreed to vote in favor of this acquisition. THE NEWS CORPORATION LIMITED New Corp. is a diversified international communications company principally engaged in: - - the production and distribution of motion pictures and television programming; - - television, satellite and cable broadcasting; - - publication of newspapers, magazines and books; - - production and distribution of promotional and advertising products and services; - - development of digital broadcasting; - - development of conditional access and subscriber management systems; and - - the provision of computer information services. News Corp.'s operations are located in the United States, Canada, the United Kingdom, Australia, Latin America and the Pacific Basin. News Corp's preferred limited voting ordinary shares trade on the Australian Stock Exchange under the symbol "NCPDP," and are represented on the NYSE by ADRs under the symbol "NWS.A." In July 1999, Liberty Media Group sold to News Corp. its 50% interest in their jointly owned Fox/Liberty Networks sports programming venture, in exchange for 51.8 million News Corp. ADRs representing preferred limited voting ordinary shares of News Corp., valued at approximately $1.425 billion, or approximately $27.52 per ADR. In a related transaction, Liberty Media Group acquired from News Corp. 28.1 million additional ADRs representing preferred limited voting ordinary shares of News Corp. for approximately $695 million, or approximately $24.74 per ADR. As a result of these transactions and subsequent open market purchases, as of March 1, 2000, Liberty Media Group owned approximately 81.7 million ADRs representing preferred limited voting ordinary shares of News Corp. or approximately 8% of News Corp.'s ordinary shares, on a fully diluted basis. Liberty Media Group's involvement in sports programming originated in 1988 when TCI began to pursue a strategy of creating regional sports networks. In April 1996, Liberty Media Group and New Corp. formed Fox/Liberty Networks, a joint venture to hold Liberty Media Group's national and regional sports networks and News Corp.'s FX, a general entertainment network which also carries various sporting events. Also in 1996, Liberty Media Group and News Corp. formed an alliance to hold their respective international sports interests (the "International Interests"). These include Fox Sports World Espanol, a Spanish language sports network, distributed in the United States and Latin America, as well as Fox Sports Americas (Latin America) and Fox Sports Middle East. As part of their agreement relating to the acquisition by News Corp. of Liberty Media Group's interest in Fox/Liberty Networks, Liberty Media Group and News Corp. agreed that, during a specified period following the second anniversary of the closing date of this transactions, each will have the right to cause News Corp. to acquire and Liberty Media Group to sell to News Corp. the International interests in exchange for News Corp. ADRs with an aggregate value at April 1, 1999 of approximately $100 million plus an additional number of ADRs representing the aggregate number of News Corp. shares which could have been purchased by reinvesting in ADRs each cash dividend declared on such number of shares between the closing of the sale of Liberty Media Group's interest in Fox/Liberty Networks and the sale of the International Interests. Between the closing of the sale of Liberty Media Group's interest in Fox/Liberty Networks and the sale of the International Interests, Liberty Media Group has further agreed to make capital contributions in respect of the International Interests in the amount of $100 million, as and when requested by News Corp. Terms of Ownership. In connection with the acquisition by News Corp. of Liberty Media Group's interest in Fox/Liberty Networks, certain agreements were entered into regarding Liberty Media Group's ability to transfer News Corp. shares and other matters. Under these agreements, the ADRs and the underlying News Corp. shares issued to Liberty Media Group are subject to a lock-up of either two years (as to 51.8 million ADRs) or nine months (as to 28.1 million ADRs), subject to certain exceptions. Liberty Media Group is entitled to certain registration rights with respect to its News Corp. shares. In addition, Liberty Media Group has agreed that it will not engage, directly or indirectly, in any sports programming service in the United States and its territories (excluding Puerto Rico) or in Canada, subject to certain exceptions, until July 2004. QVC INC. QVC Inc. is one of the two largest home shopping companies in the United States. QVC markets and sells a wide variety of consumer products and accessories primarily by means of televised shopping programs on the QVC network and via the Internet through iQVC. QVC also operates shopping networks in Germany, the United Kingdom and Ireland. QVC purchases, or obtains on consignment, products from domestic and foreign manufacturers and wholesalers, often on favorable terms based on the volume of the transactions. QVC does not depend upon any one particular supplier for any significant portion of its inventory. QVC distributes its television programs, via satellite, to affiliated video program distributors for transmission to subscribers. In return for carrying QVC, each domestic programming distributor receives an allocated portion, based upon market share, of up to 5% of the net sales of merchandise sold to customers located in the programming distributor's service area. Terms of Ownership. Liberty Media Group owns approximately 43% of QVC, and Comcast owns the remaining 57%. QVC is managed on a day-to-day basis by Comcast and Comcast has the right to appoint all of the members of the QVC board of directors. Liberty Media Group's interests are represented by two members on QVC's five-member management committee. Generally, QVC's management committee votes on every matter submitted, or required to be submitted, to a vote of the QVC board, and Liberty Media Group and Comcast are required to use their best efforts to cause QVC to follow the direction of any resolution of the management committee. Liberty Media Group also has veto rights with respect to certain fundamental actions proposed to be taken by QVC. Liberty Media Group has been granted a tag-along right that will apply if Comcast proposes to transfer control of QVC and Comcast may require Liberty Media Group to sell its QVC stock as part of the transaction, under certain circumstances and subject to certain conditions. In addition, under certain circumstances, Liberty Media Group has the right to initiate a put/call procedure with Comcast in respect of Liberty Media Group's interest in QVC. Liberty Media Group and Comcast have certain mutual rights of first refusal and mutual rights to purchase the other party's QVC stock following certain events, including change of control events affecting them. Both also have registration rights. TIME WARNER, INC. Time Warner is one of the largest media and entertainment companies in the world. Time Warner classifies its business interests into four fundamental areas: - - Cable Networks, consisting principally of interests in cable television programming, including the following networks: CNN, Cartoon Network, Headline News, TNT, Turner Classic Movies, TBS Superstation, CNNfn, HBO, Cinemax, Comedy Central and TVKO; - - Publishing, consisting principally of interests in magazine publishing, book publishing and direct marketing; - - Entertainment, consisting principally of interests in filmed entertainment, television production, television broadcasting, recorded music and music publishing; and - - Cable, consisting principally of interests in cable television systems which, as of December 31, 1999, reached approximately 12.6 million subscribers. Time Warner's common stock trades on the NYSE under the symbol "TWX." In connection with the 1996 Turner Broadcasting System/Time Warner merger, Time Warner, Turner Broadcasting System, TCI and Liberty Media Group entered into an Agreement Containing Consent Order (the "FTC Consent Decree") with the Federal Trade Commission ("FTC"). The FTC Consent Decree effectively prohibits Liberty Media Group and its affiliates from owning voting securities of Time Warner other than securities that have limited voting rights. Pursuant to the FTC Consent Decree, among other things, Liberty Media Group agreed to exchange the shares of Time Warner common stock it was to receive in the Turner Broadcasting System/Time Warner merger for shares of a separate series of Time Warner common stock with limited voting rights designated as Series LMCN-V Common Stock. The Series LMCN-V Common Stock entitles the holder to one one-hundredth (1/100th) of a vote for each share with respect to the election of directors. Liberty Media Group holds approximately 114 million shares of such stock, which represent less than 1% of the voting power of Time Warner's outstanding common stock. The Series LMCN-V Common Stock is not transferable, except in limited circumstances, and is not listed on any securities exchange. Each share of the Series LMCN-V Common Stock is convertible at Liberty Media Group's option into one share of ordinary Time Warner common stock, at any time when such conversion would not violate the federal communications laws, subject to the FTC Consent Decree, and is mandatorily convertible into ordinary Time Warner common stock upon transfer to a non-affiliate of Liberty Media Group. Further, while shares of ordinary Time Warner common stock are redeemable by action of the Time Warner board of directors under certain circumstances, to the extent necessary to prevent the loss of certain types of governmental licenses or franchises, shares of Series LMCN-V Common Stock are not redeemable under these circumstances. On January 10, 2000, Time Warner and America Online, Inc. announced that they had entered into an Agreement and Plan of Merger relating to the combination of their businesses. Pursuant to this Agreement and Plan of Merger, Time Warner and America Online would each merge with, and become wholly-owned subsidiaries of, a newly-formed holding company called "AOL Time Warner Inc." According to publicly available information, in this transaction each share of Series LMCN-V Common Stock of Time Warner held by Liberty Media Group would be converted into 1.5 shares of a new Series LMCN-V Common Stock of AOL Time Warner Inc. These securities of AOL Time Warner Inc. would have substantially the same terms as the Series LMCN-V Common Stock of Time Warner currently held by Liberty Media Group. This transaction is subject to several conditions, including the approval of Time Warner's and America Online's stockholders, as well as regulatory approvals. TV GUIDE, INC. TV Guide, Inc., formerly named United Video Satellite Group, Inc., is a media and communications company that provides print, passive and interactive program listings guides to households, distributes programming to cable television systems and direct-to-home satellite providers, and markets satellite-delivered programming to C-band satellite dish owners. TV Guide's Class A common stock trades on the National Market tier of The Nasdaq Stock Market under the symbol "TVGIA." - - TV Guide is organized into three primary business units: - - TV Guide Magazine Group, - - TV Guide Entertainment Group, and - - United Video Group. The TV Guide Magazine Group publishes and distributes TV Guide magazine, the most widely circulated paid weekly magazine in the United States, to households and newsstands. In addition, the TV Guide Magazine Group provides customized monthly television programming guides for cable and satellite operators. The TV Guide Entertainment Group supplies satellite-delivered on-screen program promotion and guide services, including TV Guide Channel and Sneak Prevue, to cable television systems and other multi-channel video programming distributors, both nationally and internationally. The TV Guide Entertainment Group also offers interactive television technology that allows television viewers to retrieve on demand continuously updated program guide information through their cable television systems and provides TV Guide Online, an Internet-based program listings guide. The United Video Group provides direct-to-home satellite services, satellite distribution of video entertainment services, software development and systems integration services and satellite transmission services for private networks. This group owns TV Guide's 80% interest in Superstar/Netlink Group LLC, which markets satellite entertainment programming packages to C-band satellite dish owners in the United States. Its retail subscriber base was approximately one million at December 31, 1999. In November 1999, TV Guide announced an exclusive direct broadcast satellite marketing alliance agreement with EchoStar to convert the existing and inactive C-band customers of Superstar/Netlink to the high power (small satellite dish) DISH Network Service. Under the conversion process, EchoStar will compensate Superstar/Netlink Group on a per subscriber base, both upon successful conversion and with residual payments over time. The United Video Group also markets and distributes three independent superstations -- WGN (Chicago), KTLA (Los Angeles) and WPIX (New York) -- and six Denver-based broadcast television stations to cable television systems and other multi-channel video programming distributors, and offers programming packages to satellite master antenna television systems. TV Guide is jointly controlled by Liberty Media Group and News Corp., with each owning approximately 44% of its equity and 49% of its voting power. Liberty Media Group's interest in TV Guide began in January 1996 when TCI acquired a controlling interest in Untied Video Satellite Group, Inc. ("UVSG"), a provider of satellite-delivered video, audio, data and program promotion services to cable television systems, satellite dish owners, radio stations and private network users primarily throughout North America. In January 1998, TCI increased its equity interest in UVSG to approximately 73% and its voting interest to approximately 93%. On March 1, 1999, UVSG acquired Liberty Media Group's 40% interest in Superstar/Netlink Group and its 100% interest in Netlink USA, which uplinks the signals of six Denver-based broadcast television stations, in exchange for shares of UVSG common stock. On the same date, UVSG acquired News Corp.'s TV Guide properties in exchange for cash and shares of UVSG common stock. By combining UVSG's passive and interactive electronic program listing guides with TV Guide's well-recognized magazine and brand name, UVSG became a leading provider of program listing guides. Following this transaction, UVSG changed its name to TV Guide, Inc. In October 1999, TV Guide announced that it had entered into a definitive merger agreement with Gemstar International Group Limited, pursuant to which TV Guide would become a wholly owned subsidiary of Gemstar. Under the merger agreement, TV Guide shareholders would receive 0.6573 shares of Gemstar common stock for each share of TV Guide common stock. TV Guide shareholders would, in the aggregate, receive approximately 45% of the fully diluted shares of the combined company. Consummation of the transaction is subject to limited conditions, including approval by the shareholders of each company (which was received on March 17, 2000) and the satisfaction of regulatory requirements. It is anticipated that the transaction will close in the first half of 2000. Upon consummation of the transaction, the company is expected to be renamed TV Guide International Inc. and the board of directors will be expanded to twelve members, of which 6 members will be persons designated by the board of directors of TV Guide prior to the merger. Gemstar develops, markets and licenses proprietary technologies and systems that simplify and enhance consumers' interaction with electronics products and other platforms that deliver video, programming information and other data. Gemstar seeks to have its technologies widely licensed, incorporated and accepted as the technologies and systems of choice by - - consumer electronics manufacturers, - - service providers such as owners or operators of cable systems, telephone networks, Internet service providers, direct broadcast satellite providers, wireless systems and other multi-channel video programming distributors, - - software developers and - - consumers. Gemstar's first proprietary system, VCR Plus+, was introduced in 1990 and is widely accepted as an industry standard for programming VCRs. VCR Plus+ enables consumers to record a television program by entering a number -- the PlusCode number -- into a VCR or television equipped with the VCR Plus+ technology. Gemstar is also a leading provider of interactive program guide services, which allow a user to view a television program guide on screen, obtain details about a program, sort programs by themes or categories, and select programs for tuning or recording through the remote control. Gemstar's common stock trades on the National Market tier of The Nasdaq Stock Market under the symbol "GMST." Terms of Ownership. Pursuant to a stockholders agreement between Liberty Media Group and News Corp., each of them is entitled to designate one director to the ten-member TV Guide board for each 12.5% of the outstanding shares of TV Guide Class B common stock owned by such party, with the remaining directors being designated by the TV Guide board. So long as Liberty Media Group or News Corp., as the case may be, is entitled to designate at least one director to TV Guide's board of directors, the other party is subject to certain restrictions on its ability to sell any of its shares of TV Guide common stock or to convert any of its shares of TV Guide Class B common stock (10 votes per share) into shares of TV Guide Class A common stock (one vote per share) unless it first offers to sell the stock to the other party. In addition, Liberty Media Group and News Corp. have mutual rights of first refusal, tag-along rights on transfers of significant interests and registration rights. Liberty Media Group and News Corp. have further agreed that, for so long as they both are entitled to appoint at least one of TV Guide's directors, TV Guide will be the exclusive vehicle through which they will each conduct program guide businesses worldwide, subject to certain limited exceptions. USA NETWORKS, INC. USA Networks, through its subsidiaries, is a diversified media and electronic commerce company that is engaged in seven principal areas of business: - - Networks and Television Production, which operates USA Network, a general entertainment basic cable television network, Sci-Fi Channel, which features science fiction, horror, fantasy and science-fact oriented programming, and Studios USA, which produces and distributes television programming; - - Electronic Retailing, which primarily consists of Home Shopping Network and America's Store, which are engaged in the electronic retailing business; - - Broadcasting, which owns and operates television stations; - - Ticketing Operations, which includes Ticketmaster, the leading provider of automated ticketing services in the United States, and Ticketmaster.com, Ticketmaster's exclusive agent for online ticket sales; - - Hotel Reservations, consisting of Hotel Reservations Network, a leading consolidator of hotel rooms for resale in the consumer market in the United States; - - Internet Services, which includes the Internet Shopping Network, USA Networks' online retailing networks business and local city guide business; and - - Filmed Entertainment, which primarily represents USA Networks' domestic theatrical film distribution and production businesses. USA Networks' common stock trades on the National Market tier of The Nasdaq Stock Market under the symbol "USAI." Liberty Media Group's interest in USA Networks consists of shares of USA Networks common stock held by Liberty Media Group and its subsidiaries, shares of USA Networks common stock held by certain entities in which Liberty Media Group has an equity interest but only limited voting rights, and securities of certain subsidiaries of USA Networks which are exchangeable for shares of USA Networks common stock. Assuming the exchange of these securities and the conversion or exchange of certain securities owned by Universal Studios, Inc. ("Universal") and certain of its affiliates for USA Networks common stock, Liberty Media Group and Universal would own approximately 21% and 45%, respectively, of USA Networks. In general, until the occurrence of certain events and with the exception of certain negative controls, Mr. Barry Diller has voting power over Liberty Media Group's interest in USA Networks, as more fully described below. Terms of Ownership. USA Networks, Universal, Liberty Media Group and Mr. Diller have entered into several agreements involving governance matters relating to USA Networks and stockholder arrangements. With respect to governance matters, Mr. Diller generally has full authority to operate the day-to-day business affairs of USA Networks and has an irrevocable proxy over all USA Networks securities owned by Universal, Liberty Media Group and certain of their affiliates for all matters except for certain fundamental changes. However, each of Liberty Media Group, Universal and Mr. Diller has veto rights with respect to certain fundamental changes relating to USA Networks and its subsidiaries (including USANi LLC, which was formed to hold USA Networks' non-broadcast businesses). If Mr. Diller and Universal agree to certain fundamental changes that Liberty Media Group does not agree to, Universal will be entitled to purchase Liberty Media Group's entire equity interest in USA Networks, subject to certain conditions, at a price determined by an independent appraiser taking into account a number of agreed upon factors. Pursuant to FCC law and regulations, Liberty Media Group is not currently permitted to have a designee on the board of directors of USA Networks. However, at such time as Liberty Media Group is no longer subject to such prohibition, Liberty Media Group will have the right to designate up to two directors if its stock ownership in USA Networks remains at certain levels. Liberty Media Group currently has the right to designate up to two directors to the USANi LLC board and will continue to have that right for so long as it is not permitted to designate directors of USA Networks and continues to maintain certain ownership levels. Each of Universal and Liberty Media Group has a preemptive