FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _________ to _________
Commission File Number 1-1105
AT&T CORP.
A NEW YORK I.R.S. EMPLOYER
CORPORATION NO. 13-4924710
32 Avenue of the Americas, New York, New York 10013-2412
Telephone Number 212-387-5400
Securities registered pursuant to Section 12(b) of the Act: See attached
SCHEDULE A.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes....x.... No........
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not con-tained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At February 26, 1999, the aggregate market value of voting stock held by
non-affiliates was $143,517,069,605.
At February 26, 1999, 1,746,368,779 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's annual report to shareholders for the year
ended December 31, 1998 (Part II)
(2) Portions of the registrant's definitive proxy statement dated March 25,
1999 issued in connection with the annual meeting of shareholders (Part III)
SCHEDULE A
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Shares # New York, Boston, Chicago,
(Par Value $1 Per Share) #### Philadelphia and Pacific
# Stock Exchanges
Class A Liberty Media Group Tracking #
Shares (common, Par Value $1 Per Share) #
#### New York Stock Exchange
Class B Liberty Media Group Tracking #
Shares (common, Par Value $1 Per Share) #
Thirty-Six Year 4-3/8% Debentures, #
due May 1, 1999 #
#
Thirty-Three Year 6% Debentures, #
due August 1, 2000 #
#
Thirty-Five Year 5-1/8% Debentures, #
due April 1, 2001 #
#
Ten Year 7-1/8% Notes, due January 15, 2002 #
#
Ten Year 6-3/4% Notes, due April 1, 2004 #
#
Ten Year 7% Notes, due May 15, 2005 #
#
Twelve Year 7-1/2% Notes, due June 1, 2006 ###### New York Stock Exchange
#
Twelve Year 7-3/4% Notes, due March 1, 2007 #
#
Thirty Year 8-1/8% Debentures, #
due January 15, 2022 #
#
Medium Term Note 8.2, due February 15, 2005 #
#
Thirty Year 8.35% Debentures, #
due January 15, 2025 #
#
Thirty-Two Year 8-1/8% Debentures, #
due July 15, 2024 #
#
Forty Year 8-5/8% Debentures, #
due December 1, 2031 #
TABLE OF CONTENTS
PART I
Item Description Page
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 39
4. Submission of Matters to a Vote of Security-Holders . . . . . . . 41
PART II
Description
5. Market for Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 42
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 42
8. Financial Statements and Supplementary Data . . . . . . . . . . . . 42
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . 42
PART III
Description
10. Directors and Executive Officers of the Registrant . . . . . . . . 42
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 42
12. Security Ownership of Certain Beneficial Owners and Management . . 42
13. Certain Relationships and Related Transactions . . . . . . . . . . 42
PART IV
Description
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . 43
See page 41 for "Executive Officers of the Registrant."
PART I
ITEM 1. BUSINESS.
GENERAL
AT&T Corp. was incorporated in 1885 under the laws of the State of New
York and has its principal executive offices at 32 Avenue of the Americas, New
York, New York 10013-2412 (telephone number 212-387-5400).
On March 9, 1999, AT&T completed the acquisition of
Tele-Communications, Inc. (TCI) in a merger. In the merger, AT&T acquired all
the business and assets of the TCI Group, which consists primarily of TCI's
domestic cable and telecommunications operations, as well as TCI's interest in
At Home Corporation (@Home) in exchange for approximately 439 million shares of
Common Stock. AT&T Common Stock will continue to represent an interest in the
business and assets of the historical AT&T together with those assets acquired
in the merger (now referred to as AT&T Broadband and Internet Services).
In addition, at the time of the merger TCI combined Liberty Media
Group, its programming arm, and TCI Ventures Group, its technology investments
unit, to form the new Liberty Media Group. The shareowners of the new Liberty
Media Group were issued separate tracking stock rather than traditional Common
Stock by AT&T Corp. in exchange for the shares held in Liberty Media Group and
TCI Ventures Group. Under the tracking stock arrangement, the Liberty Media
Group's earnings and losses will be excluded from earnings available to the
holders of Common Stock and the Liberty Media Group's businesses and assets will
be managed by a separate operating Board of Directors. As a result, although the
Liberty Media Group is wholly owned by AT&T Corp., it is accounted for as an
equity investment in the consolidated financial statements of AT&T Corp. since
AT&T does not have a "controlling financial interest" in the Liberty Media
Group.
Consequently, throughout this document, references to AT&T or the
Company refer to the businesses, results or assets attributable to the Common
Stock; references to Liberty Media refer to the businesses, results or assets
attributable to the Liberty Media Group tracking stock; and references to AT&T
Corp. refer to the combined legal entity. References herein to AT&T Common
Shares, Common Shares, AT&T Common Stock or Common Stock excludes the Liberty
Media Group tracking stock.
AT&T
AT&T is among the world's communications leaders, providing voice, data
and video communications services to large and small businesses, consumers and
government entities. AT&T and its subsidiaries furnish domestic long distance,
international long distance, regional, local and wireless telecommunications
services, cable television and Internet communications transmission services.
AT&T also provides billing, directory, and calling card services to support its
communications business.
AT&T's primary lines of business are business services; consumer
services; AT&T Broadband and Internet Services; and wireless services. In
addition, AT&T's other lines of business include local services, which includes
Teleport Communications Group Inc. (TCG); network management and professional
services through AT&T Solutions; international operations and ventures; and AT&T
WorldNet services.
Internet users can access information about AT&T and its services at
http://www.att.com. Our web site is not a part of this Form 10-K.
DEVELOPMENT OF BUSINESS
Separation
During 1998 AT&T continued the transformation of its business begun in
1996 when AT&T separated its business into three publicly held stand-alone
companies: the current AT&T, focused on communications and information services;
Lucent Technologies Inc. (Lucent), focused on communications systems and
technology; and NCR Corporation (NCR), focused on transaction-intensive
computing. AT&T distributed to its shareowners all of the shares AT&T owned of
Lucent on September 30, 1996 and all of the shares of NCR on December 31, 1996.
Asset Sales
Following the separation, AT&T focused on its core businesses and
disposed of assets and businesses that were not strategic. In October 1996, AT&T
completed the sale of its majority interest in AT&T Capital Corporation (leasing
services business). In 1997, AT&T completed the sales of AT&T Skynet (satellite
services), AT&T Tridom (satellite data and video communications services), and
its submarine systems business, as well as its investment in DirectTV
(direct-broadcast television service and DSS equipment business). In addition,
in 1998 AT&T sold AT&T Universal Card Services, Inc. (credit card services
business), American Transtech Inc. (customer care services), its investment in
LIN Television Corporation (commercial television broadcasting), and its
investment in SmarTone Telecommunications Holdings Limited (a wireless joint
venture in Hong Kong).
TCG Acquisition
During 1998, AT&T engaged in a series of transactions to
further transform the Company from one dominated by a single product, domestic
long distance telecommunications, to a fully integrated, any distance, broadband
communications service provider. In July 1998, AT&T completed the merger with
TCG pursuant to which each share of TCG was exchanged for 0.943 of an AT&T
Common Share in an all-stock transaction. TCG was the largest competitive local
exchange carrier (CLEC) in the United States, offering comprehensive
telecommunications services in major metropolitan markets throughout the United
States. TCG provides a broad array of telecommunications services, including
basic local exchange services, enhanced switch services, Internet services,
disaster avoidance services and video channel transmission services, aimed at
addressing high-volume business customers.
TCI Acquisition
On June 24, 1998, AT&T announced that it had agreed to acquire TCI
through a merger. In the merger, which closed on March 9, 1999, AT&T issued
0.7757 of an AT&T Common Share for each share of TCI Group Series A tracking
stock and 0.8533 of an AT&T Common Share for each share of TCI Group Series B
tracking stock. In addition, AT&T Corp. issued one share of newly created
Liberty Media Group Class A or Class B tracking stock for each outstanding TCI
Liberty Media Group Class A or Class B tracking stock and 0.52 share of newly
created Liberty Media Group Class A or Class B tracking stock for each
outstanding TCI Ventures Group Class A or Class B tracking stock. In the merger,
AT&T also exchanged AT&T Common Shares or Liberty Media Group tracking stock for
shares of TCI convertible preferred stock and made a cash payment in lieu of any
fractional AT&T Common Share or Liberty Media Group tracking share. In total,
AT&T issued approximately 439 million AT&T Common Shares.
BT Joint Venture
On July 26, 1998 AT&T and British Telecommunications plc (BT) announced
that they will create a global venture to serve the communications needs of
multinational companies and the international calling needs of businesses around
the world. The venture, which will be owned equally by AT&T and BT, will combine
transborder assets and operations of each company, including their existing
international networks, all of their international traffic, all of their
transborder products for business customers -- including an expanding set of
Concert services -- and AT&T and BT's multinational accounts in selected
industry sectors. The formation of the venture is subject to certain conditions,
but is expected to be completed by mid-1999.
Vanguard Acquisition
On October 5, 1998, AT&T announced that it had signed a definitive
merger agreement to purchase Vanguard Cellular Systems, Inc. (Vanguard) in a
stock and cash transaction valued at approximately $1.5 billion, including
approximately $600 million in debt. Under the terms of the agreement, each share
of Vanguard stock would be exchanged, at each shareholder's option, for either
$23.00 in cash or 0.3987 of an AT&T Common Share, subject to the limitation that
the overall consideration will consist of 50% cash and 50% AT&T stock. The
merger is subject to various closing conditions, including the approval by
Vanguard shareholders. The transaction is expected to close in the first half of
1999.
IBM Global Network Acquisition
On December 8, 1998, AT&T announced it had agreed to acquire International
Business Machines Corporation's (IBM) Global Network business for $5 billion in
cash, and the two companies will enter into outsourcing contracts 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. The IBM Global Network business AT&T will acquire
serves the networking needs of several hundred large global companies, tens of
thousands of mid-sized businesses and more than one million individual Internet
users in 59 countries. About 5,000 IBM employees will join AT&T as part of the
acquisition. IBM's Global Network has more than 1,300 dial-up points of presence
and dedicated access from more than 850 cities in 59 countries. The Global
Network offers business customers innovative services and worldwide operations
and support, including in-country, native-language support personnel. AT&T
expects the acquisition to conclude by mid-1999, following clearance by
regulatory authorities.
Cable Operator Joint Ventures
On January 8, 1999, AT&T announced that it had reached agreements with
five TCI affiliates to form separate joint ventures to offer customers advanced
communications services. AT&T expects to finalize joint ventures with Bresnan
Communications, Falcon Cable TV, Insight Communications, InterMedia Partners and
Peak Cablevision in early 1999, and begin commercial operations in the year
2000. The joint ventures will offer customers new communications services that
feature multiple phone lines per household, along with options such as
conference calling, call waiting, call forwarding and individual message centers
for family members.
AT&T, which expects to own 51 percent of each of these joint ventures,
will have long-term exclusive rights to offer communications services over the
systems of each of the five operators in return for one-time payments to be made
when the systems meet certain performance milestones. AT&T expects the total of
these payments to be in the tens of millions of dollars. In addition, the
operators will receive ongoing monthly telephony subscriber payments, with
guaranteed minimum penetration levels.
Time Warner Joint Venture
On February 1, 1999 AT&T and Time Warner, Inc. announced the formation
of a joint venture to offer AT&T-branded cable telephony service to residential
and small business customers over Time Warner's existing cable television
systems in 33 states. The two companies also agreed to jointly market
communications services and to develop other broadband communications services,
such as video telephony. Under the terms of the agreement, AT&T will own 77.5
percent of the joint venture and Time Warner will own 22.5 percent. The joint
venture will have exclusive rights to offer residential and small business
telephony services over Time Warner's cable systems for 20 years. In return, the
joint venture will make payments (estimated at $300 million) to Time Warner on a
per home passed basis as systems are upgraded. In addition, the joint venture
will pay a monthly fee per telephony subscriber, with guaranteed minimum
penetration levels. AT&T will fund the venture's negative cash flow and be
responsible for the venture's capital expenditures, including the cost of
powering the system, and, as customers sign up for the service, the cost of
adding communications equipment to cable nodes and in people's homes. The
companies said they expect to finalize their agreement within 90 days and to
close the joint venture thereafter. The transaction is subject to certain
conditions, including definitive documentation and various approvals.
MetroNet Merger
On March 4, 1999, AT&T Canada Corp. announced that it had agreed to
merge with MetroNet Communications Corp., Canada's largest competitive local
exchange carrier. Under the terms of the agreement, AT&T would receive 31% of
the combined entity in exchange for its 33 percent voting interest in AT&T
Canada Corp., 100 percent interest in ACC TelEnterprises Ltd., and 67 percent
interest in the former AT&T Canada Long Distance Services currently held in
trust. In addition, AT&T agreed to purchase all of the remaining shares at the
greater of the then appraised fair market value or the accreted minimum price,
which initially is C$75 accreting after June 30, 2000 at a rate of 16% per
annum, compounded quarterly. If the acquisition is not completed by June 30,
2003, those shares would be sold through an auction process and AT&T will make
whole the shareholders for the amount they would have been entitled to if AT&T
had purchased the shares. The completion of the merger and acquisition is
subject to various conditions and regulatory approvals, including, for the
acquisition, a change in Canada's foreign ownership restrictions.
BUSINESS SERVICES
Long Distance Voice and Data
Business Services provide voice, data and video communications services
to large and small businesses, the Federal government and state and local
governments. Business units within this group provide regular and custom long
distance communications services, data transmission services, 500 services,
toll-free or 800 and 888 services, 900 services, private line services, software
defined network services (SDN), asynchronous transfer mode (ATM) and Internet
protocol (IP) technology based services, integrated services digital network
(ISDN) technology based services, electronic mail, electronic data interchanges
and enhanced facsimile services.
AT&T also provides special long distance services, including AT&T
Calling Card services, special calling plans and the Company's domestic and
international operator services. AT&T provides communications services
internationally, including transaction services, global networks, network
management and value added network services (i.e., services offered over
communications transmission facilities that employ computer processing
applications).
Long Distance Voice. Business Services' voice communication
offerings include the traditional "one plus" dialing of domestic and
international long distance for customers that select AT&T as their primary long
distance carrier.
Business Services' dedicated services include private line and
special access services that use high-capacity digital circuits to carry voice,
data and video (or multimedia) transmission from point-to-point in multiple
configurations. These services provide high-volume customers with a direct
connection to an AT&T switch instead of switched access shared by many users.
These services permit customers to create internal computer networks, access
external computer networks and the Internet, as well as reduce originating
access costs.
Business Services also offers toll free (800 or 888) inbound service,
where the receiving party pays for the call. This is used in a wide variety of
applications, many of which generate revenue for the user (such as reservation
centers or customer service centers). AT&T offers a variety of features to
enhance customers toll free service, including call routing by origination point
and time of day routing.
Business Services also offers a variety of calling cards which allow
the user to place calls from virtually anywhere in the world. Additional
features include prepaid calling cards, conference calling, international
origination, information service access (such as weather or stock quotes), speed
dialing and voice messaging.
Enhanced Data Communication. Enhanced data services consist of
interexchange data networks utilizing packet switching and transmission
technologies and application services, such as Internet access and Web Site
hosting and management, which utilize the frame relay network. Enhanced data
services enable customers to economically and securely transmit large volumes of
data typically sent in bursts from one site to another. Enhanced data services
are utilized for local area network (LAN) interconnection, remote site, point of
sale and branch office communications solutions.
AT&T utilizes both IP and ATM systems. Both technologies offer
significant efficiencies over circuit switched systems which use a single,
dedicated circuit to complete each transmission. ATM switching is also a more
efficient method of switching and transmitting comingled or multimedia
information. The packet switching technology breaks up a transmission into short
pieces, or packets, which are encoded and transmitted with other packets on the
same circuit, and reassembled at the desired destination. ATM differs from IP in
that the data packets used in ATM (called cells) are one size (53 bytes) whereas
in IP the data packets vary in length. Also, whereas ATM establishes virtual
circuits to ensure that the information sent is reassembled at its destination
in its proper sequence, IP ships each packet of information to its destination
by a different path. While AT&T will continue to have both circuit and packet
switching and transmission technologies for some time, no more significant
future capital expenditures are scheduled for circuit switching.
ISDN services provide customers with multiple voice and data
communications services over a single telecommunications line. The Company's
ISDN services allow customers to perform multiple functions such as simultaneous
voice and computer links, and enable the Company to offer customers value-added
features. High speed ISDN applications include desk top video conferencing,
interconnection of LANs and Internet access.
Business Services has a dedicated sales force through which it markets
its long distance voice and data communication services. Sales forces are
divided into geographic markets, and in each market focus on large,
multinational corporations, small businesses, government markets, and
value-added resellers and other wholesalers. Business Services employs full
service support teams to provide significant customer support and service to
ensure customer satisfaction and retention.
Business Services offers its services in accordance with applicable
tariffs filed with the Federal Communications Commission (FCC). Rates can vary
by a number of factors, particularly the volume of usage and the day and time
that calls are made. AT&T Business Services offers long distance and data
services individually and in combination with other offerings. Through combined
offerings, AT&T provides customers with benefits such as single billing, unified
services for multilocation companies and customized calling plans.
