Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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
900 Route 202/206 North, Bedminster, New Jersey 07921
Telephone - Area Code 800-257-7865
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ..X No ...
At October 31, 2002, the following shares of stock were outstanding:
AT&T common stock - 3,851,927,498 shares
PART I - FINANCIAL INFORMATION
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
Revenue $ 11,956 $ 13,035 $ 36,044 $ 39,773
Operating Expenses
Costs of services and products (excluding depreciation
of $1,368, $1,165, $4,142 and $3,533 included below) 3,333 3,476 9,962 10,458
Access and other connection 2,696 3,033 8,267 9,289
Selling, general and administrative 2,712 2,488 7,902 7,953
Depreciation and amortization 1,981 2,274 5,835 7,036
Net restructuring and other charges (26) 399 30 1,494
Goodwill and franchise impairment charges - - 16,479 -
Total operating expenses 10,696 11,670 48,475 36,230
Operating income (loss) 1,260 1,365 (12,431) 3,543
Other income (expense), net 56 320 (935) (771)
Interest (expense) (748) (786) (2,231) (2,426)
Income (loss) from continuing operations before income
taxes, minority interest and dividends on subsidiary
preferred stock, and net (losses) related to equity
investments 568 899 (15,597) 346
(Provision) benefit for income taxes (312) 70 4,053 288
Minority interest and dividends on subsidiary preferred
stock (38) 177 (126) 1,015
Net (losses) related to other equity investments (11) (3,352) (1,032) (4,389)
Equity earnings (losses) from Liberty Media Group - 111 - (2,711)
Income (loss) from continuing operations 207 (2,095) (12,702) (5,451)
(Loss) income from discontinued operations (net of income taxes of
$44 and $(158)) - - (88) 150
Gain on disposition of discontinued operations - 13,503 - -
Income (loss) before extraordinary gain and cumulative
effect of accounting changes 207 11,408 (12,790) 8,202
Extraordinary gain (net of income taxes of $(30)) - - 48 -
Cumulative effect of accounting changes (net of income
taxes of $530 and $(578)) - - (856) 904
Net income (loss) 207 11,408 (13,598) 9,106
Dividend requirements of preferred stock, net - (235) - (652)
Premium on exchange of AT&T Wireless tracking stock - - - (80)
Income (loss) attributable to common shareowners $ 207 $ 11,173 $(13,598) $ 8,374
AT&T Common Stock Group - per basic and diluted share:
Earnings (loss) from continuing operations $ 0.05 $ (0.69) $ (3.45) $ (0.94)
(Loss) earnings from discontinued operations - - (0.02) 0.03
Gain on disposition of discontinued operations - 3.82 - 3.67
Extraordinary gain - - 0.01 -
Cumulative effect of accounting changes - - (0.23) 0.10
Earnings (loss) $ 0.05 $ 3.13 $ (3.69) $ 2.86
Dividends declared $ 0.0375 $ 0.0375 $ 0.1125 $ 0.1125
AT&T Wireless Group - per basic and diluted share:
Earnings from discontinued operations $ - $ - $ - $ 0.08
Liberty Media Group - per basic and diluted share:
Earnings (loss) before cumulative effect of accounting change $ - $ 0.04 $ - $ (1.05)
Cumulative effect of accounting change - - - 0.21
Earnings (loss) $ - $ 0.04 $ - $ (0.84)
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
At At
September 30, December 31,
2002 2001
ASSETS
Cash and cash equivalents $ 6,926 $ 10,592
Accounts receivable, less allowances of $800 and $827 6,882 7,736
Other receivables 402 1,645
Investments 459 668
Deferred income taxes 2,048 1,230
Other current assets 995 657
TOTAL CURRENT ASSETS 17,712 22,528
Property, plant and equipment, net of accumulated depreciation of
$35,678 and $32,046 41,364 41,322
Goodwill, net of accumulated amortization of $1,307 in 2001 20,517 24,675
Franchise costs, net of accumulated amortization of $2,501 in 2001 29,084 42,819
Other purchased intangible assets, net of accumulated amortization
of $846 and $647 2,003 2,222
Investments and related advances 17,920 23,818
Prepaid pension costs 3,522 3,337
Other assets 5,916 4,561
TOTAL ASSETS $138,038 $165,282
LIABILITIES
Accounts payable $ 4,342 $ 4,744
Payroll and benefit-related liabilities 1,599 2,084
Debt maturing within one year 6,560 12,958
AT&T Canada obligation 3,525 -
Other current liabilities 4,652 5,641
TOTAL CURRENT LIABILITIES 20,678 25,427
Long-term debt 36,371 40,527
Long-term benefit-related liabilities 3,707 3,594
Deferred income taxes 24,452 28,160
Other long-term liabilities and deferred credits 3,868 7,614
TOTAL LIABILITIES 89,076 105,322
Minority Interest 1,371 3,560
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated Debt
Securities of AT&T 4,728 4,720
SHAREOWNERS' EQUITY
Common Stock:
AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares;
issued and outstanding 3,851,084,978 shares (net of 858,888,662
treasury shares) at September 30, 2002, and 3,542,405,744 shares
(net of 851,746,431 treasury shares) at December 31, 2001 3,851 3,542
Additional paid-in capital 56,229 51,964
Accumulated (deficit) (17,082) (3,484)
Accumulated other comprehensive (loss) (135) (342)
TOTAL SHAREOWNERS' EQUITY 42,863 51,680
TOTAL LIABILTIES AND SHAREOWNERS' EQUITY $138,038 $165,282
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Millions)
(Unaudited)
For the Nine Months Ended
September 30,
2002 2001
AT&T Common Shares
Balance at beginning of year $ 3,542 $ 3,760
Shares issued, net:
Under employee plans 24 10
For acquisitions - 44
Settlement of put option - 155
Exchange of AT&T Wireless tracking stock - (372)
For funding AT&T Canada obligation 230 -
Redemption of TCI Pacific preferred stock 52 -
Other(1) 3 (61)
Balance at end of period 3,851 3,536
AT&T Wireless Group Common Stock
Balance at beginning of year - 362
Shares issued:
Under employee plans - 2
Exchange of AT&T Wireless tracking stock - 438
Conversion of preferred stock - 406
AT&T Wireless Group split-off - (1,208)
Balance at end of period - -
Liberty Media Group Class A Common Stock
Balance at beginning of year - 2,364
Shares issued, net - 14
Liberty Media Group split-off - (2,378)
Balance at end of period - -
Liberty Media Group Class B Common Stock
Balance at beginning of year - 206
Shares issued, net - 6
Liberty Media Group split-off - (212)
Balance at end of period - -
Additional Paid-In Capital
Balance at beginning of year 51,964 90,496
Shares issued, net:
Under employee plans 276 208
For acquisitions - 827
For funding AT&T Canada obligation 2,301 -
Redemption of TCI Pacific preferred stock 2,045 -
Other(1) 31 (1,035)
Gain on issuance of common stock by affiliates - 20
Exchange of AT&T Wireless tracking stock - 14
Settlement of put option - 3,237
Conversion of preferred stock - 9,631
AT&T Wireless Group split-off - (20,955)
Liberty Media Group split-off - (30,738)
Beneficial conversion value of preferred stock - 295
Dividends declared - AT&T Common Stock Group (422) (133)
Other 34 (16)
Balance at end of period 56,229 51,851
(Accumulated Deficit)/Retained Earnings
Balance at beginning of year (3,484) 7,408
Net (loss) income (13,598) 9,106
Dividends declared - AT&T Common Stock Group - (275)
Dividends accrued - preferred stock - (652)
Premium on exchange of AT&T Wireless tracking stock - (80)
Treasury shares issued at less than cost - (7)
AT&T Wireless Group split-off - (17,593)
Balance at end of period (17,082) (2,093)
(CONTINUED)
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Nine Months
Ended September 30,
2002 2001
Accumulated Comprehensive (Loss)
Balance at beginning of year (342) (1,398)
Other comprehensive income 207 988
AT&T Wireless Group split-off - 72
Liberty Media Group split-off - (758)
Balance at end of period (135) (1,096)
Total Shareowners' Equity $ 42,863 $ 52,198
Summary of Total Comprehensive (Loss) Income:
Net (loss) income $(13,598) 9,106
Net foreign currency translation adjustment (net of income taxes of
$(38) and $135)(2) 61 (204)
Net revaluation of securities and derivative instruments:
Unrealized gains (losses) (net of income taxes of $443 and $(274))(2) (717) 363
Recognition of previously unrealized losses (gains) (net of income taxes
of $(535) and $(513))(3) 863 829
Comprehensive (Loss) Income $(13,391) $ 10,094
AT&T accounts for treasury stock as retired stock. We have 100 million authorized shares of preferred stock at $1 par value.
(1) Other activity in 2001 represents AT&T stock received in exchange for entities owning certain cable systems.
(2) In the first nine months of 2001, total comprehensive (loss) income included LMG's foreign currency translation adjustments
totaling $(149), net of applicable income taxes and unrealized gains (losses) on available-for-sale securities totaling
$1,286, net of applicable income taxes.
(3) See note (4) for a summary of the "Recognition of previously unrealized losses (gains)."