right with respect to future issuances of USA Network's capital stock, subject to certain limitations. Liberty Media Group has agreed to certain limitations on increases in its percentage of ownership of USA Networks. Also, Liberty Media Group has agreed not to propose to the board of directors of USA Networks the acquisition by Liberty Media Group of the outstanding USA Networks securities or to otherwise influence the management of USA Networks, including by proposing or supporting certain transactions relating to USA Networks that are not supported by USA Networks' board of directors. Liberty Media Group is subject to a number of agreements that limit or control its ability to transfer its USA Network securities. As long as Mr. Diller is Chief Executive Officer of USA Networks, Liberty Media Group generally cannot transfer shares of USA Networks stock prior to August 24, 2000, subject to certain exceptions. Each of Universal and Mr. Diller has a right of first refusal with respect to certain sales of USA Networks securities by the other party. Liberty Media Group's rights in this regard are secondary to any Universal right of refusal on transfers by Mr. Diller. Each of Liberty Media Group and Mr. Diller also generally has a right of first refusal with respect to certain transfers by the other party and tag-along sale rights on certain sales of USA Networks stock by the transferring stockholder and in the event Universal transfers a substantial amount of its USA Networks stock. Liberty Media Group, Universal and Mr. Diller are each entitled to registration rights relating to their USA Networks securities and have agreed to certain put and call arrangements, pursuant to which one party has the right to sell (or the other party has the right to acquire) shares of USA Networks stock held by another party, at a price determined by an independent appraiser taking into account a number of agreed upon factors. COMMUNICATIONS Cable television systems deliver multiple channels of television programming to subscribers who pay a monthly fee for the service. Video, audio and data signals are received over-the-air or via satellite delivery by antennas, microwave relay stations and satellite earth stations and are modulated, amplified and distributed over a network of coaxial and fiber optic cable to the subscribers' television sets. Cable television providers in most markets are currently upgrading their cable systems to deliver new technologies, products and services to their customers. These upgraded systems allow cable operators to expand channel offerings, add new digital video services, offer high-speed data services and, where permitted, provide telephony services. The implementation of digital technology significantly enhances the quantity and quality of channel offerings, allows the cable operator to offer video-on-demand, additional pay-per-view offerings, premium services and incremental niche programming. Upgraded systems also enable cable networks to transmit data and gain access to the Internet at significantly faster speeds, up to 100 times faster, than data can be transmitted over conventional dial-up connections. Lastly, cable providers have been developing the capability to provide telephony services to residential and commercial users at rates well below those offered by incumbent telephone providers. Telephony providers offer local, long distance, switched services, private line and advanced networking features to customers who pay a monthly fee for the service, generally based on usage. Wireless telecommunications networks use a variety of radio frequencies to transmit voice and data in place of, or in addition to, standard landline telephone networks. Wireless telecommunications technologies include two-way radio applications, such as cellular, personal communications services, specialized mobile radio and enhanced specialized mobile radio networks, and one-way radio applications, such as paging services. Each application operates within a distinct radio frequency block. As a result of advances in digital technology, digital-based wireless system operators are able to offer enhanced services, such as integrated voicemail, enhanced custom-calling and short-messaging, high-speed data transmissions to and from computers, advanced paging services, facsimile services and Internet access service. Wireless subscribers generally are charged for service activation, monthly access, air time, long distance calls and custom-calling features. Wireless system operators pay fees to local exchange companies for access to their networks and toll charges based on standard or negotiated rates. When wireless operators provide service to roamers from other systems, they generally charge roamer air time usage rates, which usually are higher than standard air time usage rates for their own subscribers, and additionally may charge daily access fees. LIBERTY CABLEVISION OF PUERTO RICO, INC. Liberty Cablevision of Puerto Rico, Inc. is one of the largest providers of cable television services in Puerto Rico. It owns and operates cable television franchises, serving the communities of Luquillo, Arecibo, Florida, Caguas, Humacao, Cayey and Barranquitas. On September 21, 1998, hurricane Georges struck Puerto Rico and caused considerable property damage to the area in general, including Liberty Cablevision of Puerto Rico's cable television systems. However, all of Liberty Cablevision of Puerto Rico's systems have been rebuilt, and as of December 31, 1999, all of its pre-hurricane basic customers were receiving cable television services. As of December 31, 1999, approximately 85% of Liberty Cablevision of Puerto Rico's network had been rebuilt utilizing 550 MHz bandwidth capacity, with the remainder consisting of 450 MHz. At December 31, 1999, Liberty Cablevision of Puerto Rico operated from five headends, and provided subscribers with 63 channels. A significant portion of Liberty Cablevision of Puerto Rico's cable network consists of fiber-optic and coaxial cable. This infrastructure allows Liberty Cablevision of Puerto Rico to offer enhanced entertainment, information and telecommunications services and, when and to the extent permitted by law, cable telephony services. Liberty Cablevision of Puerto Rico currently offers its subscribers pay-per-view events and premium movies and as it introduces new revenue generating products and services, such as interactive services, Liberty Cablevision of Puerto Rico expects to aggressively market those products and services to its subscribers in areas with sufficient bandwidth capacity. Liberty Cablevision of Puerto Rico expects to begin offering high speed data transmission services and Internet access using high speed cable modems to its subscribers during the first half of 2001. SPRINT PCS GROUP Sprint Corporation operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide utilizing a single frequency band and a single technology. Sprint owns licenses to provide service to the entire United States population, including Puerto Rico and the U.S. Virgin Islands. At December 31, 1999, Sprint, together with certain affiliates, operated PCS systems in the majority of the metropolitan areas in the U.S. At that date, Sprint served more than 4,000 cities and communities and had approximately 5.7 million customers. Sprint attributes this business and its assets to Sprint's "Sprint PCS Group." The Sprint PCS stock is a tracking stock intended to reflect the performance of the Sprint PCS Group. The Sprint PCS stock-Series 1 trades on the NYSE under the symbol "PCS." On October 5, 1999, Sprint announced that it had entered into a definitive merger agreement with MCI WorldCom, Inc. Under the merger agreement, each share of Sprint's FON common stock would be exchanged for $76.00 of MCI WorldCom common stock, subject to a collar, and each share of Sprint PCS stock-Series 1, Sprint PCS stock-Series 2 and Sprint PCS stock-Series 3 would be exchanged for one share of a new MCI WorldCom PCS tracking stock of the corresponding series and 0.116025 shares of MCI WorldCom common stock. The terms of each series of MCI WorldCom PCS tracking stock would be equivalent to those of the corresponding Sprint security and would track the performance of the PCS business of the surviving company. The merger would be tax free to stockholders of Sprint and accounted for as a purchase. Consummation of the merger is subject to the approvals of the stockholders of Sprint and MCI WorldCom as well as customary regulatory approvals. Upon consummation of the merger, the company is expected to be renamed WorldCom and its board of directors is to have 16 members, 10 from MCI WorldCom and 6 from Sprint. Liberty Media Group owns approximately 23% (on a fully diluted basis) of the Sprint PCS stock through its ownership of shares of Sprint PCS stock-Series 2 and certain warrants and shares of convertible preferred stock exercisable for or convertible into these shares. Liberty Media Group's interest in the business that makes up the Sprint PCS Group began in 1994 when TCI, Comcast Corporation, Cox Communications, Inc. and Sprint Corporation determined to engage in the wireless communications business through a series of limited partnerships known collectively as "Sprint PCS." In November 1998, Sprint Corporation assumed ownership and management control of Sprint PCS. In exchange for its approximate 30% limited partnership interest in Sprint PCS, TCI received shares of limited-voting Sprint PCS stock-Series 2, shares of Sprint PCS convertible preferred stock and warrants to purchase shares of Sprint PCS stock-Series 2. Pursuant to a final judgment agreed to by TCI, AT&T and the United States Department of Justice in connection with the AT&T merger, all of the Sprint securities held by TCI were deposited into a trust with an independent trustee. Liberty Media Group holds trust certificates evidencing its beneficial interest in the assets of the trust. The final judgment, which was entered by the United States District Court for the District of Columbia on August 23, 1999, requires the trustee, on or before May 23, 2002, to dispose of a portion of the Sprint securities held by the trust sufficient to cause Liberty Media Group to own beneficially no more than 10% of the Sprint PCS stock that would be outstanding on a fully diluted basis on such date. On or before May 23, 2004, the trustee is required to divest the remainder of the Sprint securities held by the trust. The trust agreement grants the trustee the sole right to sell the Sprint securities beneficially owned by Liberty Media Group and provides that all decisions regarding such divestiture will be made by the trustee without discussion or consultation with AT&T or Liberty Media Group; however, the trustee is required to consult with the board of directors of Liberty Media Group (other than AT&T representatives and John C. Malone) regarding such divestiture. The trustee has the power and authority to accomplish such divestiture only in a manner reasonably calculated to maximize the value of the Sprint securities beneficially owned by Liberty Media Group. The trust agreement provides for the trustee to vote the Sprint securities beneficially owned by Liberty Media Group in the same proportion as other holders of Sprint PCS stock so long as such securities are held by the trust. The final judgment also prohibits the acquisition by Liberty Media Group of additional Sprint securities without the prior written consent of the Department of Justice, subject to limited exceptions. Terms of Ownership. Liberty Media Group was granted registration rights with respect to its Sprint PCS holdings. These registration rights are currently exercisable by the trustee. If Liberty Media Group's shares of Sprint PCS stock-Series 2 are transferred, the transferred shares become shares of full voting Sprint PCS stock-Series 1. TELEWEST COMMUNICATIONS PLC Telewest is a leading provider of cable television and residential and business cable telephony services in the United Kingdom. Telewest provides cable television services over a broadband network and uses its network, together with twisted-pair copper wire connections for final delivery to the customer premises, to provide telephony services to its customers. The broadband network enables Telewest to deliver a wide variety of both television and telephony services to its customers and to provide customers with a wide range of interactive and integrated entertainment, telecommunications and information services as they become more widely available in the future. Telewest has installed its own telephone switches, which permits it to minimize fees otherwise charged by public telephone companies and to offer a variety of value-added services without relying on public telephone operators for implementation. Telewest also offers home access to the Internet in all of its franchises. Telewest's ordinary shares trade on the London Stock Exchange under the symbol "TWT.L," and are represented by ADRs in the United States, where they trade on the National Market tier of The Nasdaq Stock Market under the symbol "TWSTY." Telewest owns and operates 41 cable franchises. As of December 31, 1999, these owned and operated franchises covered approximately 34% of the homes in the United Kingdom in areas for which cable franchises have been awarded. At that date, these franchises together included approximately 6.1 million homes and over 400,000 businesses. As of December 31, 1999, the network in these franchises passed approximately 4.7 million homes (approximately 4.4 million of which had been passed and marketed) and Telewest had approximately 1.2 million cable television customers, 1.6 million residential telephone lines and 306,000 business telephone lines. According to Telewest, approximately 62% of its customers subscribe for both cable television and cable telephony services. Ownership Interest. Liberty Media Group owns approximately a 22% interest in Telewest through a limited liability company, which is 50% owned by Liberty Media Group and 50% owned by MediaOne Group, Inc. MediaOne owns an approximately 22% interest in Telewest through the limited liability company. In addition, MediaOne owns an approximately 7% interest in Telewest outside the limited liability company. Terms of Ownership. Liberty Media Group and MediaOne have been granted preemptive rights on share issuances by Telewest which enable them to collectively maintain a majority of the voting rights in Telewest. Liberty Media Group and MediaOne have agreements with respect to the voting of shares of Telewest beneficially owned by them and the manner in which they will cause their designees to the Telewest board of directors to vote. In general, Liberty Media Group and MediaOne have agreed that, on any matter requiring shareholder approval, they will vote their Telewest shares together in such manner as may be agreed by them. As a result, Liberty Media Group and MediaOne together generally will be able to influence materially the outcome of any matter requiring shareholder approval. In addition, each of Liberty Media Group and MediaOne has veto rights with respect to certain fundamental matters affecting Telewest for so long as each holds 15% or more of the outstanding Telewest ordinary shares. Further, for so long as each of them beneficially owns at least 15% of the outstanding Telewest ordinary shares, each is entitled to appoint two members to the 10-member Telewest board of directors, and they have agreed that on any matter requiring board approval, they will cause the directors designated by them to vote together as agreed by them. Each of Liberty Media Group and MediaOne has agreed that any proposed transfer of its Telewest shares will be subject to rights of first refusal in favor of the other party, in each case subject to certain exceptions. In addition, each of Liberty Media Group and MediaOne has the right to trigger a put/call procedure in the event the other is deemed to undergo a change of control. Each of Liberty Media Group and MediaOne has agreed with Telewest, subject to certain exceptions, not to acquire interests in other cable television or cable telephony companies in the United Kingdom, and Telewest has agreed to certain restrictions on its ability to engage in businesses in the United Kingdom outside of cable television, cable telephony and wireless telephony. In May 1999, as part of a series of agreements entered into with AT&T in connection with AT&T's proposed acquisition of MediaOne, Microsoft Corporation agreed to purchase MediaOne's interest in Telewest through a tax-free exchange of Microsoft shares, subject to certain conditions, including receipt of the consent of Liberty Media Group and the closing of the proposed business combination between AT&T and MediaOne. It is expected that if this purchase is completed, Microsoft will succeed to all of MediaOne's rights and obligations set forth above, subject to certain modifications agreed to in connection with the Telewest offer for Flextech. On March 7, 2000, Telewest offered to acquire Flextech at a purchase price of approximately (pound sterling)2.76 billion. Pursuant to the offer by Telewest, each share of Flextech would be exchanged for 3.78 new Telewest shares. Liberty Media Group owns approximately a 37% equity interest in Flextech and a 22% equity interest in Telewest. The proposed acquisition is subject to approval of the shareholders of Telewest, acceptance of the offer by the shareholders of Flextech and certain other conditions. Liberty Media Group, as a shareholder of Flextech, has agreed to tender its Flextech shares, subject to certain conditions. Otherwise, Liberty Media Group has agreed with Telewest not to dispose of any of Liberty Media Group's interest in Flextech through March 31, 2000. Liberty Media Group, MediaOne and Microsoft as shareholders of approximately 51% of Telewest, in the aggregate, have agreed to vote in favor of resolutions put to Telewet shareholders in connection with the offer to the extent applicable law and stock exchange rules permit them to do so. Because of Liberty Media Group's holdings, the Listing Rules of the London Stock Exchange require a separate vote by Telewest's shareholders, excluding Liberty Media Group, to approve Telewest's acquisition of Liberty Media Group's interests in Flextech in the merger. MediaOne and Microsoft have agreed to vote in favor of this acquisition. TELIGENT, INC. Teligent, Inc. is a full-service, facilities-based communications company which offers small and medium-sized business customers local and long distance telephony, high-speed data and Internet access services over Teligent's SmartWave(TM) local networks. The SmartWave(TM) local networks integrate advanced fixed wireless technologies with traditional broadband wireline technology. Teligent"s digital wireless technology provides many of the advantages of fiber and can transport information within the network at up to 155 Megabits per second via a point-to-point radio. Teligent currently offers commercial service using its SmartWave(TM) local networks in 40 major market areas that comprise more than 580 cities and towns with a combined population of more than 100 million. INTERNET SERVICES AND TECHNOLOGY LIBERTY DIGITAL, INC. Liberty Digital, Inc. (formerly named TCI Music, Inc.) is a diversified new media company with investments in Internet content and interactive television businesses, as well as music services delivered to commercial and residential customers via cable, satellite, the Internet and other platforms. Liberty Digital's series A common stock trades on the National Market tier of The Nasdaq Stock Market under the symbol "LDIG." As of March 1, 2000, the assets of Liberty Digital consisted primarily of the following:
Liberty Digital's Ownership Entity % Business - ------------------------------------ ------------ ----------------------------------------------------------- AT&T Access Agreement N/A Certain programming rights with respect to AT&T's cable systems ACTV, Inc. (Nasdaq: IATV) 12%(1) Producer of tools for interactive programming for television and Internet platforms BET.com 5% Web site with content directed towards African Americans CarsDirect.com, Inc. 1% Online car retailer DMX, LLC. 100% Programs, markets and distributes the premium digital audio service, Digital Music Express Drugstore.com, Inc. (Nasdaq: DSCM) 1% Online pharmacy and sundries HomeGrocer.com, Inc. 1% Online grocery store (Nasdaq: HOMG) iBeam Broadcasting Corporation 8% Satellite delivery of streaming media from programmers to Internet service providers iFilm, Inc. 1% Metamediary for making, distributing and consuming film entertainment Interactive Pictures 4% Interactive photographic technology for the Internet Corporation (Nasdaq: IPIX) iVillage, Inc. 3% Internet and on-line provider of branded communications (Nasdaq: IVIL) and information services for adult women Kaleidoscope Interactive, LLC 50% Online provider of information and services related to health concerns and disabilities
Liberty Digital's Ownership Entity % Business - ----------------------------------------- --------- ----------------------------------------------------------- Kaleidoscope Network, Inc. 12% 24-hour cable network that provides video programming related to health concerns and disabilities KPCB Java Fund, L.P. 6% Investor in Java application development Lifescape, LLC 15% Online provider of information concerning substance abuse, addictions and health problems The Lightspan Partnership, Inc. 11% Developer of educational programming (Nasdaq:LSPN) MedScholar Digital Network, LLC 50% Provider of continuous medical education services to healthcare professionals MTVN Online L.P. 10% Online music venture with MTV Networks netLibrary, Inc. 2% Electronic library Online Retail Partners 21% Creates e-commerce partnerships with brick-and-mortar retailers OpenTV Inc. 4% Provider of software to enable interactive television (Nasdaq:OPTV) OrderTrust, Inc. 9% Provider of total order life cycle management services OurHouse.com 3% Ace Hardware co-branded vertical portal for online home improvement products, services and information pogo.com, Inc. 19% Online game service targeting family Internet game players priceline.com Incorporated (Nasdaq: PCLN) 2% E-commerce service allowing consumers to make offers on products and services Quokka Sports, Inc. (Nasdaq: QKKA) 3% Internet provider of live digital sports entertainment Replay TV, Inc. 1%(2) Producer of technology that allows customers to customize television viewing Sportsline USA, Inc. (Nasdaq: SPLN) 3% Internet provider of branded interactive sports information, programming and merchandise TiVo Inc. (Nasdaq: TIVO) 1% Producer of technology that allows customers to customize television viewing UGO Networks, Inc. 4% Online provider of underground entertainment news and video games