Transport
Business Services is one of the leaders in providing wholesale
networking services to other carriers, providing both network capacity and
switched services. AT&T offers a combination of high-volume transmission
capacity, conventional dedicated line services and dedicated switched services
to Internet service providers (ISPs) and Tier 1 and Tier 2 carriers on a
national or regional basis, as well as switchless resale services to Tier 3
carriers.
Wholesale networking service is typically provided pursuant to
long-term service agreements for terms of one year or longer. These agreements
generally provide for "take or pay" monthly payments at fixed rates based on the
capacity and length of the circuit used. Customers are typically billed on a
monthly basis and also may incur an installation charge or certain ancillary
charges for equipment. After contract expiration, the contracts may be renewed
or the services may be provided on a month-to-month basis. Switched services
agreements are generally offered on a month-to-month basis and the service is
billed on a minutes-of-use basis.
CONSUMER SERVICES
AT&T is the United States' leading provider of domestic and
international long distance service to residential consumers. AT&T provides
regular and custom long distance communications services which it offers
individually and in combination with other offerings.
AT&T provides interstate and intrastate long distance
telecommunications services throughout the continental United States and
provides, or joins in providing with other carriers, telecommunications services
to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international
telecommunications services to and from virtually all nations and territories
around the world. Consumers can use AT&T domestic and international long
distance services by the traditional "one plus" dialing of the desired call
destination, by dial-up access or through the use of AT&T calling cards.
AT&T both delivers and receives international traffic pursuant to its
operating agreements with foreign carriers throughout the world. The terms of
most switched voice operating agreements, as well as established FCC policy,
require that inbound switched voice traffic from the foreign carrier to the
United States be routed to United States international carriers, like AT&T, in
proportion to the percentage of United States outbound traffic routed by that
United States international carrier to the foreign carrier. AT&T's revenues and
costs of sales are sensitive to changes in international settlement rates and
international traffic routing patterns.
In the continental United States, AT&T provides long distance
telecommunications services over AT&T's backbone network. International
telecommunications services are provided by submarine cable systems in which
AT&T holds investment positions, satellites and facilities of other domestic and
foreign carriers.
AT&T markets its consumer long distance services in a variety of ways,
including by means of television advertising, direct mail solicitations and
customer care telephonic solicitations, as well as through brand awareness.
Beginning at the end of 1997, AT&T implemented significant modifications to its
marketing efforts in response to strategic choices made to improve
profitability. Primarily, AT&T commenced using free minutes in place of checks
as well as migrating customers to more favorable optional calling plans in order
to attract and retain its most profitable customers. As a result of this
strategy, AT&T now has over 26 million customers on its One Rate registered
trademark plans, including more than 13 million on AT&T One Rate Plus registered
trademark, with more than 75% of AT&T's consumer long distance minutes were
generated by customers on optional calling plans. Also, AT&T began targeting its
marketing efforts to emphasize high-value customers to optimize its customer
base for profitable future growth.
Typically, AT&T charges customers based on applicable rates filed with
the FCC. Customers select different services and from various rate plans which
determine the price per minute that they pay on their long distance calls. Rates
typically vary based on a variety or factors, particularly the volume of usage
and the day and time that calls are made.
In 1997, AT&T began conducting integrated billing for those customers
using more than one service and in 1998 introduced a new rate plan for those
customers subscribing to AT&T long distance and AT&T WorldNet service. In
addition, in January 1999 AT&T began offering AT&T Personal Network services
which bundle consumer domestic and international long distance, wireless,
Internet, personal 800 and calling card services.
AT&T BROADBAND AND INTERNET SERVICES
AT&T Broadband and Internet Services is principally comprised of the
businesses and assets of the TCI Group and TCI's interest in At Home Corporation
acquired in the TCI merger.
TCI Group
Cable television systems receive video, audio and data signals
transmitted by nearby television and radio broadcast stations, terrestrial
microwave relay services and communications satellites. Such signals are then
amplified and distributed by coaxial cable and optical fiber to the premises of
customers who pay a fee for the service. In many cases, cable television systems
also originate and distribute local programming.
At December 31, 1998, approximately 66% of TCI Group's cable television
systems had bandwidth capacities ranging from 450 megahertz to 750 megahertz.
The Company's cable television systems generally carry up to 78 analog channels.
Compressed digital video technology converts on average as many as fourteen
analog signals (now used to transmit video and voice) into a digital format and
compresses such signals (which is accomplished primarily by eliminating the
redundancies in television imagery) into the space normally occupied by one
analog signal. The digitally compressed signal is uplinked to a satellite, which
retransmits the signal to a customer's satellite dish or to a cable system's
headend to be distributed, via optical fiber and coaxial cable, to the
customer's home. At the home, a set-top video terminal converts the digital
signal into analog channels that can be viewed on a normal television set.
TCI Group began offering digital cable television service to selected
markets in 1997. In February 1998, TCI Group initiated broader marketing efforts
intended to increase the number of digital cable television customers. Such
marketing efforts encompass multi-media, product enhancements, sales promotions
and sales incentives.
TCI Group operates its cable television systems either through its
operating divisions or through certain other subsidiaries of TCI attributed to
TCI Group. Domestic Basic-TV cable customers served by TCI Group are summarized
as follows (amounts in millions):
Basic-TV customers at December 31,
1998 1997 1996 1995 1994
Managed through TCI Group's operating divisions
11.4 14.2 13.4 11.9 10.7
Other non-managed subsidiaries of TCI attributed to TCI
Group 0.5 0.2 0.5 0.6 0.5
------- ------- ------- ------- -------
11.9 14.4 13.9 12.5 11.2
======= ======= ======= ======= =======
The decline in total Basic-TV customers between 1997 and 1998 is
attributable to certain contribution transactions entered into in 1998. In the
most significant of these transactions, on March 4, 1998, TCI contributed to
Cablevision Systems Corporation (CSC) certain of its cable television systems
serving approximately 830,000 customers in exchange for approximately 48.9
million newly issued CSC Class A common shares (the CSC Transaction) and the
assumption of indebtedness. TCI has also entered into letters of intent with CSC
which provide for the TCI Group to acquire a cable system in Michigan and an
additional 4% of CSC's Class A common shares and for CSC to acquire cable
systems in Connecticut and assume certain indebtedness. The ability of the
Company to sell or increase its investment in CSC is subject to certain
restrictions and limitations set forth in a stockholders agreement with CSC.
In addition to the CSC Transaction, during 1998 TCI also completed
eight transactions whereby TCI contributed cable television systems serving in
the aggregate approximately 1,924,000 customers to eight separate joint ventures
(collectively, the 1998 Joint Ventures) in exchange for non-controlling
ownership interests in each of the 1998 Joint Ventures, and the assumption and
repayment by the 1998 Joint Ventures of indebtedness. In addition, TCI, as of
December 31, 1998, has signed agreements or letters of intent to contribute
within the next twelve months certain cable television systems serving
approximately 1.2 million basic customers to joint ventures in which the Company
will retain non-controlling ownership interests. No assurance can be given that
any of these pending contribution transactions will be consummated.
TCI Group had approximately 1 million digital customers at December 31,
1998.
TCI Group operates cable television systems throughout the United
States.
Service Charges. TCI Group offers a limited "basic service" (Basic-TV)
(primarily comprised of local broadcast signals and public, educational and
governmental (PEG) access channels) and an "expanded tier" (primarily comprised
of specialized programming services, in such areas as health, family
entertainment, religion, news, weather, public affairs, education, shopping,
sports and music). The monthly fee for basic service generally ranges from $9.00
to $12.00, and the monthly service fee for the expanded tier generally ranges
from $13.00 to $19.00. TCI Group offers "premium services" (referred to in the
cable television industry as "Pay-TV" and "pay-per-view") to its customers. Such
services consist principally of feature films, as well as live and taped sports
events, concerts and other programming. TCI Group offers Pay-TV services for a
monthly fee generally ranging from $6.00 to $15.00 per service, except for
certain movie services (such as certain Pay-TV channels) offered at $1.00 to
$2.00 per month, pay-per-view movies offered separately at $1.00 to $4.00 per
movie and certain pay-per-view events offered separately at $6.00 to $50.00 per
event. Charges are usually discounted when multiple Pay-TV services are ordered.
In most markets, customers may also elect to subscribe to digital video services
comprised of up to 36 additional video and 10 additional audio channels
featuring additional specialized programming and premium services at an average
incremental monthly charge of $10.
As further enhancements to their cable services, for a monthly charge
customers may generally rent converters or converters with remote control
devices, as well as purchase a channel guide. Also a nonrecurring installation
charge is usually charged.
Monthly fees for Basic-TV and Pay-TV services to commercial customers
vary widely depending on the nature and type of service. Except under the terms
of certain contracts to provide service to commercial accounts, customers are
free to discontinue service at any time without penalty.
The Cable Television Consumer Protection and Competition Act of 1992
(the 1992 Cable Act) and the Telecommunications Act of 1996 (the
Telecommunications Act, together with the 1992 Cable Act, the Cable Acts),
established rules under which TCI Group's basic service and expanded tier
service rates and equipment and installation charges are regulated if a
complaint is filed or if the appropriate franchise authority is certified.
Local Franchises. Cable television systems generally are constructed
and operated under the authority of nonexclusive permits or "franchises" granted
by local and/or state governmental authorities. Federal law, including the Cable
Communications Policy Act of 1984 (the 1984 Cable Act) and the 1992 Cable Act,
limits the power of the franchising authorities to impose certain conditions
upon cable television operators as a condition of the granting or renewal of a
franchise.
Franchises contain varying provisions relating to construction and
operation of cable television systems, such as time limitations on commencement
and/or completion of construction; quality of service, including (in certain
circumstances) requirements as to the number of channels and broad categories of
programming offered to customers; rate regulation; provision of service to
certain institutions; provision of channels for public access and commercial
leased-use; and maintenance of insurance and/or indemnity bonds. TCI Group's
franchises also typically provide for periodic payments of fees, not to exceed
5% of revenue, to the governmental authority granting the franchise.
Additionally, many franchises require payments to the franchising authority for
the funding of PEG access channels. Franchises usually require the consent of
the franchising authority prior to a transfer of the franchise or a transfer or
change in ownership or operating control of the franchisee.
Subject to applicable law, a franchise may be terminated prior to its
expiration date if the cable television operator fails to comply with the
material terms and conditions thereof. Under the 1984 Cable Act, if a franchise
is lawfully terminated, and if the franchising authority acquires ownership of
the cable television system or effects a transfer of ownership to a third party,
such acquisition or transfer must be at an equitable price or, in the case of a
franchise existing on the effective date of the 1984 Cable Act, at a price
determined in accordance with the terms of the franchise, if any.
In connection with a renewal of a franchise, the franchising authority
may require the cable operator to comply with different and more stringent
conditions than those originally imposed, subject to the provisions of the 1984
Cable Act and other applicable federal, state and local law. The 1984 Cable Act,
as supplemented by the renewal provisions of the 1992 Cable Act, establishes an
orderly process for franchise renewal which protects cable operators against
unfair denials of renewals when the operator's past performance and proposal for
future performance meet the standards established by the 1984 Cable Act. TCI
Group believes that its cable television systems generally have been operated in
a manner which satisfies such standards and allows for the renewal of such
franchises; however, there can be no assurance that the franchises for such
systems will be successfully renewed as they expire.
Most of TCI Group's present franchises had initial terms of
approximately 10 to 15 years. The duration of TCI Group's outstanding franchises
presently varies from a period of months to an indefinite period of time.
Approximately 1090 of TCI Group's franchises expire within the next five years.
This represents approximately twenty-five percent of the franchises held by TCI
Group and involves approximately 4.6 million basic customers.
At Home Corporation
@Home, which became a public company in July 1997, is a leading
provider of broadband Internet services that delivers data to homes and
businesses through the cable television infrastructure and a cable modem at
speeds up to 100 times faster than traditional telephone dial-up alternatives.
@Home currently offers two Internet services: @Home for residential
consumers and @Work for businesses and tele-commuters. @Home's primary offering
("the @Home service") allows residential subscribers to connect their personal
computers via cable modem to a high-speed Internet backbone network developed
and managed by @Home. @Home has entered into distribution arrangements with
cable companies whose cable systems pass approximately 57.3 million homes.
@Home's residential offering had approximately 331,000 cable modem subscribers
across North America at December 31, 1998 representing an increase of
approximately 158% from the 210,000 subscribers reported at September 30, 1998.
As of December 31, 1998, approximately 13.2 million of the homes served by the
cable companies with which @Home has distribution agreements are passed by
upgraded two-way hybrid fiber co-axial cable. For businesses, @Home's @Work
service provides a platform for Internet, intranet and extranet connectivity
solutions and networked business applications over both cable infrastructure and
digital telecommunications lines. As of December 31, 1998, @Work had over 1,700
corporate customers, and the @Work service was available in 22 metropolitan
markets.
TCI was a founding partner of @Home and at March 15, 1999 the TCI Group
held a significant equity interest and a controlling voting interest in @Home.
Four officers or directors of AT&T or TCI currently serve on @Home's 11 member
board; however, TCI has the right, at any time, to increase the size of @Home's
Board of Directors and elect a majority of the directors of the @Home Board.
TCI's controlling position in @Home is, however, subject to certain protective
rights held by @Home. TCI has agreed that @Home will be the exclusive high-speed
Internet service provider distributed over TCI's cable systems, subject to
certain exceptions, until at least June 4, 2002, subject to early termination in
certain circumstances. @Home's recently announced merger with Excite Inc. would,
if approved and completed, dilute the TCI Group's economic interest and voting
rights in @Home.
WIRELESS SERVICES
AT&T Wireless Services (Wireless Services) is the United States'
largest wireless service provider based on domestic revenues, and has the
greatest number of digital customers. The services provided by Wireless Services
currently include wireless voice and data. At December 31, 1998, Wireless
Services served almost 10 million wireless subscribers, including partnership
markets.
Wireless operations are conducted in 130 markets (including
partnerships), known as metropolitan statistical areas, rural service areas or
major trading areas. Wireless Services provides wireless services over its
wireless network, which operates both 850 megahertz and 1900 megahertz broadband
wireless licenses, covering, in the aggregate, approximately 55% of the United
States population before giving effect to Wireless Services roaming agreements
and 96% of the United States after giving effect to Wireless Services roaming
agreements. Wireless Services currently intends to increase its footprint to
improve its coverage, thereby reducing roaming expenses.
Services offered include custom calling services, such as voice mail,
call forwarding, call waiting, three-way calling, no-answer and busy transfer.
Wireless Services also offers a variety of other enhanced features, including
display messaging, which allows a cellular phone to receive and store voice mail
messages, short alphanumeric messages and pages, even if the handset is in use
or switched off, and enhanced directory assistance, which enables callers to be
connected to the party whose number was sought without hanging up and redialing.
Specialized services for business customers include Wireless Office
Service, which, among other features, provides four- or five-digit dialing for
large customers. Wireless Services is now integrating other communications
technologies into the network and will continue to explore the use of emerging
technologies to expand the reach of the network and to provide additional
services.
Wireless Services also has an interest in several wireless
communications companies outside of the United States, including cellular
operators licensed to serve Columbia, Taiwan and parts of India.
Marketing efforts focus primarily on "high-value" customer segments
(i.e., customers that spend over $50/month on wireless services). Digital
service is a key element to attract and retain these high-value customers.
Wireless Services is an industry leader in digital migration: at present, over
50% of Wireless Services' customer base is using digital service.
Wireless Services currently offers wireless and wireline bundled
services, such as a common bill and AT&T Personal Network (i.e., consumer
domestic and international long distance, Internet, personal 800 and calling
card services) with AT&T Digital One RateSM service. The number of new bundled
offers is expected to increase over time.
Wireless Services markets its services through a direct sales force,
through sales points of presence in AT&T stores and kiosks, through direct
marketing programs and through nonaffiliated retailers throughout the United
States. Marketing to large business customers is conducted through direct
solicitations or through combined offerings with other AT&T offerings. Wireless
Services also relies upon dealers to market its services in certain locations.
Dealers are independent contractors that solicit customers for Wireless Services
service, and, typically, include specialized cellular stores, specialized
electronics stores and department stores.
Customer charges can include charges for service activation, monthly
access, per-minute airtime and customer-calling features, and generally offers a
variety of pricing options, most of which combine a fixed monthly access fee and
per-minute charges. Long distance and roaming fees may also be incurred.
Non-AT&T long distance customers are billed directly by their selected long
distance carrier. Wireless Services offers long distance service to its cellular
customers, although customers on some rate plans have the choice of an alternate
long distance carrier.
AT&T Digital One RateSM. AT&T Digital One Rate customers pay one rate
for incoming and outgoing calls throughout the United States, which means that
customers pay home rates when they roam across the United States. This rate
consists of a monthly fee, which includes the use of a certain number of
minutes, and a fee for usage beyond the monthly included minutes.
Roaming Rates. Wireless Services pays other wireless providers
negotiated rates when Wireless Services customers make or receive wireless calls
when located in the other approved carriers' coverage areas and outside of
Wireless Services' coverage area. Wireless Services currently has in place
favorable roaming rates with most carriers across the United States based upon
volume and growth. There is, however, no assurance that Wireless Services will
continue to be successful in negotiating reasonable roaming rates with other
wireless providers or expand its build out to cover such service areas. With the
addition of AT&T Digital One Rate offerings, AT&T's sensitivity to changes in
roaming rates has increased.