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Nine Months Ended
September 30,
2002 2001
OPERATING ACTIVITIES
Net (loss) income $(13,598) $ 9,106
Deduct: (Loss) income from discontinued operations (88) 150
Gain on disposition of discontinued operations - 13,503
(Loss) from continuing operations (13,510) (4,547)
Adjustments to reconcile (loss) from continuing operations to net cash
provided by operating activities of continuing operations:
Cumulative effect of accounting changes - net of income taxes 856 (904)
Goodwill and franchise impairment charges 16,479 -
Depreciation and amortization 5,835 7,036
Net equity losses from Liberty Media Group - 2,711
Net losses related to other equity investments 1,671 7,149
Cost method investment impairment charges 1,411 203
Provision for uncollectible receivables 890 850
Net restructuring and other charges (18) 1,386
Deferred income taxes (4,159) (4,865)
Net revaluation of certain financial instruments (426) 779
Net gains on sales of businesses and investments (12) (689)
Minority interest (76) (1,222)
Extraordinary gain - net of income taxes (48) -
Put option mark-to-market charge - 838
Decrease (increase) in receivables 123 (49)
Decrease in accounts payable (307) (530)
Net change in other operating assets and liabilities (1,359) (873)
Other adjustments, net 338 (52)
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 7,688 7,221
INVESTING ACTIVITIES
Capital expenditures and other additions (5,295) (6,736)
Investment contributions and purchases (23) (371)
Investment distributions and sales 26 1,845
Proceeds from sale or disposal of property, plant and equipment 469 62
Net dispositions of businesses, net of cash disposed 17 4,827
Increase in restricted cash (418) -
Other investing activities, net (27) (142)
NET CASH (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS (5,251) (515)
FINANCING ACTIVITIES
Decrease in short-term borrowings, net (5,196) (9,580)
Repayment of borrowings from AT&T Wireless - (5,803)
Retirement of long-term debt (3,008) (1,618)
Dividends paid on common stock (411) (416)
Dividends paid on preferred securities (256) (190)
Proceeds from long-term debt issuances 129 195
Issuance of AT&T common shares 2,640 133
Net issuance of treasury shares - 23
Issuance of convertible preferred securities and warrants - 9,811
Issuance of AT&T Wireless Group common shares - 54
Other financing activities, net (1) (41)
NET CASH (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS (6,103) (7,432)
Net cash provided by discontinued operations - 4,860
Net (decrease) increase in cash and cash equivalents (3,666) 4,134
Cash and cash equivalents at beginning of year 10,592 64
Cash and cash equivalents at end of period $ 6,926 $ 4,198
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T
Corp.(AT&T) pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and, in the opinion of management, include
all adjustments necessary for a fair statement of the consolidated
results of operations, financial position and cash flows for each
period presented. The consolidated results for interim periods are not
necessarily indicative of results for the full year. These financial
results should be read in conjunction with AT&T's Form 10-K/A for the
year ended December 31, 2001, and AT&T's Form 10-Q for the quarters
ended March 31, 2002, and June 30, 2002. We have reclassified certain
prior period amounts to conform to our current presentation.
2) RESTRUCTURING OF AT&T
On October 25, 2000, AT&T announced a restructuring plan designed
to fully separate or issue separately tracked stocks intended to
reflect the financial performance and economic value of each of AT&T's
four major operating units.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as
a separate, independently traded company. On August 10, 2001, AT&T
completed the split-off of Liberty Media Corporation as an independent,
publicly traded company.
On July 10, 2002, AT&T and Comcast Corporation (Comcast)
shareowners approved the proposed merger between AT&T Broadband and
Comcast. The merger still remains subject to certain regulatory reviews
and approvals and certain other conditions and is expected to close by
the end of 2002. Under the terms of the agreement, AT&T will spin-off
AT&T Broadband and simultaneously AT&T Broadband and Comcast will merge
into subsidiaries of a new company to be called AT&T Comcast
Corporation (AT&T Comcast). AT&T shareowners will receive approximately
0.32 of a share of AT&T Comcast for each share of AT&T they own, based
on calculations using September 30, 2002 share prices. AT&T shareowners
will own an approximate 55% economic stake and have an approximate 61%
voting interest in the new company. The spin-off of AT&T Broadband
could result in the recognition of a gain or loss for the difference
between the fair value of the Comcast shares to be received by AT&T
shareholders in the merger and the net book value of AT&T Broadband.
On July 10, 2002, AT&T shareholders also approved a one-for-five
reverse stock split. The purpose of the reverse stock split is to seek
to adjust the trading price of AT&T common stock upward following
completion of the various transactions to effect AT&T's restructuring
plan. AT&T anticipates that the reverse stock split will be affected
immediately after the consummation of the AT&T Comcast transaction
described above.
3) SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 142, "GOODWILL
AND OTHER INTANGIBLE ASSETS"
Effective January 1, 2002, AT&T adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 requires that goodwill and
indefinite-lived intangible assets no longer be amortized, but instead
be tested for impairment at least annually. Intangible assets that have
finite useful lives will continue to be amortized over their useful
lives. In addition, the amortization period for intangible assets with
finite lives will no longer be limited to 40 years. We have determined
that our franchise costs are indefinite-lived assets, as defined in
SFAS No. 142, and therefore are not subject to amortization beginning
in 2002. In accordance with SFAS No. 142, goodwill was tested for
impairment by comparing the fair value of our reporting units to their
carrying values. As of January 1, 2002, the fair value of the reporting
units' goodwill exceeded their carrying value, and therefore no
impairment loss was recognized upon adoption. Franchise costs were
tested for impairment as of January 1, 2002, by comparing the fair
value to the carrying value (at the market level). An impairment loss
of $0.9 billion, net of taxes of $0.5 billion, or $0.23 per basic and
diluted share, was recorded relating to our AT&T Broadband segment in
the first quarter of 2002 and is included in "Cumulative effect of
accounting changes" in the Consolidated Statement of Operations. (See
note (7) for discussion of interim testing of goodwill and franchise
costs.)
The following tables present the impact of SFAS No. 142 on net
income (loss) and earnings (loss) per share had the standard been in
effect on January 1, 2001.
AT&T Common Stock AT&T Wireless Liberty Media
Group Group Group
----------- ---------- -------- ------- -------- ---------
For the Three Months Ended September 30, 2002 2001 2002 2001 2002 2001
Net income (loss):
Reported income (loss) from continuing
operations before extraordinary gain $ 207 $(2,206) $ - $ - $ - $ 111
Dividend requirements of preferred stock - (235) - - - -
Reported income (loss) from continuing
operations available to common
shareowners 207 (2,441) - - - 111
Add back amortization, net of tax:
Goodwill * - 191 - - - 50
Equity method excess basis - 14 - - - 24
Franchise costs - 181 - - - 1
Adjusted income (loss) from continuing
operations before extraordinary gain
available to common shareowners $ 207 $(2,055) $ - $ - $ - $ 186
Gain on disposition of discontinued
operations - 13,503 - - - -
Adjusted net income available to common
shareowners $ 207 $11,448 $ - $ - $ - $ 186
Basic and diluted earnings (loss) per
share:
Reported basic and diluted earnings
(loss) per share from continuing
operations before extraordinary gain $ 0.05 $(0.69) $ - $ - $ $ 0.04
Add back amortization, net of tax:
Goodwill * - 0.06 - - - 0.02
Equity method excess basis - - - - - 0.01
Franchise costs - 0.05 - - - -
Adjusted basic and diluted earnings
(loss) per share from continuing
operations before extraordinary gain $ 0.05 $(0.58) $ - $ - $ - $ 0.07
Gain on disposition - 3.82 - - - -
Adjusted basic and diluted earnings
per share $ 0.05 $ 3.24 $ - $ - $ - $ 0.07
* Goodwill amortization is net of the At Home Corp. (Excite@Home) minority interest impact on goodwill.
AT&T Common Stock AT&T Wireless Liberty Media
Group Group Group
------------ ----------- -------- ------- ------ ---------
For the Nine Months Ended September 30, 2002 2001 2002 2001 2002 2001
Net (loss) income: ------------ ----------- -------- ------- ------ ---------
Reported (loss) from continuing
operations before extraordinary gain
and cumulative effect of accounting
changes $ (12,702) $ (2,740) $ - $ - $ - $(2,711)
Dividend requirements of preferred stock - (652) - - -
Premium on exchange of AT&T Wireless
tracking stock - (80) - - - -
Reported (loss) from continuing operations
available to common shareowners (12,702) (3,472) - - - (2,711)
Add back amortization, net of tax:
Goodwill * - 596 - - - 350
Equity method excess basis - 111 - - - 346
Franchise costs - 572 - - - 4
Adjusted (loss) from continuing
operations before extraordinary gain
and cumulative effect of accounting
changes $ (12,702) $ (2,193) $ - $ - $ - $(2,011)
Reported (loss) income from discontinued
operations (88) 115 - 35 - -
Add back discontinued operations
amortization, net of tax - 152 - 36 - -
Extraordinary gain 48 - - - - -
Gain on disposition of discontinued
operations - 13,503 - - - -
Cumulative effect of accounting changes (856) 359 - - - 545
Adjusted net (loss) income available to
common shareowners $ (13,598) $ 11,936 $ - $ 71 $ - $(1,466)
Basic and diluted (loss) earnings per
share:
Reported basic and diluted (loss) per
share from continuing operations
before extraordinary gain and
cumulative effect of accounting
changes $ (3.45) $ (0.94) $ - $ - $ $ (1.05)
Add back amortization, net of tax:
Goodwill * - 0.16 - - - 0.14
Equity method excess basis - 0.03 - - - 0.13
Franchise costs - 0.16 - - - -
Adjusted basic and diluted (loss) per
share from continuing operations
before extraordinary gain and
cumulative effect of accounting
changes $ (3.45) $ (0.59) $ - $ - $ - $ (0.78)
Reported (loss) earnings from
discontinued operations (0.02) 0.03 - 0.08 - -
Add back discontinued operations
amortization, net of tax - 0.04 - 0.08 - -
Extraordinary gain 0.01 - - - - -
Gain on disposition of discontinued
operations - 3.67 - - - -
Cumulative effect of accounting changes (0.23) 0.10 - - - 0.21
Adjusted basic and diluted (loss)
earnings per share $ (3.69) $ 3.25 $ - $0.16 $ - $ (0.57)
* Goodwill amortization is net of the Excite@Home minority interest impact on goodwill.
At September 30, 2002, goodwill declined $4.2 billion from
December 31, 2001, primarily as a result of impairment charges recorded
related to AT&T Broadband in the second quarter of 2002 (see note 7).
Goodwill at September 30, 2002, by reportable segment is as follows:
Carrying Amount
AT&T Broadband $ 15,208
AT&T Business Services 5,239
AT&T Consumer Services 70
Total Goodwill $ 20,517
Identifiable intangible assets at September 30, 2002, are comprised of:
Gross Carrying Accumulated
Amount Amortization
Non-amortizable intangible assets:
Franchise costs $ 29,084 $ -
Amortizable other purchased intangible
assets:
Customer lists and relationships 2,743 787
Other 106 59
Total identifiable intangible assets $ 31,933 $ 846
The amortization expense associated with other purchased
intangible assets for the three and nine months ended September 30,
2002, was $74 and $210, respectively. Amortization expense for other
purchased intangible assets is estimated to be approximately $280 for
the year ended December 31, 2002, $270 for the year ended December 31,
2003, $250 for the year ended December 31, 2004, and $240 for each of
the years ended December 31, 2005 and 2006.
EITF Issue 01-9, "Accounting for Consideration Given by a Vendor to a
Customer"
The Emerging Issues Task Force (EITF) reached a consensus on Issue
01-9, "Accounting for Consideration Given by a Vendor to a Customer,"
that cash incentives given to customers should be characterized as a
reduction of revenue when recognized in the income statement, unless an
identifiable benefit is received in exchange. Prior to this consensus,
cash incentives to acquire customers were recorded as advertising and
promotion expense within selling, general and administrative expenses.
