-----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, RhE2wsZB2oXHzhfC3GLejfx0aZdhL3LuiGdIJ4jljcuMSLD9Y48Za1pVO3eKie9r pq4iHlBR3GMZkLvLOXZupg== 0000005907-99-000020.txt : 19990518 0000005907-99-000020.hdr.sgml : 19990518 ACCESSION NUMBER: 0000005907-99-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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-Q SEC ACT: SEC FILE NUMBER: 001-01105 FILM NUMBER: 99626990 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-Q 1 FORM 10-Q - FIRST QUARTER 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 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 - Area Code 212-387-5400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ..X No ... At April 30, 1999, the following shares of stock were outstanding: AT&T common stock - 3,182,097,067 shares Liberty Media Class A tracking stock - 577,496,407 shares Liberty Media Class B tracking stock - 55,072,748 shares AT&T Form 10-Q - Part I PART I - FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions Except Per Share Amounts) (Unaudited) For the Three Months Ended March 31, 1999 1998 Revenues........................................ $14,096 $12,831 Operating Expenses Access and other interconnection................ 3,732 3,936 Network and other communications services....... 2,872 2,546 Depreciation and amortization................... 1,461 1,067 Selling, general and administrative............. 3,157 3,277 Restructuring and other charges................. 731 601 Total operating expenses........................ 11,953 11,427 Operating income................................ 2,143 1,404 Equity losses from Liberty Media Group.......... 58 - Other income - net.............................. 149 706 Interest expense................................ 190 80 Income from continuing operations before income taxes............................ 2,044 2,030 Provision for income taxes...................... 1,026 745 Income from continuing operations............... 1,018 1,285 Income from discontinued operations (net of taxes of $6)........................... - 10 Net income...................................... $ 1,018 $ 1,295 Per AT&T common share - basic: Income from continuing operations.............. $ 0.39 $ 0.48 Income from discontinued operations............ - - Total income................................... $ 0.39 $ 0.48 Per AT&T common share - diluted: Income from continuing operations.............. $ 0.38 $ 0.48 Income from discontinued operations............ - - Total income................................... $ 0.38 $ 0.48 Dividends declared per AT&T common share........ $ 0.22 $ 0.22 Liberty Media Group loss per share: Basic.......................................... $ 0.10 $ - Diluted........................................ $ 0.10 $ - See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (Dollars in Millions Except Share Amounts) (Unaudited) March 31, December 31, 1999 1998 ASSETS Cash and cash equivalents ........................... $ 1,463 $ 3,160 Receivables, less allowances of $1,143 and $1,060.... 9,383 9,055 Deferred income taxes................................ 1,690 1,310 Other current assets................................. 709 593 TOTAL CURRENT ASSETS................................. 13,245 14,118 Property, plant and equipment, net of accumulated depreciation of $26,524 and $25,374 ............... 33,015 26,903 Licensing costs, net of accumulated amortization of $1,321 and $1,266............................... 7,800 7,948 Goodwill, net of accumulated amortization of $257 and $226...................................... 26,147 2,205 Investment in Liberty Media Group and related receivables........................................ 34,532 - Other investments.................................... 13,186 4,434 Prepaid pension costs................................ 2,168 2,074 Other assets......................................... 5,542 1,868 TOTAL ASSETS......................................... $135,635 $59,550 (CONT'D) AT&T Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (CONT'D) (Dollars in Millions Except Share Amounts) (Unaudited) March 31, December 31, 1999 1998 LIABILITIES Accounts payable..................................... $ 5,510 $ 6,226 Payroll and benefit-related liabilities.............. 1,766 1,986 Debt maturing within one year........................ 4,899 1,171 Dividends payable.................................... 701 581 Other current liabilities............................ 6,567 5,478 TOTAL CURRENT LIABILITIES............................ 19,443 15,442 Long-term debt....................................... 22,488 5,556 Long-term benefit-related liabilities................ 4,386 4,255 Deferred income taxes................................ 10,576 5,453 Other long-term liabilities and deferred credits..... 3,821 3,213 TOTAL LIABILITIES ................................... 60,714 33,919 Minority Interest in Equity of Consolidated Subsidiaries....................................... 2,899 109 Subsidiary-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debt Securities of AT&T's Wholly-Owned Subsidiary, TCI.................................... 1,660 - SHAREOWNERS' EQUITY Common Stock: AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 3,181,305,697 shares (net of 289,250,583 treasury shares) at March 31, 1999 and 2,630,391,784 shares (net of 80,222,341 treasury shares) at December, 31, 1998................................. 3,181 2,630 Liberty Media Group Class A Tracking Stock, $1 par value, authorized 2,500,000,000 shares; issued and outstanding 571,156,470 shares at March 31, 1999..................................... 571 - Liberty Media Group Class B Tracking Stock, $1 par value, authorized 2,500,000,000 shares; issued and outstanding 55,072,748 shares at March 31, 1999..................................... 55 - Additional Paid-in Capital: AT&T Common Stock.................................. 26,036 15,195 Liberty Media Group Stock.......................... 32,937 - Guaranteed ESOP obligation........................... (31) (44) Retained Earnings (Accumulated Deficit): AT&T Common Stock.................................. 6,817 7,800 Liberty Media Group Stock.......................... (58) - Accumulated other comprehensive income............... 854 (59) TOTAL SHAREOWNERS' EQUITY............................ 70,362 25,522 TOTAL LIABILITIES & SHAREOWNERS' EQUITY.............. $135,635 $59,550 See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I Consolidated Statements of Shareowners' Equity (Dollars in Millions) For the three months ended March 31, 1999 (Unaudited)
Accumulated Total Other Additional Guaranteed Compre- Share- Compre- Paid-in ESOP Retained hensive owners hensive Common Shares Capital Obligation Earnings Income Equity Income AT&T Liberty Liberty AT&T Liberty AT&T Liberty Common Media Group Media Group Common Media Group Common Media Group Stock Class A Class B Stock Stock Stock Stock Tracking Tracking Stock Stock Balance at Jan. 1, 1999 $2,630 - - 15,195 - (44) 7,800 - (59) $25,522 Shares issued (acquired),net: For employee plans (2) (103) (105) For acquisitions* 553 570 55 10,880 32,890 44,948 Other 1 47 48 Amortization 13 13 Net income 1,076 (58) 1,018 $1,018 Dividends declared (699) (699) Treasury shares issued at less than cost (1,360) (1,360) Other 64 64 Other comprehensive income (net of taxes of $595)** 913 913 913 Balance at March 31, 1999 $3,181 571 55 26,036 32,937 (31) 6,817 (58) 854 $70,362 $1,931 * AT&T accounts for treasury stock as retired stock, and at March 31, 1999, had 289 million treasury shares of which 216 million shares were owned by TCI subsidiaries and 70 million shares related to the purchase of AT&T shares previously held by Liberty Media Group. ** Includes $906 (net of taxes of $591) of other comprehensive income for Liberty Media Group. See Notes to Consolidated Financial Statements
AT&T Form 10-Q - Part I Consolidated Statements of Shareowners' Equity (Dollars in Millions) For the three months ended March 31, 1998 (Unaudited)
AT&T Additional Guaranteed Accumulated Total Other Common Paid-in ESOP Retained Comprehensive Shareowners' Comprehensive Stock Capital Obligation Earnings Income Equity Income Balance at Jan. 1, 1998 $2,684 17,121 (70) 3,981 (38) $23,678 Shares issued (acquired),net: For employee plans (1) (31) (32) Amortization 12 12 Net income 1,295 1,295 $1,295 Dividends declared (536) (536) Treasury shares issued at less than cost (215) (215) Other changes 59 2 61 Other comprehensive income (net of taxes of $23) 30 30 30 Balance at March 31, 1998 $2,683 17,149 (58) 4,527 (8) $24,293 $1,325 See Notes to Consolidated Financial Statements
AT&T Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited) For the Three Months Ended March 31, 1999 1998 Operating Activities Net income .................................. $ 1,018 $ 1,295 Deduct: Income from discontinued operations ........................ - 10 Income from continuing operations ........... 1,018 1,285 Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: Restructuring and other charges........... 731 601 Gains on sales............................ (153) (667) Depreciation and amortization............. 1,461 1,067 Provision for uncollectibles.............. 386 362 Increase in accounts receivable........... (622) (392) (Decrease) increase in accounts payable... (742) 49 Net decrease in other operating assets and liabilities......................... (1,460) (90) Other adjustments for noncash items - net............................. 127 (251) Net cash provided by operating activities of continuing operations........ 746 1,964 Investing Activities Capital expenditures....................... (1,913) (1,702) Proceeds from sale or disposal of property, plant and equipment............ 16 23 Decrease in other receivables.............. 4 661 Net dispositions (acquisitions) of licenses................................. 9 (26) Sales of marketable securities............. - 451 Purchases of marketable securities......... - (389) Equity investment distributions and sales.. 69 799 Equity investment contributions and purchases................................ (5,821) (32) Dispositions of businesses and cash acquired in acquisitions............ 797 642 Other investing activities - net........... (52) (27) Net cash (used in) provided by investing activities of continuing operations........ (6,891) 400 (CONT'D) AT&T Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) (Dollars in Millions) (Unaudited) For the Three Months Ended March 31, 1999 1998 Financing Activities Proceeds from long-term debt issuance..... 7,948 - Retirements of long-term debt............. (493) (40) Issuance of common shares................. - 2 Acquisition of treasury shares............ (4,344) (262) Dividends paid............................ (615) (536) Increase (decrease) in short-term borrowings - net........................ 1,834 (1,628) Other financing activities - net.......... 118 18 Net cash provided by (used in) financing activities of continuing operations....... 4,448 (2,446) Net cash provided by discontinued operations................................ - 92 Net (decrease) increase in cash and cash equivalents.......................... (1,697) 10 Cash and cash equivalents at beginning of year...................... 3,160 318 Cash and cash equivalents at end of period.......................... $ 1,463 $ 328 See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (a) BASIS OF PRESENTATION The consolidated financial statements have been prepared by AT&T Corp. (AT&T) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments necessary for a fair statement of the consolidated results of operations, financial position and cash flows for each period presented. The consolidated results for interim periods are not necessarily indicative of results for the full year. These financial results should be read in conjunction with AT&T's Form 10-K/A for the year ended December 31, 1998, Tele-Communications, Inc.'s (TCI) Form 10-K for the year ended December 31, 1998, TCI's Form 10-Q for the quarter ended March 31, 1999, the financial statements of Liberty Media Group for the year ended December 31, 1998 included in AT&T's Form 8-K filed on March 22, 1999, and the financial statements of Liberty Media Group for the period ended March 31, 1999, included as Exhibit 99 to this AT&T quarterly report on Form 10-Q. On March 17, 1999, our Board of Directors declared a three for two split of AT&T common stock, paid on April 15, 1999, to shareowners of record on March 31, 1999. All references to number of shares (except shares authorized or where otherwise indicated) and per share information in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. We have reclassified certain prior period amounts to conform to our current presentation. (b) MERGER WITH TCI On March 9, 1999, the previously announced merger with TCI closed and each share of TCI Group Series A common stock was converted into 0.7757 of a share of AT&T common stock (on a pre-split basis) and each share of TCI Group Series B stock was converted into 0.8533 of a share of AT&T common stock (on a pre-split basis). AT&T issued approximately 443 million shares (664 million shares on a post-split basis) for these TCI shares, of which 344 million shares (515 million shares on a post-split basis) were newly issued shares and 99 million shares (149 million shares on a post-split basis) were treasury shares including shares repurchased in February and March 1999. The total shares had an aggregate market value of approximately $26.8 billion. Certain subsidiaries of TCI held TCI Group Series A stock which was converted into 144 million shares (216 million shares on a post-split basis) of AT&T common stock. These subsidiaries continue to hold these shares, which are reflected as treasury stock in the accompanying consolidated balance sheet. AT&T Form 10-Q - Part I In addition, TCI simultaneously combined its Liberty Media Group programming business, and TCI Ventures Group, its technology investments business, forming Liberty Media Group. In connection with the closing, AT&T issued a separate tracking stock in exchange for the TCI Liberty Media Group and TCI Ventures Group tracking shares previously outstanding. A total of 540 million shares of Class A Liberty Media Group tracking stock were issued by AT&T and 55 million shares of Class B Liberty Media Group tracking stock were issued by AT&T. AT&T also issued 30 million Class A Liberty Media Group tracking shares in connection with the conversion of certain convertible notes. The aggregate market value of shares issued in conjunction with the merger was $23.4 billion. The tracking stock is designed to reflect the separate economic performance of Liberty Media Group. AT&T does not have a controlling financial interest in Liberty Media Group, therefore it has been reflected as an equity method investment in the accompanying consolidated financial statements. The results attributable to Liberty Media Group are reflected as a separate line item "Equity losses from Liberty Media Group" and "Investment in Liberty Media Group" in the accompanying consolidated financial statements. As a separate tracking stock, all of the earnings or losses related to Liberty Media Group are excluded from the earnings available to the holders of AT&T common stock. TCI's cable and certain other operations, including its ownership interest in At Home Corp. (@Home), became AT&T broadband and Internet services, and were combined with the existing AT&T operations to form the AT&T common stock group (AT&T Group). In general, the holders of shares of Liberty Media Group Class A tracking stock and the holders of shares of 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 one-tenth of a vote for each share of Liberty Media Group Class A tracking stock held, one vote per share of Liberty Media Group Class B tracking stock held and one vote per share of AT&T common stock held. The merger with TCI was recorded as a purchase. Accordingly the operating results of TCI have been included in the accompanying consolidated financial statements since March 1, 1999, the deemed effective date of acquisition for accounting purposes. The impact of results from March 1, 1999, through March 9, 1999, are deemed immaterial to our consolidated results. The excess of the aggregate purchase price of $52.155 billion over the fair value of net assets acquired, based on a preliminary allocation, was approximately $24 billion, of which $3 billion was allocated to @Home and is being amortized on a straight-line basis over seven years. The remaining $21 billion is being amortized on a straight-line basis over 40 years. In addition, approximately $11 billion of goodwill related to Liberty Media Group was recorded as part of our investment and is being amortized on a straight-line AT&T Form 10-Q - Part I basis over 20 years as a component of equity earnings (losses) from Liberty Media Group. A final allocation of the purchase price will be made upon receipt of final third party appraisals. We do not believe the final purchase price will differ materially from what has been reflected herein. In addition, in conjunction with the acquisition we acquired nonconsolidated investments in cable affiliates of $8.4 billion. Following is a summary of the noncash impact of the TCI merger: Dollars in Billions Fair value of net assets acquired $ 28 Excess purchase price over fair value of net assets acquired 24 Other* (2) Issuance of common shares: AT&T common stock (27) Liberty Media Group tracking stock (23) *Other includes assumption of convertible notes and preferred stock, as well as estimated merger costs. At March 31, 1999, there was $54 of restricted cash comprised primarily of proceeds received in connection with certain asset dispositions of TCI, which are designated to be reinvested in certain identified assets for tax purposes. Included in the March 31, 1999, cash and cash equivalent balance is $401 related to @Home. This balance is to be applied towards the liquidity requirements of @Home, accordingly, it is not anticipated that any portion of the @Home balance will be distributed or otherwise made available to AT&T. AT&T Form 10-Q - Part I Following is a summary of the pro forma results of AT&T as if the merger with TCI had closed effective January 1, 1998: For the Three Months Ended March 31, 1999 March 31, 1998 Revenues $15,026 $14,440 Income from continuing operations 446 1,223 Income from continuing operations, available to AT&T Group shareowners 716 1,271 Income from continuing operations, available to Liberty Media Group shareowners (270) (48) Net income 446 1,233 Income available to AT&T Group shareowners 716 1,281 Income available to Liberty Media Group shareowners (270) (48) Weighted-average AT&T common shares (millions) 3,147 3,126 Weighted-average AT&T common shares and potential common shares (millions) 3,253 3,234 Weighted-average Liberty Media Group shares (millions) 595 595 Basic earnings per AT&T common share: Income from continuing operations $ 0.23 $ 0.41 Total income $ 0.23 $ 0.41 Diluted earnings per AT&T common share: Income from continuing operations $ 0.22 $ 0.39 Total income $ 0.22 $ 0.40 Basic earnings per Liberty Media Group share $ (0.45) $ (0.08) Diluted earnings per Liberty Media Group share $ (0.45) $ (0.08) Pro forma data may not be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented, nor