Wireless Network. Wireless Services' ownership position in U.S. markets
was obtained through the FCC lottery and settlement process as well as through
purchases and exchanges of licenses with other cellular providers. Wireless
Services' cellular licenses generally were granted for an initial 10-year term
and are renewable for successive 10-year terms. FCC license renewal applications
continue to be filed and currently are being processed by the FCC with no
opposition. In addition, Wireless Services is required by the FCC to provide
adequate personal communication service to at least one-third of the population
in its 1900 megahertz licensed areas within five years of being licensed and
two-thirds of the population in its licensed areas within 10 years of being
licensed.
Wireless Services has created service clusters in major metropolitan
areas, and has linked its and selected other service providers' systems into a
network that permits its wireless subscribers to both place and receive calls
anywhere they travel in areas covered by the network, even if the local wireless
telephone service is not provided by Wireless Services.
Analog and digital service are offered in 850 megahertz markets and
digital service in 1900 megahertz markets. Wireless Services believes that
digital cellular technology offers many advantages over analog technology,
including substantially increased capacity, greater call privacy, lower
operating costs, reduced susceptibility to fraud and the opportunity to provide
improved data transmission. However, analog networks provide the only common
roaming platform currently available throughout the United States. Wireless
Services markets primarily multi-network phones, capable of operating in the
digital mode at 1900 megahertz and in digital and analog modes at 850 megahertz.
Wireless Services has selected time division multiple access (TDMA) as
its digital wireless technology in the United States and has deployed TDMA
service in its major markets. Wireless Services believes that TDMA technology is
an improvement over analog in that it allows for clearer calls, enhanced
security, greater functionality and additional capacity to process more calls. A
number of other wireless service providers have chosen code division multiple
access (CDMA) or the global system for mobile communications (GSM) as their
digital wireless technology. Since no manufacturers currently offer digital
handsets capable of receiving more than one digital standard, users will not be
able to roam between networks possessing different digital standards at this
time.
OTHER BUSINESSES
Local Services
Local exchange carriers provide local, toll, access and resale
services; sell, install and maintain customer premises equipment; and provide
directory services. The market for local exchange services consists of a number
of distinct service components. These service components are defined by specific
regulatory tariff classifications including: (i) local network services, which
generally include basic dial tone charges and private line services; (ii)
network access services, which consist of access charges received by LECs from
long distance carriers for the local portion of long distance telephone calls;
(iii) long distance network services, which include the variable portion of
charges received by local exchange carriers (LECs) for intra-LATA long distance
calls; and (iv) additional value added services such as caller identification,
voice mail and call waiting.
Consumer Local Services. By the end of 1997, AT&T offered resold local
service to residential customers in 8 states. Notwithstanding its substantial
efforts, AT&T experienced significant difficulty in entering local markets.
AT&T's ability to purchase combined network elements from the incumbent LECs
(ILECs), one of the primary methods by which AT&T intended to provide local
service to residential customers, was severely limited by, among other factors,
regulatory and judicial actions and a lack of technical and operational
interfaces necessary to order network elements from ILECs. In spite of strong
demand, in the fourth quarter of 1997 AT&T stopped actively marketing resold
local service to residential customers in most of the areas in which it offered
such service because of limitations on ILECs' ability to handle anticipated
demand and because discounts AT&T received from ILECs on the sale of such
service were insufficient to make resale a viable method of offering service.
AT&T intends to pursue local entry by transforming the cable footprint
of one-way cable plant into a two-way, broadband network capable of meeting the
full spectrum of communication needs of the residential customer. AT&T intends
to deploy a variety of services over the upgraded cable plant, including a
richly featured "all-distance" (i.e., local, long distance, international) voice
telephony offering. AT&T plans to use existing circuit-switched technology to
pilot telephony service offers over the cable plant beginning in 1999. However,
AT&T expects to begin to transition to an integrated Internet protocol (IP)
packet data architecture by the end of 2000 that affords cost and feature
benefits over the older circuit-switched technology.
In addition, AT&T will pursue other transport options, including:
- - Expanding AT&T's ability to offer the full range of consumer services
beyond the TCI Group cable footprint through a variety of partnership
and investment initiatives, including the Time Warner and other cable
operator joint ventures already announced;
- - Continued investment in alternative narrowband, wideband and broadband
access technologies, including the fixed wireless technology that AT&T
is currently testing in select markets, and the construction of
dedicated, high-capacity access facilities to serve the broadband
communication needs of residential customers living in multiple
dwelling units (MDUs); and
- - Resale of several forms of ILEC unbundled network elements which can be
combined with switching, routing and other network elements to support
differentiated voice and data services.
AT&T intends to utilize the former TCI Group's sales force to actively
solicit cable customers as local service customers. In these areas, AT&T intends
to offer cable and local telephony as a bundle of services. AT&T will market
local service in other areas as it rolls out its local telephony capabilities.
For local service, customers are billed a fixed charge plus usage. AT&T intends
to offer rates competitive with those offered by LECs, as well as discounted
offers for certain bundles of services. Currently, billing is done internally.
It is expected that local service sold as part of a cable bundle will be billed
in one billing statement to consumers.
Business Local Services. As of June 30, 1998, AT&T offered AT&T Digital
Link service for business customers on an outbound only basis in 48 states and
on an inbound and outbound basis in one state. AT&T's ability to provide
facilities-based local service to business customers through AT&T Digital Link
service was hampered by the inability to provide local number portability and
other factors. On July 23, 1998, AT&T completed the merger with TCG, the largest
CLEC in the United States with local networks aimed at addressing high-volume
business customers, and combined its business local services with those of TCG.
At December 31, 1998, TCG possessed local networks in operation in 83 U.S.
markets, encompassing over 11,400 route miles, over 549,600 fiber miles, and 51
local digital voice switches.
TCG's customers are principally telecommunications-intensive
businesses, healthcare, and educational institutions, governmental agencies,
long distance carriers and resellers, ISPs, disaster recovery service providers
and wireless communications and financial services companies. TCG's centrally
managed customer care and support operations are designed to facilitate the
installation of new services and the processing of orders for changes and
upgrades in customer services.
With a direct sales force in each of its markets, TCG initially targets
the large telecommunications-intensive businesses concentrated in the major
metropolitan markets served by its networks. TCG also targets small- and
medium-sized business customers in office buildings or multiple dwelling units
already served by its network.
TCG generally offers its services in accordance with applicable tariffs
filed with state regulatory agencies (for intrastate services). TCG typically
offers local service as part of a package of services, which can include any
combination of other AT&T offerings. Customers also choose among analog, digital
voice-only and ISDN Centrex telephone lines to their desktops. AT&T owns,
houses, manages and maintains the switch, while customers retain control over
network configurations, allowing customers to add, delete and move lines as
needed. For local service, customers are billed a fixed charge plus usage.
AT&T Solutions
AT&T Solutions, established in 1995, provides outsourcing, consulting
and networking integration services to large businesses. AT&T Solutions provides
clients with a broad array of professional services to satisfy clients complete
networking technology needs.
AT&T Solutions' offerings include operational and networking management
services for a broad range of computing platforms, including mainframe,
mid-range computers, personal computer and network environments, such as
local-area networks and wide-area networks. Most customers execute long-term
contracts for AT&T Solutions networking services.
AT&T Solutions' customers are generally within the top 2000
multinational corporations in the world. AT&T Solutions' sales force engages in
direct solicitation of those customers as well as referrals from other units of
AT&T.
AT&T WorldNet(R) Consumer services
AT&T offers dial-up Internet access to consumers through its AT&T
WorldNet service business unit, a leading provider of direct Internet access
service in the United States. At December 31, 1998, AT&T WorldNet service had
over 1.3 million customers and provided over 466 points of presence, located in
over 389 cities. Most of these dial-in numbers have been upgraded to accommodate
high speed 56K technology.
In 1998, AT&T WorldNet service entered into agreements with Yahoo!,
Excite, Infoseek and Lycos, four of the most popular sites on the Internet
(known as "portals"), to offer co-branded access services to the portals'
customers. For example, a Yahoo! customer may subscribe to Internet access
through Yahoo! Online Powered by AT&T WorldNet service. In these cases the AT&T
WorldNet service supplies the underlying access, billing and customer care,
while the portal provides the content in the form of a personalizable start page
and other popular features.
AT&T WorldNet service generates revenues principally through
subscription and usage fees, as well as from electronic commerce and advertising
revenues. AT&T WorldNet service offers a variety of pricing plan options,
including bundled options. Generally, customers are charged a flat rate for
unlimited hours, or a flat rate for a certain number of hours with charges for
each additional hour of usage.
AT&T WorldNet service's marketing programs are designed to attract and
retain profitable customers. AT&T seeks to build brand recognition and customer
loyalty and to make it easy for consumers to try, and stay with, AT&T WorldNet
service. In addition to direct marketing through brand name advertising, direct
mail and magazine insert promotions and bundling offers, AT&T WorldNet service
maintains a large indirect channel marketing effort. Through this indirect
channel AT&T WorldNet service software is bundled in new computers produced by
major manufacturers, and is included on millions of software titles published by
independent software vendors.
AT&T Business Internet Services
AT&T WorldNet Business Services provides IP connectivity and IP
value-added services, messaging, and electronic commerce services to businesses.
AT&T offers Managed Internet Service, which gives customers dedicated,
high-speed access to the public Internet for business applications at a variety
of speeds and types of access, as well as Business Dial Service, a dial-up
version of Internet access designed to meet the needs of small- and medium-sized
businesses.
AT&T Virtual Private Network (VPN) Service allows businesses to obtain
remote access to e-mail, order entry systems, employee directories, human
resources and other databases, or to create an Intranet and extranets with their
clients, suppliers and business partners, and enables customers to tailor their
VPNs to accommodate specific business applications, performance requirements or
the need to integrate with existing data networks.
AT&T Web Site Services are a family of hosting and transaction services
and platforms serving the web needs of thousands of businesses. Offers include
AT&T Shared Hosting Services, an economical way for businesses to establish a
presence on the World Wide Web, and AT&T Enhanced Web Development Package for
businesses that want to create web sites that require higher performance and
greater user demand. AT&T Dedicated Hosting Service provides customizable and
pre-packaged Web hosting solutions. AT&T SecureBuySM Service provides the
backoffice infrastructure required to electronically process credit card
transactions online, high-speed links into two of the leading credit card
processing services, and management reports that measure a site's success.
Other IP services AT&T offers let Web site visitors click on a "call me
now" icon if they wish to speak to a customer service agent; connect enterprise
networks that use host or LAN-based and browser-based e-mail systems to AT&T's
value-added messaging services such as e-mail and fax; and enhanced fax
services.
International
AT&T has established a number of international alliances to increase
the reach and scope of AT&T's services and network over time and has invested in
certain countries in order to increase the range of services AT&T offers in
those countries. For example, in early 1997 AT&T's joint venture in Mexico,
Alestra, began offering long distance service.
In addition, on July 26, 1998, AT&T and BT announced that they will
create a global venture to serve the communications needs of multinational
companies and the international calling needs of businesses around the world.
The venture, which will be owned equally by AT&T and BT, will combine
trans-border assets and operations of each company, including their existing
international networks, all of their international traffic, all of their
transborder products for business customers -- including an expanding set of
Concert services -- and AT&T and BT's multinational accounts in selected
industry sectors. The formation of the venture is subject to certain conditions,
and is expected to be completed by mid-1999.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
Telecommunications Act of 1996
In February 1996, the Telecommunications Act became law. The
Telecommunications Act, among other things, was designed to foster local
exchange competition by establishing a regulatory framework to govern new
competitive entry in local and long distance telecommunications services. The
Telecommunications Act will permit the Regional Bell Operating Companies (RBOCs)
to provide interexchange services originating in any state in its region after
demonstrating to the FCC that such provision is in the public interest and
satisfying the conditions for developing local competition established by the
Telecommunications Act.
In August 1996, the FCC adopted rules and regulations, including
pricing rules (the "Pricing Rules") to implement the local competition
provisions of the Telecommunications Act, including with respect to the terms
and conditions of interconnection with LEC networks and the standards governing
the purchase of unbundled network elements and wholesale services from LECs.
These implementing rules rely on state public utilities commissions to develop
the specific rates and procedures applicable to particular states within the
framework prescribed by the FCC.
On July 18, 1997, the United States Court of Appeals for the 8th
Circuit issued a decision holding that the FCC lacks authority to establish
pricing rules to implement the sections of the local competition provisions of
the Telecommunications Act applicable to interconnection with LEC networks and
the purchase of unbundled network elements and wholesale services from LECs.
Accordingly, the Court vacated the rules that the FCC had adopted in August
1996, and which had been stayed by the Court since September 1996. On October
14, 1997, the 8th Circuit Court of Appeals vacated an FCC Rule that had
prohibited incumbent LECs from separating network elements that are combined in
the LEC's network, except at the request of the competitor purchasing the
elements. This decision increased the difficulty and costs of providing
competitive local service through the use of unbundled network elements
purchased from the incumbent LECs.
On January 25, 1999, the Unites States Supreme Court issued a decision
reversing the 8th Circuit Court of Appeal's holding that the FCC lacks
jurisdiction to establish pricing rules applicable to interconnection and the
purchase of unbundled network elements, and the Court of Appeal's decision to
vacate the FCC's rule prohibiting incumbent LECs from separating network
elements that are combined in the LEC's network. The effect of the Supreme
Court's decision is to reinstate the FCC's rules governing pricing and the
separation of unbundled network elements. The 8th Circuit Court of Appeals will
now consider the incumbent LECs' claims that although the FCC has jurisdiction
to adopt pricing rule, the rules it adopted are not consistent with the
applicable provisions of the Act. The Supreme Court also vacated the FCC's rule
identifying and defining the unbundled network elements that incumbent LECs are
required to make available to new entrants, and directed the FCC to reexamine
this issue in light of the standards mandated by the Act.
In view of the proceedings pending before the 8th Circuit, FCC and
state PUCs, there can be no assurance that the prices and other conditions
established in each state will provide for effective local service entry and
competition or provide AT&T with new market opportunities.
On December 31, 1997, the U.S. District Court for the Northern District
of Texas issued a memorandum opinion and order holding that the
Telecommunications Act's restrictions on the provision of in-region, interLATA
service by the RBOCs are unconstitutional. AT&T and other carriers and the FCC
filed prompt appeals with the United States Court of Appeals for the 5th
Circuit. On February 11, 1998, the District Court stayed the effectiveness of
its December 31 memorandum opinion and order pending appeal.
On September 4, 1998, the United States Court of Appeals for the 5th
Circuit rejected arguments that the Telecommunications Act is
unconstitutional, and reversed the district court's contrary opinion. On
December 22, 1998, the United States Court of Appeals for the District of
Columbia Circuit rejected a similar challenge to the constitutionality of the
Telecommunications Act. On January 19, 1999, the United States Supreme Court
denied petitions filed by the RBOCs to review the decision of the 5th Circuit
Court of Appeals.
Modification of Final Judgment of 1982
Prior to 1996, AT&T and the RBOCs were subject to the provisions of the
Modification of Final Judgment of 1982 (MFJ) since its implementation. The
Telecommunications Act effectively superseded future operation of the MFJ.
Consequently, on April 11, 1996, Judge Harold Greene issued an order terminating
the MFJ.
Regulation of Rates
AT&T is subject to the jurisdiction of the FCC with respect to
interstate and international rates, lines and services, and other matters. From
July 1989 to October 1995, the FCC regulated AT&T under a system known as "price
caps" whereby AT&T's prices, rather than its earnings, were limited. On October
12, 1995, recognizing a decade of enormous change in the long distance market
and finding that AT&T lacked market power in the interstate long distance
market, the FCC reclassified AT&T as a "non-dominant" carrier for its domestic
interstate services. As a result, AT&T became subject to the same regulations as
its long distance competitors for such services. Thus, AT&T was no longer
subject to price cap regulation for these services, was able to file tariffs
that are presumed lawful on one day's notice, and was free of other regulations
and reporting requirements that apply only to dominant carriers.
In addition, on October 31, 1996, the FCC issued an order that would
have prohibited non-dominant carriers, including AT&T, from filing tariffs for
their domestic interstate services. AT&T and other parties have filed an appeal
of the FCC's order with the United States Court of Appeals for the D.C. Circuit.
In February 1997, the D.C. Circuit stayed the effectiveness of the FCC's order
pending appeal. Oral argument has not yet been scheduled. If the Court affirms
the FCC's order and lifts the stay, non-dominant carriers, including AT&T, will
have to utilize mechanisms other than tariffs to establish the terms and
conditions that apply to domestic, interstate telecommunications services.
Furthermore, in May 1997, the FCC adopted three orders relating to
Price Caps, Access Reform, and Universal Service that substantially revised the
level and structure of access charges that AT&T as a long distance carrier pays
to incumbent LECs. AT&T has agreed to pass through to consumers any savings to
AT&T as a result of access charge reform. AT&T began implementing these
reductions July 15, 1997. Consequently, AT&T's results after June 1997 reflects
lower revenues per minute of usage and lower access and other interconnection
costs per minute of usage.