These cash incentives are now recorded as a reduction of revenue and
prior periods have been reclassified to conform with this presentation.
Total AT&T revenue and AT&T Consumer Services revenue for the quarters
ended March 31, 2002, December 31, 2001, September 30, 2001, June 30,
2001, and March 31, 2001, was reduced by $39, $45, $52, $61, and $78,
respectively. Net income was not affected by this reclassification.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets"
On January 1, 2002, AT&T adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all
long-lived assets, including discontinued operations, and consequently
amends Accounting Principles Board (APB) Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" to eliminate the
exception to consolidation for a subsidiary for which control is likely
to be temporary. The adoption had no impact on AT&T's results of
operations, financial position or cash flows.
For a detailed discussion of significant accounting polices, refer
to AT&T's Form 10-K/A for the year ended December 31, 2001.
4) SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS) IN OTHER
COMPREHENSIVE INCOME
AT&T has investment holdings classified as "available-for-sale"
under the scope of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." These securities are carried at fair value
with any unrealized gains or losses, net of income taxes, included
within "Accumulated other comprehensive (loss)" as a component of
shareowners' equity. Under SFAS No. 115, when the "available-for-sale"
securities are sold or when we believe a decline in the investment
value is other than temporary, the previously unrealized gains or
losses are recognized in earnings in "Other income (expense), net" in
the Consolidated Statement of Operations. If these securities are part
of a hedging relationship in accordance with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," to the extent that
there are offsetting amounts generated by the related derivatives,
these amounts are also recognized in earnings in "Other income
(expense), net." In addition, upon the adoption of SFAS No. 133 in
January 2001, we reclassified certain securities to "trading,"
resulting in the recognition in earnings of previously unrealized
losses. Following is a summary of the previously unrealized losses
(gains) that were recognized in the Consolidated Statements of
Operations for the nine months ended September 30, 2002 and 2001.
Recognition of Previously Unrealized Losses (Gains)
For the Nine Months Ended September 30, 2002 2001
---------------------- ----------------------
Pretax After-tax Pretax After-tax
AT&T Group:
Included in other income (expense), net:
Other-than-temporary investment impairments $ 1,398 $ 863 $ - $ -
Reclassification of securities to "trading"
in conjunction with the adoption of SFAS No. 133 - - 1,154 713
Sales of various securities - - 159 98
Liberty Media Group:
Included in equity earnings (losses) from Liberty Media Group:
Sales of various securities - - 173 105
Included in cumulative effect of accounting change - - (144) (87)
Total recognition of previously unrealized losses $ 1,398 $ 863 $ 1,342 $ 829
5) DISCONTINUED OPERATIONS
Discontinued operations for the nine months ended September
30, 2002, reflects an estimated loss on the litigation settlement
associated with the business of Lucent Technologies Inc., which was
spun-off from AT&T in 1996. Sparks, et al. v. AT&T and Lucent
Technologies Inc. et al., is a class action lawsuit filed in 1996 in
Illinois state court. On August 9, 2002, a settlement proposal was
submitted to and accepted by the court. In accordance with the
separation and distribution agreement between AT&T and Lucent, AT&T
recorded its proportionate share of the settlement and estimated legal
costs in the second quarter of 2002, which totaled $132 pretax ($88
after-tax, or $0.02 per share). (See note 13 for a complete discussion
of this matter.)
Pursuant to APB Opinion No. 30, the consolidated financial
statements of AT&T reflect the disposition of AT&T Wireless, which was
split-off from AT&T on July 9, 2001, as discontinued operations.
Accordingly, the revenue, costs and expenses, and cash flows of AT&T
Wireless through June 30, 2001, the effective split-off date for
accounting purposes, have been excluded from the respective captions in
the 2001 Consolidated Statements of Operations and Consolidated
Statements of Cash Flows and have been reported as "(Loss) income from
discontinued operations," net of applicable income taxes; and as "Net
cash provided by discontinued operations." Revenue from discontinued
operations was $6.6 billion for the nine months ended September 30,
2001. Interest expense of $0.2 billion for the nine months ended
September 30, 2001, was allocated to discontinued operations based on
the debt of AT&T that was attributable to AT&T Wireless.
In connection with the split-off of AT&T Wireless, AT&T wrote-up
the net assets of AT&T Wireless to fair value. This resulted in a
tax-free gain of $13.5 billion, which represents the difference between
the fair value of the Wireless tracking stock at the date of the
split-off and AT&T's book value in AT&T Wireless Services. This gain
was recorded in the third quarter of 2001 as "Gain on disposition of
discontinued operations."
6) CONCERT AND AT&T CANADA
On April 1, 2002, Concert, our joint venture with British
Telecommunications plc (BT), was officially unwound and the venture's
assets and customer accounts were distributed back to the parent
companies. Under the partnership termination agreement, each of the
partners generally reclaimed the customer contracts and assets that
were initially contributed to the joint venture, including
international transport facilities and gateway assets. In addition,
AT&T assumed certain other assets that BT originally contributed to the
joint venture.
At September 30, 2002, AT&T had an approximate 31% equity
ownership in AT&T Canada. On June 25, 2002, under the terms of the 1999
merger agreement, AT&T triggered the purchase of the remaining equity
of AT&T Canada for the Back-end Price, which is the greater of the
floor price and the fair market value. The floor price accreted at 4%
each quarter, commencing on June 30, 2000. In the first and second
quarters of 2002, and the third and fourth quarters of 2001, AT&T
recorded charges reflecting the difference between the underlying value
of the AT&T Canada shares and the price AT&T has committed to pay for
them, including the 4% accretion of the floor price. In the nine months
ended September 30, 2002, and September 30, 2001, AT&T recorded
after-tax charges of $0.3 billion ($0.5 billion pretax) and $1.5
billion ($2.4 billion pretax), respectively, within "Net (losses)
related to other equity investments" in the Consolidated Statement of
Operations. At December 31, 2001, the liability of $3.0 billion was
included in "Other long-term liabilities and deferred credits" in the
Consolidated Balance Sheet. At September 30, 2002, the liability of
$3.5 billion was reflected as "AT&T Canada obligation."
On October 8, 2002, Tricap Investments Corporation, a wholly owned
subsidiary of Brascan Financial Corporation, purchased an approximate
63% equity interest in AT&T Canada and CIBC Capital Partners acquired
an approximate 6% equity interest in AT&T Canada. AT&T paid the
purchase price for the AT&T Canada shares on behalf of Tricap and CIBC
Capital Partners. AT&T funded the purchase price of the AT&T Canada
shares partly with the net proceeds of approximately $2.5 billion
received from the sale of 230 million shares of AT&T common stock on
June 11, 2002. The remaining portion of the obligation was financed
through short-term sources. Tricap and CIBC Partners made a nominal
payment to AT&T upon completion of the transaction. AT&T continues to
hold a 31% ownership interest in AT&T Canada.
7) IMPAIRMENT CHARGES
Goodwill and Franchise Impairment Charges
SFAS No. 142 requires that goodwill and intangible assets not
subject to amortization be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the
asset might be impaired. The impairment test shall consist of a
comparison of the fair value of the intangible asset/goodwill with its
carrying amount. AT&T has determined that its annual testing date for
these assets will be in the fourth quarter of each year.
In the second quarter of 2002, we noted significant changes in the
general business climate as evidenced by the severe downward movement
in the U.S. stock market (including the decline in values of publicly
traded cable industry stocks). At June 30, 2002, five of our cable
competitors as a group experienced an average decline in total market
capitalization of over 20% since January 1, 2002. We have also
witnessed corporate bankruptcies. We believe these factors coupled with
the pending merger of AT&T Broadband and Comcast (which was approved by
both companies' shareholders on July 10, 2002) created a "trigger
event" for our AT&T Broadband segment, which necessitated the testing
of goodwill and franchise costs for impairment as of the end of the
second quarter.
We assessed our impairment on the same principles employed during
the initial adoption of SFAS No. 142. Such testing resulted in the
recognition of a $12.3 billion franchise cost impairment charge and a
$4.2 billion goodwill impairment charge (aggregating to $11.8 billion
after-tax) recorded in "Goodwill and franchise impairment charges" in
the Consolidated Statement of Operations.
Investment Impairment Charges
In accordance with SFAS No. 115 and APB Opinion No. 18 "The Equity
Method of Accounting for Investments in Common Stock," we evaluated our
portfolio of investments for potential impairments. SFAS No. 115 and
APB Opinion No. 18 both require the recognition in earnings of declines
in value of cost and equity method securities which are "other than
temporary."
Given the significant decline in stock prices, the length of time
these investments had been below market and industry specific issues,
we believed that certain investments would not recover our cost basis
in the foreseeable future. Accordingly, we believed the declines in
value were "other than temporary" and, as a result, AT&T recorded total
investment impairment charges of $2.4 billion pretax ($1.5 billion
after-tax) in the first nine months of 2002. The following is a
breakout of the investment impairment charges recorded by type of
investment.
Cost Method Investments
In the first nine months of 2002, we recorded investment
impairment charges on cost method investments of $1.4 billion pretax
($0.9 billion after-tax), within "Other income (expense), net" in the
Consolidated Statement of Operations. These charges related to
securities that were classified as "available-for-sale" and were
marked-to-market through "Other comprehensive income" as a component of
shareowners' equity. The majority of these charges were recorded in the
second quarter and primarily consisted of impairments on our
investments in Cablevision Systems Corporation ($0.6 billion pretax,
$0.4 billion after-tax), Comcast ($0.3 billion pretax, $0.2 billion
after-tax) and Microsoft Corporation ($0.2 billion pretax, $0.1 billion
after-tax).
Our investment in Cablevision stock is monetized by debt which is
indexed to the value of Cablevision shares. The debt contains an
embedded derivative which is designated as a cash-flow hedge under the
provisions of SFAS No. 133 and is marked-to-market through "Other
comprehensive income." At the time we recognized the
other-than-temporary decline in the value of the Cablevision stock as
an expense, as permitted by SFAS No. 133, we also recognized, in
earnings, the unrealized gain on the embedded derivative that was
previously recorded in "Other comprehensive income," resulting in the
$0.6 billion pretax impairment discussed above.
Equity Method Investments
In the nine months ended September 30, 2002, we recorded
investment impairment charges on equity method investments of $1.0
billion pretax ($0.6 billion after-tax) within "Net (losses) related to
other equity investments" in the Consolidated Statement of Operations.