(1) Liberty Digital also holds warrants to purchase additional shares of ACTV, Inc. common stock, which it may exercise over a period of one to five years. Exercise of these warrants would increase Liberty Digital's ownership to approximately 25%. (2) Discovery, Starz Encore and TV Guide each owns an additional 1% of Replay. An approximately 94% interest in Liberty Digital is attributed to the Liberty Media Group. Liberty Media Group's interest in Liberty Digital began in 1997 when TCI Music was formed as a wholly owned subsidiary of TCI for the purpose of entering into a business combination with DMX, LLC. DMX currently programs, markets and distributes the premium digital audio music service, known as Digital Music Express to more than 29 million subscribers in the United States. In December 1997, TCI Music acquired The Box Worldwide, Inc., which programs and distributes a subscriber selected music video television programming service to cable and broadcast television systems via satellite delivery, and SonicNet, Inc., a leading Internet music network consisting of a group of music web sites. TCI Music acquired The Box to serve as the platform for music video and acquired SonicNet to provide music-related content to DMX and The Box and to position itself to take advantage of developments in music distribution through the Internet. In July 1999, TCI Music entered into a joint venture with MTV Networks, a division of Viacom, Inc., to form and operate an online music venture, MTVN Online L.P. As part of that transaction, TCI Music contributed to MTVN Online substantially all of the assets and businesses of The Box and SonicNet, subject to certain exceptions. In return, TCI Music received a 10% interest in MTVN Online. In connection with this transaction, TCI Music and Liberty Media Group each agreed not to compete with MTVN Online in its online music video business until July 15, 2000 or in the music video business generally until July 15, 2004, subject to certain exceptions. In September 1999, TCI Music and Liberty Media Group completed a transaction pursuant to which Liberty Media Group and certain of its affiliates contributed to TCI Music substantially all of their respective Internet content and interactive television assets, certain rights with respect to access to AT&T cable systems for the provision of interactive video services, and a combination of cash and notes receivable equal to $150 million, in exchange for preferred and common stock of TCI Music. Following this transaction, TCI Music changed its name to Liberty Digital, Inc. In addition, Liberty Media Group adopted a policy that Liberty Digital would be its primary (but not exclusive) vehicle to pursue corporate opportunities relating to interactive programming and interactive content related services in the United States and Canada, subject to certain exceptions. MOTOROLA, INC. (SUCCESSOR TO GENERAL INSTRUMENT CORPORATION) Liberty Media Group's interest in Motorola, Inc. derives from its former interest in General Instrument Corporation. GI merged with Motorola on January 5, 2000. Prior to its merger with Motorola, General Instrument Corporation was a leading worldwide provider of integrated and interactive broadband access solutions and, with its strategic partners and customers, GI sought to advance the convergence of the Internet, telecommunications and video entertainment industries. To that end, GI made products that allow video, voice and data to be delivered over cable, digital satellite and telephony networks. GI was a leading supplier of digital and analog set-top terminals and systems for wired and wireless cable television networks, as well as hybrid fiber/coaxial network transmission systems used by cable television operators. GI also provided digital satellite television systems for programmers, direct-to-home satellite networks and private networks for business communications. Through its limited partnership interest in Next Level Communications L.P., GI provided next-generation broadband access solutions for local telephone companies. GI also had audio and Internet/data-delivery systems among its product lines. In the Motorola merger, each share of GI common stock was exchanged for 0.575 shares of Motorola common stock. In connection with the merger, Liberty Media Group entered into an agreement with Motorola, pursuant to which Liberty Media Group agreed to vote its shares of GI common stock in favor of the transaction and Motorola granted to Liberty Media Group certain registration rights with respect to the shares of Motorola common stock acquired by Liberty Media Group in the merger. Immediately following the merger, GI stockholders owned approximately 17% of Motorola. Motorola is a global leader in providing integrated communications solutions and embedded electronic solutions. These include: - software-enhanced wireless telephone, two-way radio, messaging and satellite communications products and systems, as well as networking and Internet access products, for consumers, network operators, and commercial, government and industrial customers, - embedded semiconductor solutions for customers in networking, transportation, wireless communications and imaging and entertainment markets, and - embedded electronic systems for automotive, communications, imaging, manufacturing systems, computer and consumer markets. Motorola's common stock trades on the NYSE under the symbol "MOT." Liberty Media Group currently holds common stock representing a 2.5% interest in Motorola, excluding vested warrants to purchase common stock in Motorola. Liberty Media Group also holds warrants to purchase approximately 12.3 million additional shares of Motorola common stock at $24.78 per share. The warrants vest at specified dates, with the number of warrants vesting on each such date relating to the number of advanced digital set-top terminals purchased by AT&T and certain of its affiliates. If the warrants do not vest on the specified date, the warrants will terminate. If any warrants terminate solely because AT&T fails to purchase the required number of advanced digital set-top terminals, AT&T will pay to Liberty Media Group an amount equal to $14.35 for each warrant terminated, adjusted as appropriate for any changes in the capitalization of Motorola. Warrants to purchase 6.1 million shares are currently vested, and assuming Liberty Media Group's exercise of such vested warrants, its ownership interest in Motorola would increase to 3.3%. Liberty Media Group's relationship with GI began in December 1997 when National Digital Television Center, Inc., a wholly owned subsidiary of TCI ("NDTC"), entered into an agreement with GI to purchase advanced digital set-top terminals. In connection with NDTC's purchase commitment, GI granted the warrants specified above. In July 1998, TCI acquired 21.4 million restricted shares of GI common stock in exchange for: - certain of the assets of NDTC's set-top authorization business, - the license of certain related software to GI, - a $50 million promissory note from TCI to GI and - a nine year revenue guarantee from TCI in favor of GI. In connection with the AT&T merger, the shares of GI common stock and the note payable were contributed to Liberty Media Group. In April 1999, Liberty Media Group acquired an additional 10 million shares of GI from Forstmann Little & Co. for $280 million. This purchase by Liberty Media Group increased Liberty Media Group's ownership in GI to approximately 21% and made Liberty Media Group the largest stockholder of GI. REGULATORY MATTERS DOMESTIC PROGRAMMING In the United States, the FCC regulates the providers of satellite communications services and facilities for the transmission of programming services, the cable television systems that carry such services, and, to some extent, the availability of the programming services themselves through its regulation of program licensing. Cable television systems in the United States are also regulated by municipalities or other state and local government authorities. Cable television companies are currently subject to federal rate regulation on the provision of basic service, and continued rate regulation or other franchise conditions could place downward pressure on the fees cable television companies are willing or able to pay for programming services in which Liberty Media Group has interests and regulatory carriage requirements could adversely affect the number of channels available to carry the programming services in which we have an interest. Regulation of Program Licensing. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") directed the FCC to promulgate regulations regarding the sale and acquisition of cable programming between multi-channel video programming distributors (including cable operators) and satellite-delivered programming services in which a cable operator has an attributable interest. The legislation and the implementing regulations adopted by the FCC preclude virtually all exclusive programming contracts between cable operators and satellite programmers affiliated with any cable operator (unless the FCC first determines the contract serves the public interest) and generally prohibit a cable operator that has an attributable interest in a satellite programmer from improperly influencing the terms and conditions of sale to unaffiliated multi-channel video programming distributors. Further, the 1992 Cable Act requires that such affiliated programmers make their programming services available to cable operators and competing multi-channel video programming distributors such as multi-channel multi-point distribution systems and direct broadcast satellite distributors on terms and conditions that do not unfairly discriminate among distributors. The Telecommunications Act of 1996 has extended these rules to programming services in which telephone companies and other common carriers have attributable ownership interests. The FCC revised its program licensing rules, by implementing a damages remedy in situations where the defendant knowingly violates the regulations and by establishing a timeline for the resolution of such complaints, among other things. Regulation of Carriage of Programming. Under the 1992 Cable Act, the FCC has adopted regulations prohibiting cable operators from requiring a financial interest in a programming service as a condition to carriage of such service, coercing exclusive rights in a programming service or favoring affiliated programmers so as to restrain unreasonably the ability of unaffiliated programmers to compete. Regulation of Ownership. The 1992 Cable Act required the FCC, among other things, (a) to prescribe rules and regulations establishing reasonable limits on the number of channels on a cable system that will be allowed to carry programming in which the owner of such cable system has an attributable interest and (b) to consider the necessity and appropriateness of imposing limitations on the degree to which multi-channel video programming distributors (including cable operators) may engage in the creation or production of video programming. In 1993, the FCC adopted regulations limiting carriage by a cable operator of national programming services in which that operator holds an attributable interest to 40% of the first 75 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. These rules may limit carriage of the programming companies in which Liberty Media Group has interests on certain systems of affiliated cable operators. In the same rulemaking, the FCC concluded that additional restrictions on the ability of multi-channel distributors to engage in the creation or production of video programming were then unwarranted. The FCC's rules also generally prohibit common ownership of a cable system and broadcast television stations or multichannel multi-point distribution systems ("MMDS") with overlapping service areas. In August 1999, the FCC revised the attribution standards, which are used to implement these ownership rules, and adopted new attribution standards based upon a combination of equity, debt and other indicia of influence. The new attribution criteria could limit Liberty Media Group's ability to engage in certain transactions involving broadcast stations and MMDS systems. The ownership attribution standards used to enforce other rules, including the horizontal cable system ownership, channel occupancy limits, program access and program carriage rules, also were revised in October 1999. Regulation of Carriage of Broadcast Stations. The 1992 Cable Act granted broadcasters a choice of must carry rights or retransmission consent rights. The rules adopted by the FCC generally provided for mandatory carriage by cable systems of all local full-power commercial television broadcast signals selecting must carry rights and, depending on a cable system's channel capacity, non-commercial television broadcast signals. Such statutorily mandated carriage of broadcast stations coupled with the provisions of the Cable Communications Policy Act of 1984, which require cable television systems with 36 or more "activated" channels to reserve a percentage of such channels for commercial use by unaffiliated third parties and permit franchise authorities to require the cable operator to provide channel capacity, equipment and facilities for public, educational and government access channels, could adversely affect some or substantially all of the programming companies in which Liberty Media Group has interests by limiting the carriage of such services in cable systems with limited channel capacity. The FCC recently initiated a proceeding asking to what extent cable operators must carry all digital signals transmitted by broadcasters. The imposition of such additional must carry regulation, in conjunction with the current limited cable system channel capacity, would make it likely that cable operators will be forced to drop cable programming services, which may have an adverse impact on the programming companies in which Liberty Media Group has interests. Closed Captioning and Video Description Regulation. The Telecommunications Act of 1996 also required the FCC to establish rules and an implementation schedule to ensure that video programming is fully accessible to the hearing impaired through closed captioning. The rules adopted by the FCC will require substantial closed captioning over an eight to ten year phase-in period with only limited exemptions. As a result, the programming companies in which Liberty Media Group has interests are expected to incur significant additional costs for closed captioning. In November 1999, the FCC also issued a notice of proposed rulemaking that would require certain broadcasters and the largest national video programming services to begin to provide audio descriptions of visual events for the visually impaired on the secondary audio program. Depending upon the final requirements of any rule, increased costs for programmers may result. Copyright Regulation. Satellite carriers, such as TV Guide's UVTV division, retransmit the broadcast signals of "superstations," such as KWGN and WGN, and of network stations to home satellite dish owners for private home viewing under statutory license pursuant to the Satellite Home Viewer Act of 1994 (the "SHV Act"). The Intellectual Property and Communications Omnibus Reform Act of 1999 ("IPCORA"), enacted into law in November 1999, extends the SHV Act license until December 31, 2004. Under the SHV Act, satellite carriers previously paid a monthly fee of 27 cents per subscriber for the secondary transmission of distant superstations and distant network stations. However, IPCORA has decreased the royalty fee for distant superstations by 30% and distant network stations by 45%. To the extent that satellite carriers transmit superstation or network station signals to cable operators, such cable operators pay the copyright fee under the separate compulsory license. Satellite carriers may only distribute the signals of network broadcast stations, as distinguished from superstations, to "unserved households" that are outside the Grade B contours of a station affiliated with such network. IPCORA requires the FCC to conduct a number of rulemaking proceedings that may ultimately subject superstations and distant network stations delivered by satellite directly to dish owners to new program exclusivity rules (similar to those imposed on cable operators), including syndicated exclusivity, network non-duplication and sports blackout rules. The FCC also will commence rule makings to review the signal strength measurement and subscriber eligibility standards. The new legislation provides a copyright liability moratorium for all satellite carriers distributing distant network signals to existing (as of October 31, 1999) and recently terminated (after July 1, 1998) subscribers who are within Grade B contours of local network affiliates. Moreover, the entire C-band satellite industry is exempt from all restrictions on delivering distant network signals to subscribers who received C-band service before October 31, 1999. IPCORA and rulemakings, exemptions, and regulatory requirements adopted under it will substantially impact the C-band and DBS industry, potentially affecting the economics of uplinking and distributing distant network stations and superstations to dish owners. A subsidiary of TV Guide entered into an agreement with the National Association of Broadcasters, the ABC, CBS, FOX and NBC networks, their affiliate associations, and several hundred broadcast stations to identify by zip code those geographic areas which are "unserved" by network affiliated stations in May 1998. With the passage of IPCORA, that subsidiary has opted to discontinue that agreement. The broadcasters have, however, objected to such termination and have asserted claims for liquidated damages and other damages as a result of the failure to terminate distant network signal subscribers during the period from September, 1999 through the passage of IPCORA and the termination of the agreement. Satellites and Uplink. In general, authorization from the FCC must be obtained for the construction and operation of a communications satellite. The FCC authorizes utilization of satellite orbital slots assigned to the United States by the World Administrative Radio Conference. Such slots are finite in number, thus limiting the number of carriers that can provide satellite transponders and the number of transponders available for transmission of programming services. At present, however, there are numerous competing satellite service providers that make transponders available for video services to the cable industry. Proposed Changes in Regulation. The regulation of programming services, cable television systems, satellite carriers and television stations is subject to the political process and has been in constant flux over the past decade. Further material changes in the law and regulatory requirements must be anticipated and there can be no assurance that Liberty Media Group's business will not be adversely affected by future legislation, new regulation or deregulation. DOMESTIC TELEPHONY The FCC regulates the licensing, construction, operation, acquisition, resale and interconnection arrangements of domestic wireless telecommunications systems. The activities of wireless service providers, such as the Sprint PCS Group, are subject to regulation in varying degrees, depending on the jurisdiction, by state and local regulatory agencies as well. The FCC, in conjunction with the U.S. Federal Aviation Administration, also regulates tower marking and lighting, and FCC environmental rules may cause certain PCS network facilities to become subject to regulation under the National Environmental Policy Act and the National Historic Preservation Act. INTERNATIONAL CABLE, TELEPHONY AND PROGRAMMING Some of the foreign countries in which Liberty Media Group has, or proposes to make, an investment regulate, in varying degrees, (a) the granting of cable and telephony franchises, the construction of cable and telephony systems and the operations of cable, other multi-channel television operators and telephony operators and service providers, as well as the acquisition of, and foreign investments in, such operators and service providers, and (b) the distribution and content of programming and Internet services and foreign investment in programming companies. Regulations or laws may cover wireline and wireless telephony, satellite and cable communications and Internet services, among others. Regulations or laws that exist at the time Liberty Media Group makes an investment in a foreign subsidiary or business affiliate may thereafter change, and there can be no assurance that material and adverse changes in the regulation of the services provided by Liberty Media Group's subsidiaries and business affiliates will not occur in the future. Regulation can take the form of price controls, service requirements and programming and other content restrictions, among others. Moreover, some countries do not issue exclusive licenses to provide multi-channel television services within a geographic area, and in those instances Liberty Media Group may be adversely affected by an overbuild by one or more competing cable operators. In certain countries where multi-channel television is less developed, there is minimal regulation of cable television, and, hence, the protections of the cable operator's investment available in the United States and other countries (such as rights to renewal of franchises and utility pole attachment) may not be available in these countries. INTERNET SERVICES The Internet companies in which we have interests are subject, both directly and indirectly, to various laws and governmental regulations relating to their respective businesses. There are currently few laws or regulations directly applicable to access to or commerce on commercial online services or the Internet. For example, the Digital Millennium Copyright Act, enacted into law in 1998, protects certain qualifying online service providers from copyright infringement liability, the Internet Tax Freedom Act, also enacted in 1998, placed a three year moratorium on new state and local taxes on Internet access and commerce, and under the Communications Decency Act, an Internet service provider will not be treated as the publisher or speaker of any information provided by another