The Price Cap Order requires LECs to reduce their price cap indices by
6.5 percent annually, less an adjustment for inflation, which is likely to
result in a reduction in the interstate access charges that long distance
carriers, such as AT&T, pay to LECs. The Access Charge Reform Order restructured
access charges so that certain costs that do not vary with usage will be
recovered on a flat-rate basis and permitted increased flat-rate assessments on
multiline business customers and on residential lines beyond the primary
telephone line. This restructuring allows a reduction in access charges assessed
on long distance carriers on a usage basis. Finally, the Universal Service Order
(which represents an FCC mandated contribution to support schools and libraries
and rural health care programs, high cost support and low income support
mechanisms which are paid to the Universal Service Administrative Company)
adopts a new mechanism for funding universal service which expands the set of
carriers that must contribute to support universal service from only long
distance carriers to all carriers, including LECs, that provide interstate
telecommunications services. Similarly, the set of carriers eligible for the
universal service support has been expanded from only LECs to any eligible
carrier providing local service to a customer, including AT&T as a new entrant
in local markets. The Universal Service Order also adopted measures to provide
discounts on telecommunications services, Internet access and inside wire to
eligible schools and libraries and rural health carrier providers.
AT&T remains subject to the statutory requirements of Title II of the
Communications Act. AT&T must offer service under rates, terms and conditions
that are just, reasonable and not unreasonably discriminatory; it is subject to
the FCC's complaint process, and it must give notice to the FCC and affected
customers prior to discontinuance, reduction, or impairment of service. AT&T has
also made certain commitments that address concerns that had been raised with
regard to the potential impact of declaring AT&T to be non-dominant, including a
three-year rate assurance for low income and low usage residential users and a
three-year limit on, and 5 days advance notice for, rate increases on 800
directory assistance and analog private line services.
AT&T's international private line services have been classified as
non-dominant for several years. AT&T's switched international services have
become subject to increased competition, similar to its domestic services and on
May 9, 1996, the FCC adopted an order reclassifying AT&T as a non-dominant
carrier for such services. AT&T has made certain voluntary commitments that
address issues raised in that proceeding, including commitments: (i) to maintain
its annual average revenues per minute for international residential calls at or
below the 1995 level through May 9, 1999, and in the event of a significant
change that substantially raises AT&T's costs, to provide the FCC five business
days notice prior to implementing rate increases that would raise the annual
average revenues per minute for such calls above the 1995 level; and (ii) to
maintain certain discount calling plans providing at least a 15% discount off
basic pricing schedules until May 9, 1999. AT&T also made voluntary commitments
relating to its operation of international cable facilities, its negotiation of
settlement agreements with foreign carriers and its relationship with foreign
partners.
In addition to the matters described above with respect to the
Telecommunications Act, state public service commissions or similar authorities
having regulatory power over intrastate rates, lines and services and other
matters regulate AT&T's local and intrastate communications services. The system
of regulation used in many states is rate-of-return regulation. In recent years,
many states have adopted different systems of regulation, such as: complete
removal of rate-of-return regulation, pricing flexibility rules, price caps and
incentive regulation.
Wireless Regulatory Environment
Wireless Services' operations (cellular and PCS) are licensed and
regulated by the FCC. The licenses must be renewed periodically. Furthermore, if
a licensee fails to provide service to a specified percentage of the population
in the licensed area, the FCC may reduce the size of the licensed area to that
which is receiving service. Wireless Services does not foresee difficulties with
renewals or risks of license restrictions that would have a material impact on
the performance of its wireless businesses.
Currently, the FCC limits wireless operators to holding a maximum of 45
MHz of cellular, broadband PCS or specialized mobile radio (SMR) licenses in a
single market. However, the FCC recently opened a proceeding to examine whether
to modify or abolish its spectrum cap policy.
The FCC has exclusive jurisdiction to regulate rates and entry for
wireless services and currently does so by permitting competitive market forces
to operate. However, in addition to the licensing rules specified above, the FCC
has imposed a number of other regulatory obligations on wireless carriers. It
requires wireless carriers, as well as other telecommunications carriers, to
remit a portion of their revenues to a federal Universal Service Fund, which is
designed to promote the availability of affordable local telephone service, the
FCC has issued regulations pursuant to the Telecommunications Act that require
the industry to implement local number portability by March 31, 2000. The FCC is
planning to issue rules that would implement provisions of the
Telecommunications Act that require all telecommunications carriers to make
their services accessible to individuals with disabilities if readily
achievable. Similarly, the FCC has required wireless carriers to ensure that
customers using TTY devices (i.e., teletype devices used by the deaf) can call
emergency services (e.g., calls to 911) over wireless digital service as well as
over analog services. The FCC also has specified the technical services that
wireless carriers must provide in order to support electronic wiretapping by law
enforcement authorities pursuant to Communications Assistance to Law Enforcement
Act of 1994. It may not be practicable for Wireless Services or the industry to
meet certain of the deadlines that have been established by the FCC and
investments will be required to comply with the relevant regulations. However,
the FCC is reviewing petitions that have been filed by Wireless Services and by
other members of the wireless industry to postpone compliance dates and modify
regulations that would minimize the burden and expense of compliance.
State and local governments are preempted from regulating either market
entry by, or the rates of, cellular and PCS operators. However, state
governments can regulate other terms and conditions of wireless service and
several states have imposed (or have proposed legislation that will impose)
various consumer protection regulations on the wireless industry. States may
also impose their own universal service support regimes on wireless and other
telecommunications carriers, similar to the requirements that have been
established by the FCC. At the local level, wireless facilities are typically
subject to zoning and land use regulation. However, under the federal
Telecommunications Act, neither local nor state governments may categorically
prohibit the construction of cellular or broadband PCS facilities in any
community.
Cable Regulation and Legislation
The operation of cable television systems is extensively regulated by
the FCC, some state governments and most local governments. The
Telecommunications Act removes barriers to competition in both the cable
television market and the local telephone market and reduces the scope of cable
rate regulation.
The Telecommunications Act requires the FCC to implement numerous
rulemakings, the final outcome of which cannot yet be determined due to court
challenges. Moreover, Congress and the FCC have frequently revisited the subject
of cable television regulation and may do so again. Future legislative and
regulatory changes could adversely affect TCI Group's operations. This section
briefly summarizes key laws and regulations currently affecting the growth and
operation of TCI Group's cable systems.
Cable Rate Regulation. The 1992 Cable Act imposed extensive rate
regulation on the cable television industry. All cable systems are subject to
rate regulation of their basic and upper tier programming services, as well as
their provision of customer equipment used to receive basic tier services,
unless they face "effective competition" in their local franchise area. Under
the 1992 Cable Act, the incumbent cable operator can demonstrate effective
competition by showing either low penetration (less than 30% of the occupied
households in the franchise area subscribe to basic service), or the presence
(measured collectively as 50% availability, 15% customer penetration) of other
multichannel video programming distributors (MVPDs). The Telecommunications Act
expands the existing definition of effective competition to create a special
test for a competing MVPD (other than a direct broadcast satellite (DBS)
distributor) affiliated with a LEC. There is no penetration minimum for a LEC
affiliate to qualify as an effective competitor, but it must offer comparable
programming services in the franchise area.
Although the FCC establishes all cable rate rules, local government
units (commonly referred to as local franchising authorities or LFAs) are
primarily responsible for administering the regulation of the lowest level of
cable -- the basic service tier (BST), which typically contains local broadcast
stations and PEG access channels. Before an LFA begins BST rate regulation, it
must certify to the FCC that it will follow applicable federal rules, and many
LFAs have voluntarily declined to exercise this authority. LFAs also have
primary responsibility for regulating cable equipment rates. Under federal law,
charges for various types of cable equipment must be unbundled from each other
and from monthly charges for programming services, and priced no higher than the
operator's actual cost, plus an 11.25% rate of return.
The FCC itself directly administers rate regulation of any cable
programming service tiers (CPST), which typically contain satellite-delivered
programming. Under the Telecommunications Act, the FCC can regulate CPST rates
only if an LFA first receives at least two complaints from local customers
within 90 days of a CPST rate increase and then files a formal complaint with
the FCC. When new CPST rate complaints are filed, the FCC now considers only
whether the incremental increase is justified and will not reduce the previously
established CPST rate.
Under the FCC's rate regulations, TCI Group was required to reduce its
BST and CPST rates in 1993 and 1994, and has since had its rate increases
governed by a complicated price structure that allows for the recovery of
inflation and certain increased costs, as well as providing some incentive for
expanding channel carriage. The FCC has modified its rate adjustment regulations
to allow for annual rate increases and to minimize previous problems associated
with delays in implementing rate increases. Operators also have the opportunity
of bypassing this "benchmark" structure in favor of traditional cost-of-service
regulation in cases where the latter methodology appears favorable. However, the
FCC significantly limited the inclusion in the rate base of acquisition costs in
excess of the historical cost of tangible assets. As a result, TCI Group pursued
cost of service justifications in only a few cases. Premium cable services
offered on a per channel or per program basis remain unregulated, as do
affirmatively marketed packages consisting entirely of new programming product.
The Telecommunications Act sunsets FCC regulation of CPST rates for all
systems (regardless of size) on March 31, 1999. However, certain members of
Congress and FCC officials have called for the delay of this regulatory sunset
and further have urged more rigorous rate regulation (including limits on
programming cost pass-throughs to cable customers) until a greater degree of
competition to incumbent cable operators has developed. The Telecommunications
Act also relaxes existing uniform rate requirements by specifying that uniform
rate requirements do not apply where the operator faces effective competition,
and by exempting bulk discounts to MDUs, although complaints about predatory
pricing in MDUs still may be made to the FCC.
Cable Entry Into Telecommunications. The Telecommunications Act
provides that no state or local laws or regulations may prohibit or have the
effect of prohibiting any entity from providing any interstate or intrastate
telecommunications service. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way.
Although the Telecommunications Act clarifies that traditional cable franchise
fees may be based only on revenues related to the provision of cable television
services, it also provides that LFAs may require reasonable, competitively
neutral compensation for management of the public rights-of-way when cable
operators provide telecommunications service. The Telecommunications Act
prohibits LFAs from requiring cable operators to provide telecommunications
service or facilities as a condition of a franchise grant, renewal or transfer,
except that LFAs argue they can seek "institutional networks" as part of such
franchise negotiations. The favorable pole attachment rates afforded cable
operators under federal law can be increased by utility companies owning the
poles during a five year phase-in period beginning in 2001, if the cable
operator provides telecommunications service, as well as cable service, over its
plant.
Telephone Company Entry Into Cable Television. The Telecommunications
Act allows telephone companies to compete directly with cable operators by
repealing the historic telephone company/cable company cross-ownership ban and
the FCC's video dialtone regulations. This will allow LECs, including the RBOCs,
to compete with cable operators both inside and outside their telephone service
areas. Because of their resources, LECs could be formidable competitors to
traditional cable operators, and certain LECs have begun offering cable service.
Under the Telecommunications Act, a LEC or other entity providing video
programming to customers will be regulated as a traditional cable operator
(subject to local franchising and federal regulatory requirements), unless it
elects to provide its programming via an "open video system" (OVS). It was
anticipated that the primary benefit of using an OVS regulatory model was to
avoid the need to obtain a local franchise prior to providing services. However,
a January 1999 federal court of appeals decision held that OVS providers can be
required to obtain such a franchise. To be eligible for OVS status, the provider
cannot occupy more than one-third of the system's activated channels when demand
for channels exceeds supply. Nor can it discriminate among programmers or
establish unreasonable rates, terms or conditions for service.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibitions remain on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator buyouts of co-located LEC systems, and joint ventures among cable
operators and LECs in the same market. The Telecommunications Act provides a few
limited exceptions to this buyout prohibition.
Electric Utility Entry Into Telecommunications/Cable Television. The
Telecommunications Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services, information services, and
other services or products subject to the jurisdiction of the FCC,
notwithstanding the Public Utilities Holding Company Act. Electric utilities
must establish separate subsidiaries, known as "exempt telecommunications
companies" and must apply to the FCC for operating authority. Again, because of
their resources, electric utilities could be significant competitors.
Additional Ownership Restrictions. Pursuant to the 1992 Cable Act, the
FCC adopted regulations establishing a 30% limit on the number of homes
nationwide that a cable operator may reach through cable systems in which it
holds an attributable interest with an increase to 35% if the additional cable
systems are minority controlled. The FCC stayed the effectiveness of its
ownership limits pending the appeal of a September 16, 1993 decision by the
United States District Court for the District of Columbia which, among other
things, found unconstitutional the provision of the 1992 Cable Act requiring the
FCC to establish such ownership limits. If the ownership limits are determined
on appeal to be constitutional, they may affect TCI Group's ability to acquire
attributable interests in additional cable systems. The FCC is currently
conducting a reconsideration of its national customer limit rules, and it is
possible the FCC will revise both the national customer reach percentage
limitation and/or the manner in which it attributes ownership to a cable
operator. Either of these revisions, which are expected to be completed in 1999,
could adversely affect various joint ventures, partnerships and equity ownership
arrangements announced by TCI Group in 1997 and 1998 in TCI Group's effort to
reduce the number of cable systems over which it has control and management
responsibility.
The FCC also adopted regulations limiting carriage by a cable operator
of national programming services in which that operator holds an attributable
interest (using the same attribution standards as were adopted for its limits on
the number of homes nationwide that a cable operator may reach through its cable
systems) to 40% of the activated channels on each of the cable operator's
systems. The rules provide for the use of two additional channels or a 45%
limit, whichever is greater, provided that the additional channels carry
minority controlled programming services. The regulations also grandfather
existing carriage arrangements which exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. These channel occupancy limits
apply only up to 75 activated channels on the cable system, and the rules do not
apply to local or regional programming services.
The Telecommunications Act eliminates statutory restrictions on
broadcast/cable cross-ownership (including broadcast network/cable
restrictions), but leaves in place existing FCC regulations prohibiting local
cross-ownership between television stations and cable systems. The
Telecommunications Act leaves in place existing restrictions on cable
cross-ownership with Satellite Master Antenna Television (SMATV) and
multi-channel multi-point distribution systems (MMDS) facilities, but lifts
those restrictions where the cable operator is subject to effective competition.
In January 1995, however, the FCC adopted regulations which permit cable
operators to own and operate SMATV systems within their franchise area, provided
that such operation is consistent with local cable franchise requirements.
Must Carry/Retransmission Consent. The 1992 Cable Act contains
broadcast signal carriage requirements that allow local commercial television
broadcast stations to elect once every three years between requiring a cable
system to carry the station ("must carry") or negotiating for payments for
granting permission to the cable operator to carry the station ("retransmission
consent"). Less popular stations typically elect must carry, and more popular
stations typically elect retransmission consent. Must carry requests can dilute
the appeal of a cable system's programming offerings, and retransmission consent
demands may require substantial payments or other concessions (e.g. a
requirement that the cable system also carry the local broadcaster's affiliated
cable programming service). Either option has a potentially adverse effect on
TCI Group's business. The burden associated with must-carry obligations could
dramatically increase if television broadcast stations proceed with planned
conversions to digital transmissions and if the FCC determines in a pending
rulemaking that cable systems must carry all analog and digital signals
transmitted by the television stations.
Access Channels. LFAs can include franchise provisions requiring cable
operators to set aside certain channels for PEG access programming. Federal law
also requires a cable system with 36 or more channels to designate a portion of
its activated channel capacity (either 10% or 15%) for commercial leased access
by unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of this
designated channel capacity, but use of commercial leased access channels has
been relatively limited. In February of 1997, the FCC released revised rules
which mandated a modest rate reduction that has made commercial leased access a
more attractive option for third party programmers, particularly for part-time
leased access carriage.
"Anti-Buy Through" Provisions. Federal law requires each cable system
to permit customers to purchase premium or pay-per-view video programming
offered by the operator on a per-channel or a per-program basis without the
necessity of subscribing to any tier of service (other than the basic service
tier) unless the system's lack of addressable converter boxes or other
technological limitations does not permit it to do so. The statutory exemption
for cable systems that do not have the technological capability to comply
expires in October 2002, but the FCC may extend that period if deemed necessary.
Access to Programming. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes satellite video programmers affiliated with cable
operators from favoring cable operators over competing multichannel video
programming distributors (such as DBS and MMDS distributors). This provision
limits the ability of vertically integrated satellite cable programmers to offer
exclusive programming arrangements to TCI Group. Recently, both Congress and the
FCC have considered proposals that would expand the program access rights of
cable's competitors, including the possibility of subjecting both terrestrially
delivered video programming and video programmers who are not affiliated with
cable operators to all program access requirements.
Inside Wiring. In a 1997 Order, the FCC established rules that require
an incumbent cable operator upon expiration or termination of an MDU service
contract to sell, abandon, or remove "home run" wiring that was installed by the
cable operator in a MDU building. These inside wiring rules will assist building
owners in their attempts to replace existing cable operators with new video
programming providers who are willing to pay the building owner a higher fee.
Additionally, the FCC has proposed abrogating all exclusive MDU contracts held
by cable operators, but at the same time allowing competitors to cable to enter
into exclusive MDU service contracts.
Internet Service Regulation. Although there is no significant federal
regulation of cable system delivery of internet services at the current time,
and the FCC recently issued a report to Congress finding no immediate need to
impose such regulation, this situation may change as cable systems expand their
broadband delivery of internet services. In particular, proposals have been
advanced at the FCC that would require cable operators to provide access to
unaffiliated internet service providers and online service providers. Certain
internet service providers also are attempting to use existing commercial leased
access provisions of the Telecommunications Act to gain access to cable system
delivery. Finally, some local franchising authorities are considering the
imposition of mandatory internet access requirements as part of cable franchise
renewals or transfer approvals.