These charges consisted of impairments of our cable partnerships,
primarily Texas Cable Partners, LP ($0.4 billion pretax, $0.2 billion
after-tax), Insight Midwest LP ($0.2 billion pretax, $0.1 billion
after-tax), Kansas City Cable Partners ($0.2 billion pretax, $0.1
billion after-tax), Parnassos Communications, LP ($0.1 billion pretax
and after-tax) and Century-TCI California Communications, LP ($0.1
billion pretax and after-tax). Parnassos Communications, LP and
Century-TCI California Communications, LP represent the only
partnership investments we have with Adelphia Communications
Corporation. Adelphia Communications Corporation and subsidiaries
(including Parnassos Communications, LP and Century-TCI California
Communications, LP) filed for Chapter 11 bankruptcy on June 25, 2002.
8) RESTRUCTURE OF TIME WARNER ENTERTAINMENT COMPANY L.P.
AT&T currently holds a 27.64% interest in Time Warner
Entertainment L.P. (TWE) through its AT&T Broadband segment. In
February 2001, AT&T requested that TWE begin the process of converting
the limited partnership into a corporation with registered equity
securities. On August 21, 2002, AT&T and Comcast entered into an
agreement with AOL Time Warner for the restructuring of TWE. The
restructuring agreement is intended to provide for a more orderly and
timely disposition of AT&T's entire stake in TWE than would be
available under the registration rights provisions of the TWE
partnership agreement. Under the restructuring agreement, AT&T will
receive $2.1 billion in cash, $1.5 billion in common stock of AOL Time
Warner Inc. (valued at the time of the closing and subject to certain
limitations) and an effective 21% passive equity interest in a new
cable company, to be named Time Warner Cable, which will consist of all
of AOL Time Warner's cable properties, including those already in TWE.
Upon consummation of the merger of AT&T Broadband with Comcast, AT&T
Comcast will assume all of AT&T's interest in TWE and in the
restructuring agreement, and AT&T Broadband will have registration
rights enabling it to dispose of its shares in Time Warner Cable and in
AOL Time Warner. The TWE restructuring is expected to close in the
first half of 2003.
In connection with the transactions, AT&T Broadband and Comcast
have also reached a three-year non-exclusive agreement with AOL Time
Warner under which AOL High-Speed Broadband service would be made
available on certain of AT&T's, or AT&T Comcast's, cable systems, which
pass approximately 10 million homes.
The TWE restructuring is subject to receipt of certain regulatory
approvals and other closing conditions, certain of which are outside
the control of AT&T and Comcast. There can be no assurance that the
transaction contemplated by the TWE restructuring agreement will be
consummated. If the restructuring agreement is terminated, the parties
will return to the registration rights process under the TWE
partnership agreement.
If the merger of Comcast and AT&T Broadband is terminated, the TWE
restructuring agreement will remain in place between AT&T and AOL Time
Warner, although certain changes would be made to the Internet service
provider carriage agreement.
9) NET RESTRUCTURING AND OTHER CHARGES
In the third quarter of 2002, AT&T recorded a net reversal of $26
of net restructuring and other charges. In light of current
unprecedented industry conditions, including the bankruptcy of several
significant competitors, AT&T's management reevaluated the business
restructuring plan established in the fourth quarter of 2001 and
determined that the plan needed to be modified primarily for certain
areas of AT&T Business Services, including network services. As a
result, approximately $137 of net restructuring and other charges were
reversed which primarily consisted of $110 for employee separation
costs. In addition, the reversals included $12 of sales obligation
liabilities associated with the government-mandated disposition of AT&T
Communications (U.K.) Ltd. that were never incurred. However, in order
to continue to properly manage our cost structure, AT&T's management
developed a new exit plan in other areas of AT&T Business Services,
including network services, totaling $111. This plan primarily consists
of $91 for employee separation costs related to approximately 1,400
employees (slightly more than half of which are management) and $16 for
facility closings related to buildings becoming vacant as a result of
previously announced restructuring plans.
Net restructuring and other charges for the nine months ended
September 30, 2002, totaled $30 which primarily represents costs
associated with AT&T Broadband's efforts to reorganize and streamline
certain centralized and field functions, partially offset by the
reversal of reserves primarily for AT&T Business Services' initiatives.
The $30 is comprised of new exit plans totaling $207 primarily
consisting of $133 associated with employee separation costs and $66 in
connection with facility closings. These charges were largely offset by
total reversals of $177 which were primarily comprised of $127 of
employee separation costs and $26 related to excess vintage facility
closing restructuring reserves. In addition, the reversals included $12
from the third quarter relating to sales obligations associated with
AT&T Communications (U.K.) Ltd. The reversals were due primarily to
management's reevaluation of the restructuring plan established in the
fourth quarter of 2001 for certain areas of AT&T Business Services, as
discussed above, as well as the redeployment of certain employees to
different functions within the company.
Approximately 2,300 employees will be separated in conjunction
with the exit plans implemented in 2002 (about 17% of which will be
leaving voluntarily), with more than 60% of the total employees
impacted being management employees. Approximately 34% of the employees
affected by these exit plans have left their positions as of September
30, 2002, with the remaining reductions expected to be completed by the
end of the first quarter of 2003. Termination benefits of $38 were paid
to employees through the third quarter of 2002 relative to these exit
plans.
The following table displays the activity and balances of the
restructuring reserve account from January 1, 2002, to September 30,
2002:
Type of Cost
Employee Facility
Separations Closings Other Total
Balance at January 1, 2002 $ 508 $ 316 $ 19 $ 843
Additions 133 66 4 203
Deductions (423) (84) (18) (525)
Balance at September 30, 2002 $ 218 $ 298 $ 5 $ 521
Deductions reflect total cash payments of $375, of which $306
represents cash termination benefits funded primarily through cash from
operations. Deductions also reflect reversals of $160. In addition,
deductions include non-cash activity of $10 primarily due to the
issuance of common stock to satisfy restricted stock obligations that
vested upon separation, primarily to executives. Offsetting these
deductions is a $20 transfer into the restructuring reserve related to
the third quarter 2002 reversal for separation payments that was
originally anticipated to be funded through AT&T's pension assets.
During the third quarter of 2001, $399 of net restructuring and
other charges were recorded by Excite@Home, primarily asset impairment
charges due to continued weakness in the on-line media market and the
bankruptcy filing of Excite@Home. These charges included the write-off
of goodwill and other intangible assets, warrants granted in connection
with distributing the @Home service and fixed assets.
Net restructuring and other charges for the nine months ended
September 30, 2001, totaled $1,494. The charges included $1,171 of
asset impairment charges related to Excite@Home and $323 for
restructuring and exits costs, which consisted of $151 for severance
costs, $156 for facility closings and $16 primarily related to
termination of contractual obligations.
The severance costs, for approximately 7,700 employees, primarily
resulted from synergies created by the MediaOne merger as well as
continued cost reduction efforts by Excite@Home. These business
restructuring plans were substantially completed by March 31, 2002.
10) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
Net income (loss) attributable to the different classes of AT&T
common stock are as follows:
AT&T Common Stock AT&T Wireless Liberty Media
Group Group Group
For the Three Months Ended September 30, 2002 2001 2002 2001 2002 2001
Income (loss) from continuing operations $ 207 $ (2,206) $ - $ - $ - $ 111
Dividend requirements of preferred stock - (235) - - - -
Income (loss) from continuing operations
attributable to common shareowners 207 (2,441) - - - 111
Gain on disposition of discontinued
operations - 13,503 - - - -
Net income (loss) attributable to common
shareowners $ 207 $ 11,062 $ - $ - $ - $ 111
For the Nine Months Ended September 30, 2002 2001 2002 2001 2002 2001
(Loss) from continuing operations $(12,702) $ (2,740) $ - $ - $ - $(2,711)
Dividend requirements of preferred stock - (652) - - - -
Premium on exchange of AT&T Wireless
tracking stock - (80) - - - -
(Loss) from continuing operations
attributable to common shareowners (12,702) (3,472) - - - (2,711)
(Loss) income from discontinued
operations (88) 115 - 35 - -
Gain on disposition of discontinued
operations 13,503
Extraordinary gain 48 - - - - -
Cumulative effect of accounting changes (856) 359 - - - 545
Net (loss) income attributable to common
shareowners $(13,598) $10,505 $ - $ 35 $ - $(2,166)
Basic earnings (loss) per share for AT&T Common Stock Group was
computed by dividing AT&T Common Stock Group earnings (loss) by the
weighted-average number of shares outstanding of 3,848 million and
3,534 million, for the three months ended September 30, 2002 and 2001,
respectively, and 3,681 million and 3,677 million for the nine months
ended September 30, 2002 and 2001, respectively.
Diluted earnings per share for AT&T Common Stock Group was
computed by dividing AT&T Common Stock Group earnings by the
weighted-average number of shares and dilutive potential shares
outstanding of 3,850 million for the three months ended September 30,
2002. At September 30, 2002, the 2 million share difference between
basic and diluted shares is attributable to the shares potentially
issuable for stock options. Since AT&T recorded a loss from continuing
operations for the three months ended September 30, 2001, and the nine
months ended September 30, 2002 and 2001, the diluted loss per share is
the same as basic loss per share, as any potentially dilutive
securities would be antidilutive to continuing operations.
Basic and diluted earnings per share from discontinued operations
for AT&T Wireless Group for the year-to-date period through its
split-off date were computed by dividing income attributable to AT&T
Wireless Group by the weighted-average number of shares outstanding of
AT&T Wireless Group of 438 million. AT&T Wireless was split-off from
AT&T in July 2001.
Basic and diluted loss per share for LMG was computed by dividing
the loss attributable to LMG by the weighted-average number of shares
outstanding of LMG of 2,588 million for the third quarter of 2001, and
2,582 million for the year-to-date period in 2001 though its split-off
date. LMG was split-off from AT&T in August 2001.
11) EQUITY TRANSACTIONS
Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T
was required to redeem the outstanding TCI Pacific Communications, Inc.
Class A Senior Cumulative Exchangeable Preferred Stock for AT&T common
stock. Each share of TCI Pacific preferred stock was exchangeable at
the option of the holder for 8.365 shares of AT&T common stock. All
outstanding shares (approximately 6.2 million) of TCI Pacific preferred
stock with a carrying value of $2.1 billion at December 31, 2001
(included in Minority Interest in the Consolidated Balance Sheet),
were either exchanged or redeemed for approximately 51.8 million shares
of AT&T common stock. No gain or loss was recorded on the
exchange/redemption of the TCI Pacific preferred stock.