does it intend to be a projection of future results. AT&T Form 10-Q - Part I (c) OTHER MERGERS, ACQUISITIONS, VENTURES AND DISPOSITIONS On March 4, 1999, AT&T Canada announced a definitive merger agreement with MetroNet Communications Corp. (MetroNet), Canada's largest facilities-based competitive local exchange carrier (CLEC). The merged entity will possess a national network to provide Canadian business customers local and long distance voice, data, Internet and electronic commerce services as well as wireless services through Cantel AT&T. The terms of the agreement outline a multi-stage transaction, which will result in MetroNet shareholders indirectly owning 69% of the merged company and AT&T indirectly owning 31%. AT&T will contribute its 33% voting interest in AT&T Canada Corp. (formerly AT&T Canada Long Distance Services), the remaining 67% of AT&T Canada Corp. currently held in trust and its 100% interest in ACC TelEnterprises Ltd. MetroNet will contribute all of its assets and operations. In addition, AT&T has agreed to purchase, or arrange for another entity to purchase, all of the shares currently held by MetroNet shareholders for the greater of at least C$75 per share or the then appraised fair market value. The exact timing will likely be partially dependent upon the future status of Canadian federal foreign ownership regulations. Consideration for the MetroNet shares will be paid in the form of cash, AT&T shares, or a combination thereof. The merger is subject to certain conditions, including the receipt of regulatory approval. The previously announced global venture between AT&T and British Telecommunications plc (BT) has received approval from the European Commission. The global venture will combine the transborder assets and operations of each company. The venture will be equally owned by both companies when it begins operations. The receipt of certain additional regulatory approvals is required and the venture is expected to be completed by mid-1999. On March 31, 1999, AT&T completed the acquisition of certain assets of SmarTalk Tele-Services, Inc., a leading seller of prepaid calling cards, for $145. On March 31, 1999, AT&T completed the sale of its Language Line Services over-the-phone interpretation business, which resulted in a pretax gain of $153. In the first quarter of 1999, @Home entered into a merger agreement with Excite, Inc. (Excite), a global Internet media company that offers consumers and advertisers comprehensive Internet navigation services with extensive personalization capabilities. Under the terms of the merger agreement, @Home will issue approximately 55 million shares of its common stock for all of the outstanding common stock of Excite based on an exchange ratio of 1.041902 shares of @Home's common stock for each share of Excite's common stock. As a result of the proposed merger, AT&T's economic interest in @Home would decrease from 38.8% to 26.5%. AT&T Form 10-Q - Part I (d) DEBT OFFERING On January 26, 1999, AT&T filed a registration statement with the SEC for the offering and sale of up to $10 billion of notes and warrants to purchase notes, resulting in a total available shelf registration of $13.1 billion. On March 26, 1999, AT&T issued $8 billion in notes as follows: $2 billion 5.625% Notes due 2004 $3 billion 6.000% Notes due 2009 $3 billion 6.500% Notes due 2029 Interest is payable semiannually in arrears on September 15 and March 15, beginning September 15, 1999. AT&T received net proceeds of approximately $7.9 billion from the sale of the notes. The proceeds were utilized to repay commercial paper issued in connection with our acquisition of TCI and towards funding the share repurchase program. (e) RESTRUCTURING AND OTHER CHARGES Restructuring and other charges for the quarter were $731 pretax, including an in-process research and development charge of $594 related to the TCI acquisition. The charge reflects the estimated value, as of the acquisition date, of research and development projects at TCI which have not yet reached technological feasibility and which have no alternative future use. The projects identified relate to TCI's efforts to offer voice over Internet protocol, cost savings efforts for cable telephony implementation and product integration efforts for advanced set-top devices that will enable TCI to offer next-generation digital services. In addition, @Home has research and development efforts underway including projects to allow for self-provisioning of devices and the development of next-generation client software, network and back-office infrastructure to enable a variety of network devices beyond personal computers and improved design for the regional data centers' infrastructure. Although there are significant technological issues to overcome in order to successfully complete the acquired in-process research and development, AT&T expects successful completion. If, however, AT&T is unable to establish technological feasibility and produce a commercially viable product/service, then anticipated incremental future cash flows attributable to expected profits from such new product/service may not be realized. Additionally, AT&T recorded a charge of $196 primarily related to the settlement associated with the exit of a joint venture that will compete directly with the global venture that AT&T is forming with BT. These charges were partially offset by gains of $59 related to the settlement of pension obligations for former employees who accepted AT&T's voluntary retirement incentive program offer. AT&T Form 10-Q - Part I In the first quarter of 1998, AT&T recorded a $601 charge related to AT&T's decision not to pursue Total Service Resale (TSR) as a local service strategy. The Regional Bell Operating Companies have made it extremely difficult to enter the local market under a TSR strategy. After spending billions of dollars in an attempt to enter this market, it became clear that the TSR solution was not economically viable. The pretax charge includes a $543 write-down of software, $42 primarily related to equipment associated with the software platform and $16 for certain contractual obligations and termination penalties under several contracts that were canceled during the first quarter as a result of this decision. AT&T received no operational benefit from these contracts once this decision was made. (f) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE Basic earnings per share (EPS) for AT&T Group for the three months ended March 31, 1999 and 1998, was computed by dividing income attributable to AT&T Group common shareowners by the weighted-average number of common shares outstanding of AT&T Group during the period. Diluted EPS for AT&T Group for the three months ended March 31, 1999 and 1998, was computed by dividing the income attributable to AT&T Group common shareowners by the weighted-average number of common shares and dilutive potential common shares outstanding of AT&T Group during the period, assuming conversion of the potential common shares at the beginning of the periods presented. Shares issuable upon conversion of preferred stock of subsidiaries, convertible debt securities of subsidiary, stock options and other performance awards have been included in the diluted calculation of weighted-average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. The convertible debt securities were all converted as of March 31, 1999. AT&T Form 10-Q - Part I A reconciliation of basic EPS to diluted EPS with respect to AT&T Group is as follows: Three Months Ended March 31, 1999 1998 Income from continuing operations attributable to AT&T Group $1,076 $1,285 Income attributable to Liberty Media Group (58) - Income from continuing operations $1,018 $1,285 Income attributable to AT&T Group $1,076 $1,295 Income attributable to Liberty Media Group (58) - Net Income $1,018 $1,295 AT&T Group weighted-average common shares (millions) 2,751 2,683 Stock options 41 26 Preferred stock of subsidiary 10 - Convertible debt securities of subsidiary 7 - AT&T Group weighted-average common shares and potential common shares (millions) 2,809 2,709 Basic EPS for Liberty Media Group for the month ended March 31, 1999, was computed by dividing the income attributable to Liberty Media Group shareowners by the weighted-average number of shares outstanding of Liberty Media Group of 597 million for the period. Since Liberty Media Group had a loss for the month, the impact of any potential shares would have been antidilutive, and therefore are not factored into the diluted calculation. There were 90 million potentially dilutive securities outstanding at March 31, 1999. (g) SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF AT&T'S WHOLLY-OWNEDSUBSIDIARY, TCI Certain subsidiary trusts of TCI (the "Trusts") had preferred securities outstanding at March 31, 1999, as follows: Interest Maturity Face Subsidiary Trust Rate Date Amount TCI Communications Financing I 8.72% 2045 $ 500 TCI Communications Financing II 10.00% 2045 500 TCI Communications Financing III 9.65% 2027 300 TCI Communications Financing IV 9.72% 2036 200 Purchase accounting fair market value adjustment* 160 Total $1,660 * In connection with the acquisition of TCI, approximately $160 was allocated to the Trust Preferred Securities representing the excess of the fair market value over the recorded value at the date of acquisition. The excess is being amortized over the remaining life of the Trust Preferred Securities, 28 to 46 years. AT&T Form 10-Q - Part I The Trusts exist for the exclusive purpose of issuing the Trust Preferred Securities and investing the proceeds thereof into Subordinated Deferrable Interest Notes (the "Subordinated Debt Securities") of TCI. The Subordinated Debt Securities have interest rates equal to the interest rate of the corresponding Trust Preferred Securities and have maturity dates ranging from 30 to 49 years from the date of issuance. The Subordinated Debt Securities are unsecured obligations of TCI and are subordinate and junior in right of payment to certain other indebtedness of TCI. Upon redemption of the Subordinated Debt Securities, the Trust Preferred Securities will be mandatorily redeemable. TCI effectively provides a full and unconditional guarantee of the Trusts' obligations under the Trust Preferred Securities. The Trust Preferred Securities are presented together in a separate line item in the accompanying consolidated balance sheets captioned "Subsidiary-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debt Securities of AT&T's Wholly-Owned Subsidiary, TCI". Dividends accrued on the Trust Preferred Securities aggregated $12 for the period from completion of the merger with TCI through March 31, 1999, and are recorded as a reduction of other income in the accompanying consolidated statements of income. (h) PREFERRED STOCK TCI issued preferred stock which remains outstanding subsequent to the TCI merger. There are 1.552 million shares of Class B Preferred Stock of TCI outstanding as of March 31, 1999, net of shares held by a subsidiary, out of an authorized 1.675 million shares. Dividends accrue cumulatively (but without compounding) at an annual rate of 6% of the stated liquidation value of $100 per share, whether or not such dividends are declared or funds are legally available for payment of dividends. Accrued dividends are payable annually on March 1 of each year in cash or AT&T stock, or any combination of the foregoing at the sole discretion of the AT&T Board of Directors. Accrued dividends not paid on any dividend payment date will accumulate. Dividends accrued on shares of Class B Preferred Stock aggregated $776 thousand from the date of the merger through March 31, 1999. The amount of Class B Preferred Stock and accumulated dividends thereon are reflected within "Minority Interest in Equity of Consolidated Subsidiaries" in the accompanying consolidated balance sheet and aggregated $154 at March 31, 1999. AT&T Form 10-Q - Part I TCI Pacific Communications Inc. (Pacific) issued preferred stock which remains outstanding after the TCI merger. There are 6.258 million shares of Pacific authorized and outstanding at March 31, 1999. Each share of the Pacific 5% Class A Senior Cumulative Exchangeable Preferred Stock is exchangeable, from and after August 1, 2001, for approximately 6.3375 shares of AT&T Common Stock, subject to certain anti-dilution adjustments. Additionally, Pacific may elect to make any dividend, redemption or liquidation payment in cash, shares of AT&T Common Stock or by a combination of the foregoing. The amount of Pacific Preferred Stock and accumulated dividends thereon are reflected within "Minority Interest in Equity of Consolidated Subsidiaries" in the accompanying consolidated balance sheet and aggregated $2 billion at March 31, 1999. Dividends accrued on shares of the Pacific stock aggregated $3 from the date of the merger through March 31, 1999. (i) FINANCIAL INSTRUMENTS In the normal course of business we use various financial instruments, including derivative financial instruments, for purposes other than trading. We do not use derivative financial instruments for speculative purposes. These instruments include letters of credit, guarantees of debt, interest rate swap agreements and foreign currency exchange contracts. Interest rate swap agreements and foreign currency exchange contracts are used to mitigate interest rate and foreign currency exposures. Collateral is generally not required for these types of instruments. Interest Rate Swap Agreements: As a result of the TCI merger, AT&T added interest rate swaps to its portfolio that TCI had entered into prior to the consummation of the merger. The following table indicates the types of swaps in use by TCI at March 31, 1999, and their weighted-average interest rates. Variable to fixed rate swaps-notional amount $1,950 Average receive rate 7.04% Average pay rate 5.71% Variable to variable rate swaps-notional amount $ 495 Average receive rate 5.42% Average pay rate 5.30% AT&T Form 10-Q - Part I The weighted-average remaining terms of these swap contracts were 7.2 years at March 31, 1999. Debt and Off Balance Sheet Instruments: Pursuant to the TCI merger, AT&T is exposed to off balance sheet risks which TCI had entered into prior to the consummation of the merger. TCI has agreed to take certain steps to support debt compliance with respect to obligations aggregating $1,690 of certain cable television partnerships in which TCI has a non-controlling ownership interest. Although there can be no assurance, management believes that it will not be required to meet its obligations under such guarantees. At March 31, 1999, the fair value of TCI's debt approximated its carrying amount since the debt was written up $955 to fair market value pursuant to the merger. A consortium of lenders provides revolving-credit facilities of $7.0 billion to AT&T. These credit facilities are intended for general corporate purposes and were unused at March 31, 1999. AT&T terminated a $2.0 billion 364-day back up facility following its debt offering. In May 1999, AT&T entered into additional revolving credit facilities of $3.0 billion which are currently unused. (j) SEGMENT REPORTING AT&T's results are segmented according to the way we manage our business: business services, consumer services, wireless services and broadband & Internet services. Our existing segments reflect certain managerial changes since the publication of our 1998 annual results. The business services segment was expanded to include the results of Teleport Communications Group Inc. (TCG) and the business portion of AT&T WorldNet Service; the consumer services segment was expanded to include the residential portion of AT&T WorldNet Service. All prior results have been restated to reflect these changes. In addition, as a result of our merger with TCI, we established a new segment called broadband & Internet services. Broadband & Internet services include services provided through the broadband cable network including traditional analog cable service, as well as new services, such as Digital Cable, AT&T@Home - the high-speed cable Internet service, and eventually broadband telephony. Reflecting the dynamics of our business, we continuously review our management model and structure, which may result in additional adjustments to our operating segments in the future. AT&T Form 10-Q - Part I REVENUES For the Quarter Ended March 31, 1999 1998 Business services external revenues $ 5,927 $5,558 Business services internal revenues 287 221 Total business services revenues 6,214 5,779 Consumer services external revenues 5,486 5,680 Wireless services external revenues 1,562 1,164 Broadband & Internet services external revenues 483 - Total reportable segments 13,745 12,623 Other and corporate revenues (a) 351 208 Total revenues $14,096 $12,831 (a) Included in other and corporate revenues are revenues from AT&T Solutions, international operations and ventures, other smaller units and the elimination of internal revenues. RECONCILIATION OF EBIT TO INCOME BEFORE INCOME TAXES For the Quarter Ended March 31, 1999 1998 Business services $ 1,567 $ 1,124 Consumer services 1,887 1,322 Wireless services (49) (2) Broadband & Internet services (646) - Total reportable segments' EBIT 2,759 2,444 Other and corporate EBIT (467) (334) Liberty Media Group equity losses 58 - Interest expense 190 80 Total income before income taxes $ 2,044 $ 2,030 ASSETS At Mar. 31, At Dec. 31, 1999 1998 Business services $ 21,267 $21,415 Consumer services 6,658 6,335 Wireless services 19,219 19,341 Broadband & Internet services 42,748 - Total reportable segments 89,892 47,091 All other segments 4,417 4,165 Corporate assets: Investment in Liberty Media Group 34,532 - Prepaid pension costs 2,168 2,074 Deferred taxes 1,257 1,156 Other corporate assets 3,369 5,064 Total assets $135,635 $59,550 AT&T Form 10-Q - Part I (k) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following summary of significant accounting policies supplements our annual disclosure to reflect certain policies related to the acquired TCI cable operations. REVENUE RECOGNITION Cable installation revenues are recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution system. FRANCHISE COSTS Franchise costs include the difference between the cost of acquiring cable television systems and amounts allocated to their tangible assets. These amounts are reflected within other assets in the accompanying consolidated balance sheets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred in negotiating and renewing existing franchise agreements are amortized on a straight-line basis over the remaining life of the franchise, generally 10 to 20 years. PROPERTY, PLANT AND EQUIPMENT Cable distribution systems are amortized on a straight-line basis using estimated useful lives of 3 to 15 years. Support equipment and buildings are amortized on a straight-line basis using estimated useful lives of 3 to 40 years. (l) SUBSEQUENT EVENTS On May 6, 1999, AT&T and Microsoft Corp. (Microsoft) announced a series of agreements in which the companies will work together to accelerate the deployment of next-generation broadband and Internet services to millions of American homes. Under the agreements, Microsoft will purchase $5 billion of AT&T securities, AT&T will increase its use of Microsoft's TV software platform in advanced set-top devices, and both companies will work together to showcase new digital cable services in two U.S. cities. AT&T currently has a commitment to use the Windows CE-based system in 5 million set-top devices. Under a non-exclusive agreement, AT&T will expand its Windows CE-based license to cover an additional 2.5 million to 5 million set-top devices. AT&T will also license Microsoft client/server software that supports a range of digital services. Microsoft will pay $5 billion for newly issued AT&T convertible trust preferred securities and warrants. The preferred securities, which will have a face value of $5 billion and be priced at $50 per security, will make a quarterly payment of 62.5 cents per security. The preferred securities, which will be convertible into 66.7 million shares of AT&T common stock at a price of $75 per share, will have a maturity of 30 years, and the conversion feature can be terminated, under certain conditions, after three years. The warrants will be exercisable in three years to purchase 40 million AT&T common shares at a price of $75 per share. AT&T will use the proceeds to fund working capital and capital expenditures. In addition, as part of these agreements, Microsoft will purchase the MediaOne Group Inc.'s (MediaOne) 29.9% interest in Telewest Communications plc through a tax-free exchange of Microsoft shares, subject to certain approvals. AT&T Form 10-Q - Part I On May 4, 1999, AT&T and Comcast Corporation (Comcast) announced that they had reached 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 four thousand five hundred dollars per added subscriber for a total value of $3.0 billion to $3.5 billion. In addition, Comcast will receive an option from AT&T to purchase, over the next three years, additional cable systems with a total of approximately 1.25 million subscribers. The price for these additional systems is expected to be consideration having a value of approximately $5.7 billion subject to certain conditions. 