Other FCC Regulations. In addition to the FCC regulations noted above,
there are other FCC regulations covering such areas as equal employment
opportunity, customer privacy, programming practices (including, among other
things, syndicated program exclusivity, network program nonduplication, local
sports blackouts, indecent programming, lottery programming, political
programming, sponsorship identification, and children's programming
advertisements), registration of cable systems and facilities licensing,
maintenance of various records and public inspection files, frequency usage,
lockbox availability, antenna structure notification, tower marking and
lighting, consumer protection and customer service standards, technical
standards, and consumer electronics equipment compatibility. FCC requirements
imposed in 1997 for Emergency Alert Systems and for hearing-impaired Closed
Captioning on programming will result in new and potentially significant costs
for TCI Group. The FCC has the authority to enforce its regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
The FCC recently completed a rulemaking designed to encourage and
facilitate third-party sale of cable converters to cable customers.
Specifically, the FCC requires cable operators to segregate security functions
of set top boxes from all other functions by July 1, 2000. Additionally, as of
January 1, 2005, cable operators can no longer lease or sell converter set top
boxes that have integrated security and navigation functions. The result of this
rulemaking is that cable subscribers will not necessarily obtain their set top
boxes from the cable operator, but, instead, may purchase such set top boxes
from third-party vendors. Such third-party sales of previously unmodified cable
set top boxes could make it more difficult for cable operators to combat theft
of service.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenue to a federal copyright royalty pool (such percentage varies depending on
the size of the system and the number of distant broadcast television signals
carried), cable operators can obtain blanket permission to retransmit
copyrighted material on broadcast signals. The possible modification or
elimination of this compulsory copyright license is subject to continuing review
and could adversely affect TCI Group's ability to obtain desired broadcast
programming. In addition, the cable industry pays music licensing fees to
Broadcast Music, Inc. and is negotiating a similar arrangement with the American
Society of Composers, Authors and Publishers. Copyright clearances for
nonbroadcast programming services are arranged through private negotiations.
State and Local Regulation. Cable television systems generally are
operated pursuant to nonexclusive franchises granted by a municipality or other
state or local government entity. The Telecommunications Act clarified that the
need for an entity providing cable services to obtain a local franchise depends
solely on whether the entity crosses public rights of way. Federal law now
prohibits franchise authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises covering an existing cable
system's service area. Cable franchises generally are granted for fixed terms
and in many cases are terminable if the franchisee fails to comply with material
provisions. Non-compliance by the cable operator with franchise provisions may
also result in monetary penalties.
The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing cable operations, service rates, franchise fees, system construction
and maintenance obligations, system channel capacity, design and technical
performance, customer service standards, and indemnification protections. A
number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. Although LFAs have considerable
discretion in establishing franchise terms, there are certain federal
limitations. For example, LFAs cannot insist on franchise fees exceeding 5% of
the system's gross revenue, cannot dictate the particular technology used by the
system, and cannot specify video programming other than identifying broad
categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees and funding for PEG channels as a condition of renewal.
Similarly, if a franchise authority's consent is required for the purchase or
sale of a cable system or franchise, such authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
consent. Historically, franchises have been renewed for cable operators that
have provided satisfactory services and have complied with the terms of their
franchises.
COMPETITION
Competition in communications services is based on price and pricing
plans, the types of services offered, customer service, access to customer
premises, and communications quality, reliability and availability, as well as,
for business customers, the ability to provide high quality data communication
services and technical support. AT&T's principal competitors include
MCIWorldcom, Inc. and Sprint Corporation, for long distance, and the RBOCs and
GTE Corporation, for local services. AT&T also experiences significant
competition in long-distance from dial around resellers.
The ILECs have very substantial capital and other resources, long
standing customer relationships and extensive existing facilities and network
rights-of-way and are AT&T's primary competitors in the local services market.
In addition, it is anticipated that a number of long distance telecommunication,
wireless and cable service providers and others will enter the local services
market in competition with AT&T. Some of these potential competitors have
substantial financial and other resources. AT&T will also compete in the local
services market with a number of CLECs, a few of which have existing local
networks and significant financial resources.
Wireless Services' primary competitors are AirTouch Communications,
Inc., BellSouth Corporation, Ameritech Corp., Bell Atlantic Mobile Systems Inc.,
GTE Corporation, SBC Communications Inc., Sprint PCS, Inc. and Nextel
Communication, Inc. Competition is principally on the basis of service quality,
service offering and packaging capability, price and coverage area. Wireless
Services' cellular operations have always experienced direct competition from
the second cellular licensee in each market. Beginning in 1997, Wireless
Services began experiencing competition from as many as six license holders in
certain markets. Competition from new providers in Wireless Services' markets
will continue to increase as the networks of license holders are built out over
the next several years. While Wireless Services will continue to build out its
wireless network, there is no assurance that Wireless Services will be able to
continue to do so in a reasonable and economical manner as new entrants lower
rates and the cost of construction permits and licenses rise. In addition, as
the number of new entrants in Wireless Services' markets increases, AT&T
anticipates that there may be increased pressure to reduce prices, which may
adversely affect margins.
Cable television competes for customers in local markets with other
providers of entertainment, news and information. The competitors in these
markets include broadcast television and radio, newspapers, magazines and other
printed material, motion picture theatres, video cassettes and other sources of
information and entertainment including directly competitive cable television
operations and internet service providers. The Cable Acts are designed to
increase competition in the cable television industry. There are alternative
methods of distributing the same or similar video programming offered by cable
television systems. These include DBS (allowing the subscriber to receive video
services directly via satellite using a relatively small dish), telephone
networks (whether it is through wireless cable, or through upgraded telephone
networks), utility company networks, MMDS (which deliver programming services
over microwave channels received by customers with special antennas),
competitive, non-exclusive franchises, city provided cable services, SMATV
systems (which provide multichannel program services directly to hotel, motel,
apartment, condominium and similar multi-unit complexes within a cable
television system's franchise area, generally free of any regulation by state
and local governmental authorities). In addition to competition for customers,
the cable television industry competes with broadcast television, radio, the
print media and other sources of information and entertainment for advertising
revenue.
AT&T currently faces significant competition and expects that the level
of competition will continue to increase. As competitive, regulatory and
technological changes occur, including those occasioned by the
Telecommunications Act, AT&T anticipates that new and different competitors will
enter and expand their position in the communications services markets. These
may include entrants from other segments of the communications and information
services industry or global competitors seeking to expand their market
opportunities. Many such new competitors are likely to enter with a strong
market presence, well recognized names and pre-existing direct customer
relationships.
The Telecommunications Act has already impacted the competitive
environment. Anticipating changes in the industry, non-RBOC LECs, which are not
required to implement the Telecommunications Act's competitive checklist prior
to offering long distance in their home markets, have begun integrating their
local service offerings with long distance offerings in advance of AT&T being
able to offer combined local and long distance service in these areas, adversely
affecting AT&T's revenues and earnings in these service regions. In addition,
mergers, such as the proposed Bell Atlantic/GTE merger, could accelerate RBOC
entry into long distance.
In addition, the Telecommunications Act will permit RBOCs to provide
interLATA interexchange services after demonstrating to the FCC that such
provision is in the public interest and satisfying the conditions for developing
local competition established by the Telecommunications Act. The RBOCs have
petitioned the FCC for permission to provide interLATA interexchange services in
one or more states within their home market; to date the FCC has not granted any
petition. To the extent that the RBOCs obtain in-region interLATA authority
before the Telecommunications Act's checklist of conditions have been fully or
satisfactorily implemented and adequate facilities-based local exchange
competition exists, there is a substantial risk that AT&T and other
interexchange service providers would be at a disadvantage to the RBOCs in
providing both local service and combined service packages. Because it is widely
anticipated that substantial numbers of long distance customers will seek to
purchase local, interexchange and other services from a single carrier as part
of a combined or full service package, any competitive disadvantage, inability
to profitably provide local service at competitive rates or delays or
limitations in providing local service or combined service packages could
adversely affect AT&T's future revenues and earnings. In any event, the
simultaneous entrance of numerous new competitors for interexchange and combined
service packages is likely to adversely affect AT&T's future long distance
revenues and could adversely affect future earnings.
Furthermore, in February 1997, a General Agreement on Trade in Services
(GATS) was reached under the World Trade Organization. The GATS, which
became effective January 1, 1998, is designed to open each country's domestic
telecommunications markets to foreign competitors. The GATS, and future trade
agreements, may accelerate the entrance into the U.S. market of foreign
telecommunications providers, certain of whom are likely to possess dominant
home market positions in which there is not effective competition. The GATS may
also permit AT&T's entrance into other markets as only a small number of
countries refused to eliminate their foreign ownership restrictions.
In addition to the matters referred to above, various other factors,
including technological hurdles, market acceptance, start-up and ongoing costs
associated with the provision of new services and local conditions and
obstacles, could adversely affect the timing and success of AT&T's entrance into
the local exchange services market and AT&T's ability to offer combined service
packages that include local service.
FORWARD LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-K 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 Shareholders, Form 10-Q or Form 8-K of AT&T may include forward looking
statements. In addition, other written or oral statements which constitute
forward looking statements have been made and may in the future be made by or on
behalf of AT&T, including statements concerning future operating performance,
AT&T's share of new and existing markets, AT&T's short- and long-term revenue
and earnings growth rates, and general industry growth rates and AT&T's
performance relative thereto. These forward looking statements rely on a number
of assumptions concerning future events, including the outcome of litigation,
the adoption and implementation of balanced and effective rules and regulations
by the 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. These factors include, but are not limited to:
- - the adoption and implementation of balanced and effective rules and
regulations by the FCC and state regulatory agencies to implement the provisions
of the Telecommunications Act; the outcome of litigation relative thereto; and
the impact of regulatory changes relating to access reform, the unbundling of
cable facilities and international settlement reform;
- - success and market acceptance for new initiatives, including the launch of
cable telephony, many of which are untested; the level and timing of the growth
and profitability of new initiatives; start-up costs associated with entering
new markets, including advertising and promotional efforts; successful
deployment and technological implementations of new systems and applications to
support new initiatives; the ability to address the needs of customers for
broadband and Internet access; and local conditions and obstacles;
- - competitive pressures, including pricing pressures, alternative routing
developments, and the ability to offercombined service packages that include
local service; technological developments, including the rate of technological
advances in, and implementation of, internet telephony services that compete
with traditional telephony services; the extent and pace at which different
competitive environments develop for each segment of the telecommunications
industry; the extent at and duration for which competitors from each segment of
the telecommunications industry are able to offer combined or full service
packages prior to AT&T being able to; and the degree to which AT&T experiences
material competitive impacts to its traditional service offerings prior to
achieving adequate local service entry;
- - the availability, terms and deployment of capital; the impact of regulatory
and competitive developments on capital outlays; the ability to achieve cost
savings and realize productivity improvements; the ability to effectively
integrate TCI's and TCG's operations with AT&T; the ability to realize
cost-saving and revenue synergies from the TCI merger and TCG merger; the
ability to successfully implement the BT, Time Warner and cable operator joint
ventures; the ability to expand the cable footprint and the wireless footprint
in an economical and expeditious manner; and the ability to enter into
agreements which provide for reasonable roaming rates for wireless services; and
- - the ability to attract and retain qualified management employees in all key
areas of the business; general economic conditions, government and regulatory
policies, and business conditions in the communications industry.
Readers are cautioned not to put undue reliance on such forward looking
statements. For a more detailed description of these and additional
uncertainties and other factors that could cause actual results to differ
materially from such forward looking statements, see "Results of Operations",
"Financial Condition", "Regulatory and Legislative Developments", and
"Competition" included in or incorporated by reference into this Form 10-K. As
described elsewhere in this Form 10-K, these uncertainties and factors could
adversely affect the timing and success of AT&T's entrance into the local
exchange services market and AT&T's ability to offer combined service packages
that include local service, thereby adversely affecting AT&T's future revenues
and earnings. 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.
LIBERTY MEDIA GROUP
LIBERTY MEDIA GROUP
Programming Services
Liberty Media Group, through Liberty Media Corporation, and its
attributed subsidiaries and affiliates, produces, acquires and distributes
entertainment, sports and informational programming services, as well as
electronic retailing services. Such programming is delivered via cable
television and other distribution technologies to viewers in the United States
and overseas. Liberty Media Group's assets also include video and telephony
distribution businesses which operate in countries outside the United States.
Liberty Media Group's principal assets include interests in Encore Media Group
LLC, Discovery Communications, Inc., Fox/Liberty regional and national sports
networks, Time Warner Inc., QVC, Inc., and USA Networks, Inc. Liberty Media
Group also has interests in certain other domestic and international programming
networks and businesses.
Cable television networks distribute their programming via cable and
other distribution technologies, including direct-to-home satellite (DTH)
companies, broadcast television stations, SMATV systems, MMDS, and the Internet.
Both basic cable networks and pay television programming services generally
enter into separate multi-year agreements, known as "affiliation agreements,"
with operators of cable television systems, SMATV systems, MMDS and DTH
distribution companies that have agreed to carry such networks. With the
proliferation of new cable networks and services, competition for cable carriage
on the limited available channel capacity has intensified. Basic cable networks
generate their revenue principally from the sale of advertising time on the
networks and from receipt of monthly per subscriber fees paid by cable
operators, DTH distribution companies and other customers, who have contracted
to receive and distribute such networks. Pay-TV networks do not sell advertising
and generate their revenue principally from monthly subscriber fees.
Relationship with the TCI Group. Most of the networks affiliated with
Liberty Media Group have entered into affiliation agreements with Satellite
Services, Inc. (TCI-SSI) a company within the TCI Group. TCI-SSI purchases
programming services from programming suppliers and then makes such services
available to cable television systems owned by or affiliated with the TCI Group
(TCI-SSI Affiliates). Customers served by TCI-SSI Affiliates (TCI-SSI
Subscribers) represented approximately 24% of U.S. households which received
cable or satellite delivered programming at December 31, 1998. The following
details each national network which had a number of TCI-SSI Subscribers, as a
percentage of total subscribers, in excess of 24% as of December 31, 1998: FX
(28%), Fox Sports World (64%), Fox Sports World Espanol (35%), and International
Channel (26%). Regional networks, such as Bay TV and the regional sports
networks may be disproportionately dependent on the predominant cable provider
in their region, whether a TCI-SSI Affiliate or an unaffiliated cable operator.
Therefore, where a TCI-SSI Affiliate is the predominant cable provider in the
region, the ratio of TCI-SSI Subscribers to overall subscribers to such networks
significantly exceeds 24%. For example, at December 31, 1998, approximately 87%
of the subscribers of Bay TV, a regional network for the San Francisco region,
were TCI-SSI Affiliates. Each of EMG and TCI Music, Inc. ("TCI Music") has
entered into long term, fixed rate affiliation agreements with the TCI Group
pursuant to which the TCI Group pays monthly fixed amounts in exchange for
unlimited access to certain programming services of such companies.
Programming Services
Encore Media Group LLC. EMG provides 25 channels of cable and
satellite-delivered premium movie services, including Encore, which
predominantly airs hit movies from the `60's, `70's and `80's as well as first
run movies; six thematic multiplexed channels--Love Stories, Westerns, Mystery,
Action, True Stories and WAM!, a 24-hour youth oriented education and
entertainment service; STARZ! a first-run movie service; STARZ!2, offering
"prime time movies all the time," and BET Movies/STARZ!3 featuring African
American actors and directors. EMG also offers MOVIEplex, a "theme by day"
channel featuring a different Encore or thematic multiplex channel each day, on
a weekly rotation.
Discovery Communications, Inc. ("Discovery") Discovery is the largest
originator of documentary, non-fiction programming in the world. Discovery
operates several business units. The first of these, Discovery Networks, US,
consists of four basic cable networks: Discovery Channel, The Learning Channel,
Animal Planet, and the recently acquired Travel Channel, and six networks
created for the digital platform: Discovery Science, Discovery Civilization,
Discovery Home & Leisure, Discovery Kids, Discovery Health and Discovery Wings.
Discovery Channel and The Learning Channel provide nature, science, technology
and other non-fiction programming, and are distributed in virtually all U.S.
pay-television homes. Animal Planet offers a range of animal programming,
including children's programs, game shows, feature films, wildlife documentaries
and how-to pet shows.
Discovery Networks International distributes various Discovery networks
in Latin America, Europe, Asia and Africa. Discovery's international networks
serve more than 66 million customers in more than 50 countries outside the
United States. Discovery Retail operates over 115 retail stores in the United
States and the United Kingdom. These include The Nature Company stores,
Discovery Channel Stores and one Discovery Channel Destination flagship store.
Discovery also markets and distributes BBC America, which launched in March
1998. Discovery recently purchased Eye on People, a 24-hour cable channel
focused on people and personalities, from CBS Corporation.
Time Warner Inc. Time Warner has interests in four fundamental areas of
business: Entertainment, consisting primarily of interests in filmed
entertainment, television production, television broadcasting, recorded music
and music publishing; Cable Networks, consisting principally of interests in
cable television programming; Publishing, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and Cable, consisting
principally of interests in cable television systems. Time Warner is a holding
company which derives its operating income and cash flow from its investments in
its direct subsidiaries, Time Warner Companies, Inc. and TBS.