In the nine months ended September 30, 2002, AT&T issued 14.7
million shares of AT&T common stock to certain current and former
senior managers in settlement of their deferred compensation accounts.
Pursuant to AT&T's deferred compensation plan, senior managers may
defer short- and long-term incentive compensation awards. The issuance
of these shares resulted in an increase to total shareowners' equity of
$0.2 billion.
In September 2002, AT&T offered to exchange certain outstanding
employee AT&T stock options for restricted stock units or cash at a
discount to the Black-Scholes option value. Each restricted stock unit
represents a right to receive a share of AT&T's common stock upon
vesting. On October 29, 2002, the offer closed, resulting in
approximately 75 million options cancelled and the issuance of
approximately 13 million restricted stock units and cash payments of
approximately $4.
In June of 2002, AT&T completed a public equity offering of 230
million shares of AT&T common stock at a price of $11.25 per share for
net proceeds of $2.5 billion. AT&T utilized the proceeds from the
offering to satisfy a portion of its obligation to AT&T Canada common
shareholders (see Note 6).
On January 22, 2001, NTT DoCoMo invested approximately $9.8
billion for 812,512 shares of a new class of AT&T preferred stock with
a par value of $1 per share. On July 9, 2001, in conjunction with the
split-off of AT&T Wireless Group, these preferred shares were converted
into AT&T Wireless common stock. In the three and nine months ended
September 30, 2001, we recorded dividend requirements on this preferred
stock of $0.2 billion and $0.7 billion, respectively. The preferred
stock dividend represented interest in connection with the DoCoMo
preferred stock as well as accretion of the beneficial conversion
feature associated with this preferred stock. The beneficial conversion
feature was recorded upon the issuance of the preferred stock and
represented the excess of the fair value of the preferred shares issued
over the proceeds received.
12) DEBT OBLIGATIONS
During 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $2.7 billion of funding,
limited by monthly eligible receivables. Under the program, certain
AT&T Business Services' and AT&T Consumer Services' accounts receivable
can be sold on a discounted, revolving basis, to a special purpose,
wholly-owned subsidiary of AT&T, which assigns interests in such
receivables to unrelated third-party financing entities. AT&T has
renewed both its AT&T Business Services and AT&T Consumer Services
customer accounts receivable securitization facilities. The terms of
these facilities have been extended to June (AT&T Business Services)
and July (AT&T Consumer Services) of 2003. Together the programs, as
renewed, provide up to $2.0 billion of available financing, limited by
the eligible receivables balance, which varies from month to month. The
securitization proceeds were recorded as a borrowing and included in
"Debt maturing within one year" in the Consolidated Balance Sheets. At
September 30, 2002 and December 31, 2001, such short-term notes totaled
$1.5 billion and $2.3 billion, respectively.
In the first nine months of 2002, AT&T called $1.5 billion of TCI
Communications Financing I, II and IV, MediaOne Financing Trust A and B
and MediaOne Finance II preferred securities for early redemption. This
redemption resulted in a gain on early extinguishment of debt recorded
as an extraordinary gain of $48 net of taxes ($78 pretax). The gain
represents the difference between the carrying value of the debt and
the cash paid to extinguish the debt.
In June 2002, AT&T registered $7.0 billion of the private
placement notes sold in November 2001 and commenced a tender of the
private notes for registered notes. The note exchange was completed on
August 2, 2002. The terms of the registered notes are identical to the
private notes.
As of September 30, 2002, AT&T had approximately $0.8 billion in
private debt outstanding that was partially collateralized with
restricted cash of approximately $0.4 billion. The restricted cash is
recorded in "Other assets" in the Consolidated Balance Sheet.
On August 12, 2002, in connection with the proposed merger
between AT&T Broadband and Comcast, AT&T filed a preliminary prospectus
contemplating a potential offer to exchange an aggregate of $11.8
billion of AT&T's existing debt securities. The exchange offer involves
two types of transactions. The first involves an exchange of certain
series of AT&T notes for new notes that would ultimately become
obligations of AT&T Broadband Corp., a newly formed company to which
AT&T will spin-off its AT&T Broadband unit prior to completing the
merger. AT&T Comcast and certain of its subsidiaries would guarantee
these obligations upon completion of the merger. The second involves an
exchange of other series of AT&T notes for new notes that would remain
obligations of AT&T. The new notes will have revised maturity dates
and/or interest rates.
Neither AT&T, AT&T Broadband, nor any other entity would receive
any proceeds from the issuance of the new notes in the exchange offer.
The new notes would represent a new offering with respect to those
notes that ultimately become obligations of AT&T Broadband and would
reduce the amount that AT&T Broadband would otherwise be required to
pay to AT&T upon completion of the merger with Comcast. The new notes
would represent a refinancing with respect to those notes that remain
obligations of AT&T after the merger.
On October 4, 2002, AT&T and Comcast commenced the exchange offer.
On November 8, 2002, the exchange offer was closed with $3.5 billion of
AT&T debt exchanged for AT&T Broadband debt and $4.7 billion of debt
exchanged for new AT&T debt.
At December 31, 2001, AT&T had exchangeable notes outstanding,
which were indexed to 9.8 million shares of Rainbow Media Group common
stock. On August 20, 2002, Cablevision Systems Corporation exchanged
each share of Rainbow Media Group common stock for 1.19093 shares of
Cablevision NY Group (Cablevision) common stock. As a result of the
exchange, AT&T's exchangeable notes outstanding at September 30, 2002,
are now indexed to 11.7 million shares of Cablevision common stock,
with a put price of $18.89 per share and a call price of $23.05 per
share. All other provisions of the exchangeable notes remain the same.
13) COMMITMENTS AND CONTINGENCIES
In the normal course of business we are subject to proceedings,
lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters
are subject to many uncertainties, and outcomes are not predictable
with assurance. However, management makes its best estimate of the
outcome of these matters based on all available facts and records loss
contingencies as appropriate. Consequently, we are unable to ascertain
the ultimate aggregate amount of monetary liability or financial impact
with respect to these matters at September 30, 2002. These matters
could affect the operating results of any one quarter when resolved in
future periods. However, we believe that after final disposition, any
monetary liability or financial impact to us beyond that provided for
at September 30, 2002, would not be material to our annual consolidated
financial statements.
Sprint PCS, a wireless carrier, sued AT&T for access charges for
AT&T long distance calls terminated on Sprint PCS' network and for
toll-free calls that Sprint PCS customers originated and which were
terminated on AT&T's network. AT&T refused to pay Sprint PCS based on
longstanding industry practice that wireless carrier-long distance
carrier interconnection is on a bill and keep basis and that wireless
carriers charged their customers for calls they received. On July 3,
2002, the FCC ruled that wireless carriers such as Sprint PCS are not
prohibited from charging AT&T access charges, but that AT&T was not
required to pay such charges absent a contractual obligation to do so.
The FCC further held that the question whether the parties entered into
a contract concerning an access payment obligation is not a matter of
federal communications law but rather should be determined by the court
that had referred the issue to the FCC. Because there was no express
contract between AT&T and Sprint PCS, the court will need to determine
whether an implied-in-fact contract can be inferred in light of the
parties' conduct and their tacit understanding. Petitions of Sprint PCS
and AT&T Corp. for Declaratory Ruling Regarding CMRS Access Charges, WT
Docket No. 01-316, Declaratory Ruling, FCC 02-203, rel. July 3, 2002.
The FCC remanded the matter to the federal district court, Sprint
Spectrum, L.P. v. AT&T Communications, Inc., Civil Action No.
00-0973-CV-W-5 (W.D. Mo.). AT&T has petitioned for review of the FCC's
ruling in the U.S. Court of Appeals for the District of Columbia
Circuit, AT&T Corp. v. FCC et al., No. 02-1240 (D.C. Cir. filed Aug. 1,
2002), and has requested a continuance of the stay from the federal
district court in Missouri pending appellate review. An adverse
decision in the present litigation may result in additional wireless
carriers seeking similar compensation from AT&T. AT&T believes the case
is without merit and intends to defend it vigorously, but cannot
predict the outcome of any such proceedings.
Sparks, et al. v. AT&T and Lucent Technologies Inc. et al., is a
class action lawsuit filed in 1996 in Illinois state court under the
name of Crain v. Lucent Technologies. The complaint sought damages on
behalf of present and former customers based on a claim that the AT&T
Consumer Products business (which became part of Lucent in 1996) and
Lucent had defrauded and misled customers who leased telephones,
resulting in payments in excess of the cost to purchase the telephones.
AT&T and Lucent have denied any wrongdoing, but settled this matter to
avoid the uncertainty and expense of protracted litigation. The court
has given final approval to the settlement. Pursuant to the separation
and distribution agreement between Lucent and AT&T, AT&T recorded its
proportionate share of the settlement and estimated legal costs in the
second quarter of 2002, which totaled $132 pretax ($88 after-tax).
Depending upon the number of claims submitted and accepted, the actual
cost of the settlement to AT&T may be less than stated amounts, but it
is not possible to estimate the amount at this time. While similar
consumer class actions are pending in various state courts, the
Illinois state court has held that the class it certified covers claims
in the other state court class actions.
In light of recent publicly reported developments, AT&T is
examining the impact to it if various telecommunications companies and
vendors are unable to satisfy their agreement with AT&T, including the
separation agreements between AT&T and Lucent Technologies, Inc. While
AT&T has not completed its review and can not quantify the impact, if
any, it is possible that under certain circumstances any such inability
by telecommunications companies and vendors, including the inability of
Lucent to meet its obligations under such agreements, could have
negative financial and operational impacts on AT&T, which may be
material.
On March 13, 2002, AT&T Broadband informed CSG Systems, Inc. that
it was considering the initiation of an arbitration against CSG
relating to a Master Subscriber Management System Agreement that the
two companies entered into in 1997. Pursuant to the Master Agreement,
CSG provides billing support to AT&T Broadband. On May 10, 2002, AT&T
Broadband filed a demand for arbitration against CSG before the
American Arbitration Association. On May 31, 2002, CSG answered AT&T
Broadband's arbitration demand and asserted various counterclaims. On
June 21, 2002, CSG filed a lawsuit against Comcast Corporation in
federal court located in Denver, Colorado asserting claims related to
the Master Agreement and the pending arbitration, which complaint was
withdrawn without prejudice on November 1, 2002. In the event that this
process results in the termination of the Master Agreement, AT&T
Broadband may incur significant costs in connection with its
replacement of these customer care and billing services and may
experience temporary disruptions to its operations.