information content provider. However, due to the increasing popularity and use of commercial online services and the Internet, it is possible that a number of laws and regulations may be adopted with respect to commercial online services and the Internet. Such laws and regulations may cover issues such as user privacy, defamatory speech, copyright infringement, pricing and characteristics and quality of products and services. The adoption of such laws or regulations in the future may slow the growth of commercial online services and the Internet, which could in turn cause a decline in the demand for the services and products of the Internet companies in which we have interests and increase such companies' costs of doing business or otherwise have an adverse effect on their businesses, operating results and financial conditions. Moreover, the applicability to commercial online services and the Internet of existing laws governing issues such as property ownership, libel, personal privacy and taxation is uncertain and could expose these companies to substantial liability. BROADCASTERS Liberty Media Group also has nonattributable minority ownership interests in group owners of broadcast television and radio stations. The FCC extensively regulates the ownership and operation of such stations through a variety of rules. COMPETITION Programming. The business of distributing programming for cable and satellite television is highly competitive, both in the United States and in foreign countries. The programming companies in which we have interests directly compete with other programmers for distribution on a limited number of channels. Once distribution is obtained, our programming services and our business affiliates' programming services compete, in varying degrees, for viewers and advertisers with other cable and off-air broadcast television programming services as well as with other entertainment media, including home video (generally video rentals), pay-per-view services, online activities, movies and other forms of news, information and entertainment. The programming companies in which we have interests also compete, to varying degrees, for creative talent and programming content. Our management believes that important competitive factors include the prices charged for programming, the quantity, quality and variety of the programming offered and the effectiveness of marketing efforts. In addition, HSN and QVC operate in direct competition with businesses that are engaged in retail merchandising. Communications. The cable television systems and other forms of media distribution in which we have interests directly compete for viewer attention and subscriptions in local markets with other providers of entertainment, news and information, including other cable television systems in those countries that do not grant exclusive franchises, broadcast television stations, direct-to-home satellite companies, satellite master antenna television systems, multi-channel multi-point distribution systems and telephone companies, other sources of video programs (such as videocassettes) and additional sources for entertainment news and information, including the Internet. Cable television systems also face strong competition from all media for advertising dollars. Our management believes that important competitive factors include fees charged for basic and premium services, the quantity, quality and variety of the programming offered, the quality of signal reception, customer service and the effectiveness of marketing efforts. In addition, there is substantial competition in the domestic wireless telecommunications industry, and it is expected that such competition will intensify as a result of the entrance of new competitors and the increasing pace of development of new technologies, products and services. Each of the markets in which the Sprint PCS Group competes is served by other two-way wireless service providers, including cellular and PCS operators and resellers. A majority of the markets will have five or more commercial mobile radio service providers and each of the top 50 metropolitan markets have at least one other PCS competitor in addition to two cellular incumbents. Many of these competitors have been operating for a number of years and currently service a significant subscriber base. Internet Services and Technology. The markets for Internet services, online content and products are relatively new, intensely competitive and rapidly changing. Since the Internet's commercialization in the early 1990's, the number of Internet companies and web sites competing for consumers' attention and spending has proliferated with no substantial barriers to entry, and we expect that competition will continue to intensify in the future. The Internet companies and web sites in which we have interests compete, directly and indirectly, for members, visitors, advertisers, content providers and merchandise sales with many categories of companies, including: - other Internet companies and web sites targeted to the respective audiences of the Internet companies and web sites in which we have interests; - publishers and distributors of traditional off-line media (such as television, radio and print), including those targeted to the respective audiences of the Internet companies and web sites in which we have interests, many of which have made, or may in the future make, significant acquisitions of or investments in Internet companies and/or have established, or may in the future establish, web sites; - general purpose consumer online services such as America Online and Microsoft Network, each of which provides access to content and services targeted to the respective audiences of the Internet companies and web sites in which we have interests; - vendors of information, merchandise, products and services distributed through other means, including retail stores, mail, facsimile and private bulletin board services; and - web search and retrieval services and other high-traffic web sites. Liberty Media Group anticipates that the number of such competitors will increase in the future. The technology companies in which we have interests compete with a substantial number of foreign and domestic companies, and the rapid technological changes occurring in such companies' markets are expected to lead to the entry of new competitors. The ability of the technology companies in which we have interests to anticipate technological changes and introduce enhanced products on a timely basis will be a significant factor in their ability to expand and remain competitive. Existing competitors' actions and new entrants may have an adverse impact on these companies' sales and profitability. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders AT&T Corp.: We have audited the accompanying combined balance sheets of Liberty Media Group (a combination of certain assets of AT&T Corp., as defined in note 1) ("New Liberty" or "Successor") as of December 31, 1999, and of Liberty Media Group (a combination of certain assets of Tele-Communications, Inc., as defined in note 1) ("Old Liberty" or "Predecessor") as of December 31, 1998, and the related combined statements of operations and comprehensive earnings, combined equity, and cash flows for the periods from March 1, 1999 to December 31, 1999 (Successor period) and from January 1, 1999 to February 28, 1999 and for each of the years in the two-year period ended December 31, 1998 (Predecessor periods). These combined financial statements are the responsibility of management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The combined financial statements of Liberty Media Group are presented for purposes of additional analysis of the consolidated financial statements of AT&T Corp. As more fully described in note 1, the combined financial statements of Liberty Media Group are intended to reflect the performance of the businesses of AT&T Corp., that produce, acquire and distribute entertainment, educational and informational programming services. The combined financial statements of Liberty Media Group should be read in conjunction with the consolidated financial statements of AT&T Corp. In our opinion, the aforementioned Successor combined financial statements present fairly, in all material respects, the financial position of New Liberty as of December 31, 1999, and the results of their operations and their cash flows for the Successor period, in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor combined financial statements present fairly, in all material respects, the financial position of Old Liberty as of December 31, 1998, and the results of their operations and their cash flows for the Predecessor periods, in conformity with generally accepted accounting principles. As discussed in note 1, effective March 9, 1999, AT&T Corp., the owner of the assets comprising New Liberty, acquired Tele-Communications, Inc., the owner of the assets comprising Old Liberty, in a business combination accounted for as a purchase. As a result of the acquisition, the combined financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG LLP Denver, Colorado February 29, 2000 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) COMBINED BALANCE SHEETS December 31, 1999 and 1998
New Liberty Old Liberty 1999 1998 ------------------- ----------- (note 2) amounts in millions Assets Current assets: Cash and cash equivalents $ 1,714 407 Short-term investments 378 124 Trade and other receivables, net 134 185 Prepaid expenses and committed program rights 406 263 Deferred income tax assets 750 216 Other current assets 5 21 ------- ------ Total current assets 3,387 1,216 ------- ------ Investments in affiliates, accounted for under the equity method, and related receivables (note 6) 15,922 3,079 Investments in available-for-sale securities and others (note 7) 28,601 14,383 Property and equipment, at cost 162 935 Less accumulated depreciation 19 350 ------- ------ 143 585 ------- ------ Intangible assets: Excess cost over acquired net assets 9,973 1,030 Franchise costs 273 109 ------- ------ 10,246 1,139 Less accumulated amortization 454 164 ------- ------ 9,792 975 ------- ------ Other assets, at cost, net of accumulated amortization 839 326 ------- ------ Total assets $58,684 20,564 ======= ======
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) COMBINED BALANCE SHEETS December 31, 1999 and 1998
New Liberty Old Liberty 1999 1998 --------------- ----------- (note 2) amounts in millions Liabilities and Combined Equity Current liabilities: Accounts payable $ 44 78 Accrued liabilities 201 204 Accrued stock compensation 2,405 126 Program rights payable 166 156 Customer prepayments -- 134 Current portion of debt 554 578 ------- ------ Total current liabilities 3,370 1,276 ------- ------ Long-term debt (note 11) 2,723 2,318 Deferred income tax liabilities (note 12) 14,107 4,674 Other liabilities 23 423 ------- ------ Total liabilities 20,223 8,691 ------- ------ Minority interests in equity of attributed subsidiaries (notes 8 and 9) 1 545 Obligation to redeem common stock -- 17 Combined equity (note 13): Combined equity 31,876 6,896 Accumulated other comprehensive earnings, net of taxes (note 14) 6,557 3,718 ------- ------ 38,433 10,614 Due to related parties 27 697 ------- --- Total combined equity 38,460 11,311 ------- ------ Commitments and contingencies (note 15) Total liabilities and combined equity $58,684 20,564 ======= ======
See accompanying notes to combined financial statements. "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
New Liberty Old Liberty -------------- ------------------------------------- Ten months Two months ended ended Years ended December 31, February 28, December 31, 1999 1999 1998 1997 -------------- ------------ -------- ---------- amounts in millions (note 2) Unaffiliated parties $ 549 239 1,301 1,104 Related parties (note 13) 180 43 258 195 ------- ------- ------- ------- 729 282 1,559 1,299 ------- ------- ------- ------- Operating costs and expenses: Operating 343 136 882 682 Selling, general and administrative 229 89 427 348 Charges from related parties (note 13) 24 2 28 75 Cost of distribution agreements (note 10) -- -- 50 -- Stock compensation 1,785 183 518 296 Depreciation and amortization 562 47 243 196 ------- ------- ------- ------- 2,943 457 2,148 1,597 ------- ------- ------- ------- Operating loss (2,214) (175) (589) (298) Other income (expense): Interest expense (287) (27) (116) (57) Interest expense to related parties, net (note 13) (1) (1) (10) (12) Dividend and interest income 243 12 100 57 Share of losses of affiliates, net (note 6) (904) (66) (1,034) (850) Minority interests in losses of attributed subsidiaries 46 4 102 25 Gains on dispositions, net (notes 6 and 7) 3 14 4,738 420 Gains on issuance of equity by affiliates and subsidiaries (notes 6, 8 and 10) -- 389 357 172 Other, net (5) -- 6 2 ------- ------- ------- ------- (905) 325 4,143 (243) ------- ------- ------- ------- Earnings (loss) before income taxes (3,119) 150 3,554 (541) Income tax benefit (expense) (note 12) 1,097 (209) (1,397) 130 ------- ------- ------- ------- Net earnings (loss) $(2,022) (59) 2,157 (411) ------- ------- ------- ------- Other comprehensive earnings, net of taxes: Foreign currency translation adjustments 60 (15) 3 (22) Unrealized holding gains arising during the period, net of reclassification adjustments 6,497 971 2,947 749 ------- ------- ------- ------- Other comprehensive earnings (loss) 6,557 956 2,950 727 ------- ------- ------- ------- Comprehensive earnings (note 14) $ 4,535 897 5,107 316 ======= ======= ======= ======= Basic and diluted loss per share (note 4): Loss attributable to common stockholders $(2,022) ======= Basic and diluted loss per share attributable to common stockholders $ (1.61) ======= Weighted average common shares 1,259 =======
See accompanying notes to combined financial statements. "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) COMBINED STATEMENTS OF EQUITY Years ended December 31, 1999, 1998 and 1997
Accumulated other Due to comprehensive (from) Total Combined earnings, related combined equity net of tax parties equity --------- ------------- ------- -------- amounts in millions Balance at January 1, 1997 $ 5,038 41 (134) 4,945 Net loss (411) -- -- (411) Foreign currency translation adjustments -- (22) -- (22) Unrealized gains on available-for-sale securities -- 749 -- 749 Contribution to combined equity for issuance of common stock to TCI Employee Stock Purchase Plan 2 -- -- 2 Repurchase of common stock (625) -- -- (625) Excess of consideration paid over carryover basis of net assets acquired from related party (note 9) (219) -- -- (219) Gain in connection with issuance of stock of affiliate (note 6) 66 -- -- 66 Issuance of stock by attributed subsidiary 19 -- -- 19 Issuance of common stock (note 8) 30 -- -- 30 Excess of cash received over carryover basis of SUMMITrak Assets 30 -- -- 30 Other transfers from related parties, net 81 -- 664 745 ------- ------- ------- ------- Balance at December 31, 1997 4,011 768 530 5,309 Net earnings 2,157 -- -- 2,157 Foreign currency translation adjustments -- 3 -- 3 Unrealized gains on available-for-sale securities -- 2,947 -- 2,947 Payments for call agreements (140) -- -- (140) Repurchase of common stock (30) -- -- (30) Premium received in connection with put obligation 2 -- -- 2 Reclassification of redemption amount of common stock subject to put obligation (17) -- -- (17) Gain in connection with issuance of stock of affiliates and attributed subsidiaries (note 6) 70 -- -- 70 Issuance of common stock (note 8) 777 -- (5) 772 Transfer of net liabilities to related party 50 -- -- 50 Assignment of option contract from related party 16 -- (16) -- Other transfers from related parties, net -- -- 188 188 ------- ------- ------- ------- Balance at December 31, 1998 6,896 3,718 697 11,311 Net loss (59) -- -- (59) Foreign currency translation adjustments -- (15) -- (15) Unrealized gains on available-for-sale securities -- 971 -- 971 Reversal of reclassification of redemption amount of common stock subject to put obligation 8 -- -- 8 Transfer of net liabilities to related party, net of taxes 99 -- -- 99 Excess paid on settlement of preferred stock conversion (18) -- -- (18) Other transfers to related parties, net -- -- (24) (24) ------- ------- ------- ------- Balance at February 28, 1999 $ 6,926 4,674 673 12,273 ======= ======= ======= =======
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) COMBINED STATEMENTS OF EQUITY Years ended December 31, 1999, 1998 and 1997
Accumulated other Due to comprehensive (from) Total Combined earnings, related combined equity net of tax parties equity -------- ------------- ------- -------- amounts in millions Balance at February 28, 1999 $ 6,926 4,674 673 12,273 ======== ======== ======== ======== Balance at March 1, 1999 33,515 -- 197 33,712 Net loss (2,022) -- -- (2,022) Foreign currency translation adjustments -- 60 -- 60 Recognition of previously unrealized losses on available-for-sale securities, net -- 7 -- 7 Unrealized gains on available-for-sale securities -- 6,490 -- 6,490 AT&T Liberty Media Group Tracking Stock issued for conversion of debentures (note 11) 354 -- -- 354 Reversal of reclassification of redemption amount of common stock subject to put obligation 9 -- -- 9 Gain in connection with the issuance of common stock of affiliates and attributed subsidiaries (note 9) 108 -- -- 108 Utilization of net operating losses of Liberty Media Group by AT&T (note 12) (88) -- -- (88) Other transfers to related parties, net -- -- (170) (170) -------- -------- -------- -------- Balance at December 31, 1999 $ 31,876 6,557 27 38,460 ======== ======== ======== ========
See accompanying notes to combined financial statements. "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) COMBINED STATEMENTS OF CASH FLOWS
New Liberty Old Liberty ------------ ---------------------------------- Ten months Two months ended ended Years ended December 31, February 28, December 31, 1999 1999 1998 1997 ------------ ------------ ---- ---- amounts in millions Cash flows from operating activities: (note 5) Net earnings (loss) $(2,022) (59) 2,157 (411) Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization 562 47 243 196 Stock compensation 1,785 183 518 296 Payments of stock compensation (111) (126) (58) (75) Share of losses of affiliates, net 904 66 1,034 850 Deferred income tax (benefit) expense (1,025) 205 1,393 16 Intergroup tax allocation (75) -- (2) (159) Cash payment from AT&T pursuant to tax sharing agreement 1 -- -- -- Minority interests in losses of attributed subsidiaries (46) (4) (102) (25) Gains on issuance of equity by affiliates and subsidiaries -- (389) (357) (172) Gains on disposition of assets, net (3) (14) (4,738) (420) Noncash interest 153 -- -- -- Other noncash charges 3 9 55 32 Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions: Change in receivables 7 (19) (49) 9 Change in prepaid expenses and committed program rights (119) (10) (39) (3) Change in payables, accruals and customer prepayments 119 4 11 38 ------- ------- ------- ------- Net cash provided (used) by operating activities 133 (107) 66 172 ------- ------- ------- ------- Cash flows from investing activities: Cash paid for acquisitions (109) -- (92) (41) Capital expended for property and equipment (40) (21) (144) (168) Cash balances of deconsolidated subsidiaries -- (53) -- (39) Investments in and loans to affiliates and others (2,596) (45) (1,404) (683) Purchases of marketable securities (7,757) (132) (124) -- Sales and maturities of marketable securities 5,725 34 -- -- Return of capital from affiliates 7 -- 12 5 Collections on loans to affiliates and others -- -- -- 133 Cash proceeds from dispositions 130 43 423 302 Other, net (18) (9) (29) (6) ------- ------- ------- ------- Net cash used by investing activities (4,658) (183) (1,358) (497) ------- ------- ------- ------- Cash flows from financing activities: Borrowings of debt 3,187 156 2,428 667 Repayments of debt (2,211) (148) (622) (348) Net proceeds from issuance of stock by subsidiaries 123 -- 75 148 Payments for call agreements -- -- (140) -- Cash transfers (to) from related parties (159) 132 (216) 310 Repurchase of common stock -- -- (30) (625) Repurchase of stock of subsidiaries -- (45) (24) (42) Other, net (20) (1) 4 (5) ------- ------- ------- ------- Net cash provided by financing activities 920 94 1,475 105 ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents (3,605) (196) 183 (220) Cash and cash equivalents at beginning of year 5,319 407 224 444 ------- ------- ------- ------- Cash and cash equivalents at end of year $ 1,714 211 407 224 ======= ======= ======= =======
See accompanying notes to combined financial statements. "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) December 31, 1999, 1998 and 1997 (1) Basis of Presentation The accompanying combined financial statements include the accounts of the subsidiaries and assets of AT&T Corp. ("AT&T") that are attributed to Liberty Media Group, as defined below. On March 9, 1999, AT&T acquired Tele-Communications, Inc. ("TCI"), the former owner of the assets attributed to Liberty Media Group, in a merger transaction (the "AT&T Merger"). See note 2. The AT&T Merger has been accounted for using the purchase method. Accordingly, Liberty Media Group's assets and liabilities have been recorded at their respective fair market values therefore, creating a new cost basis. For financial reporting purposes the AT&T Merger and related restructuring transactions described in note 2 are deemed to have occurred on March 1, 1999. Accordingly, for periods prior to March 1, 1999 the assets and liabilities attributed to Liberty Media Group and the related combined financial statements are sometimes referred to herein as "Old Liberty", and for periods subsequent to February 28, 1999 the assets and liabilities attributed to Liberty Media Group and the related combined financial statements are sometimes referred to herein as "New Liberty". The "Company" and "Liberty Media Group" refer to both New Liberty and Old Liberty. The following table represents the summary balance sheet of Old Liberty at February 28, 1999 prior to the restructuring transactions and the consummation of the AT&T Merger and the opening summary balance sheet of New Liberty subsequent to the restructuring transactions and the consummation of the AT&T Merger. Certain pre-merger transactions occurring between March 1, 1999 and March 9, 1999 that affected Old Liberty's equity, gains on issuance of equity by subsidiaries and stock compensation have been reflected in the two-month period ended February 28, 1999.