In connection with the TBS/Time Warner Merger in which Liberty Media
Group received Time Warner common shares, Time Warner, TBS, TCI and Liberty
Media Group entered into an Agreement Containing Consent Order with the Federal
Trade Commission (FTC), dated August 14, 1996, as amended on September 4, 1996
(the FTC Consent Decree). Pursuant to the FTC Consent Decree, among other
things, Liberty Media Group agreed to exchange its shares of Time Warner common
stock for shares of a separate series of Time Warner common stock with limited
voting rights designated as Series LMCN-V common stock (the "TW Exchange
Stock"). The TW Exchange Stock entitles the holder to one one-hundredth
(1/100th) of a vote for each share with respect to the election of directors.
Liberty Media Group holds approximatley 114 million shares of the TW Exchange
Stock, which represent less than 1% of the voting power of Time Warner's
outstanding common stock. Each share of TW Exchange Stock is exchangeable, under
certain circumstances, for one share of Time Warner common Stock.
ACTV, Inc. On September 21, 1998 Liberty Media Group purchased a 7.5%
interest in ACTV, Inc., a company which produces tools for the creation of
programming that allows viewer participation for both television and internet
platforms.
BET Holdings II, Inc. (BET). BET's primary operations are conducted by
BET Cable Network, an advertiser-supported basic cable network which provides a
broad mix of music videos, off-network situation comedies and original
programming targeted to the interests and concerns of African American viewers.
BET also operates BET on Jazz featuring jazz concerts and music videos, as well
as BET Action Pay-Per-View, which distributes films produced by major studios
and independent film companies. In addition, BET has interests in magazine and
book publishing, as well as motion picture production.
Court TV. Court TV is a basic cable network which provides live and/or
tape delayed coverage and analysis of selected criminal and civil legal
proceedings.
TCI Music, Inc. TCI Music is a diversified music entertainment company
delivering audio and video music services to commercial and residential
customers via television, the Internet and other distribution technologies. TCI
Music's principal services include THE BOX, an interactive all music video
channel; Digital Music Express, a premium digital audio music service; and
SonicNet, a leading music site on the Internet.
E! Entertainment Television. E! Entertainment Television is a 24-hour
basic cable network devoted to the world of celebrities and entertainment. The
network's programming mix includes entertainment news reports, original
programs, and exclusive live coverage of major awards shows and celebrity
events.
International Cable Channels Partnership, Ltd. (ICCP). ICCP distributes
and markets ethnic programming in the United States. Its basic network,
International Channel, provides news, sports, music, movies and general
entertainment programming from around the world in more than 20 different
languages. ICCP also operates Premium Networks, a digital tier of
single-language channels, such as Chinese and French. In addition, ICCP markets
and distributes Canales n, a newly launched digital tier of Spanish-language
cable television channels designed to serve the growing Latino market in the
United States.
Odyssey. Odyssey, a national basic cable network, provides viewers with
non-denominational religious and values-based entertainment and informational
programming. Hallmark Entertainment and The Jim Henson Company, both leaders in
the production of family entertainment, recently invested in Odyssey, reducing
the Liberty Media Group's ownership interest from 49% to approximately 33%. Both
Hallmark Entertainment and The Jim Henson Company will make their programming
available to Odyssey.
MacNeil/Lehrer Productions. MacNeil/Lehrer Productions is the primary
producer of the News Hour on the Public Broadcasting System and a producer of
other high-quality documentary and public affairs programming.
TV Guide, Inc. (formerly United Video Satellite Group, Inc.) is a media
and communications company engaged predominantly in providing print, passive and
interactive program listings guides to households, distributing superstation
programming to cable television systems and DTH satellite providers, and
marketing satellite delivered programming to C-band satellite dish owners.
On March 1, 1999, UVSG acquired Liberty Media Group's 40% interest in
Superstar/Netlink Group LLC (SNG), and Liberty Media Group's 100% interest in
Netlink USA in exchange for 12,750,000 shares of UVSG Class B Common Stock (the
Netlink Transaction). As a result of the Netlink Transaction, UVSG owns
approximately 80% of SNG which markets packages of satellite entertainment
programming to C-band satellite dish owners in North America. Netlink USA
uplinks the signals of six broadcast television stations to C-band packagers
such as SNG.
On the same date, UVSG acquired from TVG Holdings, Inc., an indirect
subsidiary of News Corp., the stock of News America Publications, Inc. and TVSM,
Inc. (the TV Guide Transaction). These entities publish TV Guide Magazine and
other printed television program listings guides and distribute, through the
internet, an entertainment service known as TV Guide Online. News Corp. received
consideration consisting of approximately 22.5 million shares of UVSG Class A
common stock, approximately 37.5 million shares of UVSG Class B common stock and
$800 million in cash. News Corp. then elected to purchase approximately 6.5
million additional shares of UVSG Class A Common Stock for approximately $129
million in cash to equalize its ownership with that of TCI.
Upon closing of the foregoing transactions, UVSG's name was changed to
TV Guide, Inc. TCI and News Corp. each owned approximately 44% of the issued and
outstanding common stock of UVSG and each owned approximately 49% of the total
voting power of UVSG. TCI's entire interest in UVSG is attributed to Liberty
Media Group and TCI Ventures Group.
USA Networks, Inc. USAi, formerly known as HSN, Inc., is a diversified
media and electronic commerce company that is engaged in five principal areas of
business: HSN, which primarily engages in the electronic retailing business;
Networks and television production, which operates the USA Network, a general
entertainment basic cable television network, and The Sci-Fi Channel, which
features classic science fiction movies, science fact, fiction, movies and
original production; Studios USA, which produces and distributes television
programming; USA Broadcasting, which owns and operates a group of UHF and low
power television stations; Ticketmaster Group, Inc., which is the leading
provider of automated ticketing services in the United States; and Internet
services.
Liberty Media Group's interest in USAi consists of shares of USAi
common stock held by Liberty Media Group and its subsidiaries, shares of USAi
common stock held by certain entities in which Liberty Media Group has an equity
interest but only limited voting rights, and securities of certain subsidiaries
of USAi which are exchangeable for shares of USAi common stock. In general,
until the occurrence of certain events and with the exception of certain
negative controls, Mr. Barry Diller has voting power over Liberty Media Group's
interest in USAi.
Fox Sports Networks. In April 1996, Liberty Media Group and News Corp.,
formed Fox/Liberty Networks (Fox Sports), a joint venture to hold Liberty Media
Group's national and regional sports networks and the FX network. In December
1997, Fox Sports completed a series of transactions (the Rainbow Transactions)
with Rainbow Media Sports Holdings, Inc. (Rainbow) in which Fox Sports acquired
a 40% interest in Rainbow's eight regional sports networks, the Madison Square
Garden entertainment complex, Radio City Productions LLC, the New York Rangers,
a professional hockey team, and the New York Knicks, a professional basketball
team. As of December 31, 1998, Fox Sports owned interests in, or was affiliated
with, 24 regional sports networks, 17 of which operate under the Fox Sports
name. These regional sports networks have rights to telecast live games of
professional sports teams in the National Basketball Association, the National
Hockey League and/or Major League Baseball, and numerous collegiate sports
teams.
As part of the Rainbow Transaction, Fox Sports and Rainbow established
a 50-50 partnership to operate Fox Sports Net, which provides affiliated
regional sports networks, 24 hours per day, with national sports programming to
supplement their regional sports offerings. Fox Sports Net features live and
replayed sporting events, as well as other original sports programming,
including a national sports news program, Fox Sports News. Fox Sports and
Rainbow also established a national advertising representative firm to sell
advertising time during both the regional affiliates' local programming and
national network programming provided by Fox Sports Net.
Fox Sports also operates several national networks in addition to Fox
Sports Net, including FX, a general entertainment network which also carries
various sporting events; FiT TV, which features health and fitness programming;
Speedvision, which provides coverage of the automotive, motorcycle, aviation and
marine industries; and Outdoor Life Network, which is devoted to adventure,
wildlife and environmental issues and the outdoor lifestyle.
At the international level, Liberty Media Group and TINTA formed a
joint venture with News Corp. to hold their international sports interests.
These include Fox Sports World Espanol, a Spanish language sports network,
distributed in the United States and in Latin America, and STAR TV, a
satellite-delivered programming platform available to 220 million viewers in
Asia, India and the Middle East. Outside of the venture with News Corp., Liberty
Media Group and TINTA own an interest in J-Sports, a sports network in Japan
featuring coverage of SUMO wrestling, soccer, baseball and other international
sporting events; and Torneos y Competencias S.A. ("TyC"), Argentina's dominant
sports programming service. TyC also owns an interest in Canal 9, a general
entertainment broadcast channel in Buenos Aires, Argentina which has become an
international superchannel, providing programming to the United States and, via
cable, to outlying areas of Argentina.
The sports programming networks typically enter into rights agreements
with one or more professional sports teams in their regions and acquire rights
to collegiate and other sporting events through arrangements with regional
conferences, individual schools, programming syndicators and event organizers.
Fox Sports also acquires national rights agreements with professional leagues,
such as Major League Baseball, and with regional collegiate conferences.
Programming acquired under national rights agreements may be exhibited on Fox
Sports Net and FX in addition to the regional sports networks. The duration of
the rights agreements with the professional teams ranges from one to 20 years.
The rights agreements for collegiate sporting events typically range from two to
10 years. Certain factors such as player strikes, bankruptcy of leagues or
individual teams or team relocations may have an adverse effect on the revenue
of the regional sports networks.
Telemundo. On August 12, 1998, Liberty Media Group, in a 50-50
partnership with Sony Pictures Entertainment, acquired 100% of the Telemundo
network and approximately 50% of the Telemundo station group. The Telemundo
network is a broadcast network which provides 24-hour Hispanic language
programming to 61 markets in the United States, including the 37 largest
Hispanic markets, and reaches approximately 85% of all Hispanic households in
the United States. The Telemundo station group owns and operates eight full
power UHF stations and 15 low power television stations serving some of the
largest Hispanic markets in the United States and Puerto Rico. While Liberty
Media Group has approximately a 25% interest in the Telemundo station group, its
voting power is less than 5% to meet certain regulatory requirements.
Electronic Retailing. Liberty Media Group has significant investments
in the two largest home shopping companies in the United States--QVC and HSN.
These companies market and sell a wide variety of consumer products and services
primarily by means of televised shopping programs on the QVC and HSN networks
and via the Internet through iQVC and Internet Shopping Network. QVC also
operates shopping networks in the United Kingdom and Germany, while HSN operates
home shopping networks in Japan and Germany.
TINTA. On November 19, 1998 TINTA completed its merger with a wholly
owned subsidiary of TCI and, as a result, TCI now owns 100% of TINTA. Prior to
the TINTA merger the TCI Ventures Group owned approximately 83% of TINTA's
Series A common stock and all of TINTA's Series B common stock. Following the
TINTA merger, approximately 85% of TINTA was attributed to the TCI Ventures
Group and 15% was attributed to the Liberty Media Group.
Regulation-Programming Companies
The FCC regulates the providers of satellite communications services
and facilities for the transmission of programming services, the cable
television systems that carry such services, and, to some extent, the
availability of the programming services themselves through its regulation of
program licensing. Cable television systems are also regulated by municipalities
or other state and local government authorities. Continued rate regulation or
other franchise conditions could place downward pressure on subscriber fees
earned by the programming companies described above in which Liberty Media Group
has interests (the Programming Companies) and regulatory carriage requirements
could adversely affect the number of channels available to carry the Programming
Companies.
Regulation of Program Licensing. The 1992 Cable Act directed the FCC to
promulgate regulations regarding the sale and acquisition of cable programming
between multi-channel video programming distributors (including cable operators)
and satellite-delivered programming services in which a cable operator has an
attributable interest. The legislation and the implementing regulations adopted
by the FCC preclude virtually all exclusive programming contracts between cable
operators and satellite programmers affiliated with any cable operator (unless
the FCC first determines the contract serves the public interest) and generally
prohibit a cable operator that has an attributable interest in a satellite
programmer from improperly influencing the terms and conditions of sale to
unaffiliated multi-channel video programming distributors. Further, the 1992
Cable Act requires that such affiliated programmers make their programming
services available to cable operators and competing multi-channel video
programming distributors such as MMDS and direct broadcast satellite
distributors on terms and conditions that do not unfairly discriminate among
such distributors. The Telecommunications Act has extended these rules to
programming services in which telephone companies and other common carriers have
attributable ownership interests. The FCC recently revised its program licensing
rules, by implementing a damages remedy in situations where the defendant
knowingly violates the regulations and by establishing a timeline for the
resolution of such complaints, among other things.
Regulation of Carriage of Programming. Under the Telecommunications
Act, the FCC has adopted regulations prohibiting cable operators from requiring
a financial interest in a programming service as a condition to carriage of such
service, coercing exclusive rights in a programming service or favoring
affiliated programmers so as to restrain unreasonably the ability of
unaffiliated programmers to compete.
Regulation of Ownership. The 1992 Cable Act required the FCC, among
other things, (a) to prescribe rules and regulations establishing reasonable
limits on the number of channels on a cable system that will be allowed to carry
programming in which the owner of such cable system has an attributable interest
and (b) to consider the necessity and appropriateness of imposing limitations on
the degree to which multi-channel video programming distributors (including
cable operators) may engage in the creation or production of video programming.
In 1993, the FCC adopted regulations limiting carriage by a cable operator of
national programming services in which that operator holds an attributable
interest to 40% of the first 75 activated channels on each of the cable
operator's systems. The rules provide for the use of two additional channels or
a 45% limit, whichever is greater, provided that the additional channels carry
minority-controlled programming services. The regulations also grandfather
existing carriage arrangements that exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. These channel occupancy limits
apply only up to 75 activated channels on the cable system, and the rules do not
apply to local or regional programming services. These rules may limit carriage
of the Programming Companies on certain systems of affiliated cable operators.
In the same rulemaking, the FCC concluded that additional restrictions on the
ability of multi-channel distributors to engage in the creation or production of
video programming were then unwarranted.
Regulation of Carriage of Broadcast Stations. The 1992 Cable Act
granted broadcasters a choice of must carry rights or retransmission consent
rights. The rules adopted by the FCC generally provided for mandatory carriage
by cable systems of all local full-power commercial television broadcast signals
selecting must carry rights and, depending on a cable system's channel capacity,
non-commercial television broadcast signals. Such statutorily mandated carriage
of broadcast stations coupled with the provisions of the 1984 Cable Act, which
require cable television systems with 36 or more "activated" channels to reserve
a percentage of such channels for commercial use by unaffiliated third parties
and permit franchise authorities to require the cable operator to provide
channel capacity, equipment and facilities for PEG access channels access, could
adversely affect some or substantially all of the Programming Companies by
limiting the carriage of such services in cable systems with limited channel
capacity. The FCC recently initiated a proceeding asking to what extent cable
operators must carry all digital signals transmitted by broadcasters. The
imposition of such additional must carry regulation, in conjunction with the
current limited cable system channel capacity, would make it likely that cable
operators will be forced to drop cable programming services, which may have an
adverse impact on the Programming Companies' programming interests.
Closed Captioning Regulation. The 1992 Cable Act also required the FCC
to establish rules and an implementation schedule to ensure that video
programming is fully accessible to the hearing impaired through closed
captioning. The rules adopted by the FCC will require substantial closed
captioning over an eight to 10 year phase-in period with only limited
exemptions. As a result, the Programming Companies are expected to incur
significant additional costs for closed captioning.
Copyright Regulation. Under regulations adopted by the Copyright
Office, satellite carriers such as Netlink USA are not "cable systems" within
the meaning of the Copyright Revision Act of 1976 as amended. Accordingly,
satellite carriers are not permitted to provide superstation or network station
broadcast signals to home satellite dish owners under the separate compulsory
license extended to cable systems. Instead, Congress granted a statutory
copyright license to satellite carriers retransmitting the broadcast signals of
"superstations," such as KWGN and WGN, and of network stations to the public for
private home viewing under the Satellite Home Viewer Act of 1994 (the SHV Act),
which license is scheduled to expire on December 31, 1999. Although bills,
which, among other things, would extend the license granted under the SHV Act,
have been introduced in Congress, if the license is not further extended,
satellite carriers will be required to negotiate private licenses for the
retransmission of copyright material to home satellite dish owners after 1999.
Satellite carriers may only distribute the signals of network broadcast
stations, as distinguished from superstations, to "unserved households" that are
outside the Grade B contours of a primary station affiliated with such network.
The FCC released new rules on February 2, 1999 for determining whether
households are unserved. Netlink USA entered into an agreement with the National
Association of Broadcasters, the ABC, CBS, FOX and NBC networks, their affiliate
associations, and several hundred broadcast stations, effective May 1, 1998, to
identify by zip code those geographic areas which are "unserved" by network
affiliated stations. Depending upon the implementation of the agreement and such
identification, Netlink USA may be required, after expiration of a transition
period on August 31, 1999, to disconnect a substantial number of existing
subscribers. Under the SHV Act, satellite carriers must pay a monthly fee for
each subscriber. To the extent that satellite carriers transmit superstation or
network station signals to cable operators, such cable operators pay the
copyright fee under the separate compulsory license.