14) RELATED PARTY TRANSACTIONS
AT&T had various related party transactions with Concert until the
joint venture was officially unwound on April 1, 2002.
Included in "Revenue" in the Consolidated Statements of Operations
for the nine months ended September 30, 2002, was $0.3 billion, and for
the three and nine months ended September 30, 2001, was $0.3 billion
and $0.8 billion, respectively, for services provided to Concert.
Included in "Access and other connection expense" in the
Consolidated Statements of Operations were charges from Concert
representing costs incurred on our behalf to connect calls made to
foreign countries (international settlements) and costs paid by AT&T to
Concert for distributing Concert products. Such charges totaled $0.5
billion for the nine months ended September 30, 2002, and $0.4 billion
and $1.5 billion, respectively for the three and nine months ended
September 30, 2001.
Included in "Accounts receivable" in the Consolidated Balance
Sheet at December 31, 2001, was $0.4 billion related to
telecommunications transactions with Concert. Included in "Accounts
payable" in the Consolidated Balance Sheet at December 31, 2001, was
$0.2 billion related to transactions with Concert.
Included in "Other receivables" in the Consolidated Balance
Sheet at December 31, 2001, was $0.8 billion related to administrative
transactions performed on behalf of Concert. Included in "Other current
liabilities" in the Consolidated Balance Sheet at December 31, 2001,
was $0.9 billion related to administrative transactions performed by
Concert on our behalf.
During 2001, we had various related party transactions with LMG.
Included in "Costs of services and products" in the Consolidated
Statement of Operations were programming expenses related to services
from LMG while owned by AT&T of $27 and $199 for the quarter and
year-to-date periods ended July 31, 2001, the deemed effective LMG
split-off date for accounting purposes.
15) SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our
business: AT&T Business Services, AT&T Consumer Services and AT&T
Broadband.
Our existing segments reflect certain managerial changes that were
implemented during 2002. The changes primarily include the following:
revenue previously recorded by the AT&T Business Services segment as
"Internal Revenue" for services provided to certain other AT&T units
and then eliminated within the Corporate & Other group, is now recorded
as a contra-expense by AT&T Business Services; the results of certain
units previously included in the Corporate & Other group were
transferred to the AT&T Business Services segment and the financial
impacts of SFAS No. 133 that were previously recorded in the Corporate
& Other group were transferred to the appropriate segments. In
addition, AT&T Consumer Services and total AT&T revenue was
reclassified in accordance with EITF issue 01-9, "Accounting for
Consideration Given by a Vendor to a Customer," which requires cash
incentives given to customers previously recorded as advertising and
promotion expense now to be recorded as a reduction of revenue when
recognized in the income statement, unless an identifiable benefit is
received in exchange (see note 3). All prior periods have been restated
to reflect these changes.
Reflecting the dynamics of our business, we continuously review
our management model and structure, which may result in additional
adjustments to our operating segments in the future.
For the Three Months For the Nine Months
Revenue Ended September 30, Ended September 30,
2002 2001 2002 2001
AT&T Business Services external revenue $ 6,602 $ 6,746 $ 19,697 $ 20,536
AT&T Business Services internal revenue 98 61 273 378
Total AT&T Business Services revenue 6,700 6,807 19,970 20,914
AT&T Consumer Services external revenue 2,794 3,770 8,791 11,423
AT&T Broadband external revenue 2,546 2,390 7,506 7,411
AT&T Broadband internal revenue 1 3 6 12
Total AT&T Broadband revenue 2,547 2,393 7,512 7,423
Total reportable segments 12,041 12,970 36,273 39,760
Corporate and Other (a) (85) 65 (229) 13
Total revenue $ 11,956 $ 13,035 $ 36,044 $ 39,773
(a) Includes revenue related to Excite@Home of $140 and $418 for the three and nine months ended September 30, 2001.
RECONCILIATION OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO INCOME BEFORE INCOME TAXES
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
AT&T Business Services EBIT $ 826 $(4,390) $ 1,969 $(1,985)
AT&T Consumer Services EBIT 618 1,282 2,252 3,817
AT&T Broadband EBIT 45 (789) (18,840) (3,150)
Total reportable segments' EBIT 1,489 (3,897) (14,619) (1,318)
Corporate and Other EBIT (a) (253) 243 (618) (2,137)
Deduct:
Pretax minority interest and dividends on
subsidiary preferred stock (62) 171 (200) 922
Pretax (losses) related to other equity
investments (18) (5,510) (1,671) (7,149)
Interest (expense) (748) (786) (2,231) (2,426)
Income (loss) from continuing operations before
income taxes, minority interest and dividends on
subsidiary preferred stock, and net (losses)
related to equity investments $ 568 $ 899 $(15,597) $ 346
(a) Includes $(294) and $(714) related to Excite@Home for the three and nine months ended September 30, 2001,
respectively.
ASSETS
At September 30, At December 31,
2002 2001
AT&T Business Services $ 38,621 $ 40,316
AT&T Consumer Services 1,762 2,141
AT&T Broadband 81,933 103,060
Total reportable segments 122,316 145,517
Corporate and Other:
Other segments 857 1,145
Prepaid pension costs 3,522 3,329
Deferred income taxes 1,784 960
Other corporate assets (a) 9,559 14,331
Total assets $ 138,038 $165,282
(a) 2002 and 2001 amounts include cash of $6.7 billion and $10.4
billion, respectively.
16) GUARANTEE OF PREFERRED SECURITIES
Prior to AT&T's acquisition of TCI and MediaOne, TCI and
MediaOne issued mandatorily redeemable preferred securities through
subsidiary trusts that held subordinated debt securities of TCI and
MediaOne.
In the first nine months of 2002, AT&T called mandatorily
redeemable preferred securities issued by TCI Communications Financing
I, II and IV, MediaOne Financing A and B, and MediaOne Finance II for
early redemption. As of September 30, 2002, AT&T provided a full and
unconditional guarantee on outstanding securities issued by MediaOne
Finance III. At September 30, 2002, $504 of MediaOne Finance III
securities were outstanding.
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2002
Guarantor Guarantor Media-One Elimination and
AT&T Subsidiary Finance Non-Guarantor Consolidation Consolidated
Parent MediaOne TCI III Subsidiaries Adjustments AT&T Corp.
ASSETS
Cash and cash equivalents... $ 6,644 $ - $ 2 $ - $ 280 $ - $ 6,926
Receivables................. 20,469 48,870 (62,055) 7,284
Investments................. 459 459
Deferred income taxes....... 1,939 413 (304) 2,048
Other current assets........ 359 2,288 96 516 (1,375) (889) 995
TOTAL CURRENT ASSETS........ 29,411 2,288 98 516 48,647 (63,248) 17,712
Property, plant & equipment,
net ................... 8,992 160 32,212 41,364
Franchise costs, net........ 14 29,070 29,084
Goodwill, net............... 70 2,554 17,893 20,517
Investments and related
advances................. 120,143 32,584 12,046 39,602 (186,455) 17,920
Other assets................ 6,537 182 12,923 (8,201) 11,441
TOTAL ASSETS................ $165,153 $37,426 12,500 $ 516 $180,347 $(257,904) $138,038
LIABILITIES
Debt maturing within one
year..................... $ 35,851 $ 350 $ 1,819 $ - $ 7,094 $ (38,554) $ 6,560
Other current liabilities... 10,798 590 471 13,328 (11,069) 14,118
TOTAL CURRENT LIABILITIES... 46,649 940 2,290 20,422 (49,623) 20,678
Long-term debt.............. 23,328 2,191 12,682 504 14,404 (16,738) 36,371
Deferred income taxes....... 1,191 23,261 24,452
Other long-term liabilities
and deferred credits..... 6,389 10 128 2,258 (1,210) 7,575
TOTAL LIABILITIES........... 77,557 3,141 15,100 504 60,345 (67,571) 89,076
Minority Interest........... 1,371 1,371
Company-Obligated
Convertible Quarterly
Income Preferred
Securities of Subsidiary
Trust Holding Solely
Subordinated Debt
Securities of AT&T....... 4,728 4,728
SHAREOWNERS' EQUITY
AT&T Common Stock........... 3,851 (11,459) 11,459 3,851
Preferred stock issued to
subsidiaries............. 10,559 (10,559) -
Other shareowners' equity... 68,458 34,285 (2,600) 12 130,090 (191,233) 39,012
TOTAL SHAREOWNERS' EQUITY... 82,868 34,285 (2,600) 12 118,631 (190,333) 42,863
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY...... $165,153 $37,426 $12,500 $ 516 $180,347 $(257,904) $138,038
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF OPERATION
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
Guarantor Guarantor Media-One Elimination and
AT&T Subsidiary Finance Non-Guarantor Consolidation Consolidated
Parent MediaOne TCI III Subsidiaries Adjustments AT&T Corp.
Revenue $4,043 $ - $ - $ - $8,245 $ (332) $11,956
Operating Expenses
Costs of services
and products..... 729 2,925 (321) 3,333
Access and other
connection......... 1,423 1,280 (7) 2,696
Selling, general and
administrative..... 697 2 186 1,831 (4) 2,712
Depreciation and
amortization....... 518 20 1,443 1,981
Net restructuring and
other charges...... 4 (30) (26)
Total operating
expenses........... 3,371 2 206 7,449 (332) 10,696
Operating income
(loss)............. 672 (2) (206) 796 1,260
Other income
(expense), net..... 301 47 11 12 696 (1,011) 56
Interest (expense).... (912) (45) (196) (11) (595) 1,011 (748)
Income (loss) from
continuing
operations before
income taxes,
minority interest,
and dividends on
subsidiary
preferred stock,
and net (losses)
related to other
equity investments. 61 (391) 1 897 568
(Provision) benefit
for income taxes... (27) 149 (434) (312)
Minority interest and
dividends on
subsidiary
preferred stock.... (40) 2 (38)
Net (losses)
earnings related
to other equity
investments........ (200) (49) 703 (11) (454) (11)
Income (loss) from
continuing
operations......... (206) (49) 461 1 454 (454) 207
(Loss) income before
extraordinary gain
and cumulative
effect of
accounting changes. (206) (49) 461 1 454 (454) 207
Net income (loss)..... $ (206) $(49) $ 461 $ 1 $ 454 $(454) $ 207
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF OPERATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Guarantor Guarantor Media-One Elimination and
AT&T Subsidiary Finance Non-Guarantor Consolidation Consolidated
Parent MediaOne TCI III Subsidiaries Adjustments AT&T Corp.