Old Liberty New Liberty ----------- ----------- (amounts in millions) Assets: Cash and cash equivalents $ 211 5,319 Other current assets 648 451 Investments in affiliates 3,971 17,116 Investment in Time Warner 7,361 7,832 Investment in Sprint 3,381 3,681 Investment in AT&T 3,856 -- Other investments 1,257 1,587 Property and equipment, net 532 125 Intangibles and other assets 817 11,159 ------- ------- $22,034 47,270 ======= ======= Liabilities and Equity: Current liabilities $ 1,446 1,675 Long-term debt 2,319 1,845 Deferred income taxes 5,369 9,971 Other liabilities 168 19 ------- ------- Total liabilities 9,302 13,510 ------- ------- Minority interests in equity of attributed subsidiaries 450 39 Obligation to redeem common stock 9 9 Equity 12,273 33,712 ------- ------- $22,034 47,270 ======= =======
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) The following table reflects the recapitalization resulting from the AT&T Merger (amounts in millions): Total combined equity of Old Liberty $12,273 Net contribution resulting from the restructuring transactions 2,334 Purchase accounting adjustments 19,105 ------- Initial combined equity of New Liberty subsequent to the AT&T Merger $33,712 =======
The following unaudited condensed results of operations for the years ended December 31, 1999 and 1998 were prepared assuming the AT&T Merger occurred on January 1, 1998. These pro forma amounts are not necessarily indicative of operating results that would have occurred if the AT&T Merger had occurred on January 1, 1998.
Years ended December 31, --------------------- 1999 1998 ---- ---- (amounts in millions) Revenue $964 1,361 Net loss $(2,246) (302) Loss per share $ (1.78) (0.25)
At December 31, 1999, Liberty Media Group consisted principally of the following: - AT&T's assets and businesses which provide programming services including production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software, including multimedia products; - AT&T's assets and businesses engaged in electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing; - certain of AT&T's assets and businesses engaged in international cable, telephony and programming businesses; and, - AT&T's holdings in a class of tracking stock of Sprint Corporation (the "Sprint PCS Group Stock"). All significant intercompany accounts and transactions have been eliminated. The combined financial statements of Liberty Media Group are presented for purposes of additional analysis of the consolidated financial statements of AT&T and should be read in conjunction with such consolidated financial statements. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) (2) Merger with AT&T As a result of the AT&T Merger, holders of shares of TCI's then outstanding Liberty Media Group tracking stock and TCI Ventures Group tracking stock were issued shares of a new targeted stock of AT&T. Each share of TCI's then outstanding Liberty Media Group Series A tracking stock was converted into 2 shares of a newly created class of AT&T tracking stock, the AT&T Liberty Media Group Class A tracking stock, each share of TCI's then outstanding Liberty Media Group Series B tracking stock was converted into 2 shares of a newly created class of AT&T tracking stock, the AT&T Liberty Media Group Class B tracking stock, each share of TCI's then outstanding TCI Ventures Group Series A tracking stock was converted into 1.04 shares of AT&T Liberty Media Group Class A tracking stock and each share of TCI's then outstanding TCI Ventures Group Series B tracking stock was converted into 1.04 shares of AT&T Liberty Media Group Class B tracking stock. Effective with the AT&T Merger, each share of TCI's Convertible Preferred Stock Series C-Liberty Media was converted into 112.5 shares of AT&T Liberty Media Group Class A tracking stock and each share of TCI's Redeemable Convertible Liberty Media Group Preferred Stock, Series H was converted into 1.18125 shares of AT&T Liberty Media Group Class A tracking stock. In general, the holders of shares of AT&T Liberty Media Group Class A tracking stock and the holders of shares of AT&T Liberty Media Group Class B tracking stock will vote together as a single class with the holders of shares of AT&T common stock on all matters presented to such stockholders, with the holders being entitled to three-fortieths (3/40th) of a vote for each share of AT&T Liberty Media Group Class A tracking stock held, three-fourths (3/4th) of a vote for each share of AT&T Liberty Media Group Class B tracking stock held and 1 vote per share of AT&T common stock held. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) The shares of AT&T Liberty Media Group Tracking Stock issued in the AT&T Merger are intended to reflect the separate performance of the businesses and assets attributed to Liberty Media Group. Immediately prior to the AT&T Merger, certain assets previously attributed to Old Liberty (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and Teleport Communications Group, Inc. ("Teleport") (see note 7), Old Liberty's interests in At Home Corporation ("@Home"), the National Digital Television Center, Inc. ("NDTC") and Western Tele-Communications, Inc.) were attributed to "TCI Group" (a group of TCI's assets, which, prior to the AT&T Merger, was comprised primarily of TCI's domestic cable and communications business) in exchange for approximately $5.5 billion in cash (the "Asset Transfers"). Also, upon consummation of the AT&T Merger, through a new tax sharing agreement between Liberty Media Group and AT&T, Liberty Media Group is entitled to the benefit of approximately $2 billion in net operating loss carryforwards available to the entities included in TCI's consolidated income tax return as of the date of the AT&T Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service ("IRS") and are subject to limitations on usage which may affect the ultimate amount utilized. Additionally, certain warrants to purchase shares of General Instruments Corporation ("GI Warrants") previously attributed to TCI Group were attributed to Liberty Media Group in exchange for approximately $176 million in cash. See note 7. Certain agreements entered into at the time of the AT&T Merger provide, among other things, for preferred vendor status to Liberty Media Group for digital basic distribution on AT&T's systems of new programming services created by Liberty Media Group and for a renewal of existing affiliation agreements. Pursuant to amended corporate governance documents for the entities included in Liberty Media Group and certain agreements among AT&T and TCI, the business of Liberty Media Group will continue to be managed by certain persons who were members of TCI's management prior to the AT&T Merger. (3) Summary of Significant Accounting Policies Cash and Cash Equivalents Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1999 and 1998 was not material. Program Rights Prepaid program rights are amortized on a film-by-film basis over the anticipated number of exhibitions. Committed program rights and program rights payable are recorded at the estimated cost of the programs when the film is available for airing less prepayments. These amounts are amortized on a film-by-film basis over the anticipated number of exhibitions. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Investments All marketable equity securities held by the Company are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of taxes as a component of accumulated other comprehensive earnings in combined equity. Realized gains and losses are determined on a specific-identification basis. Other investments in which the ownership interest is less than 20% and are not considered marketable securities are carried at the lower of cost or net realizable value. For those investments in affiliates in which the Company's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company's share of net earnings or losses of the affiliates as they occur rather then as dividends or other distributions are received, limited to the extent of the Company's investment in, advances to and commitments for the investee. The Company's share of net earnings or losses of affiliates includes the amortization of the difference between the Company's investment and its share of the net assets of the investee. Recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to the Company's ownership interest in such affiliates. Subsequent to the AT&T Merger, changes in the Company's proportionate share of the underlying equity of an attributed subsidiary or equity method investee, which result from the issuance of additional equity securities by such attributed subsidiary or equity investee, generally are recognized as gains or losses in the Company's combined statements of combined equity. Property and Equipment Property and equipment, including significant improvements, is stated at cost. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 20 years for support equipment and 10 to 40 years for buildings and improvements. Excess Cost Over Acquired Net Assets Excess cost over acquired net assets consists of the difference between the cost of acquiring non-cable entities and amounts assigned to their tangible assets. Such amounts are generally amortized on a straight-line basis over 20 years. Franchise Costs Franchise costs generally include the difference between the cost of acquiring cable companies and amounts allocated to their tangible assets. Such amounts are amortized on a straight-line basis over 40 years. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Impairment of Long-lived Assets The Company periodically reviews the carrying amounts of property, plant and equipment and its intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets, accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. Minority Interests Recognition of minority interests' share of losses of attributed subsidiaries is generally limited to the amount of such minority interests' allocable portion of the common equity of those attributed subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of attributed subsidiaries have the right to cause the Company to repurchase such holders' common equity. Preferred stock (and accumulated dividends thereon) of attributed subsidiaries are included in minority interests in equity of attributed subsidiaries. Dividend requirements on such preferred stocks are reflected as minority interests in earnings of attributed subsidiaries in the accompanying combined statements of operations and comprehensive earnings. Foreign Currency Translation The functional currency of the Company is the United States ("U.S.") dollar. The functional currency of the Company's foreign operations generally is the applicable local currency for each attributed foreign subsidiary and foreign equity method investee. In this regard, the functional currency of certain of the Company's attributed foreign subsidiaries and foreign equity investees is the Argentine peso, the United Kingdom ("UK") pound sterling ("pound sterling" or "pounds"), the French franc ("FF") and the Japanese yen ("yen"). Assets and liabilities of attributed foreign subsidiaries and foreign equity investees are translated at the spot rate in effect at the applicable reporting date, and the combined statements of operations and the Company's share of the results of operations of its foreign equity affiliates are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment, net of applicable income taxes, is recorded as a component of accumulated other comprehensive earnings in combined equity. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in the accompanying combined statements of operations and comprehensive earnings as unrealized (based on the applicable period end exchange rate) or realized upon settlement of the transactions. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Unless otherwise indicated, convenience translations of foreign currencies into U.S. dollars are calculated using the applicable spot rate at December 31, 1999, as published in The Wall Street Journal. Derivative Instruments and Hedging Activities Liberty Media Group has entered into "cashless collar" transactions with respect to certain securities attributed to Liberty Media Group. The cashless collar provides Liberty Media Group with a put option that gives it the right to require its counterparty to buy designated shares at a designated price per share and simultaneously provides the counterparty a call option giving it the right to buy the same number of shares at a designated price per share. As Liberty Media Group's cashless collars are designated to specific shares of stock attributed to Liberty Media Group and the changes in the fair value of the cashless collars are correlated with changes in the fair value of the underlying securities, the cashless collars function as hedges. Accordingly, changes in the fair value of the cashless collars designated to specific shares which are accounted for as available-for-sale securities are reported as a component of comprehensive earnings (in unrealized gains) along with the changes in the fair value of the underlying securities. During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, ("Statement 133"), which is effective for all fiscal years beginning after June 15, 2000. Statement 133 establishes accounting and reporting standards for derivative instruments and hedging activities by requiring that all derivative instruments be reported as assets or liabilities and measured at their fair values. Under Statement 133, changes in the fair values of derivative instruments are recognized immediately in earnings unless those instruments qualify as hedges of the (1) fair values of existing assets, liabilities, or firm commitments, (2) variability of cash flows of forecasted transactions, or (3) foreign currency exposure of net investments in foreign operations. Although the Company's management has not completed its assessment of the impact of Statement 133 on its combined results of operations and financial position, management does not expect that the impact of Statement 133 will be significant, however, there can be no assurances that the impact will not be significant. Revenue Recognition Programming revenue is recognized in the period during which programming is provided, pursuant to affiliation agreements. Advertising revenue is recognized, net of agency commissions, in the period during which underlying advertisements are broadcast. Cable revenue is recognized in the period that services are rendered. Cable installation revenue is recognized in the period the related services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution system. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Stock Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. As allowed by Statement 123, Liberty Media Group continues to account for stock-based compensation pursuant to Accounting Principles Board Opinion No. 25. Liberty Media Group estimates that compensation expense would not be materially different under Statement 123. Reclassifications Certain prior period amounts have been reclassified for comparability with the 1999 presentation. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (4) Loss Per Common Share Basic earnings or loss per share ("EPS") is measured as the income or loss attributable to common stockholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Potential common shares that have an anti-dilutive effect are excluded from diluted EPS. The basic and diluted loss attributable to Liberty Media Group common stockholders per common share for the ten months ended December 31, 1999 was computed by dividing the net loss attributable to Liberty Media Group common stockholders by the weighted average number of common shares outstanding of AT&T Liberty Media Group tracking stock during the period. Potential common shares were not included in the computations of weighted average shares outstanding because their inclusion would be anti-dilutive. At December 31, 1999, there were 48 million potential common shares consisting of fixed and nonvested performance awards, stock options and convertible securities that could potentially dilute future EPS calculations in periods of net earnings. No material changes in the weighted average outstanding shares or potential common shares occurred after December 31, 1999. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) (5) Supplemental Disclosures to Combined Statements of Cash Flows Cash paid for interest was $93 million, $32 million, $112 million and $60 million for the ten months ended December 31, 1999, the two months ended February 28, 1999 and the years ended December 31, 1998 and 1997, respectively. Cash paid for income taxes during the ten months ended December 31, 1999 and the two months ended February 28, 1999 was not material. Cash paid for income taxes during the years ended December 31, 1998 and 1997 was $29 million and $35 million, respectively.
New Liberty Old Liberty ------------ ---------------------------------------- Ten months Two months ended ended Years ended December 31, February 28, December 31, ------------ ------------ --------------------- 1999 1999 1998 1997 ------------ ------------ ---- ---- amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ 122 -- 162 452 Net liabilities assumed (13) -- (107) (209) Debt issued to related parties and others -- -- -- (404) Deferred tax asset recorded in acquisition -- -- -- 112 Minority interest in equity of acquired attributed subsidiaries -- -- 39 (129) Excess consideration paid over carryover basis of net assets acquired from related party -- -- -- 219 Gain in connection with the issuance of stock by attributed subsidiary -- -- (2) -- ----- ------- ---- ---- Cash paid for acquisitions $ 109 -- 92 41 ===== ======= ==== ====
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Significant noncash investing and financing activities are as follows:
New Liberty Old Liberty ------------ --------------------------------------- Ten months Two months ended ended Years ended December 31, February 28, December 31, 1999 1999 1998 1997 ------------ -------------- ----------------------- amounts in millions Exchange of attributed subsidiaries for limited partnership interest $135 -- -- -- ==== ===== ==== === Cost of distribution agreements (note 10) $ -- -- 74 173 ==== ===== ==== === Noncash acquisitions of minority interests in equity of attributed subsidiaries (note 8): Fair value of assets $ -- -- (741) (29) Deferred tax liability recorded -- -- 154 -- Minority interests in equity of attributed subsidiaries -- -- (185) (1) Liberty Media Group tracking stock issued -- -- 772 30 ---- ----- ---- --- $ -- -- -- -- ==== ===== ==== === Common stock received in exchange for option (note 7) $ -- -- -- 306 ==== ===== ==== === Preferred stock received in exchange for common stock and note receivable (note 7) $ -- -- -- 371 ==== ===== ==== ===
The following table reflects the change in cash and cash equivalents resulting from the AT&T Merger and related restructuring transactions (amounts in millions):
Cash and cash equivalents prior to the AT&T Merger $ 211 Cash received in the Asset Transfers, net of cash balances transferred 5,284 Cash paid to TCI Group for GI Warrants (176) ------- Cash and cash equivalents subsequent to the AT&T Merger $ 5,319 =======
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Liberty Media Group ceased to include TV Guide, Inc. ("TV Guide") in its combined financial results and began to account for TV Guide using the equity method of accounting, effective March 1, 1999 (see note 8). Liberty Media Group ceased to include Flextech p.l.c. ("Flextech") and Cablevision S.A. ("Cablevision") in its combined financial results and began to account for Flextech and Cablevision using the equity method of accounting, effective January 1, 1997 and October 1, 1997, respectively. The effects of changing the method of accounting for Liberty Media Group's ownership interests in these investments from the consolidation method to the equity method are summarized below:
New Liberty Old Liberty ------------ --------------------------------------- Ten months Two months ended ended Years ended December 31, February 28, December 31, 1999 1999 1998 1997 ------------ ------------ ---------------------- amounts in millions Assets (other than cash and cash equivalents) reclassified to investments in affiliates $ -- (200) -- (596) Liabilities reclassified to investments in affiliates -- 190 -- 484 Minority interests in equity of attributed subsidiaries reclassified to investments in affiliates -- 63 -- 151 ----- ---- ---- ---- Decrease in cash and cash equivalents $ -- 53 -- 39 ===== ==== ==== ====
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) (6) Investments in Affiliates Accounted for under the Equity Method Liberty Media Group has various investments accounted for under the equity method. The following table includes Liberty Media Group's carrying amount and percentage ownership of the more significant investments in affiliates at December 31, 1999 and the carrying amount at December 31, 1998:
New Liberty Old Liberty --------------------------------------- ----------------- December 31, 1999 December 31, 1998 --------------------------------------- ----------------- Percentage Ownership Carrying Amount Carrying Amount ---------- --------------- --------------- amounts in millions USA Networks, Inc. ("USAI") and related investments 21% $ 2,699 1,042 Telewest Communications plc ( "Telewest ") 22% 1,996 515 Discovery Communications, Inc. ("Discovery") 49% 3,441 49 TV Guide 44% 1,732 -- QVC Inc. ( "QVC ") 43% 2,515 197 Flextech 37% 727 320 UnitedGlobalCom, Inc. ("UnitedGlobalCom") 10% 505 -- Jupiter Telecommunications Co., Ltd. ("Jupiter") 40% 399 143 Various foreign equity investments (other than Telewest, Flextech and Jupiter) various 1,064 518 Other various 844 295 ------- ----- $15,922 3,079 ======= =====
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) The following table reflects Liberty Media Group's share of earnings (losses) of affiliates:
New Liberty Old Liberty ------------ -------------------------------------------- Ten months Two months ended ended Years ended December 31, February 28, December 31, 1999 1999 1998 1997 ------------ ------------ ------- -------- amounts in millions USAI and related investments $ (20) 10 30 5 Telewest (222) (38) (134) (145) Discovery (269) (8) (39) (29) TV Guide (46) -- -- -- QVC (11) 13 64 30 Flextech (41) (5) (21) (16) Fox/Liberty Networks LLC ("Fox/Liberty Networks") (48) (1) (83) -- UnitedGlobalCom 23 -- -- -- Jupiter (54) (7) (26) (23) Other foreign investments (113) (15) (99) (80) Teleport -- -- (32) (66) Sprint Spectrum Holding Company, L.P., MinorCo, L.P. and PhillieCo Partnership I, L.P. (the "PCS Ventures") (note 7) -- -- (629) (493) Other (103) (15) (65) (33) ------------- ------ ------ ---- $ (904) (66) (1,034) (850) ============= ====== ====== ====
Summarized unaudited combined financial information for affiliates is as follows:
December 31, -------------------------- 1999 1998 ------- ------- amounts in millions Combined Financial Position Investments $ 1,415 2,003 Property and equipment, net 8,885 8,147 Other intangibles, net 19,778 14,395 Other assets, net 9,207 7,553 ------- ------- Total assets $39,285 32,098 ======= ======= Debt $17,210 15,264 Other liabilities 12,645 11,620 Owners' equity 9,430 5,214 ------- ------- Total liabilities and equity $39,285 32,098 ======= =======
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2)
New Liberty Old Liberty ------------- ------------------------------------------------------ Ten months Two months ended ended Years ended December 31, February 28, December 31, 1999 1999 1998 1997 ------------ ------------ -------- -------- amounts in millions Combined Operations Revenue $ 10,492 2,341 14,062 7,107 Operating expenses (9,066) (1,894) (13,092) (7,635) Depreciation and amortization (1,461) (353) (2,629) (1,152) -------- -------- -------- -------- Operating income (loss) (35) 94 (1,659) (1,680) Interest expense (886) (281) (1,728) (656) Other, net (151) (127) (166) (443) -------- -------- -------- -------- Net loss $ (1,072) (314) (3,553) (2,779) ======== ======== ======== ========
USAI owns and operates businesses in network and television production, television broadcasting, electronic retailing, ticketing operations, and internet services. At December 31, 1999, Liberty Media Group directly and indirectly held 66.5 million shares of USAI's common stock (as adjusted for a subsequent two-for-one stock split). Liberty Media Group also held shares directly in certain subsidiaries of USAI which are exchangeable into 79.0 million shares of USAI common stock (as adjusted for the two-for-one stock split). Liberty Media Group's direct ownership of USAI is currently restricted by Federal Communications Commission ("FCC") regulations. The exchange of these shares can be accomplished only if there is a change to existing regulations or if Liberty Media Group obtains permission from the FCC. If the exchange of subsidiary stock into USAI common stock was completed at December 31, 1999, Liberty Media Group would own 145.5 million shares (as adjusted for the two-for-one stock split) or approximately 21% (on a fully-diluted basis) of USAI common stock. USAI's common stock had a closing market value of $27.63 per share (as adjusted for the two-for-one stock split) on December 31, 1999. Liberty Media Group accounts for its investments in USAI and related subsidiaries on a combined basis under the equity method. In February 1998, USAI paid cash and issued shares and one of its subsidiaries issued shares in connection with the acquisition of certain assets from Universal Studios, Inc. (the "Universal Transaction"). Liberty Media Group recorded an increase to its investment in USAI of $54 million and an increase to combined equity of $33 million (after deducting deferred income taxes of $21 million) as a result of this share issuance. USAI issued shares in June 1998 to acquire the remaining stock of Ticketmaster Group, Inc. which it did not previously own (the "Ticketmaster Transaction"). Liberty Media Group recorded an increase to its investment in USAI of $52 million and an increase to combined equity of $31 million (after deducting deferred income taxes of $21 million) as a result of this share issuance. No gain was recognized in the combined statement of operations and comprehensive earnings for either the Universal Transaction or the Ticketmaster Transaction due primarily to Liberty Media Group's intention to purchase additional equity interests in USAI. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) In connection with the Universal Transaction, Liberty Media Group was granted an antidilutive right with respect to any future issuance of USAI's common stock, subject to certain limitations, that enables it to maintain its percentage ownership interests in USAI. Telewest currently operates and constructs cable television and telephone systems in the UK. At December 31, 1999 Liberty Media Group indirectly owned 506 million of the issued and outstanding Telewest ordinary shares. The reported closing price on the London Stock Exchange of Telewest ordinary shares was $5.34 per share at December 31, 1999. Effective September 1, 1998, Telewest and General Cable PLC ("General Cable") consummated a merger (the "General Cable Merger") in which holders of General Cable received New Telewest shares and cash. Based upon Telewest's closing price of $1.51 per share on April 14, 1998, the General Cable Merger was valued at approximately $1.1 billion. The cash portion of the General Cable Merger was financed through an offer to qualifying Telewest shareholders for the purchase of approximately 261 million new Telewest shares at a price of $1.57 per share (the "Telewest Offer"). Liberty Media Group subscribed to 85 million Telewest ordinary shares at an aggregate cost of $133 million in connection with the Telewest Offer. In connection with the General Cable Merger, Liberty Media Group converted its entire holdings of Telewest convertible preference shares (133 million shares) into Telewest ordinary shares. As a result of the General Cable Merger, Liberty Media Group's ownership interest in Telewest decreased to 22%. In connection with the increase in Telewest's equity, net of the dilution of Liberty Media Group's interest in Telewest, that resulted from the General Cable Merger, Liberty Media Group recorded a non-cash gain of $60 million (before deducting deferred income taxes of $21 million) during 1998. The Class A common stock of TV Guide is publicly traded. At December 31, 1999, Liberty Media Group held 58 million shares of TV Guide Class A common stock (as adjusted for a two-for-one stock split) and 75 million shares of TV Guide Class B common stock (as adjusted for a two-for-one stock split). See note 8. The TV Guide Class B common stock is convertible, one-for-one, into TV Guide Class A common stock. The closing price for TV Guide Class A common stock was $43.00 per share on December 31, 1999. Flextech develops and sells a variety of television programming in the UK. At December 31, 1999, Liberty Media Group indirectly owned 58 million Flextech ordinary shares. The reported closing price on the London Stock Exchange of the Flextech ordinary shares was $18.58 per share at December 31, 1999. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) In April 1997, Flextech and BBC Worldwide Limited ("BBC Worldwide") formed two separate joint ventures (the "BBC Joint Ventures") and entered into certain related transactions. The consummation of the BBC Joint Ventures and related transactions resulted in, among other things, a reduction of Liberty Media Group's economic ownership interest in Flextech from 46.2% to 36.8%. Liberty Media Group continues to maintain a voting interest in Flextech of approximately 50%. As a result of such dilution, Liberty Media Group recorded a $152 million increase to the carrying amount of Liberty Media Group's investment in Flextech, a $53 million increase to deferred income tax liability, a $66 million increase to combined equity and a $33 million increase to minority interests in equity of attributed subsidiaries. No gain was recognized in the combined statement of operations and comprehensive earnings due primarily to certain contingent obligations of Liberty Media Group with respect to one of the BBC Joint Ventures (see note 15). Liberty Media Group and The News Corporation Limited ("News Corp.") each previously owned 50% of Fox/Liberty Networks, which operates national and regional sports networks. Prior to the first quarter of 1998, Liberty Media Group had no obligation, nor intention, to fund Fox/Liberty Networks. During 1998, Liberty Media Group made the determination to provide funding to Fox/Liberty Networks based on specific transactions consummated by Fox/Liberty Networks. Consequently, Liberty Media Group's share of losses of Fox/Liberty Networks for the year ended December 31, 1998 included previously unrecognized losses of Fox/Liberty Networks of approximately $64 million. Losses for Fox/Liberty Networks were not recognized in prior periods due to the fact that Liberty Media Group's investment in Fox/Liberty Networks was less than zero. During 1999, News Corp. acquired Liberty Media Group's 50% interest in Fox/Liberty Networks (see note 7). On September 30, 1999, Liberty Media Group purchased 9.9 million class B shares of UnitedGlobalCom for approximately $493 million in cash. UnitedGlobalCom is the largest global broadband communications provider of video, voice and data services with operations in over 20 countries throughout the world. At December 31, 1999, Liberty Media Group owned an approximate 10% economic ownership interest representing an approximate 36% voting interest in UnitedGlobalCom. The closing price for UnitedGlobalCom Class A common stock was $70.63 per share on December 31, 1999. The UnitedGlobalCom Class B common stock is convertible, on a one-for-one basis, into UnitedGlobalCom Class A common stock. During the year ended December 31, 1997, Teleport issued 6.6 million shares of its Class A common stock for certain acquisitions and consummated a public offering of 7.3 million shares of its Class A common stock. As a result of the increase in Teleport's equity, net of the dilution of Liberty Media Group's ownership interest in Teleport that resulted from these transactions, Liberty Media Group recognized non-cash gains aggregating $112 million (before deducting deferred income tax expense of $43 million). On April 22, 1998, Teleport completed a merger transaction with ACC Corp. As a result, Liberty Media Group's interest in Teleport was reduced to approximately 26%. In connection with the increase in Teleport's equity, net of the dilution of Liberty Media Group's interest in Teleport, that resulted from the merger, Liberty Media Group recorded a non-cash gain of $201 million (before deducting deferred income tax expense of $71 million). (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) On October 9, 1997, Liberty Media Group sold a portion of its 51% interest in Cablevision to unaffiliated third parties. In connection with such sale and certain related transactions, Liberty Media Group recognized a gain of $49 million. Liberty Media Group's equity interest in Cablevision was 28% at December 31, 1999. The $13 billion aggregate excess of Liberty Media Group's aggregate carrying amount in its affiliates over Liberty Media Group's proportionate share of its affiliates' net assets is being amortized over estimated useful life of 20 years. Certain of Liberty Media Group's affiliates are general partnerships and, as such, are liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. (7) Investments in Available-for-sale Securities and Others Investments in available-for-sale securities and others are summarized as follows:
New Liberty Old Liberty ------------ ----------- December 31, -------------------------------- 1999 1998 ------------ ----------- amounts in millions Sprint Corporation ("Sprint") (a) $ 10,186 2,446 Time Warner, Inc. ("Time Warner") (b) 8,202 7,083 News Corp. (c) 2,403 -- General Instrument Corporation ("General Instrument") (d) 3,430 396 Other available-for-sale securities 3,773 283 AT&T (e) -- 3,556 Other investments, at cost, and related receivables (f) 985 743 --------- ------- 28,979 14,507 Less short-term investments 378 124 --------- ------- $ 28,601 14,383 ========= =======
(a) Pursuant to a final judgment (the "Final Judgment ") agreed to by Liberty Media Corporation, AT&T and the United States Department of Justice (the "DOJ ") on December 31, 1998, Liberty Media Group transferred all of its beneficially owned securities (the "Sprint Securities ") of Sprint to a trustee (the "Trustee ") prior to the AT&T Merger. The Final Judgment, which was entered by the United States District Court for the District of Columbia on August 23, 1999, would require the Trustee, on or before May 23, 2002, to dispose of a portion of the Sprint Securities sufficient to cause Liberty Media Group to beneficially own no more than 10% of the outstanding Series 1 PCS Stock of Sprint on a fully diluted basis on such date. On or before May 23, 2004, the Trustee must divest the remainder of the Sprint Securities beneficially owned by Liberty Media Group. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) The Final Judgment requires that the Trustee vote the Sprint Securities beneficially owned by Liberty Media Group in the same proportion as other holders of Sprint's PCS Stock so long as such securities are held by the trust. The Final Judgment also prohibits the acquisition of Liberty Media Group of additional Sprint Securities, with certain exceptions, without the prior written consent of the DOJ. The PCS Ventures included Sprint Spectrum Holding Company, L. P. and MinorCo, L.P. (collectively, "Sprint PCS") and PhillieCo Partnership I, L.P. ("PhillieCo"). The partners of each of the Sprint PCS partnerships were subsidiaries of Sprint, Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and Liberty Media Group. The partners of PhillieCo were subsidiaries of Sprint, Cox and Liberty Media Group. Liberty Media Group had a 30% partnership interest in each of the Sprint PCS partnerships and a 35% partnership interest in PhillieCo. On November 23, 1998, Liberty Media Group, Comcast, and Cox exchanged their respective interests in Sprint PCS and PhillieCo (the "PCS Exchange") for shares of Sprint PCS Group Stock, which tracks the performance of Sprint's then newly created PCS Group (consisting initially of the PCS Ventures and certain PCS licenses which were separately owned by Sprint). The Sprint PCS Group Stock collectively represents an approximate 17% voting interest in Sprint. As a result of the PCS Exchange, Liberty Media Group, through the trust established pursuant to the Final Judgment, holds the Sprint Securities which consists of shares of Sprint PCS Group Stock, as well as certain additional securities of Sprint exercisable for or convertible into such securities, representing approximately 24% of the equity value of Sprint attributable to its PCS Group and less than 1% of the voting interest in Sprint. Through November 23, 1998, Liberty Media Group accounted for its interest in the PCS Ventures using the equity method of accounting; however, as a result of the PCS Exchange, Liberty Media Group's less than 1% voting interest in Sprint and the Final Judgment, Liberty Media Group no longer exercises significant influence with respect to its investment in the PCS Ventures. Accordingly, Liberty Media Group accounts for its investment in the Sprint PCS Group Stock as an available-for-sale security. As a result of the PCS Exchange, Liberty Media Group recorded a non-cash gain of $1.9 billion (before deducting deferred income taxes of $647 million) during the fourth quarter of 1998 based on the difference between the carrying amount of Liberty Media Group's interest in the PCS Ventures and the fair value of the Sprint Securities received. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) In September 1999, a trust for Liberty Media Group's benefit entered into a four and one-half year "cashless collar" with a financial institution with respect to 35 million shares of Sprint PCS Group Stock (as adjusted for a two-for-one stock split), secured by 35 million shares of such stock (as adjusted for a two-for-one stock split). The collar provides the trust with a put option that gives it the right to require its counterparty to buy 35 million shares of Sprint PCS Group Stock from the trust in five tranches in approximately four and one-half years for a weighted average price of $27.62 per share (as adjusted for a two-for-one stock split). Liberty Media Group simultaneously sold a call option giving the counterparty the right to buy the same shares of stock from the trust in five tranches in approximately four and one-half years for a weighted average price of $57.42 per share (as adjusted for a two-for-one stock split). Additionally, on December 15, 1999, the trust entered into a "cashless collar" with a financial institution with respect to 18 million shares of Sprint PCS Group Stock (as adjusted for a two-for-one stock split). The collar consists of a put option that gives the trust the right to require its counterparty to buy 18 million shares of Sprint PCS Group Stock (as adjusted for a two-for-one stock split) from the trust in three tranches in approximately two years for $50.00 per share (as adjusted for a two-for-one stock split). The counterparty has a call option giving the counterparty the right to buy the same shares from the trust in three tranches in approximately two years for $65.23 per share (as adjusted for a two-for-one stock split). The put and the call options of each of these collars were equally priced, resulting in no cash cost to the trust or Liberty Media Group. (b) Liberty Media Group holds shares of a series of Time Warner's series common stock with limited voting rights (the "TW Exchange Stock") that are convertible into an aggregate of 114 million shares of Time Warner common stock. Liberty Media Group accounts for its investment in Time Warner as an available-for-sale security. On June 24, 1997, Liberty Media Group granted Time Warner an option to acquire the business of Southern Satellite Systems, Inc. (the "Southern Business") from Liberty Media Group. Liberty Media Group received 6.4 million shares of TW Exchange Stock valued at $306 million in consideration for the grant. Pursuant to the option, Time Warner acquired the Southern Business, effective January 1, 1998, for $213 million in cash. Liberty Media Group recognized a $515 million pre-tax gain in connection with such transaction in the first quarter of 1998. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) In March 1999, Liberty Media Group entered into a seven-year "cashless collar" with a financial institution with respect to 15 million shares of Time Warner common stock, secured by 15 million shares of its TW Exchange Stock. This cashless collar provides Liberty Media Group with a put option that gives it the right to require its counterparty to buy 15 million Time Warner shares from Liberty Media Group in approximately seven years for $67.45 per share. Liberty Media Group simultaneously sold a call option giving the counterparty the right to buy the same number of Time Warner shares from Liberty Media Group in approximately seven years for $158.33 per share. The put and the call options were equally priced, resulting in no cash cost to Liberty Media Group. (c) On July 15, 1999, News Corp. acquired Liberty Media Group's 50% interest in Fox/Liberty Networks in exchange for 51.8 million News Corp. American Depository Receipts ( "ADRs ") representing preferred limited voting ordinary shares of News Corp. Of the 51.8 million ADRs received, 3.6 million were placed in an escrow (the "Escrow Shares ") pending an independent third party valuation, as of the third anniversary of the transaction. The remainder of the 51.8 million ADRs received (the "Restricted Shares ") are subject to a two-year lockup which restricts any transfer of the securities for a period of two years from the date of the transaction. Liberty Media Group recorded the ADRs at fair value of $1,403 million, which included a discount from market value for the Restricted Shares due to the two-year restriction on transfer, resulting in a $13 million gain on the transaction. In a related transaction, Liberty Media Group acquired from News Corp. 28.1 million additional ADRs representing preferred limited voting ordinary shares of News Corp. for approximately $695 million. Liberty Media Group accounts for its investment in News Corp. as an available-for-sale security, with the exception of the Restricted Shares and the Escrow Shares. (d) On July 17, 1998, TCI acquired 21.4 million shares of restricted stock of General Instrument in exchange for (i) certain of the assets of the NDTC's set-top authorization business, (ii) the license of certain related software to General Instrument, (iii) a $50 million promissory note from TCI to General Instrument and (iv) a nine year revenue guarantee from TCI in favor of General Instrument. In connection therewith, NDTC also entered into a service agreement pursuant to which it will provide certain postcontract services to General Instrument's set-top authorization business. The 21.4 million shares of General Instrument common stock were, in addition to other transfer restrictions, originally restricted as to their sale by Liberty Media Group for a three year period. Liberty Media Group recorded its investment in such shares at fair value which included a discount attributable to the above-described liquidity restriction. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) On January 5, 2000, Motorola, Inc. completed the acquisition of General Instrument through a merger of General Instrument with a wholly owned subsidiary of Motorola. In the merger, each outstanding share of General Instrument common stock was converted into the right to receive 0.575 shares of Motorola common stock. In connection with the merger Liberty Media Group received 18 million shares and warrants to purchase 12 million shares of Motorola common stock in exchange for its holdings in General Instrument. Subsequent to the merger, the Motorola securities are no longer subject to the three year restriction and accordingly, Liberty Media Group accounted for its investment in General Instrument as an available-for-sale security at December 31, 1999. Liberty Media Group has agreed not to transfer or encumber the Motorola securities for a specified period which is less than one year. Liberty Media Group's ability to exercise warrants to purchase 6.1 million shares of Motorola common stock are subject to AT&T satisfying the terms of a purchase commitment in 2000. AT&T has agreed to pay Liberty Media Group $14.35 for each warrant that does not vest as a result of the purchase commitment not being met. (e) During July 1998, Teleport was acquired by AT&T and Liberty Media Group received in exchange for all of its interest in Teleport approximately 70.4 million shares of AT&T common stock. Liberty Media Group recognized a $2.3 billion gain (excluding related tax expense of $883 million) on such transaction during the third quarter of 1998 based on the difference between the carrying value of Liberty Media Group's interest in Teleport and the fair value of the AT&T common stock received. (f) On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of Liberty Media Group, which held non-voting Class C common stock of International Family Entertainment, Inc. ( "IFE ") ( "Class C Stock ") and $23 million of IFE 6% convertible secured notes due 2004, convertible into Class C Stock ( "Convertible Notes "), contributed its Class C Stock and Convertible Notes to Fox Kids Worldwide, Inc. ( "FKW ") in exchange for a new series of 30 year non-convertible 9% preferred stock of FKW with a stated value of $345 million. As a result of the exchange, Liberty Media Group recognized a pre-tax gain of approximately $304 million during the third quarter of 1997. Investments in available-for-sale securities are summarized as follows:
New Liberty Old Liberty ----------- ----------- December 31, ------------------------------ 1999 1998 ----------- ----------- amounts in millions Equity securities: Fair value $ 24,472 13,243 Gross unrealized holding gains 11,457 4,875 Gross unrealized holding losses (646) -- Debt securities: Fair value $ 1,995 -- Gross unrealized holding losses (22) --
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Management of Liberty Media Group estimates the market value, calculated using a variety of approaches including multiple of cash flow, per subscriber value, a value of comparable public or private businesses or publicly quoted market prices, of all of Liberty Media Group's investments in available-for-sale securities and others aggregated $29.2 billion and $11.2 billion at December 31, 1999 and December 31, 1998, respectively. No independent appraisals were conducted for those assets. (8) Acquisitions and Dispositions During July 1997, the 10% minority interest in Encore Media Corporation ("EMC") was purchased by Liberty Media Group for approximately 2.4 million shares of TCI's then outstanding Liberty Media Group tracking stock. Such 10% interest in EMC was accounted for as an acquisition of a minority interest and resulted in an increase of $30 million in combined equity. On January 12, 1998, Liberty Media Group acquired from a minority shareholder of TV Guide, formerly named United Video Satellite Group, Inc. ("UVSG"), 49.6 million shares of UVSG Class A common stock (as adjusted for a two-for-one stock split) in exchange for shares of TCI's then outstanding Liberty Media Group tracking stock. The aggregate value assigned to the shares issued by TCI was based upon the market value of such shares at the time the transaction was announced. Such transaction was accounted for as an acquisition of minority interest. As a result of such transaction, Liberty Media Group increased its ownership in the equity of UVSG to approximately 73% and the voting power increased to 93%. In connection with the issuance of TCI's then outstanding Liberty Media Group tracking stock in such transaction, Liberty Media Group recorded the total purchase price of $346 million as an increase to combined equity. Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision") contributed the assets, obligations and operations of its retail C-band satellite business to Superstar/Netlink Group LLC ("SNG") in exchange for an approximate 20% interest in SNG. As a result of such transaction, Liberty Media Group's ownership interest in SNG decreased to approximately 80%. In connection with the increase in SNG's equity, net of the dilution of Liberty Media Group's ownership interest in SNG, that resulted from such transaction, Liberty Media Group recognized a gain of $38 million (before deducting deferred income taxes of $15 million). Turner Vision's contribution to SNG was accounted for as a purchase and the $61 million excess of the purchase price over the fair value of the net assets acquired was recorded as excess cost and is being amortized over five years. On August 24, 1998, Liberty Media Group purchased 100% of the issued and outstanding common stock of Pramer S.A. ("Pramer"), an Argentine programming company, for a total purchase price of $97 million, which was satisfied by $32 million in cash and the issuance of notes payable in the amount of $65 million. Such transaction was accounted for under the purchase method. Accordingly, the results of operations of Pramer have been included with those of Liberty Media Group since August 24, 1998. The $101 million excess cost over acquired net assets is being amortized over ten years. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) On November 19, 1998, Liberty Media Group exchanged, in a merger transaction, 10.1 million shares of TCI's then outstanding Liberty Media Group tracking stock for shares of Tele-Communications International, Inc. ("TINTA") common stock not beneficially owned by Liberty Media Group. Such transaction was accounted for by Liberty Media Group as an acquisition of minority interest in equity of attributed subsidiaries. The aggregate value assigned to the shares issued by Liberty Media Group was based upon the market value of the Liberty Media Group Series A tracking stock at the time the merger was announced. In connection with the issuance of TCI's then outstanding Liberty Media Group tracking stock in such merger transaction, Liberty Media Group recorded the total purchase price of $426 million as an increase to combined equity. On March 1, 1999, UVSG and News Corp. completed a transaction whereby UVSG acquired News Corp.'s TV Guide properties, creating a broader platform for offering television guide services to consumers and advertisers, and UVSG was renamed TV Guide. News Corp. received total consideration of $1.9 billion including $800 million in cash, 22.5 million shares of UVSG's Class A common stock and 37.5 million shares of UVSG's Class B common stock valued at an average of $18.65 per share. In addition, News Corp. purchased approximately 6.5 million additional shares of UVSG Class A common stock for $129 million in order to equalize its ownership with that of Liberty Media Group. As a result of these transactions, and another transaction completed on the same date, News Corp, Liberty Media Group and TV Guide's public stockholders own on an economic basis approximately 44%, 44% and 12%, respectively, of TV Guide. Following such transactions, News Corp. and Liberty Media Group each have approximately 49% of the voting power of TV Guide's outstanding stock. In connection with the increase in TV Guide's equity, net of dilution of Liberty Media Group's ownership interest in TV Guide, Liberty Media Group recognized a gain of $372 million (before deducting deferred income taxes of $147 million). Upon consummation, Liberty Media Group began accounting for its interest in TV Guide under the equity method of accounting. (9) Liberty Digital, Inc. Effective July 11, 1997, a wholly-owned subsidiary of Liberty Digital (then named TCI Music) was merged with and into DMX, Inc. with DMX as the surviving corporation (the "DMX Merger"). As a result of the DMX Merger, stockholders of DMX became stockholders of TCI Music. In connection with the DMX Merger, TCI granted to each stockholder who became a stockholder of TCI Music pursuant to the DMX Merger, one right (a "Right") with respect to each whole share of TCI Music Series A common stock acquired by such stockholder in the DMX Merger pursuant to the terms of a Rights Agreement among TCI, TCI Music and the rights agent (the "Rights Agreement"). Each Right entitled the holder to require TCI to purchase from such holder one share of TCI Music Series A common stock for $8.00 per share, subject to reduction by the aggregate amount per share of any dividend and certain other distributions, if any, made by TCI Music to its stockholders, and, payable at the election of TCI, in cash, a number of shares of TCI's then outstanding TCI Group Series A tracking stock, having an equivalent value or a combination thereof, if during the one-year period beginning on the effective date of the DMX Merger, the price of TCI Music Series A common stock did not equal or exceed $8.00 per share for a period of at least 20 consecutive trading days. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Effective with the DMX Merger, TCI beneficially owned approximately 45.7% of the outstanding shares of TCI Music Series A common stock and 100% of the outstanding shares of TCI Music Series B common stock, which represented 89.6% of the equity and 98.7% of the voting power of TCI Music. Simultaneously with the DMX Merger, Liberty Media Group acquired the TCI-owned TCI Music common stock by agreeing to reimburse TCI for any amounts required to be paid by TCI pursuant to TCI's contingent obligation under the Rights Agreement to purchase up to 15 million shares (7 million of which were owned by Liberty Media Group) of TCI Music Series A common stock and issuing an $80 million promissory note (the "Music Note") to TCI. Liberty Media Group recorded its contingent obligation to purchase such shares under the Rights Agreement as a component of minority interest in equity of attributed subsidiaries in the accompanying combined financial statements. TCI Music was included in the combined financial results of Liberty Media Group as of the date of the DMX Merger. Due to the related party nature of the transaction, the $86 million excess of the consideration paid over the carryover basis of the TCI Music common stock acquired by Liberty Media Group from TCI was reflected as a decrease in combined equity. The Music Note was repaid during 1999. Prior to the July 1998 expiration of the Rights, Liberty Media Group was notified of the tender of 4.9 million shares of TCI Music Series A common stock and associated Rights. On August 27, 1998, Liberty Media Group paid $39 million to satisfy TCI's obligation under the Rights Agreement. Such transaction was recorded as an acquisition of minority interest in equity of attributed subsidiaries. On September 9, 1999, Liberty Media Group and TCI Music completed a transaction (the "Liberty Digital Transaction") pursuant to which Liberty Media Group contributed to TCI Music substantially all of its directly held internet content and interactive television assets, its rights to provide interactive video services on AT&T's cable television systems and a combination of cash and notes receivable equal to $150 million. In exchange, TCI Music issued common stock and convertible preferred stock to Liberty Media Group and was renamed Liberty Digital, Inc. During 1999, Liberty Digital issued approximately 4.8 million shares of common stock in connection with the conversion of its preferred stock and approximately 2.8 million shares of common stock in connection with the exercise of certain employee stock options. In connection with the increase in Liberty Digital's equity, net of the dilution of Liberty Media Group's interest in Liberty Digital, that resulted from such stock issuances, Liberty Media Group recorded a $108 million increase to combined equity. (10) At Home Corporation During 1998, @Home completed a public offering of @Home common stock and issued 1.2 million shares of common stock in certain acquisitions. As a result of the increase in @Home's equity in connection with these stock issuances, net of the dilution of Liberty Media Group's ownership interest in @Home, Liberty Media Group recognized a gain of $51 million. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) During 1997, @Home issued shares of convertible preferred stock and completed its initial public offering of @Home common stock. In connection with the increase in @Home's equity, net of the dilution of Liberty Media Group's ownership interest in @Home resulting from these stock issuances, Liberty Media Group recognized a gain of $60 million during the third quarter of 1997. In connection with exclusive distribution agreements entered into between @Home and certain cable operators, @Home issued warrants to such cable operators to purchase shares of @Home's common stock. Of these warrants, warrants to purchase 11.2 million shares were exercisable as of December 31, 1998. During the year ended December 31, 1998, @Home recorded non-cash charges of $50 million to operations based on the fair value of 1 million shares which were underlying warrants which became exercisable during the period. Such charges are included in "cost of distribution agreements" in the accompanying combined statements of operations. (11) Long-Term Debt Debt is summarized as follows:
Weighted average interest December 31, rate ------------------ 1999 1999 1998 -------- ---- ---- amounts in millions Parent company debt: Bank credit facilities 5.7% $ 390 529 Senior notes (a) 7.875% 741 -- Senior debentures (a) 8.5% 494 -- Senior exchangeable debentures (b) 4.0% 1,022 -- ------ ----- 2,647 529 Debt of subsidiaries: Bank credit facilities 6.2% 573 1,500 Convertible subordinated debentures (c) -- -- 574 Other debt, at varying rates 57 293 ------ ----- 630 2,367 ------ ----- Total debt 3,277 2,896 Less current maturities 554 578 ------ ----- Total long-term debt $ 2,723 2,318 ====== =====
(a) On July 7, 1999, Liberty Media Group received net cash proceeds of approximately $741 million and $494 million from the issuance of 7-7/8% Senior Notes due 2009 (the "Senior Notes ") and 8-1/2% Senior Debentures due 2029 (the "Senior Debentures "), respectively. The Senior Notes, which are stated net of unamortized discount of $9 million, have an aggregate principal amount of $750 million and the Senior Debentures, which are stated net of unamortized discount of $6 million, have an aggregate principal amount of $500 million. Interest on the Senior Notes and the Senior Debentures is payable on January 15 and July 15 of each year. The proceeds were used to repay outstanding borrowings under certain of Liberty Media Group's credit facilities, which were subsequently canceled. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) (b) On November 16, 1999, Liberty Media Group received net cash proceeds of $854 million from the issuance of 4% Senior Exchangeable Debentures due 2030. The exchangeable debentures have an aggregate principal amount of $869 million. Each debenture has a $1,000 face amount and is exchangeable at the holder's option for the value of 22.9486 shares of Sprint PCS Group Stock (as adjusted for a two-for-one stock split). This amount will be paid only in cash until the later of December 31, 2001 and the date the direct and indirect ownership level of Sprint PCS Group Stock owned by Liberty Media Group falls below a designated level, after which, at Liberty Media Group's election, Liberty Media Group may pay the amount in cash, Sprint PCS Group Stock or a combination thereof. Interest on these exchangeable debentures is payable on May 15 and November 15 of each year. The carrying amount of the exchangeable debentures in excess of the principal amount (the "Contingent Portion) is based on the fair value of the underlying Sprint PCS Group Stock. The increase or decrease in the Contingent Portion is recorded as an increase or decrease to interest expense in the combined statement of operations and comprehensive earnings. (c) On April 8, 1999, Liberty Media Group redeemed all of its outstanding 4-1/2% Convertible Subordinated Debentures due February 15, 2005 with a principal amount of $345 million. The debentures were convertible into shares of AT&T Liberty Media Group Class A tracking stock at a conversion price of $23.54, or 42.48 shares per $1,000 principal amount. Certain holders of the debentures had exercised their rights to convert their debentures and 14.6 million shares of AT&T Liberty Media Group tracking stock were issued to such holders. In connection with such issuance of AT&T Liberty Media Group tracking stock, Liberty Media Group recorded a $354 million increase to combined equity. At December 31, 1999, Liberty Media Group had approximately $160 million in unused lines of credit under its bank credit facilities. The bank credit facilities of Liberty Media Group generally contain restrictive covenants which require, among other things, the maintenance of certain financial ratios, and include limitations on indebtedness, liens, encumbrances, acquisitions, dispositions, guarantees and dividends. Liberty Media Group was in compliance with its debt covenants at December 31, 1999. Additionally, Liberty Media Group pays fees ranging from .15% to .375% per annum on the average unborrowed portions of the total amounts available for borrowings under bank credit facilities. The U.S. dollar equivalent of the annual maturities of Liberty Media Group's debt for each of the next five years are as follows: 2000: $554 million; 2001: $72 million; 2002: $80 million; 2003: $99 million and 2004: $145 million. Based on quoted market prices, the fair value of Liberty Media Group's debt at December 31, 1999 is as follows (amounts in millions):
Senior Notes $ 742 Senior Debentures 506 4% Senior Exchangeable Debentures 1,088
Liberty Media Group believes that the carrying amount of the remainder of its debt approximated its fair value at December 31, 1999. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) (12) Income Taxes Subsequent to the AT&T Merger, Liberty Media Group is included in the consolidated federal income tax return of AT&T and party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement"). Liberty Media Group calculates its respective tax liability on a separate return basis. The income tax provision for Liberty Media Group is calculated based on the increase or decrease in the tax liability of the AT&T consolidated group resulting from the inclusion of those items in the consolidated tax return of AT&T which are attributable to Liberty Media Group. Under the AT&T Tax Sharing Agreement, Liberty Media Group will receive a cash payment from AT&T in periods when it generates taxable losses and such taxable losses are utilized by AT&T to reduce the consolidated income tax liability. This utilization of taxable losses will be accounted for by Liberty Media Group as a current federal intercompany income tax benefit. To the extent such losses are not utilized by AT&T, such amounts will be available to reduce federal taxable income generated by Liberty Media Group in future periods, similar to a net operating loss carryforward, and will be accounted for as a deferred federal income tax benefit. In periods when Liberty Media Group generates federal taxable income, AT&T has agreed to satisfy such tax liability on Liberty Media Group's behalf up to a certain amount. The reduction of such computed tax liabilities will be accounted for by Liberty Media Group as an addition to combined equity. The total amount of future federal tax liabilities of Liberty Media Group which AT&T will satisfy under the AT&T Tax Sharing Agreement is approximately $512 million, which represents the tax effect of the net operating loss carryforward reflected in TCI's final federal income tax return, subject to IRS adjustments. Thereafter, Liberty Media Group is required to make cash payments to AT&T for federal tax liabilities of Liberty Media Group. To the extent AT&T utilizes existing net operating losses of Liberty Media Group, such amounts will be accounted for by Liberty Media Group as a reduction of combined equity. During the ten month period ending December 31, 1999, AT&T utilized net operating losses of Liberty Media Group with a tax effected carrying value of $88 million. Liberty Media Group will generally make cash payments to AT&T related to states where it generates taxable income and receive cash payments from AT&T in states where it generates taxable losses. Prior to the AT&T Merger, Liberty Media Group was included in TCI's consolidated tax return and was a party to the TCI tax sharing agreements. Liberty Media Group's obligation under the 1995 TCI Tax Sharing Agreement of approximately $139 million (subject to adjustment), which is included in "due to related parties," shall be paid at the time, if ever, that Liberty Media Group deconsolidates from the AT&T income tax return. Liberty Media Group's receivable under the 1997 TCI Tax Sharing Agreement of approximately $220 million was forgiven in the AT&T Tax Sharing Agreement and recorded as an adjustment to combined equity by Liberty Media Group in connection with the AT&T Merger. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Income tax benefit (expense) consists of:
Current Deferred Total ------- -------- ----- amounts in millions Ten months ended December 31, 1999: State and local income tax (expense) benefit, including intercompany tax allocation $ (3) 152 149 Federal income tax benefit, including intercompany tax allocation 75 873 948 ------- ------- ------- $ 72 1,025 1,097 ======= ======= ======= Two months ended February 28, 1999: State and local income tax expense, including intercompany tax allocation $ (1) (36) (37) Federal income tax expense, including intercompany tax allocation (3) (169) (172) ------- ------- ------- $ (4) (205) (209) ======= ======= ======= Year ended December 31, 1998: State and local income tax expense, including intercompany tax allocation $ (2) (200) (202) Federal income tax expense, including intercompany tax allocation (1) (1,190) (1,191) Foreign income tax expense (1) (3) (4) ------- ------- ------- $ (4) (1,393) (1,397) ======= ======= ======= Year ended December 31, 1997: State and local income tax expense, including intercompany tax allocation $ (3) (32) (35) Federal income tax benefit, including intercompany tax allocation 158 12 170 Foreign income tax (expense) benefit (9) 4 (5) ------- ------- ------- $ 146 (16) 130 ======= ======= =======
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:
New Liberty Old Liberty --------------- ---------------------------------------------------- Ten months Two months ended ended Years ended December 31, February 28, December 31, --------------- -------------- -------------- 1999 1999 1998 1997 ------------- ------------- ------------- ------------- amounts in millions Computed expected tax benefit (expense) $ 1,092 (53) (1,244) 189 Dividends excluded for income tax purposes 11 6 16 8 Minority interest in equity of attributed subsidiaries 16 3 33 3 Amortization not deductible for income tax purposes (122) (4) (21) (10) State and local income taxes, net of federal income taxes 102 (29) (132) (23) Recognition of difference in income tax basis of investments in attributed subsidiaries -- (133) (1) (10) Increase in valuation allowance -- -- (44) (26) Gain on sale of attributed subsidiaries' stock -- -- 18 21 Effect of deconsolidations on deferred tax expense -- -- -- (11) Other, net (2) 1 (22) (11) -------- -------- -------- -------- $ 1,097 (209) (1,397) 130 ======== ======== ======== ========
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below:
New Liberty Old Liberty ----------- ----------- December 31, ----------------------------- 1999 1998 -------- -------- amounts in millions Deferred tax assets: Net operating and capital loss carryforwards $ 43 188 Future deductible amount attributable to accrued stock compensation and deferred compensation 749 215 Recognized gain on sale of assets -- 147 Other future deductible amounts due principally to non-deductible accruals 37 16 -------- -------- Deferred tax assets 829 566 Less valuation allowance 50 139 -------- -------- Net deferred tax assets 779 427 -------- -------- Deferred tax liabilities: Investments in affiliates, due principally to the application of purchase accounting and losses of affiliates recognized for income tax purposes in excess of losses recognized for financial statement purposes 13,915 4,825 Intangibles, principally due to differences in amortization 200 -- Other, net 21 60 -------- -------- Deferred tax liabilities 14,136 4,885 -------- -------- Net deferred tax liabilities $13,357 4,458 ======== ========
At December 31, 1999, Liberty Media Group had net operating and capital loss carryforwards for income tax purposes aggregating approximately $94 million which, if not utilized to reduce taxable income in future periods, will expire as follows: 2004: $18 million; 2005: $14 million; 2006: $14 million; 2007: $13 million; 2008: $12 million; and $23 million between 2009 and 2010. These net operating losses are subject to certain rules limiting their usage. (13) Combined Equity Stock Repurchase and Issuances In conjunction with a stock repurchase program or similar transaction, the issuer may elect to sell put options on its own common stock. Proceeds from any sales of puts with respect to TCI's then outstanding TCI Ventures Group tracking stock and TCI's then outstanding Liberty Media Group tracking stock have been reflected as an increase to combined equity, and an amount equal to the maximum redemption amount under unexpired put options with respect to such tracking stocks was reflected as an "obligation to redeem common stock" in the accompanying combined balance sheets. At December 31, 1999 no amounts were outstanding under such arrangements. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) During the year ended December 31, 1998, pursuant to a stock repurchase program, Liberty Media Group repurchased 239,450 shares of TCI's then outstanding TCI Ventures Group tracking stock and 766,783 shares of TCI's then outstanding Liberty Media Group tracking stock at an aggregate cost of approximately $30 million. During the year ended December 31, 1997, pursuant to a stock repurchase program, Liberty Media Group repurchased 916,500 shares of TCI's then outstanding Liberty Media Group tracking stock and 338,196 shares of TCI's then outstanding TCI Ventures Group tracking stock in open market transactions and 219,937 shares of TCI's then outstanding Liberty Media Group tracking stock from the spouse of an officer and director of TCI at an aggregate cost of $22 million. Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a wholly-owned TCI subsidiary attributed to TCI Group. TCI exchanged 47.2 million shares of TCI's then outstanding TCI Group Series A tracking stock for shares of Kearns-Tribune Corporation which held 17.9 million shares of TCI's then outstanding TCI Group tracking stock and 10.1 million shares of TCI's then outstanding Liberty Media Group tracking stock. Liberty Media Group purchased from TCI Group the 10.1 million shares of TCI's then outstanding Liberty Media Group tracking stock that were acquired in such transaction for $168 million. During the third quarter of 1997, Liberty Media Group commenced a tender offer (the "Liberty Tender Offer") to purchase up to an aggregate of 22.5 million shares of TCI's then outstanding Liberty Media Group tracking stock at a price of $20 per share through October 3, 1997. During the fourth quarter of 1997, Liberty Media Group repurchased 21.7 million shares of TCI's then outstanding Liberty Media Group Series A tracking stock and 82,074 shares of TCI's then outstanding Liberty Media Group Series B tracking stock at an aggregate cost of approximately $435 million pursuant to the Liberty Tender Offer. All of the above described purchases are reflected as a reduction of combined equity in the accompanying combined financial statements. Transactions with Officers and Directors Prior to the AT&T Merger, a limited liability company owned by Dr. John C. Malone (Liberty Media Corporation's Chairman) acquired, from certain attributed subsidiaries of Liberty Media Group, for $17 million, working cattle ranches located in Wyoming. No gain or loss was recognized on such acquisition. The purchase price was paid by such limited liability company in the form of a 12-month note in the amount of $17 million having an interest rate of 7%. Such note was repaid in March 2000. In connection with the AT&T Merger, Liberty Media Group paid two of its directors and one other individual, all three of whom were directors of TCI, an aggregate of $12 million for services rendered in connection with the AT&T Merger. Such amount is included in operating, selling, general and administrative expenses for the two months ended February 28, 1999 in the accompanying combined statements of operations and comprehensive earnings. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) On February 9, 1998, in connection with the settlement of certain legal proceedings relative to the Estate of Bob Magness (the "Magness Estate"), the late founder and former Chairman of the Board of TCI, TCI entered into a call agreement with Dr. Malone and Dr. Malone's wife (together with Dr. Malone, the "Malones"), and a call agreement with the Estate of Bob Magness, the Estate of Betsy Magness, Gary Magness (individually and in certain representative capacities) and Kim Magness (individually and in certain representative capacities) (collectively, the "Magness Group"). Under these call agreements, each of the Magness Group and the Malones granted to TCI the right to acquire all of the shares of TCI's common stock owned by them that entitle the holder to cast more than one vote per share (the "High-Voting Shares") upon Dr. Malone's death or upon a contemplated sale of the High-Voting Shares (other than a minimal amount) to third parties. In either such event, TCI had the right to acquire such shares at a price equal to the then market price of shares of TCI's common stock of the corresponding series that entitled the holder to cast no more than one vote per share (the "Low-Voting Stock"), plus a 10% premium, or in the case of a sale, the lesser of such price and the price offered by the third party. In addition, each call agreement provides that if TCI were ever to be sold to a third party, then the maximum premium that the Magness Group or the Malones would receive for their High-Voting Shares would be the price paid for shares of the relevant series of Low-Voting Stock by the third party, plus a 10% premium. Each call agreement also prohibits any member of the Magness Group or the Malones from disposing of their High-Voting Shares, except for certain exempt transfers (such as transfers to related parties or to the other group or public sales of up to an aggregate of 5% of their High-Voting Shares after conversion to the respective series of Low-Voting Stock) and except for a transfer made in compliance with TCI's purchase right described above. TCI paid $150 million to the Malones and $124 million to the Magness Group in consideration of their entering into the call agreements, of which an aggregate of $140 million was allocated to and paid by Liberty Media Group. Transactions with AT&T (formerly transactions with TCI), and Other Related Parties Certain AT&T corporate general and administrative costs are charged to Liberty Media Group at rates set at the beginning of the year based on projected utilization for that year. Management believes this allocation method is reasonable. During the ten months ended December 31, 1999, the two months ended February 28, 1999 and the years ended December 31, 1998 and 1997 Liberty Media Group was allocated less than $1 million, $2 million, $13 million and $13 million, respectively, in corporate general and administrative costs by AT&T. These costs are included in charges from related parties in the accompanying combined statements of operations and comprehensive earnings. Subsidiaries of Liberty Media Group lease satellite transponder facilities from a subsidiary of AT&T. Charges for such arrangements and other related operating expenses for the ten months ended December 31, 1999 aggregated $20 million and are included in charges from related parties in the accompanying combined statements of operations and comprehensive earnings. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) During 1999, 1998 and 1997, Liberty Media Group made marketing support payments to AT&T. Charges by AT&T for such arrangements for the ten months ended December 31, 1999, the two months ended February 28, 1999 and the years ended December 31, 1998 and 1997 aggregated $4 million, less than $1 million, $5 million and $19 million, respectively, and are included in charges from related parties in the accompanying combined statements of operations and comprehensive earnings. The Puerto Rico Subsidiary purchases programming services from AT&T. The charges, which approximate AT&T's cost and are based on the aggregate number of subscribers served by the Puerto Rico Subsidiary, aggregated $6 million and $1 million during the ten months ended December 31, 1999, the two months ended February 28, 1999, respectively, and $6 million for each of the years ended December 31, 1998 and 1997, and are included in operating expenses in the accompanying combined statements of operations and comprehensive earnings. In connection with the AT&T Merger, warrants to buy 3 million shares of common stock of CSG Systems International, Inc. ("CSG") and related registration rights were transferred to Liberty Media Group. On April 13, 1999, AT&T purchased these warrants from Liberty Media Group for an aggregate purchase price of $75 million along with the related registration rights. The vesting of the CSG warrants is contingent on AT&T meeting certain subscriber commitments to CSG. If any warrants do not vest, Liberty Media Group must repurchase the unvested warrants from AT&T, with interest at 6% from April 12, 1999. Accordingly, Liberty Media Group has recorded the unvested CSG warrants as deferred income until such time as the CSG warrants vest. During September 1998, TCI assigned its obligation under an option contract to Liberty Media Group. As a result of such assignment, Liberty Media Group recorded a $16 million reduction to the intercompany amount due to TCI and a corresponding increase to combined equity. Cablevision purchases programming services from certain Liberty Media Group affiliates. The related charges generally are based upon the number of Cablevision's subscribers that receive the respective services. During the year ended December 31, 1997, such charges aggregated $12 million. Additionally, certain of Cablevision's general and administrative functions are provided by Liberty Media Group. The related charges, which generally are based upon the respective affiliate's cost of providing such functions, aggregated $2 million during the year ended December 31, 1997. The above-described programming and general and administrative charges were included in operating costs in the accompanying combined statements of operations and comprehensive earnings. During July 1997, AT&T entered into a 25 year affiliation agreement with Starz Encore Group (the "EMG Affiliation Agreement") pursuant to which AT&T will pay monthly fixed amounts in exchange for unlimited access to all of the existing Encore and STARZ! services. Liberty Digital and AT&T entered into an Amended and Restated Contribution Agreement to be effective as of July 11, 1997 which provides, among other things, for AT&T to deliver, or cause certain of its subsidiaries to deliver to Liberty Digital fixed monthly payments (subject to inflation and other adjustments) through 2017. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) During the third quarter of 1997, Liberty Media Group sold certain assets (the "SUMMITrak Assets") to CSG for cash consideration of $106 million, plus five-year warrants to purchase up to 1.5 million shares of CSG common stock at $24 per share and $12 million in cash, once certain numbers of TCI affiliated customers are being processed on a CSG billing system. In connection with the sale of the SUMMITrak Assets, TCI committed to purchase billing services from CSG through 2012. In light of such commitment, Liberty Media Group has reflected the $30 million excess (after deducting deferred income taxes of $17 million) of the cash received over the book value of the SUMMITrak Assets as an increase to combined equity. During the fourth quarter of 1997, Liberty Media Group's remaining assets in TCI SUMMITrak of Texas, Inc. and TCI SUMMITrak L.L.C. were transferred to TCI in exchange for a $19 million reduction of the amount owed by Liberty Media Group to TCI. Such transfer was accounted for at historical cost due to the related party nature of the transaction. Due to Related Parties The components of "Due to related parties" are as follows:
New Liberty Old Liberty ----------- ----------- December 31, ------------------------------ 1999 1998 ----------- ----------- amounts in millions Notes payable to TCI, including accrued interest $ -- 141 Intercompany account 27 556 ----- ------ $ 27 697 ===== ======
The non-interest bearing intercompany account includes certain stock compensation allocations (in Old Liberty) and income tax allocations that are to be settled at some future date. Stock compensation liabilities of New Liberty are classified as a separate component of current liabilities. All other amounts included in the intercompany account are to be settled within thirty days following notification. Amounts outstanding at December 31, 1998 under notes payable to TCI had varying rates of interest. During the second quarter of 1998, TCI made a contribution to Liberty Media Group of $5 million, which was used to reduce the amount due under the Music Note. (continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) (14) Other Comprehensive Earnings Accumulated other comprehensive earnings included in Liberty Media Group's combined balance sheets and combined statements of equity reflect the aggregate of foreign currency translation adjustments and unrealized holding gains and losses on securities classified as available-for-sale. The change in the components of accumulated other comprehensive earnings, net of taxes, is summarized as follows:
Accumulated Foreign other currency Unrealized comprehensive translation gains on earnings, net adjustments securities of taxes ----------- ---------- ------------- amounts in millions Balance at January 1, 1997 $ 25 16 41 Other comprehensive earnings (loss) (22) 749 727 ------------ ------------- ---------- Balance at December 31, 1997 3 765 768 Other comprehensive earnings 3 2,947 2,950 ------------ ------------- ---------- Balance at December 31, 1998 6 3,712 3,718 Other comprehensive earnings (loss) (15) 971 956 ------------ ------------- ---------- Balance at February 28, 1999 $ (9) 4,683 4,674 ============ ============= ========== Balance at March 1, 1999 $ -- -- -- Other comprehensive earnings 60 6,497 6,557 ------------ ------------- ---------- Balance at December 31, 1999 $ 60 6,497 6,557 ============ ============= ==========
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) The components of other comprehensive earnings are reflected in Liberty Media Group's combined statements of operations and comprehensive earnings, net of taxes and reclassification adjustments for gains realized in net earnings (loss). The following table summarizes the tax effects and reclassification adjustments related to each component of other comprehensive earnings.
Tax Before-tax (expense) Net-of-tax amount benefit amount ---------- --------- ---------- amounts in millions Ten months ended December 31, 1999: Foreign currency translation adjustments $ 99 (39) 60 ------------- -------- ------------ Unrealized gains on securities: Unrealized holding gains arising during period 10,736 (4,246) 6,490 Less: reclassification adjustment for losses realized in net loss 12 (5) 7 ------------- -------- ------------ Net unrealized gains 10,748 (4,251) 6,497 ------------- -------- ------------ Other comprehensive earnings $ 10,847 (4,290) 6,557 ============= ======== ============ Two months ended February 28, 1999: Foreign currency translation adjustments $ (25) 10 (15) Unrealized gains on securities: Unrealized holding gains arising during period 1,606 (635) 971 ------------- -------- ------------ Other comprehensive earnings $ 1,581 (625) 956 ============= ======== ============ Year ended December 31, 1998: Foreign currency translation adjustments $ 5 (2) 3 Unrealized gains on securities: Unrealized holding gains arising during period 4,875 (1,928) 2,947 ------------- -------- ------------ Other comprehensive earnings $ 4,880 (1,930) 2,950 ============= ======== ============ Year ended December 31, 1997: Foreign currency translation adjustments $ (36) 14 (22) Unrealized gains on securities: Unrealized holding gains arising during period 1,239 (490) 749 ------------- -------- ------------ Other comprehensive earnings $ 1,203 (476) 727 ============= ======== ============
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) (15) Commitments and Contingencies Starz Encore Group provides premium programming distributed by cable, direct satellite, TVRO and other distributors throughout the United States. Starz Encore Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2017 (the "Film Licensing Obligations"). Based on customer levels at December 31, 1999, these agreements require minimum payments aggregating approximately $900 million. The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. Flextech has undertaken to finance the working capital requirements of a joint venture (the "Principal Joint Venture") formed with BBC Worldwide, and is obligated to provide the Principal Joint Venture with a primary credit facility of (pound sterling)88 million and, subject to certain restrictions, a standby credit facility of (pound sterling)30 million. As of December 31, 1999, the Principal Joint Venture had borrowed (pound sterling)53 million under the primary credit facility. If Flextech defaults in its funding obligation to the Principal Joint Venture and fails to cure within 42 days after receipt of notice from BBC Worldwide, BBC Worldwide is entitled, within the following 90 days, to require that Liberty Media Group assume all of Flextech's funding obligations to the Principal Joint Venture. Liberty Media Group has guaranteed various loans, notes payable, letters of credit and other obligations (the "Guaranteed Obligations") of certain affiliates. At December 31, 1999, the Guaranteed Obligations aggregated approximately $655 million. Currently, Liberty Media Group is not certain of the likelihood of being required to perform under such guarantees. Liberty Media Group leases business offices, has entered into pole rental and transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounts to $30 million, $18 million, $98 million and $84 million for the ten months ended December 31, 1999, the two months ended February 28, 1999 and the years ended December 31, 1998 and 1997, respectively. A summary of future minimum lease payments under noncancelable operating leases as of December 31, 1999 follows (amounts in millions):
Years ending December 31: 2000 $ 21 2001 18 2002 16 2003 16 2004 13 Thereafter 21
(continued) "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) It is expected that in the normal course of business, leases that expire generally will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amount shown for 2000. Liberty Media Group has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible Liberty Media Group may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying combined financial statements. -----END PRIVACY-ENHANCED MESSAGE-----