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 announced on April 22, 1999, and other regulatory and legal approvals. On May 4, 1999, AT&T and Lenfest Communications, Inc. (Lenfest) announced that they have signed an agreement for AT&T to acquire the remaining 50% interest in Lenfest not already owned by AT&T. Lenfest has approximately 1.5 million customers in the greater Philadelphia area. AT&T has agreed to a stock purchase of the remaining ownership interest, and expects to issue approximately 43 million shares of AT&T common stock to Lenfest once the transaction receives the necessary legal and regulatory approvals. On May 3, 1999, AT&T closed the previously announced merger with Vanguard Cellular Systems, Inc. (Vanguard). Under the agreement, each Vanguard shareholder was entitled to elect to receive either cash or AT&T stock in exchange for their Vanguard shares subject to the limitation that the overall consideration would consist of 50% AT&T stock and 50% cash. Because stock elections were made for a greater number of Vanguard shares, holders of Vanguard shares that elected cash (or did not elect) received $23 per share in cash for each Vanguard share; and, holders of Vanguard shares that elected stock received approximately 0.3134 shares of AT&T stock and approximately $10.95 per share in cash. Consummation of the merger resulted in the issuance of approximately 12.6 million AT&T shares and payment of $485 in cash. In addition, Vanguard had approximately $550 in debt, which has subsequently been repaid by AT&T. On April 30, 1999, AT&T completed the U.S. phase of the previously announced acquisition of IBM's Global Network business. Under the terms of the agreement, AT&T acquired the global network of IBM, and the two companies entered into outsourcing agreements with each other. IBM will outsource a significant portion of its global networking needs to AT&T. AT&T will outsource certain applications-processing and data-center-management operations to AT&T Form 10-Q - Part I IBM. Customer contracts, assets and about 3,000 employees based in the U.S. have now been transferred to AT&T. IBM has assumed management of AT&T's data processing centers, which operate corporate information systems. The transfer of approximately 2,000 AT&T employees to IBM is expected to be completed in June 1999. The acquisition of IBM Global Network assets and the transfer of employees outside the U.S. will be completed in phases throughout the year as legal and regulatory requirements are met. Approval was received from the European Union in April 1999. On April 25, 1999, AT&T and BT announced they have entered into a definitive agreement to acquire a 30% stake in Japan Telecom, one of Japan's largest telecommunications companies, for $1.83 billion. Under the agreement, AT&T and BT will each subscribe for 15% of the equity interest in Japan Telecom and will jointly manage the investment. The global venture will use Japan Telecom's extensive network infrastructure to enhance its coverage and provide end-to-end services to customers. The agreement is expected to close in autumn of 1999. On April 22, 1999, AT&T announced that it had submitted an offer to purchase MediaOne for $87.375 per share in a combination of stock and cash worth approximately $58 billion. In addition, approximately $4.5 billion in MediaOne debt and preferred equity (to be converted in AT&T preferred equity) will be outstanding. AT&T indicated it will pay $30.85 per share in cash plus .95 shares of AT&T stock for every MediaOne share, and plans to issue approximately 626 million shares in the transaction. In addition, the cash portion of the AT&T offer will be increased to offset up to a 10% decline from AT&T's closing stock price of $57 per share on April 21, 1999. This will maintain a value of $85 per share for every MediaOne share if AT&T's stock trades between $57 per share and $51.30 per share. On April 27, 1999, AT&T announced that it had received commitments for a $30 billion credit facility which would become effective at the consummation of the merger. On May 6, 1999, AT&T and MediaOne announced that the merger had been approved by the Board of Directors of MediaOne and a definitive merger agreement had been reached. Accordingly, in conjunction with MediaOne's previous merger agreement with Comcast, Comcast received a $1.5 billion break-up fee. MediaOne received the funds to pay the break-up fee in the form of a note payable to AT&T. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW On March 9, 1999, the previously announced merger with TCI closed and each share of TCI Group Series A common stock was converted into 0.7757 of a share of AT&T common stock (on a pre-split basis) and each share of TCI Group Series B stock was converted into 0.8533 of a share of AT&T common stock (on a pre-split basis). AT&T issued approximately 443 million shares (664 million shares on a post-split basis) for these TCI shares, of which 344 million shares (515 million shares on a post-split basis) were newly issued shares and 99 million shares (149 million shares on a post-split basis) were treasury shares including shares repurchased in February and March 1999. The total shares had an aggregate market value of approximately $26.8 billion. Certain subsidiaries of TCI held TCI Group Series A stock which was converted into 144 million shares (216 million shares on a post-split basis) of AT&T common stock. These subsidiaries continue to hold these shares, which are reflected as treasury stock in the accompanying consolidated balance sheet. In addition, TCI simultaneously combined its Liberty Media Group programming business, and TCI Ventures Group, its technology investments business, forming Liberty Media Group. In connection with the closing, AT&T issued separate tracking stock in exchange for the TCI Liberty Media Group and TCI Ventures Group tracking shares previously outstanding. A total of 540 million shares of Class A Liberty Media Group tracking stock were issued by AT&T and 55 million shares of Class B Liberty Media Group tracking stock were issued by AT&T. AT&T also issued 30 million Class A Liberty Media Group tracking shares in connection with the conversion of certain convertible notes. The aggregate market value of shares issued in conjunction with the merger was $23.4 billion. The tracking stock is designed to reflect the separate economic performance of Liberty Media Group. AT&T does not have a controlling financial interest in Liberty Media Group, therefore it has been reflected as an equity method investment in the accompanying consolidated financial statements. The results attributable to Liberty Media Group are reflected as a separate line item "Equity losses from Liberty Media Group" and "Investment in Liberty Media Group" in the accompanying consolidated financial statements. As a separate tracking stock, all of the earnings or losses related to Liberty Media Group are excluded from the earnings available to the holders of AT&T common stock. The merger with TCI was recorded as a purchase, accordingly the operating results of TCI have been included in the accompanying consolidated financial statements since the date of acquisition. For accounting purposes the deemed effective date of the acquisition is March 1, 1999, since the impact of results from March 1, 1999, through March 9, 1999, is deemed immaterial to our consolidated results. TCI's cable and certain other operations, including its ownership interest in At Home Corp.(@Home), but excluding Liberty Media Group, became AT&T broadband & Internet services, and were combined with the existing operations of AT&T to form the AT&T Common Stock Group (AT&T Group). We segment our results by the way we manage our business. The following businesses comprise AT&T Group: business services, consumer services, broadband & Internet services and wireless services. A fifth category, other and corporate, includes the results of AT&T Solutions, international operations and ventures, other corporate operations, overhead and eliminations. Results are discussed for these five categories as well as for combined AT&T Group. The discussion for the other and corporate category is further broken out to include information for AT&T Solutions and international operations and ventures. AT&T Form 10-Q - Part I Operating results are discussed separately for AT&T Group and Liberty Media Group. All lines of the accompanying consolidated statements of income except for "Equity losses from Liberty Media Group", "Income from continuing operations" and "Net income" reflect the results of AT&T Group only. All lines of the accompanying consolidated balance sheet, except for the "Investment in Liberty Media Group" and the components of shareowners' equity labeled as relating to Liberty Media Group are attributable to AT&T Group only. The liquidity, financial condition, risk management and year 2000 discussion pertain to consolidated AT&T. CONSOLIDATED RESULTS OF OPERATIONS For the Three Months Ended March 31, 1999 1998 Dollars in Millions (except per share amounts) Income from continuing operations attributable to common shareowners: AT&T Group............................... $1,076 $1,285 Liberty Media Group...................... (58) - Income attributable to common shareowners: AT&T Group................................ $1,076 $1,295 Liberty Media Group....................... (58) - Per AT&T common share - basic: Income from continuing operations......... $ 0.39 $ 0.48 Income from discontinued operations....... - - Total income.............................. $ 0.39 $ 0.48 Per AT&T common share - diluted: Income from continuing operations......... $ 0.38 $ 0.48 Income from discontinued operations....... - - Total income.............................. $ 0.38 $ 0.48 Liberty Media Group loss per share: Basic..................................... $ 0.10 $ - Diluted................................... $ 0.10 $ - Earnings per share attributable to AT&T common shareowners were $0.38 on a diluted basis for the first quarter of 1999, down 20.8% from the first quarter of 1998. AT&T Group's operational earnings excluding the impact of the TCI merger were $0.67 on a diluted basis, up 45.7% from the first quarter of 1998. Operational earnings also exclude restructuring and other charges in 1999 and 1998 as well as the gain on the sale of the AT&T Language Line Services business in 1999 and gains on the sales of AT&T Solutions Customer Care (ASCC) and LIN Television Corp. (LIN-TV) in 1998. The increase in operational earnings was primarily due to higher revenues coupled with an improved cost structure, which positively impacted margins. In addition, we look at our operational earnings including TCI, but excluding the earnings impact of @Home and Cablevision Systems Corp (Cablevision) since these companies are independent and publicly traded. Operational earnings including the results of TCI since the date of acquisition but excluding @Home and Cablevision were $0.61 per diluted share for the quarter ended March 31, 1999. Liberty Media Group's loss per share was $0.10 on a diluted basis from the date of the acquisition through March 31, 1999. The results of AT&T Group and Liberty Media Group are discussed in further detail below. AT&T Form 10-Q - Part I FORWARD-LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this Report on Form 10-Q 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. Any Form 10-K, Annual Report to Shareowners, Form 10-Q or Form 8-K of AT&T may include forward-looking statements, including statements concerning future operating performance, year 2000 compliance, 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 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. For a more complete discussion of the factors that could cause actual results to differ materially from such forward-looking statements, see the discussion thereof contained under the heading "Forward-Looking Statements" in AT&T's Form 10-K for the year ended December 31, 1998. Readers should also consider the factors discussed under the headings "Results of Operations" and "Financial Condition" included in this Form 10-Q. 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. AT&T GROUP RESULTS OF OPERATIONS REVENUES For the Three Months Ended March 31, Change 1999 1998 $ % Dollars in Millions Business services.......................... $ 6,214 $ 5,779 $ 435 7.5% Consumer services.......................... 5,486 5,680 (194) (3.4)% Wireless services.......................... 1,562 1,164 398 34.2% Broadband & Internet services.............. 483 - 483 NMF Other and corporate........................ 351 208 143 69.1% Total revenues............................. $14,096 $12,831 $1,265 9.9% Total revenues on a reported basis increased $1,265 million, or 9.9%, to $14,096 million compared with the first quarter of 1998. Excluding TCI, revenues increased $782 million, or 6.1%, compared with the first quarter of 1998. Growth was led by business services, primarily data and local voice services, wireless services, AT&T Solutions' network outsourcing services, and international operations and ventures, partially offset by lower consumer services revenues. Revenues, on a pro forma basis which include the results of TCI for a full quarter in 1999 and 1998 and adjusted to exclude the impact of all announced cable partnerships, increased 6.2% for the first quarter of 1999 compared with the first quarter of 1998. AT&T Form 10-Q - Part I OPERATING EXPENSES Change For the Three Months Ended March 31, 1999 1998 $ % Dollars in Millions Access and other interconnection........... $3,732 $3,936 $(204) (5.2%) Access and other interconnection expenses decreased $204 million, or 5.2%, to $3,732 million in the first quarter of 1999 compared with the first quarter of 1998. The decline primarily relates to FCC-mandated reductions in per-minute access charges, as well as lower negotiated international settlement rates, partially offset by business volume increases. TCI does not have access or interconnection expenses, therefore the results are the same excluding TCI. Change For the Three Months Ended March 31, 1999 1998 $ % Dollars in Millions Network and other communication services... $2,872 $2,546 $326 12.8% Network and other communication services expenses increased $326 million, or 12.8%, to $2,872 million in the first quarter of 1999 compared with the same period last year. Excluding TCI, network and other communication services expenses increased 3.6% year-over-year, driven primarily by higher off-network roaming charges and higher costs of wireless handsets sold, both attributable to the success of AT&T Digital One Rate service. The increase was also partly attributable to growth in AT&T Solutions. These increases were partially offset by lower per-call compensation expense resulting from FCC-mandated rate reductions in the first quarter of 1999. Change For the Three Months Ended March 31, 1999 1998 $ % Dollars in Millions Depreciation and amortization expenses..... $1,461 $1,067 $394 37.0% Depreciation and amortization expenses increased $394 million, or 37.0%, in the first quarter of 1999 compared with the first quarter of 1998. Excluding TCI, depreciation and amortization expenses increased $227 million, or 21.3%, year-over-year. The increase was primarily due to growth in AT&T Group's depreciable asset base resulting from the continued investment in our network assets throughout 1998. In the first quarter of 1999 capital expenditures were $1.3 billion, which focused on cable operations, business local, data and wireless services. Change For the Three Months Ended March 31, 1999 1998 $ % Dollars in Millions Selling, general and administrative expenses $3,157 $3,277 $(120) (3.7%) Selling, general and administrative (SG&A) expenses were down $120 million, or 3.7%, to $3,157 million in the first quarter of 1999 compared with the comparable prior year period. Excluding TCI, SG&A expenses declined $167 million, or 5.1%, versus the year-ago quarter. The decrease is primarily due to savings from headcount reductions and other cost control initiatives. These decreases were partially offset by increases in marketing and sales and customer AT&T Form 10-Q - Part I care expenses associated with growth in wireless subscribers. Including TCI, SG&A expenses as a percent of revenues were 22.4% compared with 25.5% in the first quarter of 1998. SG&A expenses excluding wireless services and the consumer local business as a percentage of revenues were 20.4%. Change For the Three Months Ended March 31, 1999 1998 $ % Dollars in Millions Restructuring and other charges............ $731 $601 $130 21.7% Restructuring and other charges for the quarter were $731 million pretax, or a reduction of approximately $0.24 per diluted share, including an in-process research and development charge of $594 million related to the TCI acquisition. The charge reflects the estimated value, as of the acquisition date, of research and development projects at TCI which have not yet reached technological feasibility and which have no alternative future use. The projects identified relate to TCI's efforts to offer voice over Internet protocol, cost savings efforts for cable telephony implementation and product integration efforts for advanced set-top devices that will enable TCI to offer next-generation digital services. In addition, @Home has research and development efforts underway including projects to allow for self-provisioning of devices and the development of next-generation client software, network and back-office infrastructure to enable a variety of network devices beyond personal computers and improved design for the regional data centers' infrastructure. Although there are significant technological issues to overcome in order to successfully complete the acquired in-process research and development, AT&T expects successful completion. If, however, AT&T is unable to establish technological feasibility and produce a commercially viable product/service, then anticipated incremental future cash flows attributable to expected profits from such new product/service may not be realized. Additionally, AT&T recorded a charge of $196 million primarily related to the settlement associated with the exit of a joint venture that will compete directly with the global venture that AT&T is forming with British Telecommunications plc (BT). These charges were partially offset by gains of $59 million related to the settlement of pension obligations for former employees who accepted AT&T's voluntary retirement incentive program offer. In the first quarter of 1998 AT&T Group recorded a $601 million charge, or a reduction of approximately $0.14 per diluted share, related to our decision not to pursue Total Service Resale (TSR) as a local service strategy. The Regional Bell Operating Companies have made it extremely difficult to enter the local market under a TSR strategy. After spending several billions of dollars in an attempt to enter this market, it became clear that the TSR solution was not economically viable. The pretax charge includes a $543 million write-down of software, $42 million primarily related to equipment associated with the software platform and $16 million for certain contractual obligations and termination penalties under several vendor contracts that were canceled during the first quarter as a result of this decision. AT&T received no operational benefit from these contracts once this decision was made. Change For the Three Months Ended March 31, 1999 1998 $ % Dollars in Millions Other income - net......................... $149 $706 $(557) (78.9%) AT&T Form 10-Q - Part I Other income-net was $149 million in the first quarter of 1999, a decrease of 78.9% from the year-ago quarter. This decrease was due to greater gains on sales of businesses in the first quarter of 1998 compared with the first quarter of 1999. In the first quarter of 1999, other income net-included a $153 million pretax gain on the sale of the Language Line Services business, or approximately $0.03 per diluted share. In the first quarter of 1998, other income-net included pretax gains from the sales of ASCC of $350 million and LIN-TV of $317 million, representing approximately $0.16 per diluted share. Change For the Three Months Ended March 31, 1999 1998 $ % Dollars in Millions Interest expense........................... $190 $80 $110 138.8% Interest expense was $190 million for the first quarter of 1999. The increase was primarily due to interest expense on the debt incurred in conjunction with the acquisition of TCI. Excluding the impacts of TCI, interest expense was $94 million, up from $80 million in the first quarter of 1998. The $14 million increase was due primarily to the reclassification of interest expense from discontinued operations to continuing operations related to the debt not retired upon the sale of Universal Card Services (UCS). This increase was partially offset by lower average debt outstanding and lower average interest rates. Change For the Three Months Ended March 31, 1999 1998 $ % Dollars in Millions Provision for income taxes................. $1,026 $745 $281 37.6% The provision for income taxes increased $281 million, or 37.6%, to $1,026 million compared with the first quarter of 1998. The effective income tax rate for the quarter was 50.2%, up from 36.7% in the first quarter of 1998. In the first quarter of 1999 AT&T Group recorded a non-tax deductible in-process research and development charge, and accordingly, no tax benefit was recorded. Excluding this charge as well as the equity losses from Liberty Media Group from income before taxes, the effective income tax rate for the first quarter was 38.1%. Change For the Three Months Ended March 31, 1999 1998 $ % Dollars in Millions Income available to AT&T shareowners....... $1,076 $1,295 $(219) (16.9%) Income available to AT&T shareowners decreased $219 million, or 16.9%, in the first quarter of 1999 compared with the first quarter of 1998. The decrease was due primarily due to lower gains on sales of businesses and higher restructuring and other charges, partially offset by increased income from operations resulting from higher revenues and an improved cost structure. AT&T Form 10-Q - Part I AT&T GROUP SEGMENT RESULTS Business Services The business services segment results reflect sales of long distance and local voice and data services to business customers, including domestic and international, inbound and outbound, intra-LATA toll, calling card and operator-handled services and other network enabled services. In addition, this segment provides Internet protocol (IP) for business customers such as Web site hosting, AT&T WorldNet business Internet access and electronic commerce services. Consumer Services The consumer services segment includes the results of providing telecommunications services to residential customers including domestic and international long distance services, intra-LATA toll services, calling-card and operator-handled calling services, and prepaid calling cards. In addition, this segment includes AT&T WorldNet residential Internet access service as well as noncable local services provided to residential customers. Wireless Services The results of this segment are comprised primarily of sales of wireless services and products to customers in AT&T Group's 850 MHz (cellular) and 1900 MHz (PCS) markets. Also included are aviation communications services and the costs associated with the development of fixed wireless technology. The results of AT&T's former messaging business are included in 1998 results through October 2, when the unit was sold. Broadband & Internet Services This segment reflects operations associated with providing services through the broadband cable network acquired as a result of AT&T's merger with TCI. This includes the results associated with traditional analog cable service, as well as new services, such as Digital Cable, AT&T@Home - the high-speed cable Internet service, and eventually broadband telephony. AT&T@Home, along with several other large cable operators, has a contract with @Home, the operator of an Internet "backbone", over which we can provide high-speed cable Internet service. Other and Corporate This group includes the results of AT&T Solutions, international operations and ventures, other corporate operations, overhead and eliminations. The above segments reflect certain changes since the publication of our annual results due to changes in the way we manage our business. The business services segment was expanded to include the results of Teleport Communications Group Inc. (TCG) and the business portion of AT&T WorldNet Service; the consumer services segment was expanded to include the residential portion of AT&T WorldNet Service. All prior results have been restated to reflect these changes. AT&T Form 10-Q - Part I The discussion of segment results for AT&T Group generally includes revenues; earnings before interest and taxes, including other income (EBIT); earnings before interest, taxes, depreciation and amortization, including other income (EBITDA); capital additions and total assets. The discussion of EBITDA for AT&T Group's wireless services and broadband & Internet services segments is modified to exclude other income. AT&T calculates EBIT as operating income plus other income and is a measure used by our chief operating decision-makers to measure AT&T's consolidated operating results and to measure segment profitability. Interest and taxes are generally not allocated to our segments because debt is managed and serviced and taxes are managed and calculated on a centralized basis. Trends in interest and taxes are discussed separately on a consolidated basis. Management believes EBIT is a meaningful measure to disclose to investors because it provides investors with an analysis of operating results using the same measures used by the chief operating decision-makers of AT&T, provides a return on total capitalization measure, and allows investors a means to evaluate the financial results of each segment in relation to consolidated AT&T. Our calculation of EBIT may or may not be consistent with the calculation of EBIT by other public companies, and EBIT 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. EBITDA is also used by management as a measure of segment performance and is defined as EBIT plus depreciation and amortization. We believe it is meaningful to investors as a measure of each segment's liquidity and allows investors to evaluate a segment's liquidity using the same measure that is used by the chief operating decision-makers of AT&T. Consolidated EBITDA is also provided for comparison purposes. Our calculation of EBITDA may or may not be consistent with the calculation of EBITDA by other public companies and should not be viewed by investors as an alternative to 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 effect changes in certain assets and liabilities which can affect cash flow. Total assets for each segment include all assets, except interentity receivables. Deferred taxes, 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 the prior two years' volumes of minutes used. Capital additions for each segment include additions to property, plant and equipment and other long-lived assets including licenses, investments, franchise costs and capitalized software. AT&T Form 10-Q - Part I BUSINESS SERVICES Three months ended March 31, Change Dollars in Millions 1999 1998 $ % External revenues................... $ 5,927 $ 5,558 $ 369 6.6% Internal revenues................... 287 221 66 30.1% Total revenues...................... 6,214 5,779 435 7.5% EBIT................................ 1,567 1,124 443 39.4% EBITDA.............................. 2,256 1,651 605 36.6% OTHER ITEMS Capital additions................... $ 892 $ 960 $ (68) (7.0)% At March 31, At Dec. 31, Change 1999 1998 $ % Total assets........................ $21,267 $21,415 $(148) (0.7)% REVENUES Business services revenues increased $435 million, or 7.5%, in the first quarter of 1999 compared with the first quarter of 1998 driven by continued strength in data and local voice services as well as improved long distance voice volumes, which grew at a mid-teens rate. AT&T local voice revenues formerly associated with TCG'S operations are now reported as part of the business services segment. Including local service, calling volumes increased in excess of 25%. Data services revenues grew in the high teens for the quarter led by continued strong growth in frame relay and high speed private line services. Also contributing to growth in data services were IP and ATM services as well as increased customer demand for high-bandwith (OC-X capability) and the increased distribution of AT&T Concert global data services. Long distance voice revenues grew at a low-single-digit rate for the quarter, accelerating from the fourth quarter rate due to higher growth in calling volumes. Volume growth continues to be partially offset by a declining average price per minute driven by competitive forces as well as changes in product mix. Higher-priced calling card and operator services, for example, are becoming a smaller percentage of overall business volumes as those services are increasingly migrating to wireless services. Local voice service revenues grew over 90% for the quarter, as AT&T continued the aggressive deployment of facilities-based assets serving business customers. AT&T's integrated business local operations, including AT&T Digital Link, added 87,052 access lines in the first quarter, bringing total access lines in service to 762,881 as of March 31, 1999. Currently, AT&T serves 22,680 buildings, up from 15,189 in the prior year, with approximately 25% of the buildings on net in 83 metropolitan statistical areas (MSAs). AT&T Form 10-Q - Part I EBIT/EBITDA EBIT and EBITDA for business services increased to $1,567 million, or 39.4%, and $2,256 million, or 36.6%, respectively, in the first quarter of 1999 compared with the year-ago quarter. The improvements were driven by the growth in revenues as well as continued improvement in the cost structure of the business, in part due to headcount reductions. In addition, EBIT was impacted by higher depreciation and amortization expense due primarily to 1998 capital expenditures. OTHER ITEMS Capital additions were $892 million in the first quarter of 1999 compared with $960 million in the first quarter of 1998. Capital spending in both periods was focused on local and data services. Total assets were relatively flat at March 31, 1999, compared with December 31, 1998. CONSUMER SERVICES Three months ended March 31, Change Dollars in Millions 1999 1998 $ % Revenues............................. $5,486 $5,680 $(194) (3.4)% EBIT................................. 1,887 1,322 565 42.7% EBITDA............................... 2,095 1,495 600 40.1% OTHER ITEMS Capital additions.................... $ 97 $ 98 $ (1) (1.0)% At March 31, At Dec. 31, Change 1999 1998 $ % Total assets......................... $6,658 $6,335 $323 5.1% REVENUES Consumer services revenues decreased 3.4% compared with the first quarter of 1998. Excluding AT&T WorldNet Services, revenues were down 3.8% while long distance calling volumes declined at a low-single-digit rate. These results reflect the competitive nature of the consumer long distance industry, and the continued impact of AT&T's strategy to migrate higher-usage customers to optional calling plans in order to improve customer retention and reduce marketing costs. In conjunction with the above strategy, AT&T is seizing opportunities to grow revenues profitably and gain share in key market segments. In the first quarter of 1999, AT&T launched its Personal Network service, which provides customers a bundled bill with a single rate per minute for domestic long distance, wireless, calling-card, personal 800 and certain international calling. AT&T has also accelerated its efforts in transactional calling services such as prepaid cards, dial-around (10-10-345) and automated collect calling (1-800-CALL-ATT). On March 31, 1999, AT&T completed the acquisition of certain assets of SmarTalk TeleServices, Inc. (SmarTalk), a leading seller of prepaid calling cards, giving the company distribution agreements with the U.S. Postal AT&T Form 10-Q - Part I Service and several key retailers. Also on March 31, 1999, as a part of the continuing focus on the core business, we completed the sale of our Language Line Services business resulting in a pretax gain of $153 million. EBIT/EBITDA EBIT and EBITDA for consumer services increased 42.7% and 40.1%, respectively, in the first quarter of 1999 compared with the first quarter of last year. EBIT and EBITDA for consumer services excluding the gain on the sale of Language Line Services increased 31.1% and 29.9%, respectively over the year-ago quarter driven primarily by lower negotiated international settlement rates, reduced headcount, and improvement in the efficiency of its marketing efforts. The implementation of programs such as bimonthly or quarterly billing, as well as online billing of AT&T's One Rate Online plan, have also improved consumer services' profitability. In an effort to reduce losses due to low-usage customers, in mid-1998 AT&T instituted a $3 monthly minimum charge for all new basic schedule customers. In April 1999, the company announced plans to extend the minimum charge to all existing basic rate customers effective in July 1999. Consumer WorldNet Services revenues increased 40.8% over the year-ago quarter to $65 million. AT&T WorldNet Services now serves approximately 1.4 million residential subscribers, an increase of 39.4% from a year ago with over 250 thousand net new subscribers joining during the first quarter. Growth in AT&T WorldNet Services continues to be driven by growth in the overall Internet service provider (ISP) industry and from accelerated customer acquisition efforts. OTHER ITEMS Capital additions for consumer services were essentially flat in the first quarter of 1999 compared with the comparable prior year quarter. Total assets increased $323 million, or 5.1%, to $6,658 million at March 31, 1999, from December 31, 1998. The increase was due primarily to an increase in property, plant and equipment, assets acquired in connection with the purchase of SmarTalk and increased capitalized software costs. WIRELESS SERVICES Three months ended March 31, Change Dollars in Millions 1999 1998 $ % Revenues............................ $ 1,562 $ 1,164 $ 398 34.2% EBIT................................ (49) (2) (47) NMF EBITDA, excluding other income...... 186 194 (8) (4.0)% OTHER ITEMS Capital additions................... $ 172 $ 168 $ 4 2.3% At March 31, At Dec. 31, Change 1999 1998 $ % Total assets........................ $19,219 $19,341 $(122) (0.6)% AT&T Form 10-Q - Part I REVENUES Wireless services revenues increased $398 million, or 34.2%, in the first quarter of 1999 compared with the first quarter of 1998. Adjusted for the sale of our messaging business in October 1998, revenues grew 40.0% compared with the year-ago quarter. The growth was driven by the continued successful execution of AT&T's wireless strategy of targeting and retaining high-value subscribers, expanding the national wireless footprint, focusing on digital service, and offering simple rate plans. AT&T's Digital One Rate service offer, which leverages all of the elements of this strategy, continues to generate significant growth and build on the momentum of 1998. During the first quarter, the number of AT&T Digital One Rate service subscribers grew to over 1 million. Over 80% of the net new customers who chose this product in the first quarter of 1999 were new AT&T Wireless customers. AT&T continues to experience strong growth in wireless subscribers and net subscriber additions. Consolidated net additions increased 94.5% versus the year-ago period to over 378 thousand, bringing consolidated subscribers to a total of approximately 7.6 million at March 31, 1999, up 23.0% from a year ago. Total subscribers, including partnership markets in which AT&T does not own a controlling interest, topped 10 million in the first quarter. In November 1998 AT&T began managing day-to-day operations of the unconsolidated Los Angeles market; in March 1999 this market took on the AT&T brand name enabling the introduction of AT&T Digital One Rate service to Los Angeles. AT&T's focus on high-value subscribers has helped generate rising usage by customers and increased quarterly average revenue per user (ARPU) compared to prior year. ARPU across all of AT&T's wireless markets was $60.6 in the first quarter, an increase of 15.0% from the year-ago quarter. We continue to migrate customers rapidly to digital service, generating more efficient use of the network while also reducing customer churn. As of the end of the first quarter, 67.3% of AT&T's 7.6 million consolidated subscribers were on digital service, up from 60.5% at the end of 1998 and 35.1% a year ago. EBIT/EBITDA EXCLUDING OTHER INCOME EBIT was a deficit of $49 million in the first quarter of 1999 compared with a deficit of $2 million in the first quarter of 1998. EBITDA excluding other income was $186 million in the first quarter of 1999, a decline of 4.0% from the year-ago quarter. These declines were driven by an expanding customer base resulting in increased costs from higher off-network roaming expenses, and increased customer acquisition and digital migration costs, partially offset by higher revenues. AT&T is in the process of expanding its wireless footprint by building out new markets including Columbus, Ohio; Omaha; San Diego; and certain Connecticut cities. Subsequent to March 31, 1999, AT&T completed its acquisitions of Vanguard Cellular and Bakersfield Cellular. In addition, AT&T has announced plans to acquire Honolulu Cellular . These efforts will decrease future off-network roaming expenses. In areas not addressed by footprint expansion, AT&T is continuing efforts to reduce off-network roaming rates through the renegotiation of intercarrier roaming agreements. AT&T Form 10-Q - Part I OTHER ITEMS Capital additions were relatively flat in the first quarter of 1999 compared with the same period last year. Total assets were essentially flat at March 31, 1999 compared with December 31, 1998. BROADBAND & INTERNET SERVICES One month ended March 31, Dollars in Millions 1999 Revenues............................ $ 483 EBIT................................ (646) EBITDA, excluding other income...... (392) OTHER ITEMS Capital additions................... $ 310 At March 31, 1999 Total assets........................ $42,748 REVENUES Total revenues for the broadband and Internet services segment included in AT&T's consolidated results were $483 million representing revenues earned from the acquisition of TCI, which closed in early March. Broadband & Internet services ended first quarter 1999 with 11.427 million basic cable customers. Total Digital Cable customers were approximately 1.225 million. The high-speed cable Internet service, AT&T@Home, had approximately 52,000 customers at the end of the first quarter. In 1997 and early 1998, TCI announced a number of cable partnerships aimed at improving its overall geographic clustering. When complete, these partnerships will result in the deconsolidation of approximately 3.9 million customers and the exchange of an additional two million customers. The majority of the announced cable partnerships have closed, resulting in the deconsolidation of approximately 3.3 million customers. Three partnerships are pending to which the company expects to contribute approximately 600,000 customers. EBIT/EBITDA EXCLUDING OTHER INCOME EBIT was a deficit of $646 million. EBITDA excluding other income was a deficit of $392 million. These deficits were primarily the result of a charge for in-process research and development which reflects the estimated value, as of the acquisition date, of research and development projects at TCI which have not yet reached technological feasibility and which have no alternative future use. The projects identified relate to TCI's development work for voice and Internet protocol telephony as well as a number of projects at @Home. OTHER ITEMS Total assets were $42,748 million at March 31, 1999. Capital additions were $310 million, comprised primarily of spending on cable distribution systems. AT&T Form 10-Q - Part I OTHER AND CORPORATE Three months ended March 31, Change Dollars in Millions 1999 1998 $ % Revenues............................ $ 351 $ 208 $ 143 69.1% EBIT................................ (467) (334) (133) (39.8)% EBITDA.............................. (342) (205) (137) (65.6)% OTHER ITEMS Capital additions................... $ 364 $ 90 $ 274 299.3% At March 31, At Dec. 31, Change 1999 1998 $ % Total assets........................ $11,332 $12,459 $(1,127) (9.0)% REVENUES Revenues for the first quarter 1999 increased $143 million, or 69.1%, to $351 million from the same quarter a year ago. Revenue growth was primarily driven by AT&T Solutions as a result of major contracts signed after the first quarter of 1998 and international operations and ventures due to the acquisition of ACC Corp. in April 1998. Revenue growth was partially offset by the sale of ASCC in March 1998. The elimination of revenues and profit generated by the sale of services between business segments is primarily a result of the sale of business long distance services to other AT&T units. Revenues eliminated in the quarter were $296 million, an increase of 6.1% from the first quarter of 1998. EBIT/EBITDA EBIT and EBITDA deficits for the first quarter of 1999 increased $133 million and $137 million, to deficits of $467 million and $342 million, respectively, over the comparable prior year quarter. Excluding the international charge and pension settlement gain in the first quarter of 1999, and the local asset write-off and gains from the sales of ASCC and LIN-TV in the first quarter of 1998, EBIT and EBITDA deficits improved $70 million and $66 million, respectively, in the first quarter of 1999 compared with the same period last year due primarily to lower corporate expenses driven by cost cutting initiatives. OTHER ITEMS Capital additions increased $274 million, or 299.3%, in the first quarter of 1999 compared with the first quarter of 1998 driven by an increase in investments in non-consolidated subsidiaries at international operations and ventures. Total assets at March 31, 1999, were $11,332 million compared with $12,459 million at December 31, 1998, which represents a 9.0% decrease. The decrease was primarily driven by a lower cash balance. AT&T SOLUTIONS AT&T Solutions is our outsourcing, network-management and professional-services business. The results of AT&T Solutions are included in the other and corporate group. AT&T Form 10-Q - Part I Three months ended March 31, Change Dollars in Millions 1999 1998 $ % Revenues............................ $343 $ 226 $117 51.3% EBIT................................ 11 (9) 20 215.5% EBITDA.............................. 84 58 26 46.8% OTHER ITEMS Capital additions................... $ 11 $ 23 $(12) (54.1)% At March 31, At Dec. 31, Change 1999 1998 $ % Total assets........................ $989 $1,023 $(34) (3.4)% REVENUES AT&T Solutions grew revenues 51.3% in the first quarter of 1999 to $343 million. With more than 800 clients, including IBM, CitiGroup, McGraw-Hill, Bank One, United HealthCare, Textron, J.P. Morgan, Merrill Lynch, and MasterCard International, the unit currently has the potential for more than $9.8 billion in revenues over the life of signed contracts. In the first quarter of 1999, AT&T Solutions announced the signing of a $60 million per year, 10-year contract with McDermott International to design, implement and manage McDermott's global information technology capabilities. This agreement is a significant expansion of an existing, wide area networking relationship that dates from 1995. The new agreement now includes the full breadth of McDermott's IT infrastructure to nearly 60 global locations including business applications, desktops, servers, local and wide area networks (LAN/WAN) and end-to-end networking management. Also during the first quarter, AT&T Solutions added American Express Financial Advisors and New York Life as major clients. EBIT/EBITDA EBIT and EBITDA improved $20 million and $26 million, respectively, in the first quarter of 1999 compared with the same period in 1998. The improvement was primarily due to revenue growth in AT&T Solutions' commercial (non-internal) operations partially offset by higher expenses driven by the higher revenues. AT&T Solutions manages AT&T's internal network infrastructure--an operation that generated approximately $1.7 billion in internal billings in 1998. Total internal billings in the first quarter were $429 million which were recorded as a reduction to AT&T Solutions' expenses (cost recovery). OTHER ITEMS Capital additions for the first quarter of 1999 were $11 million, a decrease of 54.1% over the comparable 1998 period. The decrease was primarily due to higher capital spending on the AT&T infrastructure in the first quarter of 1998. Total assets decreased $34 million, or 3.4%, from December 31, 1998, due primarily to depreciation of property, plant and equipment during the period, partially offset by an increase in accounts receivable. AT&T Form 10-Q - Part I INTERNATIONAL OPERATIONS AND VENTURES International operations and ventures include consolidated foreign operations such as AT&T Communications Services UK (Comms UK) and ACC, our transit and reorigination businesses and international online services. The equity earnings or losses of AT&T's nonconsolidated international joint ventures and alliances, such as Alestra in Mexico and AT&T Canada Long Distance Services are also included. This area does not include bilateral international long distance traffic which is reflected in business services and consumer services, as appropriate. The results of international operations and ventures are included in the other and corporate group. Three months ended March 31, Change Dollars in Millions 1999 1998 $ % Revenues............................ $ 292 $ 179 $113 63.8% EBIT................................ (249) (63) (186) (295.4)% EBITDA.............................. (230) (46) (184) (407.3)% OTHER ITEMS Capital additions................... $ 315 $ 31 $284 959.0% At March 31, At Dec. 31, Change 1999 1998 $ % Total assets........................ $2,207 $1,915 $292 15.3% REVENUES Revenues grew 63.8% in the first quarter of 1999 driven by the impact of ACC which was purchased in April 1998, growth in Comms UK, and increased reorigination traffic. EBIT/EBITDA EBIT and EBITDA declined in the year-over-year quarter by $186 million and $184 million, respectively, due primarily to a first quarter 1999 charge related to the exit of a joint venture associated with our upcoming formation of a global joint venture with BT. Excluding the charge, EBIT and EBITDA improved in the year-over-year quarter by $10 million and $12 million, respectively, due primarily to revenue increases and cost reduction activities as well as reduced equity losses. OTHER ITEMS Capital additions increased $284 million for the quarter ended March 31, 1999, compared with the same period last year. The increase was primarily due to increased investments in nonconsolidated subsidiaries. Total assets were $2,207 million at March 31, 1999, compared with $1,915 million at December 31, 1998. The increase was due primarily to goodwill associated with an additional investment in AT&T Canada Long Distances Services in the first quarter of 1999. AT&T Form 10-Q - Part I LIBERTY MEDIA GROUP RESULTS Liberty Media Group produces, acquires and distributes entertainment, educational and informational programming services through all available formats and media. Liberty Media Group is also engaged in electronic retailing services, direct marketing services, advertising sales relating to programming services, infomercials and transaction processing. Although Liberty Media Group is a wholly owned subsidiary of AT&T, it is accounted for as an equity investment in the accompanying consolidated financial statements since AT&T does not have a controlling financial interest in Liberty Media Group. Equity losses from Liberty Media Group were $58 million for the period from the date of acquisition through March 31, 1999. LIQUIDITY Three months ended March 31, Dollars in Millions 1999 1998 CASH FLOW OF CONTINUING OPERATIONS: Provided by operating activities............ $ 746 $1,964 (Used in) provided by investing activities.. (6,891) 400 Provided by (used in) financing activities.. 4,448 (2,446) EBITDA* ...................................... $3,793 $3,192 * Earnings before interest, taxes, depreciation and amortization (EBITDA) for the first three months of 1999 includes a $153 million pretax gain on the sale of the Language Line Services business and restructuring and other charges of $731 million. EBITDA for the first three months of 1998 includes pretax gains from the sales of ASCC of $350 million and LIN-TV of $317 million and a $601 million asset impairment charge. EBITDA excludes the results of Liberty Media Group. The net cash provided by the operating activities of continuing operations was $746 million in the first quarter 1999 compared with $1,964 million in the first quarter 1998. The decrease of $1,218 million was driven primarily by an increase in cash tax payments in the first quarter 1999 as well as greater access payments (due to timing differences), partially offset by greater operational earnings excluding depreciation and amortization expense in the first quarter 1999 compared with the first quarter 1998. AT&T's investing activities resulted in a net use of cash in the first quarter 1999 of $6,891 million compared with a net source of cash of $400 million in the first quarter 1998. In the first quarter 1999 AT&T transferred $5.5 billion of cash to Liberty Media Group and used $1.9 billion for capital expenditures. In the first quarter 1998 proceeds from the sales of nonstrategic assets were partially offset by capital spending of $1.7 billion. In the first quarter 1999 the net cash provided by financing activities of AT&T's continuing operations was $4.4 billion compared with cash used in financing activities of $2.4 billion in the first quarter 1998. During 1999 AT&T received $7.9 billion of cash from a March 1999 bond issuance and $3.3 billion from the issuance of commercial paper. From this, $3.9 billion was used to fund the share repurchase program and $2.0 billion was used to retire commercial paper and other short-term debt. In the first quarter 1998 cash used in financing activities was largely attributable to the paydown of commercial paper. AT&T Form 10-Q - Part I On April 15, 1999, AT&T executed a three-for-two common stock split. AT&T shareowners of record received one additional share for every two shares they owned at the close of business on March 31, 1999. On a post-split basis, AT&T had approximately 3.181 billion AT&T common shares outstanding at March 31, 1999. EBITDA is a measure of our ability to generate cash flow and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with generally accepted accounting principles. EBITDA increased $601 million, or 18.8%, for the first three months of 1999 compared to the same period in 1998. Excluding TCI, the restructuring and other charges, asset impairment and gains on sales of businesses in 1999 and 1998, EBITDA increased 35.1% to $4,223 million in the first quarter 1999 from $3,126 million in the first quarter of 1998. The increase was primarily due to increased revenues attributable to growth in business data services and wireless services, and lower expenses primarily attributable to our cost reduction efforts. These were partially offset by higher network costs associated with our growing wireless subscriber base. EURO CONVERSION On January 1, 1999, certain members of the European Union established fixed conversion rates between their existing currencies and the European Union's currency (Euro). The transition period is anticipated to extend between January 1, 1999, and July 1, 2002. We have assessed the impact of the conversion on information-technology systems, currency exchange rate risk, derivatives and other financial instruments, continuity of material contracts as well as income tax and accounting issues. We do not expect the conversion during the transition period to have a material effect on our consolidated financial statements. FINANCIAL CONDITION Total assets increased $76,085 million, or 127.8%, to $135,635 million at March 31, 1999, compared with December 31, 1998. The increase in total assets was due primarily to the TCI acquisition which resulted in an investment in Liberty Media Group of $34.5 billion, preliminary goodwill of $24.0 billion, an increase in investments of $8.4 billion including TCI's investments in Cablevision Systems Corp. and Lenfest Communications, Inc., and the addition of $6.3 billion to property, plant and equipment. Total liabilities increased $26,795 million, or 79.0%, to $60,714 million at March 31, 1999, compared with December 31, 1998. The increase was due primarily to the addition of TCI debt, an $8.0 billion bond offering, the issuance of commercial paper, as well as the addition of TCI deferred income taxes. Total shareowners' equity increased $44,840 million, or 175.7%, to $70,362 million at March 31, 1999, compared with December 31, 1998. The increase was due primarily to the issuance of shares related to the TCI acquisition, partially offset by the share repurchase program. AT&T Group's ratio of total debt to total capital at March 31, 1999, was 44.7% compared with 20.9% at December 31, 1998, and includes the subsidiary-obligated manditorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities of AT&T's wholly-owned subsidiary, TCI. The increase was primarily driven by an increase in debt associated with the TCI merger and an $8 billion bond issuance in March 1999, partially offset by a higher equity base. AT&T Form 10-Q - Part I RISK MANAGEMENT We are exposed to market risk from changes in interest and foreign exchange rates. On a limited basis we use certain derivative financial instruments, including interest rate swaps, options, forwards and other derivative contracts to manage these risks. We do not use financial instruments for trading or speculative purposes. All financial instruments are used in accordance with board-approved policies. Assuming a 10% downward shift in interest rates at March 31, 1999, the potential loss for changes in fair value of unhedged debt would have been $1.2 billion. AT&T has revolving credit facilities of $7 billion at March 31, 1999. The credit facilities are intended for general corporate purposes, which include support for AT&T's commercial paper, and were unused at March 31, 1999. AT&T terminated its $2 billion 364-day back-up facility pursuant to AT&T's issuance of debt under its debt offering. In May 1999, AT&T entered into additional revolving credit facilities of $3.0 billion which are currently unused. On April 22, 1999, AT&T announced that it had submitted an offer to purchase the MediaOne Group for a combination of stock and cash worth approximately $58 billion. AT&T has received commitments for a $30 billion credit facility which would become effective at the consummation of the merger. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities. " Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. This standard is effective for fiscal years beginning after June 15, 1999, 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, 2000. Management does not expect the adoption of this standard to have a material impact on AT&T's results of operations, financial position or cash flows. YEAR 2000 AT&T is preparing its systems and applications for the year 2000 (Y2K). The issue our Y2K program addresses is the use of a two-digit year field instead of a four-digit year field in computer systems. If computer systems cannot distinguish between the year 1900 and the year 2000, system failures or other computer errors could result. The potential for failures and errors spans all aspects of our business, including computer systems, voice and data networks, and building infrastructures. We are also faced with addressing our interdependencies with our suppliers, connecting carriers and major customers, all of whom face the same issue. AT&T's company-wide Y2K program is focused on four interrelated categories which are critical to maintaining uninterrupted service to our customers: AT&T-developed applications and their external interfaces, AT&T networks, information-technology (IT) platforms that support the applications, and non-IT infrastructure. AT&T Form 10-Q - Part I AT&T's progress in our Y2K program is measured by certain key milestones or phases common to each category of systems. These milestones are: assessment, repair/remediation, testing and certification. The end-state of the process is a declaration of Y2K compliance, which means that neither performance nor functionality is affected by dates prior to, during and after the year 2000. AT&T monitors and tracks the progress of our Y2K program through a series of scorecards that capture the activities related to the Y2K process phases. All systems encompassed in our Y2K program have various projected dates for Y2K certification, which are outlined in further detail below by major category. As a result of our acquisition of TCI in early March 1999, we are in the process of integrating TCI's Y2K program into ours. The status of TCI's Y2K program is discussed separately from the existing AT&T program. All targets cited herein also exclude information regarding pending acquisitions, whose programs are still being evaluated and planned for integration into the overall AT&T Y2K program. Program Status AT&T has approximately 3,000 internally developed software applications that (1) directly support AT&T's voice and data telecommunications services (including wired and wireless); (2) are critical to the provisioning, administration, maintenance and customer service/support related to our telecommunications services; and (3) support our sales and marketing organizations, other AT&T services and internal administrative functions. These applications represent 380 million lines of code. As of March 31, 1999, AT&T has completed 100% of the assessment, approximately 99% of the repair, and about 96% of the application testing. All phases leading to 100% Y2K-compliance are targeted to be completed in the second quarter of 1999. With respect to external (third-party) interface assessment, formal letters were sent to about 2,000 domestic telecommunications companies and international telecommunications authorities to request information on their Y2K plans and targets for compliance. We have identified about 1,000 different types of third-party interfaces and about 10,000 total instances of those types. As of March 31, 1999, AT&T has assessed approximately 95% of third-party interface types, and approximately 94% are Y2K compliant. We expect to be 100% complete with Y2K certification of external interfaces in the second quarter of 1999. The AT&T network is critical to providing top-quality, reliable service to AT&T customers. At March 31, 1999, the assessment, repair and certification phases of the operation-support systems (OS) were 100% complete. Approximately 92% of these systems are now fully deployed, with 100% deployment targeted by the second quarter of 1999. In addition to the AT&T-developed applications supporting the network, AT&T has inventoried more than 800 externally purchased network elements (NE) including switches, routers, network-control points and signal-transfer points. Additional Y2K testing is conducted to independently verify supplier claims of compliance. All of the NEs are now certified. After OS/NE certification is complete, AT&T performs integration testing to verify Y2K certification of NEs in conjunction with the associated OS applications. Such integration testing is 100% completed as of March 31, 1999, with 91% of the NEs fully deployed. 100% deployment is targeted by the second quarter of 1999. AT&T Form 10-Q - Part I The IT infrastructure category addresses not only the computing platforms that are critical to the AT&T-developed applications, but also the common modules, communications protocols, the internal AT&T wide-area and local-area networks, desktop hardware/software and the internal voice network. A large part of this effort has been focused on the inventory and assessment of the products and components. As of March 31, 1999, AT&T was approximately 74% compliant in computing platforms, about 69% compliant in desktops, approximately 92% compliant in voice systems and adjuncts, and about 94% compliant in data networks. AT&T anticipates completion of IT infrastructure certification by the second quarter of 1999. The non-IT infrastructure focuses on the energy- and environment-management systems that are critical to various computer systems, as well as safety, security and operations. This aspect of the Y2K program encompasses more than 8,000 sites, as well as about 6,500 wireless cell sites. As of March 31, 1999, approximately 98% of all sites completed inventory and about 71% are assessed and compliant (or not impacted). AT&T has targeted 100% site compliance by the second quarter of 1999. Similar to AT&T's Y2K program, the TCI program has a four-phased approach to determining the readiness of systems for Y2K, namely; assessment, remediation, testing and implementation. We anticipate substantial completion of all phases of TCI's program by the third quarter of 1999. TCI has received information that most critical systems, services or products supplied to TCI are either Y2K ready or are expected to be Y2K ready by mid-1999, and is also in the process of independently verifying such claims. Costs We have expended approximately $500 million since inception in 1997 on all phases of the Y2K project. This figure includes approximately $51 million of costs incurred during the first quarter of 1999, of which approximately $6 million represented capital spending for upgrading and replacing non-compliant computer systems and network components. More than half of these costs represent internal IT resources that have been redeployed from other projects and are expected to return to these projects upon completion of the Y2K project. We anticipate remaining Y2K costs for 1999, inclusive of approximately $103 million projected expenditures associated with completing the TCI program, will be approximately $250 million. This projection includes approximately $63 million of capitalized costs. Risk Assessment We have assessed our business exposure that would result from a failure of our Y2K program, as well as those of our suppliers, connecting carriers and major customers. Such failures would result in business consequences that could include failure to be able to serve customers, loss of network functionality, inability to render accurate bills, lost revenues, harm to the AT&T brand, legal and regulatory exposure, and failure of management controls. Although we believe that internal Y2K compliance will be achieved no later than December 31, 1999, there can be no assurance that the Y2K problem will not have a material adverse effect on our business, financial condition or results of operations. AT&T Form 10-Q - Part I Contingency Plans AT&T is in the process of establishing Y2K contingency plans to further mitigate Y2K risks. Specific examples of AT&T's contingency plan initiatives include the following: Plans are under way to position AT&T personnel on site at critical locations to monitor operations and manage increases in work and call volumes. Agreements are being negotiated with contractors and vendors to ensure the availability of on-site technical support. This coverage includes, but is not limited to, network centers and sites, customer-care centers and data centers. We are planning to proactively stage power, fuel, water, heating, air-conditioning and ventilation sources to support critical business operations and personnel requirements. Alternate procedures and processes are being developed to support critical customer functions, including alternative procedures for rapid repair, recovery and restoration of critical technology components by business resumption teams. Procedures to perform database backups, hardcopy printouts, data retention and recovery are being established for business critical data. OTHER MATTERS On March 4, 1999, AT&T Canada announced a definitive merger agreement with MetroNet Communications Corp. (MetroNet), Canada's largest facilities-based competitive local exchange carrier (CLEC). The merged entity will possess a national network to provide Canadian business customers local and long distance voice, data, Internet and electronic commerce services as well as wireless services through Cantel AT&T. The terms of the agreement outline a multi-stage transaction, which will result in MetroNet shareholders indirectly owning 69% of the merged company and AT&T indirectly owning 31%. AT&T will contribute its 33% voting interest in AT&T Canada Corp. (formerly AT&T Canada Long Distance Services), the remaining 67% of AT&T Canada Corp. currently held in trust and its 100% interest in ACC TelEnterprises Ltd. MetroNet will contribute all of its assets and operations. In addition, AT&T has agreed to purchase, or arrange for another entity to purchase, all of the shares currently held by MetroNet shareholders for the greater of at least C$75 per share or the then appraised fair market value. The exact timing will likely be partially dependent upon the future status of Canadian federal foreign ownership regulations. Consideration for the MetroNet shares will be paid in the form of cash, AT&T shares, or a combination thereof. The merger is subject to certain conditions, including the receipt of regulatory approval. The previously announced global venture between AT&T and BT has received approval from the European Commission. The global venture will combine the transborder assets and operations of each company. The venture will be equally owned by both companies when it begins operations. The receipt of certain additional regulatory approvals is required and the venture is expected to be completed by mid-1999. On March 31, 1999, AT&T completed the acquisition of certain assets of SmarTalk, a leading seller of prepaid calling cards, for $145 million. AT&T Form 10-Q - Part I On March 31, 1999, AT&T completed the sale of its Language Line Services over-the-phone interpretation business, which resulted in a pretax gain of $153 million. In the first quarter of 1999, @Home entered into a merger agreement with Excite, Inc. (Excite), a global Internet media company that offers consumers and advertisers comprehensive Internet navigation services with extensive personalization capabilities. Under the terms of the merger agreement, @Home will issue approximately 55 million shares of its common stock for all of the outstanding common stock of Excite based on an exchange ratio of 1.041902 shares of @Home's common stock for each share of Excite's common stock. As a result of the proposed merger, AT&T's economic interest in @Home would decrease from 38.8% to 26.5%. SUBSEQUENT EVENTS On May 6, 1999, AT&T and Microsoft Corp. (Microsoft) announced a series of agreements in which the companies will work together to accelerate the deployment of next-generation broadband and Interenet services to millions of American homes. Under the agreements, Microsoft will purchase $5 billion of AT&T securities, AT&T will increase its use of Microsoft's TV software platform in advanced set-top devices, and both companies will work together to showcase new digital cable services in two U.S. cities. AT&T currently has a commitment to use the Windows CE-based system in 5 million set-top devices. Under a non-exclusive agreement, AT&T will expand its Windows CE-based license to cover an additional 2.5 million to 5 million set-top devices. AT&T will also license Microsoft client/server software that supports a range of digital services. Microsoft will pay $5 billion for newly issued AT&T convertible trust preferred securities and warrants. The preferred securities, which will have a face value of $5 billion and be priced at $50 per security, will make a quarterly payment of 62.5 cents per security. The preferred securities, which will be convertible into 66.7 million shares of AT&T common stock at a price of $75 per share, will have a maturity of 30 years, and the conversion feature can be terminated, under certain conditions, after three years. The warrants will be exercisable in three years to purchase 40 million AT&T common shares at a price of $75 per share. AT&T will use the proceeds to fund working capital and capital expenditures. In addition, as part of these agreements, Microsoft will purchase the MediaOne Group Inc.'s (MediaOne) 29.9% interest in Telewest Communications plc through a tax-free exchange of Microsoft shares, subject to certain approvals. On May 4, 1999, AT&T and Comcast Corporation (Comcast) announced that they had reached 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 to 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. In addition, Comcast will receive an option from AT&T to purchase, over the next three years, additional cable systems with a total of approximately 1.25 million subscribers. The price for these additional systems is expected to be consideration having a value of approximately $5.7 billion subject to certain conditions. 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 announced on April 22, 1999, and other regulatory and legal approvals. AT&T Form 10-Q - Part I On May 4, 1999, AT&T and Lenfest Communications, Inc. (Lenfest) announced that they have signed an agreement for AT&T to acquire the remaining 50% interest in Lenfest not already owned by AT&T. Lenfest has approximately 1.5 million customers in the greater Philadelphia area. AT&T has agreed to a stock purchase of the remaining ownership interest, and expects to issue approximately 43 million shares of AT&T common stock to Lenfest once the transaction receives the necessary legal and regulatory approvals. On May 3, 1999, AT&T closed the previously announced merger with Vanguard Cellular Systems, Inc. (Vanguard). Under the agreement, each Vanguard shareholder was entitled to elect to receive either cash or AT&T stock in exchange for their Vanguard shares subject to the limitation that the overall consideration would consist of 50% AT&T stock and 50% cash. Because stock elections were made for a greater number of Vanguard shares, holders of Vanguard shares that elected cash (or did not elect) received $23 per share in cash for each Vanguard share; and, holders of Vanguard shares that elected stock received approximately 0.3134 shares of AT&T stock and approximately $10.95 per share in cash. Consummation of the merger resulted in the issuance of approximately 12.6 million AT&T shares and payment of $485 million in cash. In addition, Vanguard had approximately $550 million in debt, which has subsequently been repaid by AT&T. On April 30, 1999, AT&T completed the U.S. phase of the previously announced acquisition of IBM's Global Network business. Under the terms of the agreement, AT&T acquired the global network of IBM, and the two companies entered into outsourcing agreements with each other. IBM will outsource a significant portion of its global networking needs to AT&T. AT&T will outsource certain applications-processing and data-center-management operations to IBM. Customer contracts, assets and about 3,000 employees based in the U.S. have now been transferred to AT&T. IBM has assumed management of AT&T's data processing centers, which operate corporate information systems. The transfer of approximately 2,000 AT&T employees to IBM is expected to be completed in June 1999. The acquisition of IBM Global Network assets and the transfer of employees outside the U.S. will be completed in phases throughout the year as legal and regulatory requirements are met. Approval was received from the European Union in April 1999. On April 25, 1999, AT&T and BT announced they have entered into a definitive agreement to acquire a 30% stake in Japan Telecom, one of Japan's largest telecommunications companies, for $1.83 billion. Under the agreement, AT&T and BT will each subscribe for 15% of the equity interest in Japan Telecom and will jointly manage the investment. The global venture will use Japan Telecom's extensive network infrastructure to enhance its coverage and provide end-to-end services to customers. The agreement is expected to close in autumn of 1999. On April 22, 1999, AT&T announced that it had submitted an offer to purchase MediaOne for $87.375 per share in a combination of stock and cash worth approximately $58 billion. In addition, approximately $4.5 billion in MediaOne debt and preferred equity (to be converted into AT&T preferred equity) will be outstanding. AT&T indicated it will pay $30.85 per share in cash plus .95 shares of AT&T stock for every MediaOne share, and plans to issue approximately 626 million shares in the transaction. In addition, the cash portion of the AT&T AT&T Form 10-Q - Part I offer will be increased to offset up to a 10% decline from AT&T's closing stock price of $57 per share on April 21, 1999. This will maintain a value of $85 per share for every MediaOne share if AT&T's stock trades between $57 per share and $51.30 per share. On April 27, 1999, AT&T announced that it had received commitments for a $30 billion credit facility which would become effective at the consummation of the merger. On May 6, 1999, AT&T and MediaOne announced that the merger had been approved by the Board of Directors of MediaOne and a definitive merger agreement had been reached. Accordingly, in conjunction with MediOne's previous merger agreement with Comcast, Comcast received a $1.5 billion break-up fee. MediaOne received the funds to pay the break-up fee in the form of a note payable to AT&T. AT&T Form 10-Q - Part II PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders A special meeting of the shareholders of the registrant was held on February 17, 1999. (c) Holders of common shares voted at this meeting on the following director's proposals, which were set forth in the registrant's proxy statement/prospectus dated January 8, 1998. (i) To approve a charter amendment and the issuance of shares in connection with the merger of a subsidiary of AT&T Corp. with Tele-Communications, Inc.* % of Shares Voted % of Shares Outstanding For: 1,273,002,363 shares 98.81 72.59 Against: 8,983,412 shares 0.70 0.51 Abstain: 6,315,975 shares 0.49 0.36 (ii) In the event that any other matter may properly come before the meeting, or any adjournment thereof, the Proxy Committee is authorized, at their discretion, to vote the matter.** % of Shares Voted % of Shares Outstanding For: 891,707,698 shares 69.21 50.85 Against: 258,065,046 shares 20.03 14.71 Abstain: 138,529,006 shares 10.76 7.90 * Approval of this proposal required a majority of the outstanding common shares.** Approval of this proposal required a majority of the common shares voted. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule 99 Liberty Media Group financial results for the period ended March 31, 1999 (b) Reports on Form 8-K Form 8-K dated January 8, 1999 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits). Form 8-K/A dated January 8, 1999 was filed pursuant to Item 5 and Item 7. Form 8-K dated January 25, 1999 was filed pursuant to Item 5 and Item 7. Form 8-K dated March 9, 1999 was filed pursuant to Item 5 and Item 7. Form 8-K dated March 9, 1999 was filed pursuant to Item 5. Form 8-K dated March 19, 1999 was filed pursuant to Item 2 (Acquisitions or Dispositions of Assets) and Item 5 and Item 7. AT&T Form 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AT&T Corp. /s/ N. S. Cyprus ------------------------------ By: N. S. Cyprus Vice President and Controller (Principal Accounting Officer) Date: May 14, 1999 AT&T Form 10-Q Exhibit Index Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule 99 Liberty Media Group Financial Results for the Period Ended March 31, 1999 EX-12 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Form 10-Q For the Three Months Ended March 31, 1999 AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) Income from Continuing Operations Before Income Taxes ................................. $2,044 Less Interest Capitalized during the Period........................................... 25 Add Equity Investment Losses, net of distributions of Less than 50% Owned Affiliates.................... 70 Add Fixed Charges...................................... 289 Total Earnings from Continuing Operations Before Income Taxes and Fixed Charges.................................... $2,378 Fixed Charges Total Interest Expense Including Capitalized Interest.. $ 215 Interest Portion of Rental Expense..................... 57 Preferred Stock Dividend Requirement................... 17 Total Fixed Charges.................................. $ 289 Ratio of Earnings to Fixed Charges..................... 8.2 EX-27 3 ART. 5 FDS FOR 1ST QUARTER 10-Q