Revenue $ 12,065 $ - $ - $ - $ 25,168 $(1,189) $ 36,044
Operating Expenses
Costs of services and
products............. 2,066 9,054 (1,158) 9,962
Access and other
connection........... 4,168 4,126 (27) 8,267
Selling, general and
administrative....... 1,958 (7) 543 5,412 (4) 7,902
Depreciation and
amortization......... 1,479 64 4,292 5,835
Net restructuring and
other charges........ 4 26 30
Goodwill and franchise
cost impairment
charges 16,479 16,479
Total operating expenses 9,675 (7) 607 39,389 (1,189) 48,475
Operating income (loss). 2,390 7 (607) (14,221) (12,431)
Other income (expense),
net.................. 689 396 33 35 646 (2,734) (935)
Interest (expense)...... (2,566) (159) (532) (34) (1,674) 2,734 (2,231)
Income (loss) from
continuing
operations before
income taxes,
minority interest,
and dividends on
subsidiary preferred
stock, and net
(losses) related to
other equity
investments.......... 513 244 (1,106) 1 (15,249) (15,597)
(Provision) benefit for
income taxes......... (196) (93) 423 3,919 4,053
Minority interest and
dividends on
subsidiary preferred
stock................ (120) (6) (126)
Net earnings (losses)
related to other
equity investments... 228 (8,162) (5,290) (1,001) 13,193 (1,032)
Income (loss) from
continuing operations 425 (8,011) (5,973) 1 (12,337) 13,193 (12,702)
(Loss) from
discontinued
operation (net of
income taxes)........ (88) (88)
(Loss) income before
extraordinary gain... 337 (8,011) (5,973) 1 (12,337) 13,193 (12,790)
Extraordinary gain (net
of income taxes)..... 48 48
Cumulative effect of
accounting changes
(net of income taxes) (856) (856)
Net (loss) income....... $ 337 $(8,011) $(5,925) $ 1 $(13,193) $13,193 $(13,598)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Elimination
Guarantor Guarantor Media-One and
AT&T Subsidiary Finance Non-Guarantor Consolidation Consolidated
Parent MediaOne TCI III Subsidiaries Adjustments AT&T Corp.
NET CASH (USED IN)
PROVIDED BY
OPERATING
ACTIVITIES OF
CONTINUING
OPERATIONS.......... $ (925) $ (576) $ (526) $ 9,715 $ 7,688
INVESTING ACTIVITIES
Capital expenditures
and other
additions......... (1,497) (166) (3,632) (5,295)
Other (5,973) 726 (3,207) (6,972) 15,470 44
NET CASH (USED IN)
PROVIDED BY
INVESTING
ACTIVITIES OF
CONTINUING
OPERATIONS.......... (7,470) 726 (3,373) (10,604) 15,470 (5,251)
FINANCING ACTIVITIES
Proceeds from debt
from AT&T........... 1,933 1,413 6,406 (9,752)
Proceeds from
long-term debt 129 129
Retirement of
long-term debt...... (2,900) (28) (454) 374 (3,008)
Retirement of AT&T debt (1,547) (2,051) 3,598
(Decrease) increase in
short-term
borrowings, net..... (4,442) (754) (5,196)
Increase (decrease) in
short-term
borrowings from
AT&T, net 6,837 (6,837)
Issuance of AT&T
common shares 2,640 2,640
Other 556 1,255 (2,479) (668)
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES OF
CONTINUING
OPERATIONS.......... 4,624 (162) 3,901 1,004 (15,470) (6,103)
Net (decrease)
increase in cash
and cash equivalents (3,771) (12) 2 115 (3,666)
Cash and cash
equivalents at
beginning of year... 10,415 12 165 10,592
Cash and cash
equivalents at end
of period........... $ 6,644 $ 2 $ 280 $ 6,926
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2001
Guaran- Guaran- Guaran- TCI TCI TCI Media Media Media Media Non- Elimi- Consoli-
tor tor tor Finan- Finan- Finan- -One -One -One -One Guar- nation dated
AT&T Sub- Sub- cing cing cing Finan-Finan-Finan-Finan- antor and AT&T
Parent sidiary sidiary I II IV cing ce ce ce Sub- Con- Corp.
TCI MediaOne A B II III sid- soli-
iaries dation
Adjust-
ments
ASSETS
Cash and cash
equivalents...... $ 10,415 $ - $ 12 $ - $ - $ - $ - $ - $ - $ - $ 165 $ - $ 10,592
Receivables........ 11,682 44,516 (46,817) 9,381
Investments........ 668 668
Deferred income
taxes............ 729 501 1,230
Other current
assets........... 302 71 689 527 513 204 31 29 220 11 (45) (1,895) 657
TOTAL CURRENT
ASSETS........... 23,128 71 701 527 513 204 31 29 220 11 45,805 (48,712) 22,528
Property, plant &
equipment, net... 8,580 135 32,607 41,322
Franchise costs,
net.............. 20 42,799 42,819
Goodwill, net...... 70 2,526 22,079 24,675
Investments and
related advances. 130,219 12,747 41,413 63,996 (224,557) 23,818
Other assets....... 5,445 91 21 16 16 516 8,835 (4,820) 10,120
TOTAL ASSETS....... $167,442 $13,064 $44,640 $527 $513 $204 $52 $45 $236 $527 $216,121 $(278,089) $165,282
LIABILITIES
Debt maturing
within one year.. $34,195 $616 $753 $527 $513 $204 $30 $28 $214 $ 8,985 $ (33,107) $ 12,958
Other current
liabilities...... 8,763 597 59 1 1 6 11 11,419 (8,388) 12,469
TOTAL CURRENT
LIABILITIES...... 42,958 1,213 812 527 513 204 31 29 220 11 20,404 (41,495) 25,427
Long-term debt..... 23,810 9,866 676 504 14,640 (8,969) 40,527
Deferred income
taxes............ 1,147 934 26,079 28,160
Other long-term
liabilities and
deferred credits. 6,850 45 23 7,378 (3,088) 11,208
TOTAL LIABILITIES.. 74,765 11,124 2,445 527 513 204 31 29 220 515 68,501 (53,552) 105,322
Minority Interest.. 3,560 3,560
Company-Obligated
Convertible
Quarterly Income
Preferred
Securities of
Subsidiary Trust
Holding Solely
Subordinated
Debt Securities
of AT&T.......... 4,720 4,720
SHAREOWNERS' EQUITY
AT&T Common Stock.. 3,542 3,542
Preferred stock
issued to
subsidiaries..... 10,559 (10,559) -
Other shareowners'
equity........... 73,856 1,940 42,195 21 16 16 12 144,060 (213,978) 48,138
TOTAL SHAREOWNERS'
EQUITY........... 87,957 1,940 42,195 21 16 16 12 144,060 (224,537) 51,680
TOTAL LIABILITIES
AND SHAREOWNERS'
EQUITY........... $167,442 $13,064 $44,640 $527 $513 $204 $52 $45 $236 $527 $216,121 $(278,089) $165,282
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
For the three months ended September 30, 2001
Guarantor Guarantor Guarantor TCI TCI TCI
AT&T Subsidiary Subsidiary Financing Financing Financing
Parent TCI MediaOne I II IV
Revenue....................... $4,795 $ - $ - $ - $ - $ -
Operating Expenses
Costs of services and products 876
Access and other connection... 1,610
Selling, general and
administrative.............. 470 2 (7)
Depreciation and amortization. 469 15 18
Net restructuring and other
charges.....................
Total operating expenses...... 3,425 17 11
Operating income (loss)....... 1,370 (17) (11)
Other income (expense)........ 1,336 8 (36) 10 12 4
Interest (expense)............ (956) (150) (57) (10) (12) (4)
Income (loss) from continuing
operations before income
taxes, minority interest
and (losses) from equity
investments ................ 1,750 (159) (104)
(Provision) benefit for
income taxes................ (665) 59 31
Minority interest and
dividends on subsidiary
preferred stock............. (40)
Equity (losses) from Liberty
Media Group................. 111
Net (losses) earnings from
other equity investments.... (2,284) (424) (372)
Income (loss) from continuing
operations.................. (1,239) (413) (445)
Gain on sale of discontinued
operations.................. 13,503
Net income (loss) ............ 12,264 (413) (445)
Dividend requirements of
preferred stock............. (235)
Net income (loss) available
to common shareowners....... $12,029 $(413) $(445) $ - $ - $ -
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
For the three months ended September 30, 2001
(Continued from above)
MediaOne MediaOne MediaOne MediaOne Elimination and
Financing Financing Finance Finance Non-Guarantor Consolidation Consolidated
I II II III Subsidiaries Adjustments AT&T Corp.
Revenue....................... $ - $ - $ - $ - $8,743 $(503) $13,035
Operating Expenses
Costs of services and products 3,040 (440) 3,476
Access and other connection... 1,484 (61) 3,033
Selling, general and
administrative.............. 2,025 (2) 2,488
Depreciation and amortization. 1,772 2,274
Net restructuring and other
charges..................... 399 399
Total operating expenses...... 8,720 (503) 11,670
Operating income (loss)....... 23 - 1,365
Other income (expense)........ 1 1 6 12 (246) (788) 320
Interest (expense)............ (1) (1) (5) (11) (367) 788 (786)
Income (loss) from continuing
operations before income
taxes, minority interest
and (losses) from equity
investments ................ 1 1 (590) 899
(Provision) benefit for
income taxes................ 645 70
Minority interest and
dividends on subsidiary
preferred stock............. 217 177
Equity (losses) from Liberty
Media Group................. 111
Net (losses) earnings from
other equity investments.... (3,352) 3,080 (3,352)
Income (loss) from continuing
operations.................. 1 1 (3,080) 3,080 (2,095)
Gain on sale of discontinued
operations.................. 13,503
Net income (loss) ............ 1 1 (3,080) 3,080 11,408
Dividend requirements of
preferred stock............. (235)
Net income (loss) available
to common shareowners....... $ - $ - $ 1 $ 1 $(3,080) $3,080 $11,173
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
For the nine months ended September 30, 2001
Guarantor Guarantor Guarantor TCI TCI TCI
AT&T Subsidiary Subsidiary Financing Financing Financing
Parent TCI MediaOne I II IV
Revenue....................... $14,641 $ - $ - $ - $ - $ -
Operating Expenses
Costs of services and products 2,564 1
Access and other connection... 4,948
Selling, general and
administrative.............. 1,392 246 2
Depreciation and other
amortization................ 1,356 47 54
Net restructuring and other
charges..................... -
Total operating expenses...... 10,260 293 57
Operating income (loss)....... 4,381 (293) (57)
Other income (expense)........ 763 97 1,076 32 35 13
Interest (expense) ........... (3,485) (1,015) (212) (32) (35) (13)
Income (loss) from continuing
operations before income
taxes, minority interest,
(losses) from equity
investments and cumulative
effect of accounting change. 1,659 (1,211) 807
(Provision) benefit for
income taxes................ (619) 454 (329)
Minority interest and
dividends on subsidiary
preferred stock............. (120)
Equity (losses) from Liberty
Media Group................. (2,711)
Net earnings (losses) from
other equity investments.... 133 (1,896) (2,161)
Income (loss) from continuing
operations.................. 1,053 (5,364) (1,683)
Income from discontinued
operations (net of income
taxes) .....................