Satellites and Uplink. In general, authorization from the FCC must be
obtained for the construction and operation of a communications satellite. The
FCC authorizes utilization of satellite orbital slots assigned to the United
States by the World Administrative Radio Conference. Such slots are finite in
number, thus limiting the number of carriers that can provide satellite
transponders and the number of transponders available for transmission of
programming services. At present, however, there are numerous competing
satellite service providers that make transponders available for video services
to the cable industry.
Proposed Changes in Regulation. The regulation of programming services,
cable television systems, satellite carriers and television stations is subject
to the political process and has been in constant flux over the past decade.
Further material changes in the law and regulatory requirements must be
anticipated and there can be no assurance that the Liberty Media Group's
business will not be affected adversely by future legislation, new regulation or
deregulation.
Competition-Programming Companies
The business of distributing programming for cable television is highly
competitive. The Programming Companies directly compete with other programming
services for distribution on a limited number of cable television channels and
on other distribution media. In addition to competition for cable distribution,
viewers and advertisers, the Programming Companies also compete, to varying
degrees, for programming content.
HSN and QVC operate in direct competition with businesses which are
engaged in retail merchandising.
BUSINESS OF THE TCI VENTURES GROUP
On March 9, 1999, TCI combined the businesses and assets of Liberty
Media Group and of TCI Ventures Group in conjunction with the TCI merger. The
following information about TCI Ventures Group is dated as of March 1, 1999 and
does not reflect the effects of the Liberty/Ventures Combination. In connection
with the TCI merger and immediately prior thereto, certain of the assets
attributed to TCI Ventures Group were transferred to TCI Group in exchange for
approximately $5.5 billion cash.
The assets attributed to the TCI Ventures Group, a business unit
created in 1997, include interests in certain technology investments. Assets
attributed to the TCI Ventures Group are held directly and indirectly through
partnerships, joint ventures, common stock investments and instruments
convertible or exchangeable into common stock. In some cases, the TCI Ventures
Group's interest may be subject to buy-sell procedures, repurchase rights,
performance guarantees and other restrictions.
Diversified Satellite Communications
TV Guide, Inc. (formerly UVSG) Following completion of the
Netlink and TV Guide Transactions, TCI had approximately a 44% equity interest
and a 49% voting interest in UVSG of which a 27% equity interest and a 32%
voting interest was attributed to TCI Ventures Group and the balance of which
was attributed to Liberty Media Group. UVSG is a media and communications
company engaged predominantly in providing print, passive and interactive
program listings guides to households, distributing superstation programming to
cable television systems and DTH satellite providers, and marketing satellite
delivered programming to C-band satellite dish owners. UVSG has been organized
into three operating groups: Magazine Group; Entertainment Group; and United
Video Group. The Magazine Group publishes and distributes TV Guide Magazine and
customized monthly programming guides for cable and satellite operators in the
US and internationally. The Entertainment Group supplies satellite-delivered
on-screen program promotion and guide services, including TV Guide Channel and
Sneak Prevue. The United Video Group provides DTH satellite services, satellite
distribution of video entertainment services, software development and systems
integration services and satellite transmission services for private networks.
This group includes SNG and Netlink USA in addition to UVSG's UVTV division
which markets and distributes to cable television systems and other
multi-channel video distributors WGN (Chicago), KTLA (Los Angeles) and WPIX (New
York), three independent "superstations".
Domestic Telephony
The TCI Ventures Group's telephony assets consist primarily of its
ownership of an approximately 24% equity interest in the "Sprint PCS Group,"
consisting of shares of Sprint PCS Stock (which have limited voting rights) and
certain warrants and shares of convertible preferred stock exercisable for or
convertible into such shares.
Pursuant to the Final Judgment agreed to by TCI, AT&T and the DOJ on
December 31, 1998, Liberty/Ventures Group prior to the AT&T Merger transferred
all of the Sprint Securities to a trust with the Trustee, pursuant to a trust
agreement approved by the DOJ. 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 held
by the trust and beneficially owned by Liberty/Ventures Group sufficient to
cause Liberty/Ventures Group to own beneficially no more than 10% of the
outstanding Series 1 PCS stock of Sprint on a fully diluted basis (assuming the
issuance of all shares of Series 1 PCS stock of Sprint ultimately issuable in
respect of the applicable securities of Sprint upon the exercise, conversion or
other issuance thereof in accordance with the terms of such securities) on such
date. On or before May 23, 2004, the Trustee must divest the remainder of the
Sprint Securities beneficially owned by Liberty/Ventures Group. For additional
information, see note 2 to the Company's consolidated financial statements
included in Part II of this report.
International Cable and Programming
TINTA. TCI owns 100% of the equity in TINTA, of which 85% is attributed
to the TCI Ventures Group and 15% is attributed to the Liberty Media Group.
TINTA provides diversified programming services and operates broadband cable
television and telephony distribution networks in selected markets outside the
United States. At December 31, 1998, TINTA had ownership interests in or managed
61 cable and satellite programming services, which are received by subscribers
in various countries outside the United States. TINTA also has ownership
interests in companies operating broadband networks that, at December 31, 1998,
provided cable television service to an aggregate of approximately 4.5 million
basic subscribers and, primarily in the United Kingdom, provided telephone
service over approximately 1.5 million telephone lines.
TINTA has recently placed greater emphasis on the acquisition and
development of multi-channel programming businesses, while maintaining
meaningful and complementary interests in cable distribution assets. TINTA's
distribution and programming ventures are concentrated in the United Kingdom,
Europe, Latin America, Asia and the Caribbean, with particular focus, at
present, on the United Kingdom, Argentina and Japan.
Included among TINTA's cable and telephony distribution assets are an
indirect 22% interest in Telewest Communications plc (Telewest) and a 40%
interest in Jupiter Telecommunications Co. Ltd (Jupiter). Telewest is a leading
provider of cable television and cable telephony services in the United Kingdom
providing cable television services over a broadband (i.e., high capacity)
network and uses such network, together with twisted-pair copper wire
connections for final delivery to the customer premises, to provide telephony
services to its customers. Jupiter provides residential and business television
and cable telephony in Japan.
TINTA also currently has an approximate 28% ownership interest and
certain conditional management rights in Cablevision S.A. (Cablevision), which
is one of the two largest cable television companies in Argentina. At December
31, 1998, Cablevision provided cable television service to an aggregate of
approximately 1.5 million subscribers.
TINTA's programming interests include a 37% equity interest
(representing a 50% voting interest) in Flextech p.l.c. (Flextech), a 30%
interest in MultiThematiques, S.A. (MultiThematiques) and a 50% interest in
Jupiter Programming. Through its subsidiaries and affiliates, Flextech creates,
packages and markets entertainment and information programming for distribution
on cable television and DTH satellite providers throughout the United Kingdom
and parts of continental Europe. Flextech's ordinary shares trade on the London
Stock Exchange. MultiThematiques and Jupiter Programming provide multi-channel
programming to cable television and DTH satellite providers in continental
Europe and Japan, respectively. In addition, in August 1998, TINTA purchased
Pramer S.C.A., an Argentine company which programs, markets and distributes 16
cable channels in Argentina, of which 10 are distributed throughout Latin
America, and which markets one terrestrial station to operators in Argentina and
neighboring countries.
Liberty/TINTA, through a 50/50 joint venture with News Corp., holds
international sports interests. These include Fox Sports World Espanol, a
Spanish language sports network, distributed in the United States and in Latin
America, and STAR TV, a satellite-delivered programming platform available to
220 million viewers in Asia, India and the Middle East. Outside of the venture
with News Corp., Liberty Media Group and TINTA own an interest in J-Sports, a
sports network in Japan featuring coverage of SUMO wrestling, soccer, baseball
and other international sporting events; and TyC, Argentina's dominant sports
programming service. TyC also owns an interest in Canal 9, a general
entertainment broadcast channel in Buenos Aires, Argentina which has become an
international superchannel, providing programming to the United States and, via
cable, to outlying areas of Argentina.
Competition. The various cable operators in which TINTA has interests
directly compete for customers and advertisers in local markets with other
providers of entertainment, news and information. Such cable operators also
compete with companies who use alternative methods of distributing the same or
similar video programming offered by cable television systems.
The business of distributing programming for cable and satellite
television is also highly competitive. TINTA's programming subsidiaries and
affiliates directly compete with other programming services for distribution on
a limited number of television channels and, when distribution is obtained, they
compete for viewers and advertisers with other programming services.
Government Regulation. Substantially every country in which TINTA has,
or proposes to make, an investment regulates, in varying degrees, (a) the
granting of cable and telephony franchises, the construction of cable and
telephony systems and the operations of cable, other multi-channel television
operators and telephony operators and service providers, as well as the
acquisition of, and foreign investments in, such operators and service
providers, and (b) the broadcast and content of programming and Internet
services and foreign investment in programming companies. Regulations or laws
may cover wireline and wireless telephony, satellite and cable communications
and Internet services, among others. Regulations or laws that exist at the time
TINTA makes an investment in a subsidiary or affiliate may thereafter change,
and there can be no assurance that material and adverse changes in the
regulation of the services provided by TINTA's subsidiaries and affiliates will
not occur in the future. Regulation can take the form of price controls, service
requirements and programming and other content restrictions, among others.
Moreover, some countries do not issue exclusive licenses to provide
multi-channel television services within a geographic area, and in those
instances TINTA may be adversely affected by an overbuild by a competing cable
operator. In certain countries where multi-channel television is less developed,
there is minimal regulation of cable television, and, hence, the protections of
the cable operator's investment available in the United States and other
countries (such as rights to renewal of franchises and utility pole attachment)
may not be available in these countries.
SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION
For information about the Company's research and development expense,
see Note 2 to the Consolidated Financial Statements. For information about the
consolidated operating revenues contributed by the Company's major classes of
products and services, see the revenue tables and descriptions on pages 31, 32
and 38-43 and Consolidated Statements of Income on page 52 of the Company's
annual report to shareholders for the year ended December 31, 1998. All such
information is incorporated herein by reference pursuant to General Instruction
G(2).
EMPLOYEE RELATIONS
At December 31, 1998 AT&T employed approximately 107,800 persons in its
operations, approximately 105,000 of whom are located domestically. About 40% of
the domestically located employees of AT&T are represented by unions. Of those
so represented, about 95% are represented by the Communications Workers of
America (CWA), which is affiliated with the AFL-CIO; about 4% by the
International Brotherhood of Electrical Workers (IBEW), which is also affiliated
with the AFL-CIO. In addition, there is a very small remainder of domestic
employees represented by other unions. Labor agreements with most of these
unions extend through May 2002.
ITEM 2. PROPERTIES.
The properties of AT&T Corp. consist primarily of plant and equipment
used to provide long distance and wireless telecommunications services and cable
television services and administrative office buildings.
Telecommunications plant and equipment consists of: central office
equipment, including switching and transmission equipment; connecting lines
(cables, wires, poles, conduits, etc.); wireless cell sites, antennas and
wireless switching facilities; land and buildings; and miscellaneous properties
(work equipment, furniture, plant under construction, etc.). The majority of the
connecting lines are on or under public roads, highways and streets and
international and territorial waters. The remainder are on or under private
property. AT&T also operates a number of sales offices, customer care centers,
and other facilities, such as research and development laboratories.
AT&T continues to manage the deployment and utilization of its assets
in order to meet its global growth objectives while at the same time ensuring
that these assets are generating value for the shareholder. AT&T will continue
to manage its asset base consistent with globalization initiatives, marketplace
forces, productivity growth and technology change.
TCI currently leases its executive offices in a suburb of Denver,
Colorado, and leases most of its regional and local operating offices. TCI owns
many of its head-end and antenna sites. During 1999 TCI will relocate its
executive offices to owned properties in a suburb of Denver, Colorado. Its
physical cable television properties, which are located throughout the United
States, consist of system components, motor vehicles, miscellaneous hardware,
spare parts and other components. TCI's cable television facilities are, in the
opinion of management, suitable and adequate by industry standards. Physical
properties of TCI are not held subject to any major encumbrance.
A substantial number of the administrative offices of AT&T Corp. are in
leased buildings. Substantially all of the important long distance
communications facilities are in buildings wholly owned by AT&T or in buildings
owned partially by AT&T and partially by the regional holding companies created
at divestiture. Many of the smaller facilities are in rented quarters. Most of
the important buildings used in connection with long distance services are on
land held in fee, but a few are on land held under long-term leases.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, AT&T Corp. is subject to proceedings,
lawsuits and other claims, including proceedings under government laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties and outcomes are not predictable with assurance.
Consequently, AT&T Corp. is unable to ascertain the ultimate aggregate amount of
monetary liability or financial impact with respect to these matters at December
31, 1998. While these matters could affect operating results of any one quarter
when resolved in future periods, it is management's opinion that after final
disposition, any monetary liability or financial impact to AT&T Corp. beyond
that provided for at year-end would not be material to AT&T Corp.'s annual
consolidated financial position or results of operations.
On July 6, 1997, MCI Telecommunications Corp. and Ronald A. Katz
Technology Licensing, L.P. filed suit in United States District Court in
Philadelphia, Pennsylvania against AT&T. The suit alleges that a number of AT&T
services infringe patents owned by Katz but licensed to MCI for enforcement
against AT&T. This matter is currently in discovery. Based on review to date, it
is management's opinion that the claims do not present any material monetary
liability or financial impact to AT&T that is not subject to patent indemnity
agreements with third-party equipment vendors.
AT&T is also a named party in a number of environmental actions, none
of which is material to the consolidated financial statements or business of the
Company. In addition, pursuant to the Separation and Distribution Agreement by
and among AT&T, Lucent, and NCR, dated as of February 1, 1996, and amended and
restated as of March 29, 1996, Lucent has assumed liability, subject to the
liability sharing provisions of that agreement, for a number of actions in which
AT&T remains a named party. AT&T is working to be released as a party to these
actions, although there can be no assurance that it will be successful in this
regard.
There are four environmental proceedings which are required to be
reported pursuant to Instruction 5.C. of Item 103 of Regulation S-K. In
September 1997, the government of the U.S. Virgin Islands filed suit in the
federal district court of the Virgin Islands against the Company, AT&T Submarine
Systems International ("SSI International"), A&L Underground, Inc., a contractor
for SSI International at that time, and other entities. In connection with the
purported 1996 release of non-toxic bentonite drilling mud within the coastal
region of St. Croix by the contractor, the suit seeks penalties for violations
of various federal and Virgin Island statutes; damages under several statutory
and common law theories; removal of the mud (which has since been completed to
the satisfaction of the federal agency that ordered the cleanup); and
restitution of response costs allegedly incurred by the Virgin Islands. SSI
International was a wholly owned subsidiary of AT&T at the time of the alleged
violation. On December 31, 1998 the Government of the U.S. Virgin Islands filed
an administrative complaint against AT&T of the Virgin Islands, Inc., seeking
$23 million in penalties (primarily for the release of drilling mud in 1996 in
conjunction with the construction of the St. Croix cable landing station). The
foregoing environmental proceeding is not material to the consolidated financial
statements or business of the Company and would not be reported but for
Instruction 5 C. of Item 103 of Regulation S-K, which requires disclosure of
such matters.
In addition, three proceedings involve matters for which Lucent has
assumed liability, as described above. On July 31, 1991, the United States
Environmental Protection Agency Region III issued a complaint pursuant to
Section 3008a of the Resource Conservation and Recovery Act alleging violations
of various waste management regulations at the Company's Richmond Works,
Richmond, Virginia. The complaint seeks a total of $4.2 million in penalties. In
addition, on July 31, 1991, the United States Environmental Protection Agency
filed a civil complaint in the U.S. District Court for the Southern District of
Illinois against the Company and nine other parties seeking enforcement of its
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
Section 106 cleanup order, issued in November 1990 for the NL Granite City
Superfund site, Granite, Illinois, past costs, civil penalties of $25,000 per
day and treble damages related to certain United States' costs. Finally, during
1994, AT&T Nassau Metals Corporation ("Nassau"), a wholly owned subsidiary of
AT&T, and the New York State Department of Environmental Conservation ("NYSDEC")
were engaged in negotiations over a study and cleanup of the Nassau plant
located on Richmond Valley Road in Staten Island, New York. During these
negotiations, in June 1994, NYSDEC presented Nassau with a draft consent order
which included not only provisions relating to site investigation and
remediation but also a provision for payment of a $3.5 million penalty for
alleged violations of hazardous waste management regulations. No formal
proceeding has been commenced by NYSDEC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this report.