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 11,953 0 386 190 2,044 1,026 1,018 0 0 0 1,018 0.39 0.38
EX-99 4 LIBERTY MEDIA FINANCIAL STATEMENTS "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Combined Balance Sheets (unaudited) New Liberty Old Liberty (note 1) March 31, December 31, 1999 1998 ----------- ------------ Assets amounts in millions Current assets: Cash and cash equivalents $ 1,973 407 Marketable securities 3,217 124 Trade and other receivables, net 135 185 Prepaid expenses and committed program rights 287 263 ----------- ------------ Total current assets 5,612 979 ----------- ------------- Investments in affiliates, accounted for under the equity method, and related receivables (note 5) 17,093 3,079 Investment in Time Warner, Inc. ("Time Warner") (note 6) 8,072 7,083 Investment in AT&T Corp. ("AT&T") -- 3,556 Investment in Sprint Corporation ("Sprint") (notes 2 and 5) 4,663 2,446 Other investments and related receivables (note 7) 1,844 1,298 Property and equipment, at cost 127 935 Less accumulated depreciation 2 350 ----------- ------------ 125 585 ----------- ------------ Intangible assets 10,325 1,139 Less accumulated amortization 43 164 ----------- ------------ 10,282 975 ----------- ------------ Other assets, at cost, net of accumulated amortization 940 347 ----------- ------------ Total assets $ 48,631 20,348 =========== ============ (continued) Combined Balance Sheets, continued (unaudited) New Liberty Old Liberty (note 1) March 31, December 31, 1999 1998 ----------- ------------ Liabilities and Combined Equity amounts in millions Current liabilities: Accounts payable and accrued liabilities $ 141 416 Program rights payable 178 156 Current portion of debt 652 578 ----------- ------------ Total current liabilities 971 1,150 ----------- ------------ Debt (note 9) 1,843 2,318 Deferred income taxes (note 10) 10,525 4,458 Other liabilities 712 549 ----------- ------------ Total liabilities 14,051 8,475 ----------- ------------ Minority interests in equity of attributed subsidiaries 39 545 Obligation to redeem common stock (note 11) 9 17 Combined equity (note 11): Combined equity 33,505 6,896 Accumulated other comprehensive earnings, net of taxes 906 3,718 ----------- ------------ 34,411 10,614 Due to related parties 121 697 ----------- ------------ Total combined equity 34,532 11,311 ----------- ------------ Commitments and contingencies (note 12) Total liabilities and combined equity $ 48,631 20,348 =========== ============ See accompanying notes to combined financial statements. Combined Statements of Operations and Comprehensive Earnings (unaudited)
New Liberty Old Liberty (note 1) (note 1) One month Two months Three months ended ended ended March 31, 1999 February 28, 1999 March 31, 1998 -------------- ----------------- -------------- amounts in millions Revenue $ 71 282 351 Operating costs and expenses: Operating, selling, general and administrative 56 227 302 Stock compensation (note 11) (41) 183 158 Depreciation and amortization 53 47 54 ----- ----- ----- 68 457 514 ----- ----- ----- Operating income (loss) 3 (175) (163) Other income (expense): Interest expense (note 11) (13) (28) (18) Dividend and interest income 24 12 17 Share of losses of affiliates, net (note 5) (80) (66) (257) Minority interests in losses of attributed subsidiaries -- 4 13 Gain on dispositions, net -- 14 552 Gains on issuance of equity by subsidiaries (note 8) -- 389 38 Other, net -- -- 2 ----- ----- ----- (69) 325 347 ----- ----- ----- Earnings (loss) before income taxes (66) 150 184 Income tax benefit (expense) 8 (209) (76) ----- ----- ----- Net earnings (loss) $ (58) (59) 108 ===== ===== ===== Other comprehensive earnings, net of taxes: Foreign currency translation adjustments 12 (15) 1 Unrealized holding gains arising during the period, net of reclassification adjustments 894 971 348 ----- ----- ----- Other comprehensive earnings 906 956 349 ----- ----- ----- Comprehensive earnings $ 848 897 457 ===== ===== ===== See accompanying notes to combined financial statements.
"LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Combined Statement of Equity Three months ended March 31, 1999 (unaudited)
Accumulated other Due to comprehensive (from) Total Combined earnings, related combined equity net of taxes parties equity ------ ------------ ------- ------ amounts in millions Balance at January 1, 1999 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 ======= ======= ======= ======= Balance at March 1, 1999 33,515 -- 213 33,728 Net loss (58) -- -- (58) Foreign currency translation adjustments -- 12 -- 12 Unrealized gains on available-for-sale securities -- 894 -- 894 AT&T Liberty Media Group Tracking Stock issued for conversion of debentures 48 -- -- 48 Other transfers to related parties, net -- -- (92) (92) ------- ------- ------- ------- Balance at March 31, 1999 $33,505 906 121 34,532 ======= ======= ======= ======= 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 (unaudited)
New Liberty Old Liberty (note 1) (note 1) One month Two months Three months ended ended ended March 31, 1999 February 28, 1999 March 31, 1998 -------------- ----------------- -------------- amounts in millions (see note 4) Cash flows from operating activities: Net earnings (loss) $ (58) (59) 108 Adjustments to reconcile net earnings (loss) to net cash used by operating activities: Depreciation and amortization 53 47 54 Stock compensation (41) 183 158 Payments of stock compensation (1) (126) (44) Share of losses of affiliates, net 80 66 257 Deferred income tax expense 3 205 15 Intergroup tax allocation (12) -- 57 Minority interests in losses of attributed subsidiaries -- (4) (13) Gain on issuance of equity by subsidiaries -- (389) (38) Gain on disposition of assets, net -- (14) (552) Other noncash charges -- 9 1 Changes in current assets and liabilities, net of the effect of acquisitions and dispositions: Change in receivables 2 (19) (3) Change in prepaid expenses and committed program rights (5) (10) (23) Change in payables and accruals (32) 4 20 ------- ------- ------- Net cash used by operating activities (11) (107) (3) ------- ------- ------- Cash flows from investing activities: Cash paid for acquisitions -- -- (10) Capital expended for property and equipment (4) (21) (36) Cash balances of deconsolidated subsidiaries -- (53) -- Investments in and loans to affiliates and others (88) (45) (113) Purchases of marketable securities (3,217) (132) (84) Sales and maturities of marketable securities -- 34 79 Cash proceeds from dispositions 3 43 291 Other, net 4 (9) 21 ------- ------- ------- Net cash provided (used) by investing activities (3,302) (183) 148 ------- ------- -------
(continued) Combined Statements of Cash Flows, continued (unaudited)
New Liberty Old Liberty (note 1) (note 1) One month Two months Three months ended ended ended March 31, 1999 February 28, 1999 March 31, 1998 -------------- ----------------- -------------- amounts in millions (see note 4) Cash flows from financing activities: Borrowings of debt 495 156 510 Repayments of debt (448) (148) (257) Payments for call agreements -- -- (140) Cash transfers from related parties (80) 132 (226) Repurchase of subsidiary preferred stock -- (45) -- Other, net -- (1) (9) ------- ------- ------- Net cash provided (used) by financing activities (33) 94 (122) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (3,346) (196) 23 Cash and cash equivalents at beginning of period 5,319 407 224 ------- ------- ------- Cash and cash equivalents at end of period $ 1,973 211 247 ======= ======= ======= See accompanying notes to combined financial statements.
"LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Notes to Combined Financial Statements March 31, 1999 (unaudited) (1) Basis of Presentation The accompanying combined financial statements include the accounts of the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that are attributed to Liberty Media Group, as defined below. On March 9, 1999, AT&T acquired TCI in a merger transaction (the "AT&T Merger"). See note 2. The AT&T Merger has been accounted for using the purchase method. 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 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 648 423 Investments in affiliates 3,971 17,073 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 1,586 Property and equipment, net 532 125 Intangibles and other assets 817 11,273 -------- -------- $ 22,034 47,312 ======== ======== (continued) Liabilities and Equity Current liabilities $ 1,317 1,012 Debt 2,319 1,845 Deferred income taxes 5,369 9,931 Other liabilities 297 748 -------- -------- Total liabilities 9,302 13,536 -------- -------- Minority interests in equity of attributed subsidiaries 450 39 Obligation to redeem common stock 9 9 Equity 12,273 33,728 -------- -------- $ 22,034 47,312 ======== ======== 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 19,121 --------------- Initial total combined equity of New Liberty subsequent to the AT&T Merger $ 33,728 =============== At March 31, 1999, Liberty Media Group consisted principally of the following: (i) 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, (ii) AT&T's assets and businesses engaged in electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing, (iii) certain of AT&T's assets and businesses engaged in international cable, telephony and programming businesses and (iv) AT&T's holdings in a new class of tracking stock of Sprint (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. The accompanying interim combined financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These combined financial statements should be read in conjunction with the combined financial statements and notes thereto contained in AT&T's Current Report on Form 8-K filed on March 22, 1999. (continued) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period amounts have been reclassified for comparability with the 1999 presentation. (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 separate shares of new targeted stock of AT&T. Each share of TCI's then outstanding Liberty Media Group Series A Tracking Stock was converted into one share of a newly created class of AT&T common 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 one share of a newly created class of AT&T common 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 0.52 of a share 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 0.52 of a share 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 Group was converted into 56.25 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 0.590625 of a share 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 one-tenth (1/10th) of a vote for each share of AT&T Liberty Media Group Class A Tracking Stock held, 1 vote per share of AT&T Liberty Media Group Class B Tracking Stock held and 1 vote per share of AT&T Common Stock held. 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., 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 (continued) consummation of the AT&T Merger, through a new tax sharing agreement between the Company and AT&T, the Company 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 the Company in exchange for approximately $176 million in cash. Certain agreements entered into at the time of the AT&T Merger provide, among other things, for preferred vendor status to the Company for digital basic distribution on AT&T's systems of new programming services created by the Company 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. Pursuant to a proposed final judgment (the "Final Judgment") agreed to by TCI, 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, if entered by the United States District Court for the District of Columbia, 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. The Final Judgment would provide 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 would also prohibit the acquisition by Liberty Media Group of additional Sprint Securities, with certain exceptions, without the prior written consent of the DOJ. (3) 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. (continued) The basic and diluted loss attributable to Liberty Media Group common stockholders per common share for the one month ended March 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 computation of weighted average shares outstanding because their inclusion would be anti-dilutive. At March 31, 1999, there were 90 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 March 31, 1999. One month ended March 31, 1999 amounts in millions, except per share amounts Basic and diluted EPS: Loss attributable to common stockholders $ 58 ============== Weighted average common shares 597 Basic and diluted loss per share attributable to common stockholders $ 0.10 ============== (4) Supplemental Disclosures to Combined Statements of Cash Flows Cash paid for interest was $16 million for the one month period ended March 31, 1999, $32 million for the two month period ended February 28, 1999 and $21 million for the three months ended March 31, 1998. Cash paid for income taxes for the one month period ended March 31, 1999, the two month period ended February 28, 1999 and the three months ended March 31, 1998 was not material. New Liberty Old Liberty One month Two months Three months ended ended ended March 31, February 28, March 31, 1999 1999 1998 amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ -- -- 15 Net liabilities assumed -- -- (2) Gain in connection with the issuance of shares by attributed subsidiary -- -- (3) -------- -------- -------- Cash paid for acquisitions $ -- -- 10 ======== ======== ======== (continued) Liberty 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). The effects of changing the method of accounting for Liberty's ownership interests in TV Guide as of March 31, 1999 from the consolidation method to the equity method are summarized below (amounts in millions): Assets (other than cash and cash equivalents) reclassified to investments in affiliates $ (572) Liabilities reclassified to investments in affiliates 190 Minority interests in equity of subsidiaries reclassified to investments in affiliates 63 Gain on issuance of equity by subsidiary 372 Decrease in cash and cash equivalents $ 53 =========== 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 =========== (5) Investments in Affiliates Liberty Media Group has various investments accounted for under the equity method. The following table includes Liberty Media Group's carrying amount of the more significant investments at March 31, 1999 and December 31, 1998: New Liberty Old Liberty March 31, December 31, 1999 1998 amounts in millions USA Networks, Inc. ("USAI") and related investments 2,602 1,042 Telewest Communications plc ("Telewest") 2,048 515 Discovery Communications, Inc. ("Discovery") 3,684 49 Fox/Liberty Networks LLC ("Fox Sports") 1,430 (1) TV Guide 1,776 -- QVC, Inc. ("QVC") 2,521 197 Flextech plc ("Flextech") 759 320 Other foreign investments (other than Telewest and Flextech) 1,498 346 Other 775 611 ------ ------ 17,093 3,079 ====== ====== (continued) The following table reflects Liberty Media Group's share of earnings (losses) of affiliates: New Liberty Old Liberty One month Two months Three months ended ended ended March 31, February 28, March 31, 1999 1999 1998 amounts in millions USAI and related investments $ 3 10 9 Telewest (25) (38) (30) Discovery (16) (8) (9) Fox Sports (9) (1) (36) TV Guide (4) -- -- QVC (1) 13 11 Flextech (5) (5) (6) Other foreign investments (15) (22) (24) PCS Ventures -- -- (155) Other (8) (15) (17) ------------ ------------ ------------ $ (80) (66) (257) ============ ============ ============ Summarized unaudited combined financial information for affiliates is as follows: New Liberty Old Liberty One month Two months Three months ended ended ended March 31, February 28, March 31, 1999 1999 1998 amounts in millions Combined Operations Revenue $ 993 2,341 2,243 Operating expenses (849) (1,894) (2,213) Depreciation and amortization (124) (353) (384) ------------ ------------ ------------ Operating income (loss) 20 94 (354) Interest expense (37) (281) (281) Other, net (89) (127) (71) ------------ ------------ ------------ Net loss $ (106) (314) (706) ============ ============ ============ (continued) USAI owns and operates businesses in network and television production, television broadcasting, electronic retailing, ticketing operations, and internet services. At March 31, 1999, Liberty Media Group directly and indirectly held 29.6 million shares of USAI's common stock. Liberty Media Group also held shares directly in certain subsidiaries of USAI which are exchangeable into 39.5 million shares of USAI common stock. Liberty Media Group's direct ownership of USAI is currently restricted by 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 Liberty Media Group's shares of such subsidiary stock, as well as certain securities owned by Universal Studios, Inc. and certain of its affiliates, into USAI common stock were completed at March 31, 1999, Liberty Media Group would own 69.1 million shares or approximately 21% (on a fully-diluted basis) of USAI common stock. USAI's common stock had a closing market price of $35-13/16 per share on March 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 it 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 a 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 the Universal Transaction due primarily to Liberty Media Group's intention at such time to purchase additional equity interests in USAI. In connection with the Universal Transaction, Liberty Media Group was granted an antidilutive right with respect to any future issuance of USAI 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 March 31, 1999 Liberty Media Group indirectly owned 463 million of the issued and outstanding Telewest ordinary shares. The reported closing price on the London Stock Exchange of Telewest ordinary shares was (pound)2.69 ($4.34) per share at March 31, 1999. Liberty Media Group and The News Corporation Limited ("News Corp.") each hold 50% of Fox Sports 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 Sports. During 1998, Liberty Media Group made the determination to provide funding to Fox Sports based on specific transactions consummated by Fox Sports. Consequently, Liberty Media Group's share of losses of Fox Sports for the three months ended March 31, 1998 includes previously unrecognized losses of Fox Sports of approximately $36 million. Losses for Fox Sports were not recognized in prior periods due to the fact that Liberty Media Group's investment in Fox Sports was less than zero. The class A common stock of TV Guide is publicly traded. At March 31, 1999, Liberty Media Group held 29 million shares of TV Guide Class A (continued) common stock and 37 million shares of TV Guide Class B common stock. 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 $36-7/8 per share on March 31, 1999. Flextech develops and sells a variety of television programming in the UK. At March 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 (pound)7.91 ($12.75) per share at March 31, 1999. 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 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 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 and Liberty Media Group's less than 1% voting interest in Sprint, 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. The $14 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 an 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. (continued) (6) Investment in Time Warner Liberty Media Group holds shares of a series of Time Warner's series common stock with limited voting rights (the "TW Exchange Stock") that are convertible into an aggregate of 114 million shares of Time Warner common stock. As security for borrowings under one of its credit facilities, Liberty Media Group has pledged a portion of its TW Exchange Stock. At March 31, 1999 such pledged portion had an aggregate fair value of approximately $3.1 billion. On June 24, 1997 Liberty Media Group granted Time Warner an option, expiring October 10, 2002, to acquire the business of Southern Satellite Systems, Inc. ("Southern") and certain of its subsidiaries (together with Southern, the "Southern Business") through a purchase of assets (the "Southern Option"). Liberty Media Group received shares of TW Exchange Stock which are convertible into 6.4 million shares of Time Warner common stock valued at $306 million in consideration for the grant. In September 1997, Time Warner exercised the Southern Option. Pursuant to the Southern 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 transactions in the first quarter of 1998. (7) Other Investments On July 17, 1998, Liberty Media Group acquired 21.4 million shares of restricted stock of General Instruments Corporation ("GI") in exchange for (i) certain of the assets of NDTC's set-top authorization business, (ii) the license of certain related software to GI, (iii) a $50 million promissory note from Liberty Media Group to GI and (iv) a nine year revenue guarantee from NDTC in favor of GI. In connection therewith, NDTC also entered into a service agreement pursuant to which it will provide certain postcontract services to GI's set-top authorization business. The 21.4 million shares of GI common stock are, in addition to other transfer restrictions, restricted as to their sale by Liberty Media Group for a three year period, and represent approximately 12% of the outstanding common stock of GI at March 31, 1999. Liberty Media Group recorded its investment in such shares at fair value which included a discount attributable to the above-described liquidity restriction. Liberty Media Group carries its investment in such shares at the lower of cost or net realizable value. Management of Liberty Media Group estimates that the market value, calculated utilizing 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 other investments aggregated $2,228 million and $1,743 million at March 31, 1999 and December 31, 1998, respectively. No independent external appraisals were conducted for those assets. (continued) (8) Acquisitions and Dispositions 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 direct and indirect 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 tax expense 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 January 12, 1998, Liberty Media Group acquired from a minority shareholder of TV Guide (formerly known as United Video Satellite Group, Inc. ("UVSG")) 24.8 million shares of UVSG Class A common stock in exchange for 12.7 million shares of TCI Ventures Group Series A Stock and 7.3 million shares of Liberty Media Group Series A Tracking Stock. The aggregate value assigned to such shares issued was based upon the market value of such shares at the time the transaction was announced. 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 common stock in such transaction, Liberty Media Group recorded a $346 million 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. A unit of News Corp. received $800 million in cash and 60 million shares of UVSG's stock, including 22.5 million shares of its Class A common stock and 37.5 million shares of its Class B common stock. 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 the dilution of Liberty Media Group's ownership interest in TV Guide, Liberty Media Group recognized a gain of $372 million (before deducting deferred income tax expense of $147 million). Upon consummation, Liberty Media Group began accounting for its interest in TV Guide under the equity method of accounting. (continued) (9) Debt Debt is summarized as follows: New Liberty Old Liberty March 31, December 31, 1999 1998 amounts in millions Bank credit facilities $ 2,094 2,029 Convertible Subordinated Debentures -- 229 4-1/2% Convertible Subordinated Debentures 306 345 Other 95 293 --------- --------- $ 2,495 2,896 ========= ========= At March 31, 1999, Liberty Media Group had approximately $531 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 and encumbrances, acquisitions, dispositions, guarantees and dividends. 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 its bank credit facilities. As collateral for borrowings under one of Liberty Media Group's credit facilities, the banks lend against certain assets designated by Liberty Media Group (the "Designated Assets"). The carrying amount of the Designated Assets as of March 31, 1999 was $6.6 billion. Recourse to the banks for payment of Liberty Media Group's obligations under this facility is limited solely to the Designated Assets. Also, as security for borrowings under one of its credit facilities, Liberty Media Group has pledged a portion of its TW Exchange Stock. See note 6. Certain of Liberty Media Group's bank credit facilities have credit agreements which provide for a three month interest reserve to be held by an administrative agent. Such interest reserves amounted to $17 million as of March 31, 1999 and December 31, 1998 and are included in other assets in the accompanying combined balance sheets. Liberty Media Group believes that the carrying value of Liberty Media Group's debt approximated its fair value at March 31, 1999. (10) 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"). The income tax provision for Liberty Media Group is calculated on a separate return basis for those items in the consolidated tax return of AT&T which are attributable to Liberty Media Group. (continued) Under the AT&T Tax Sharing Agreement, Liberty Media Group will receive a cash reimbursement 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 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 income tax benefit. In periods when Liberty Media Group generates taxable income, AT&T has agreed to satisfy such tax liability on Liberty Media Group's behalf. The reduction of such computed tax liabilities will be accounted for by Liberty Media Group as a credit to combined equity. The total amount of future 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 income tax return, subject to IRS adjustments. To the extent AT&T utilizes existing net operating losses of entities attributed to Liberty Media Group, such amounts will be accounted for by Liberty Media Group as a reduction of combined equity. 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. 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. The 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. (11) Combined Equity Stock Repurchase and Issuances In conjunction with a stock repurchase program or similar transaction, the Company may elect to sell put options on its own common stock. Proceeds from any sales of puts with respect to the Company's tracking stocks 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 the Company's tracking stock is reflected as an "obligation to redeem common stock" in the accompanying combined balance sheets. On March 10, 1999, Liberty Media Group announced that it would redeem on April 8, 1999 all of its outstanding 4-1/2% convertible subordinated debentures due February 15, 2005. (See note 9). The debentures are convertible into shares of AT&T Liberty Media Group Class A Tracking Stock at a conversion price of $47.07, or 21.24 shares per $1,000 principal amount. As of March 31, 1999 certain holders of the debentures had exercised their rights to convert their debentures and 1,001,806 shares of AT&T Liberty Media Group Tracking Stock were issued to such holders and Liberty Media Group's outstanding debentures were reduced by $49 million. (continued) During the three months ended March 31, 1998, pursuant to a stock repurchase program, Liberty Media Group repurchased 155,450 shares of TCI Ventures Group Stock at an aggregate cost of $2.4 million. Stock Options and Stock Appreciation Rights Liberty Media Group records stock compensation expense relating to restricted stock awards, options and/or stock appreciation rights on certain TCI common stock (collectively, "Awards") granted by TCI, prior to the AT&T Merger, to certain TCI employees and/or directors who are involved with Liberty Media Group. Estimated compensation relating to stock appreciation rights ("SARs") has been recorded through March 31, 1999, and is subject to future adjustment based upon vesting and market value, and ultimately, on the final determination of market value when such rights are exercised. As allowed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), Liberty Media Group continues to account for stock based compensation pursuant to Accounting Principles Board Opinion No. 25, which Liberty Media Group estimates that compensation expense would not be materially different under Statement 123. The payable arising from the compensation related to the Awards was included in the amounts due to related parties in Old Liberty and is included in other liabilities in New Liberty in the accompanying combined balance sheets. Transactions with TCI and Other Related Parties Certain TCI corporate general and administrative costs are charged to Liberty Media Group. Included in operating expenses in the accompanying combined statements of operations and comprehensive earnings, during the one month period ended March 31, 1999, the two month period ended February 28, 1999 and the three months ended March 31, 1998, Liberty Media Group was allocated less than $1 million, $2 million and $3 million, respectively, in corporate general and administrative costs by TCI. Certain subsidiaries attributed to Liberty Media Group produce and/or distribute sports and other programming and other services to cable distribution operators (including TCI) and others. Charges to TCI are based upon customary rates charged to others. Amounts included in revenue for services provided to TCI were $18 million, $43 million and $65 million for the one month period ending March 31, 1999, the two month period ending February 28, 1999 and the three months ended March 31, 1998, respectively. Entities included in Liberty Media Group lease satellite transponder facilities from NDTC. In connection with the AT&T Merger, NDTC is no longer included in the combined financial results of Liberty Media Group. Charges by NDTC for such arrangements and other related operating expenses for the one month ended March 31, 1999 aggregated $2 million and is included in operating expenses in the accompanying combined statements of operations and comprehensive earnings. During 1999 and 1998, entities attributed to Liberty Media Group made marketing support payments to entities attributed to TCI. Charges by TCI for such arrangement was less than $1 million for each of the one month period ended March 31, 1999, the two month period ended February 28, 1999 and the three months ended March 31, 1998. (continued) A subsidiary of Liberty Media Group issued preferred stock in connection with a previous acquisition which is convertible at the option of the holders into 1,084,056 of TCI Group Series A Common Stock beginning in April 1999 or sooner in the event of a change in control of TCI. In July 1998, Liberty Media Group entered into an equity swap transaction with a commercial bank, which provided Liberty Media Group with the right but not the obligation to acquire 1,084,056 shares of TCI Group Series A Stock for approximately $45 million on or before April 19, 1999. In the event Liberty Media Group did not exercise its right to acquire such shares, any difference between the counterparty's cost and the market value of the shares on the settlement date would be settled in cash or shares of TCI Ventures Group Series A Stock at Liberty Media Group's option. Liberty Media Group exercised its right under this equity swap transaction and used the TCI Group Series A Stock to satisfy the exchange requirements of the aforementioned preferred stock during the two months ended February 28, 1999. In connection with such transaction, Liberty Media Group recorded an $18 million decrease to combined equity for the difference between the exercise price of the right and the carrying amount of the preferred stock. Prior to the AT&T Merger, a limited liability company owned by Dr. John C. Malone (Liberty Media Group's Chairman) acquired, from certain 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 is payable at any time without penalty and is personally guaranteed by Dr. Malone. Due to Related Parties The components of "Due to related parties" are as follows: New Liberty Old Liberty March 31, December 31, 1999 1998 amounts in millions Note payable to TCI, including accrued interest $ 83 141 Intercompany account 38 556 ----------- ----------- $ 121 697 =========== =========== The amount outstanding at March 31, 1999 under note payable to TCI bears interest at 6.5% per annum and was repaid during the second quarter of 1999. The non-interest bearing intercompany account includes certain income tax and stock compensation allocations (in Old Liberty) that are to be settled at some future date. All other amounts included in the intercompany account are to be settled within thirty days following notification. (continued) (12) Commitments and Contingencies Encore Media 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 March 31, 1999, these agreements require minimum payments aggregating approximately $779 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)88 million ($142 million) and subject to certain restrictions, a standby credit facility of (pound)30 million ($48 million). As of March 31, 1999, the Principal Joint Venture had borrowed (pound)28 million ($45 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 Tele-Communications International, Inc. 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 March 31, 1999, the Guaranteed Obligations aggregated approximately $376 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. On September 21, 1998, Hurricane Georges struck Puerto Rico and caused considerable property damage to the area in general, including the Liberty Media Group's Puerto Rico subsidiary's cable television systems. The Puerto Rico Subsidiary's cable television systems represent $8 million of Liberty Media Group's revenue for the three months ended March 31, 1999. As of March 31, 1999, approximately 87% of the Puerto Rico Subsidiary's pre-hurricane basic customers were receiving cable television services. Although there can be no assurance, the Puerto Rico Subsidiary estimates that it will regain 100% of its pre-hurricane customer base by June 30, 1999. The loss of revenue from September 21, 1998 through March 31, 1999 has been estimated at $10 million. In addition, the estimated loss of revenue for the second quarter of 1999 is approximately $1 million. The Puerto Rico Subsidiary's business interruption insurance covered the first $3 million in lost revenue. (continued) The Puerto Rico Subsidiary has also claimed coverage for business interruption under a secondary insurance carrier. Such policy, which covers the Puerto Rico Subsidiary's parent company's subsidiaries, carries a deductible of $2.5 million. This insurance claim is subject to approval by such insurance carrier and accordingly, no assurance can be given that amounts claimed will be paid in their entirety. However, in the event such claims are collected the overall impact in lost revenues for the Puerto Rico Subsidiary as a result of Hurricane Georges will not exceed $2.5 million. 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. During the three months ended March 31, 1999, Liberty Media Group, in conjunction with AT&T, continued its enterprise-wide, comprehensive efforts to assess and remediate its computer systems and related software and equipment to ensure such systems, software and equipment recognize, process and store information in the year 2000 and thereafter. AT&T's year 2000 remediation efforts include an assessment of Liberty Media Group's most critical systems, equipment, and facilities. AT&T also continued its efforts to verify the year 2000 readiness of Liberty Media Group's significant suppliers and vendors and continued to communicate with significant business partners and affiliates to assess such partners and affiliates' year 2000 status. Failure to achieve year 2000 compliance by Liberty Media Group, its significant business partners and affiliates with which it has a relationship could negatively affect Liberty Media Group's ability to conduct business for an extended period. There can be no assurance that all of Liberty Media Group's computer systems and related software will be fully year 2000 compliant; in addition, other companies on which Liberty Media Group's computer systems and related software and operations rely may or may not be fully compliant on a timely basis, and any such failure could have a material adverse effect on Liberty Media Group's financial position, results of operation or liquidity. -----END PRIVACY-ENHANCED MESSAGE-----