Executive Officers of the Registrant
(as of March 17, 1999)
Became AT&T
Name Age Executive Officer On
- ---- --- --------------------
C. Michael Armstrong* . . . . 60 Chairman of the Board and Chief Executive Officer . . . . . . . . . . . . 10-97
Harold W. Burlingame . . . . 58 Executive Vice President, Merger & Joint Venture Integration . . . . . . 9-86
James Cicconi . . . . . . . . 46 Executive Vice President-Law & Government Affairs and General Counsel . . 12-98
Mirian Graddick . . . . . . . 44 Executive Vice President, Human Resources . . . . . . . . . . . . . . . . 3-99
Daniel R. Hesse . . . . . . . 45 Executive Vice President and President & CEO, AT&T Wireless Services . . 5-97
Leo J. Hindery, Jr. . . . . . 51 President and Chief Executive Officer, AT&T Broadband and
Internet Services . . . . . . . . . . . . . . . . . . . . . . . . . 3-99
Frank Ianna . . . . . . . . . 49 Executive Vice President and President, AT&T Network Services . . . . . . 3-97
Michael G. Keith . . . . . . 50 Executive Vice President and President, AT&T Business Services . . . . . 12-98
H. Eugene Lockhart . . . . . 49 Executive Vice President, Chief Marketing Officer . . . . . . . . . . . . 2-99
Richard J. Martin . . . . . . 52 Executive Vice President, Public Relations and Employee Communication . . 11-97
John C. Malone** . . . . . . 58 Chairman of the Board, Liberty Media Corporation . . . . . . . . . . . . 3-99
David C. Nagel . . . . . . . 54 President, AT&T Labs & Chief Technology Officer . . . . . . . . . . . . . 3-97
John C. Petrillo . . . . . . 49 Executive Vice President, Corporate Strategy and Business Development . . 1-96
Richard Roscitt . . . . . . . 47 Executive Vice President and President & CEO, AT&T Solutions . . . . . . 9-97
D. H. Schulman . . . . . . . 40 Executive Vice President and President, AT&T Consumer Long Distance
and Segment Marketing . . . . . . . . . . . . . . . . . . . . . . . 12-98
Daniel E. Somers . . . . . . 51 Senior Executive Vice President and Chief Financial Officer . . . . . . . 5-97
John D. Zeglis**. . . . . . . 51 President, AT&T; Chairman and Chief Executive Officer, AT&T Consumer
Services Company . . . . . . . . . . . . . . . . . . . . . . . . . . 9-86
<FN>
*Chairman of the Board of Directors and Chairman of the Executive
and Proxy Committees.
**Member of the Board of Directors.
</FN>
All of the above executive officers have held high level managerial
positions with AT&T or its affiliates for more than the past five years, except
Messrs. Armstrong, Cicconi, Hindery, Lockhart, Malone, Nagel and Somers. Prior
to joining AT&T in October 1997, Mr. Armstrong was Chairman and Chief Executive
Officer of Hughes Electronics from 1991. Prior to joining AT&T in September 1998
as Senior Vice President-Law and Government Affairs, Mr. Cicconi was a Partner
at the law firm of Akin, Gump, Strauss, Houer and Feld, L.L.P. from 1991. Prior
to joining AT&T, Mr. Hindery was President of TCI from March 1997 and from 1988
to 1997 was Managing General Partner of InterMedia Partners, the nation's ninth
largest MSO, which he founded in 1988. Prior to joining AT&T Mr. Lockhart was
President of BankAmerica Corporation's Global Retail Bank from 1997 to 1998 and
from 1994 to 1997 was President and Chief Executive Officer of MasterCard
International, Inc. Prior to joining AT&T, Dr. Malone was President, Chairman
and Chief Executive Officer of TCI from 1994. In addition, Dr. Malone served as
director of TCI Pacific Communications, Inc. since 1996. Prior to joining AT&T
in April 1996, Mr. Nagel was with Apple Computer, serving as Senior Vice
President from 1995 and General Manager from 1988 through 1995. Prior to joining
AT&T in May 1997, Mr. Somers was Chairman and Chief Executive Officer for Bell
Cablemedia, plc, of London for two years and from 1992 to 1995, Mr. Somers was
Executive Vice President and Chief Financial Officer for Bell Canada
International.
PART II
Items 5. through 8.
The information required by these items is included in pages 28 through
72 and the inside back cover of the Company's annual report to shareholders for
the year ended December 31, 1998. Such information is incorporated herein by
reference, pursuant to General Instruction G(2). The referenced information from
the Company's annual report to share holders has been filed as Exhibit 13 to
this document.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no changes in independent accountants and no
disagreements with independent accountants on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure during the last two years.
PART III
Items 10. through 13.
Information regarding executive officers required by Item 401 of
Regulation S-K is furnished in a separate disclosure in Part I of this report
because the Company did not furnish such information in its definitive proxy
statement prepared in accordance with Schedule 14A.
The other information required by Items 10 through 13 is included in
the Company's definitive proxy statement dated March 25, 1999, the third and
fourth paragraphs on page 7, the first and second paragraphs on page 8, the
first full paragraph on page 9 through the final footnote on page 15 and the
second paragraph on page 33 through page 58. Such information is incorporated
herein by reference, pursuant to General Instruction G(3).
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements:
Pages
-----
Report of Management ....................... *
Report of Independent Accountants .......... *
Statements:
Consolidated Statements of Income .......... *
Consolidated Balance Sheets ................ *
Consolidated Statements of Changes in
Shareowners' Equity ................... *
Consolidated Statements of Cash Flows ...... *
Notes to Consolidated Financial Statements . *
(2) Financial Statement Schedule:
Report of Independent Accountants .......... 48
Schedule:
II -- Valuation and Qualifying Accounts .... 49
Separate financial statements of subsidiaries not consolidated and 50
percent or less owned persons are omitted since no such entity
constitutes a "significant subsidiary" pursuant to the provisions of
Regulation S-X, Article 3-9.
(3) Exhibits:
Exhibits identified in parentheses below, on file with the Securities
and Exchange Commission ("SEC"), are incorporated herein by reference
as exhibits hereto.
Exhibit Number:
(3)a Restated Certificate of Incorporation of the registrant filed
January 10, 1989, Certificate of Correction of the registrant
filed June 8, 1989, Certificate of Change of the registrant
filed March 18, 1992, Certificate of Amendment of the
registrant filed June 1, 1992, Certificate of Amendment of the
registrant filed April 20, 1994, Certificate of Amendment
filed June 8, 1998 and Certificate of Amendment filed March 9,
1999.
- ------------
*Incorporated herein by reference to the appropriate portions of the Company's
annual report to shareholders for the year ended December 31, 1998. (See Part
II.)
(3)b By-Laws of the registrant, as amended March 17, 1999.
(4) No instrument which defines the rights of holders of long term
debt, of the registrant and all of its consolidated
subsidiaries, is filed herewith pursuant to Regulation S-K,
Item 601(b)(4)(iii)(A). Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
(10)(i)1 Form of Separation and Distribution Agreement by and among
AT&T Corp., Lucent Technologies Inc. and NCR Corporation,
dated as of February 1, 1996 and amended and restated as of
March 29, 1996 (Exhibit (10)(i)1 to Form 10-K for 1996, File
No. 1-1105).
(10)(i)2 Form of Distribution Agreement, dated as of November 20, 1996,
by and between AT&T Corp. and NCR Corporation (Exhibit
(10)(i)2 to Form 10-K for 1996, File No. 1-1105).
(10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent
Technologies Inc. and NCR Corporation, dated as of February 1,
1996 and amended and restated as of March 29, 1996 (Exhibit
(10)(i)3 to Form 10-K for 1996, File No. 1-1105).
(10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and
Lucent Technologies Inc., dated as of February 1, 1996 and
amended and restated as of March 29, 1996 (Exhibit (10)(i)4 to
Form 10-K for 1996, File No. 1-1105).
(10)(i)5 Form of Employee Benefits Agreement, dated as of November 20,
1996, between AT&T Corp. and NCR Corporation (Exhibit (10)(i)5
to Form 10-K for 1996, File No. 1-1105).
(10)(ii)(B)1 General Purchase Agreement between AT&T Corp. and Lucent
Technologies Inc., dated February 1, 1996 and amended and
restated as of March 29, 1996 (Exhibit (10)(ii)(B)1 to Form
10-K for 1996, File No. 1-1105).
(10)(ii)(B)2 Form of Volume Purchase Agreement, dated as of November 20,
1996, by and between AT&T Corp. and NCR Corporation (Exhibit
(10)(ii)(B)2 to Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (Exhibit
(10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17,
1997 (Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No.
1-1105).
(10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as
amended March 3, 1998 (Exhibit (10)(iii)(A)3 to Form 10-K for
1997, File No. 1-1105).
(10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor
Protection Plan, as amended and restated effective January 1,
1995 (Exhibit (10)(iii)(A)4 to Form 10-K for 1996, File No.
1-1105).
(10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated
December 29, 1994 (Exhibit (10)(iii)(A)5 to Form 10-K for
1994, File No. 1-1105).
(10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as
amended December 15, 1993 (Exhibit (10) (iii)(A)6 to Form 10-K
for 1993, File No. 1-1105).
(10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as
amended March 2, 1998 (Exhibit (10)(iii)(A)1 to Form 10-K for
1997, File No. 1-1105).
(10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident
Insurance (Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File
No. 1-1105).
(10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and
restated effective October 1, 1996 (Exhibit (10)(iii)(A)9 to
Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated
January 1, 1995 (Exhibit (10)(iii)(A)10 to Form 10-K for 1996,
File No. 1-1105).
(10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as
amended January 21, 1998.
(10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1, 1988
(Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File
No. 1-1105) including AT&T Mid-Career Pension Plan, as amended
and restated October 1, 1996, (Exhibit (10)(iii)(A)12 to Form
10-K for 1996, File No. 1-1105).
(10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended December 17,
1997 (Exhibit (10)(iii)(A)13 to Form 10-K for 1997, File No.
1-1105).
(10)(iii)(A)14 Form of Indemnification Contract for Officers and Directors
(Exhibit (10)(iii)(A)6 to Form SE, dated March 25, 1987, File
No. 1-1105).
(10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised February
20, 1989 (Exhibit 10)(iii)(A)15 to Form 10-K for 1993, File
No. 1-1105).
(10)(iii)(A)16 AT&T Corp. Senior Management Basic Life Insurance Program, as
amended February 27, 1998 (Exhibit (10)(iii)(A)16 to Form 10-K
for 1997, File No. 1-1105).
(10)(iii)(A)17 Form of AT&T Benefits Protection Trust Agreement as amended
and restated as of November 1993, including the first
amendment thereto dated December 23, 1997.
(10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9, 1997,
as amended October 30, 1997 (Exhibit (10)(iii)(A)18 to Form
10-K for 1997, File No. 1-1105).
(10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna
dated October 30, 1997 (Exhibit (10)(iii)(A)19 to Form 10-K
for 1997, File No. 1-1105).
(10)(iii)(A)20 Form of Pension Agreement between AT&T Corp. and John C.
Petrillo dated October 30, 1997 (Exhibit (10)(iii)(A)21 to
Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)21 Form of Pension Agreement between AT&T Corp. and John Zeglis
dated May 7, 1997 (Exhibit (10)(iii)(A)22 to Form 10-K for
1997, File No. 1-1105).
(10)(iii)(A)22 Form of Employment Agreement between AT&T Corp. and C. Michael
Armstrong dated October 17, 1997 (Exhibit (10)(iii)(A)23 to
Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)23 Form of Employment Agreement between AT&T Corp. and Daniel E.
Somers dated April, 1997.
(10)(iii)(A)24 Amended and Restated Tele-Communications, Inc. 1994 Stock
Incentive Plan. (Incorporated herein by reference to
Tele-Communications, Inc.'s Registration Statement on Form S-8
(Commission File No. 333-40141)).
(10)(iii)(A)25 Amended and Restated Tele-Communications, Inc. 1995 Employee
Stock Incentive Plan. (Incorporated herein by reference to
Tele-Communications, Inc.'s Registration Statement on Form S-8
(Commission File No. 333-40141)).
(10)(iii)(A)26 Amended and Restated Tele-Communications, Inc. 1996 Incentive
Plan. (Incorporated herein by reference to
Tele-Communications, Inc.'s Registration Statement on Form S-8
(Commission File No. 333-40141)).
(10)(iii)(A)27 TCI 401(k) Stock Plan, restated effective January 1, 1998.
(Incorporated herein by reference to Tele-Communications,
Inc.'s Annual Report on Form 10-K for the year ended December
31, 1997, as amended by Form 10-K/A (Commission File No.
0-20421)).
(10)(iii)(A)28 Form of 1998 Incentive Plan of Tele-Communications, Inc.,
effective December 16, 1997. (Incorporated herein by reference
to Tele-Communications, Inc.'s Definitive Proxy Statement on
Schedule 14A, dated April 30, 1998 (Commission File No.
0-20421)).
(10)(iii)(A)29 The Tele-Communications International, Inc. 1995 Stock
Incentive Plan. (Incorporated herein by reference to
Tele-Communications International, Inc. Registration Statement
on Form S-1 (Commission File No. 33-91876)).
(10)(iii)(A)30 Tele-Communications, Inc. 1994 Non-employee Director Stock
Option Plan (Incorporated herein by reference to Exhibit 4.5
to the Registration Statement on Form S-8 of
Tele-Communications, Inc. (Commission File No. 333-06179)
filed on June 18, 1996).
(10)(iii)(A)31 Tele-Communications International, Inc. 1996 Non-employee
Director Stock Option Plan (Incorporated herein by reference
to Appendix II to the Definitive Proxy Statement on Schedule
14A of Tele-Communications International, Inc. (Commission
File No. 0-26264) filed on August 13, 1996).
(10)(iii)(A)32 Liberty Media 401(K) Savings Plan (Incorporation herein by
reference to Exhibit 99.1 to Post-Effective Amendment No. 2 on
Form S-8 to the Registration Statement on Form S-4 of AT&T
Corp. (Commission File No. 333-70279) filed March 10, 1999.
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Specified portions (pages 28 through 72 and the inside back
cover) of the Company's Annual Report to Shareholders for the
year ended December 31, 1998.
(21) List of subsidiaries of AT&T.
(23) Consent of Pricewaterhouse Coopers, LLP
(24) Powers of Attorney executed by officers and directors who
signed this report.
(27) Financial Data Schedules.
AT&T will furnish, without charge, to a shareholder upon request a copy
of the annual report to shareholders and the proxy statement, portions of which
are incorporated herein by reference thereto. AT&T will furnish any other
exhibit at cost.
(b) Reports on Form 8-K:
During the fourth quarter 1998, Form 8-K dated October 16, 1998 was
filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and
Exhibits) on October 16, 1998, Form 8-K dated October 21, 1998 was filed
pursuant to Item 5 (Other Events) on October 21, 1998 and Form 8-K dated
December 8, 1998 was filed pursuant to Item 5 (Other Events) on December 8,
1998.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of AT&T Corp.:
Our report on the consolidated financial statements of AT&T
Corp. and subsidiaries has been incorporated by reference in this Form 10-K from
page 51 of the 1998 Annual Report to the Shareowners of AT&T Corp. In connection
with our audits of such financial statements, we have also audited the related
consolidated financial statement schedule listed in the index of this Form 10-K.
In our opinion, the consolidated financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
PRICEWATERHOUSECOOPERS, LLP
1301 Avenue of the Americas
New York, New York
March 19, 1999
Schedule II--Sheet 1
AT&T CORP.
AND ITS CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Millions of Dollars)
- ------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions(a) of Period
- ------------------------------------------------------------------------------------------------------------------
Year 1998
Allowances for doubtful accounts (b) $1,037 $1,389 $1,320 $1,106
Reserves related to business
restructuring, including force
and facility consolidation (c) $ 907 $ 275 $ 665 $ 517
Deferred tax asset valuation
allowance (d) $ 361 $ 23 $ 106 $ 278
Year 1997
Allowances for doubtful accounts (b) $1,000 $1,522 $1,485 $1,037
Reserves related to business
restructuring, including force
and facility consolidation (c) $1,388 $ -- $ 481 $ 907
Deferred tax asset valuation
allowance (d) $ 220 $ 142 $ 1 $ 361
The Notes on Sheet 2 are an integral part of this Schedule.
Schedule II--Sheet 2
AT&T CORP.
AND ITS CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Millions of Dollars)
- ------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions(a) of Period
- ------------------------------------------------------------------------------------------------------------------
Year 1996
Allowances for doubtful accounts (b) $ 833 $1,518 $1,351 $1,000
Reserves related to business
restructuring, including force
and facility consolidation (c) $2,092 $ -- $ 704 $1,388
Deferred tax asset valuation
allowance (d) $ 151 $ 71 $ 2 $ 220
<FN>
(a) Amounts written off as uncollectible, net of recoveries.
(b) Includes allowances for doubtful accounts on long-term receivables of $46, $49 and $52 at
December 31, 1998, 1997 and 1996, respectively (included in long-term receivables in the Consolidated
Balance Sheets).
(c) Included primarily in other current liabilities and in other long-term liabilities and deferred credits
in the Consolidated Balance Sheets.
(d) End of period balances include $18, $14 and $9 which represent the current portion of the deferred tax valuation
allowance at December 31, 1998, 1997 and 1996, respectively.
</FN>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AT&T Corp.
/s/ M. J. Wasser
------------------------------
By: M. J. Wasser
Vice President - Law and Secretary
March 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officers: #
#
C. Michael Armstrong Chairman of the Board and #
Chief Executive Officer #
#
John Zeglis President and Director #
#
Principal Financial Officer: #
#
Daniel E. Somers Senior Executive Vice President #
Chief Financial Officer #
#
Principal Accounting Officer: #
#
Nicholas S. Cyprus Vice President and Controller ## By M. J. Wasser
# (attorney-in-fact)*
Directors: #
# March 19, 1999
Kenneth T. Derr #
M. Kathryn Eickhoff #
Walter Y. Elisha #
George M. C. Fisher #
Donald V. Fites #
Ralph S. Larsen #
John C. Malone #
Donald F. McHenry #
Michael I. Sovern #
Sanford I. Weill #
Thomas H. Wyman #