Gain on sale of discontinued
operations.................. 13,503
Cumulative effect of
accounting change (net of
income taxes)............... 508 545 540
Net income (loss) ............ 15,064 (4,819) (1,143)
Dividend requirements of
preferred stock............. (652)
Premium on exchange of AT&T
Wireless tracking stock.... (80)
Net income (loss) available
to common shareowners....... $14,332 $(4,819) $(1,143) $ - $ - $ -
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
For the nine months ended September 30, 2001
(Continued from above)
MediaOne MediaOne MediaOne MediaOne Elimination and
Financing Financing Finance Finance Non-Guarantor Consolidation Consolidated
I II II III Subsidiaries Adjustments AT&T Corp.
Revenue....................... $ - $ - $ - $ - $26,859 $(1,727) $39,773
Operating Expenses
Costs of services and products 9,411 (1,518) 10,458
Access and other connection... 4,523 (182) 9,289
Selling, general and
administrative.............. 6,317 (4) 7,953
Depreciation and other
amortization................ 5,579 7,036
Net restructuring and other
charges..................... 1,494 1,494
Total operating expenses...... 27,324 (1,704) 36,230
Operating income (loss)....... (465) (23) 3,543
Other income (expense)........ 3 3 16 35 (285) (2,559) (771)
Interest (expense) ........... (2) (2) (15) (34) (672) 3,091 (2,426)
Income (loss) from continuing
operations before income
taxes, minority interest,
(losses) from equity
investments and cumulative
effect of accounting change. 1 1 1 1 (1,422) 509 346
(Provision) benefit for
income taxes................ 782 288
Minority interest and
dividends on subsidiary
preferred stock............. 1,135 1,015
Equity (losses) from Liberty
Media Group................. (2,711)
Net earnings (losses) from
other equity investments.... (3,923) 3,458 (4,389)
Income (loss) from continuing
operations.................. 1 1 1 1 (3,428) 3,967 (5,451)
Income from discontinued
operations (net of income
taxes) ..................... 178 (28) 150
Gain on sale of discontinued
operations.................. 13,503
Cumulative effect of
accounting change (net of
income taxes)............... (689) 904
Net income (loss) ............ 1 1 1 1 (3,939) 3,939 9,106
Dividend requirements of
preferred stock............. (652)
Premium on exchange of AT&T
Wireless tracking stock.... (80)
Net income (loss) available
to common shareowners....... $ 1 $ 1 $ 1 $ 1 $(3,939) $3,939 8,374
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2001
Guarantor Guarantor Guarantor TCI TCI TCI
AT&T Subsidiary Subsidiary Financing Financing Financing
Parent TCI MediaOne I II IV
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES OF
CONTINUING OPERATIONS....... $ 2,367 $ (1,116) $ 746 $ - $ - $ -
INVESTING ACTIVITIES
Capital expenditures and
other additions............. (1,313) (15)
Equity investment
distributions and sales..... 694 19,048
Net dispositions
(acquisitions) of
businesses, net of cash
disposed/acquired........... 14
Other......................... 3,658 162 (494)
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES OF
CONTINUING OPERATIONS....... 3,053 19,195 (494)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances...................
Proceeds from debt from AT&T.. 2,670
Retirement of long-term debt.. (976) (252)
Retirement of AT&T debt....... (5,169) (20,419)
Issuance of convertible
preferred securities
and warrants................ 9,811
Repayment of borrowing from
AT&T Wireless............... (5,803)
(Decrease) increase in
short-term borrowings, net.. (9,839) (330)
Other......................... 10,151
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS....... (1,825) (18,079) (252)
Net cash provided by
discontinued operations.....
Net increase (decrease) in
cash and cash equivalents... 3,595
Cash and cash equivalents at
beginning of year...........
Cash and cash equivalents at
end of period............... $ 3,595 $ - $ - $ - $ - $ -
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2001
(Continued from above)
MediaOne MediaOne MediaOne MediaOne Elimination and
Financing Financing Finance Finance Non-Guarantor Consolidation Consolidated
I II II III Subsidiaries Adjustments AT&T Corp.
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES OF
CONTINUING OPERATIONS....... $ 1 $ 1 $ 1 $ 1 $ 5,104 $ 116 $ 7,221
INVESTING ACTIVITIES
Capital expenditures and
other additions............. (5,408) (6,736)
Equity investment
distributions and sales..... 1,151 (19,048) 1,845
Net dispositions
(acquisitions) of
businesses, net of cash
disposed/acquired........... 4,813 4,827
Other......................... 1,613 (5,390) (451)
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES OF
CONTINUING OPERATIONS....... 2,169 (24,438) (515)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances................... 195 195
Proceeds from debt from AT&T.. (2,670) -
Retirement of long-term debt.. (390) (1,618)
Retirement of AT&T debt....... 823 24,765 -
Issuance of convertible
preferred securities
and warrants................ 9,811
Repayment of borrowing from
AT&T Wireless............... (5,803)
(Decrease) increase in
short-term borrowings, net.. 5,964 (5,375) (9,580)
Other......................... (1) (1) (1) (1) (18,025) 7,441 (437)
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS....... (1) (1) (1) (1) (11,433) 24,161 (7,432)
Net cash provided by
discontinued operations..... 4,699 161 4,860
Net increase (decrease) in
cash and cash equivalents... 539 4,134
Cash and cash equivalents at
beginning of year........... 64 64
Cash and cash equivalents at
end of period............... $ - $ - $ - $ - $ 603 $ - $ 4,198
17) RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
This standard requires that obligations associated with the retirement
of tangible long-lived assets be recorded as liabilities when those
obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an
asset retirement obligation, an entity must capitalize the cost by
recognizing an increase in the carrying amount of the related
long-lived asset. Over time, this liability is accreted to its future
value, and the capitalized cost is depreciated over the useful life of
the related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. For AT&T, this
means that the standard will be adopted on January 1, 2003. AT&T is
evaluating the impact that the adoption of this statement will have on
AT&T's results of operations, financial position or cash flows.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of
SFAS Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13
and Technical Corrections." SFAS No. 145 eliminates the requirement (in
SFAS No. 4) that gains and losses from the extinguishments of debt be
aggregated and classified as extraordinary items, net of the related
income tax. An entity is not prohibited from classifying such gains and
losses as extraordinary items, as long as they meet the criteria of APB
Opinion No. 30. In addition, SFAS No. 145 requires sale-leaseback
treatment for certain modifications of a capital lease that result in
the lease being classified as an operating lease. The rescission of
SFAS No. 4 is effective for fiscal years beginning after May 15, 2002,
which for AT&T would be January 1, 2003. Earlier application is
encouraged. Any gain or loss on extinguishment of debt that was
previously classified as an extraordinary item would be reclassified to
other income (expense), net. The remainder of the statement is
generally effective for transactions occurring after May 15, 2002. AT&T
does not expect that the adoption of SFAS No. 145 will have a material
impact on AT&T's results of operations, financial position or cash
flows.
On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for
Exit or Disposal Activities." This statement addresses the recognition,
measurement and reporting of costs that are associated with exit and
disposal activities. This statement includes the restructuring
activities that are currently accounted for pursuant to the guidance
set forth in EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)," costs related to
terminating a contract that is not a capital lease and one-time benefit
arrangements received by employees who are involuntarily terminated -
nullifying the guidance under EITF 94-3. Under SFAS No. 146 the cost
associated with an exit or disposal activity is recognized in the
periods in which it is incurred rather than at the date the company
committed to the exit plan. This statement is effective for exit or
disposal activities initiated after December 31, 2002, with earlier
application encouraged. Previously issued financial statements will not
be restated. The provisions of EITF 94-3 shall continue to apply for
exit plans initiated prior to the adoption of SFAS No. 146.
Accordingly, the initial adoption of SFAS No. 146 will not have an
effect on AT&T's results of operations, financial position or cash
flows. However, liabilities associated with future exit and disposal
activities will not be recognized until actually incurred.
18) SUBSEQUENT EVENTS
On November 5, 2002, AT&T was served with a shareholder
lawsuit filed on October 29, 2002, in the Court of Chancery of the
State of Delaware. The lawsuit names AT&T and each member of the board
of directors of AT&T Latin America (ALA) as defendants, asserting,
among other things, that AT&T as a majority shareholder and the named
directors breached fiduciary duties to ALA. AT&T will vigorously
contest the allegations set forth in the lawsuit.
On November 7, 2002, certain creditors of At Home Corp. (At Home)
filed a class action against AT&T in California state court asserting
claims relating to the conduct of AT&T and its designees on the At Home
board of directors in connection with At Home's declaration of
bankruptcy and subsequent efforts to dispose of some of its businesses
or assets, as well as in connection with other aspects of AT&T's
relationship with At Home. As described in the joint proxy statement
and prospectus of AT&T and Comcast, dated May 14, 2002, liability (if
any) arising from this lawsuit would be shared equally between AT&T and
AT&T Broadband, and then following the merger of Comcast and AT&T
Broadband, any such liability would be shared equally between AT&T and
AT&T Comcast.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
AT&T Corp. (AT&T or the company) is among the world's
communications leaders, providing voice, data and video communications
services to large and small businesses, consumers and government
agencies. We provide domestic and international long distance, regional
and local communications services, cable (broadband) television and
Internet communication services.
RESTRUCTURING OF AT&T
On October 25, 2000, AT&T announced a restructuring plan designed
to fully separate or issue separately tracked stocks intended to
reflect the financial performance and economic value of each of AT&T's
four major operating units.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as
a separate, independently traded company. On August 10, 2001, AT&T
completed the split-off of Liberty Media Corporation as an independent,
publicly traded company.
On July 10, 2002, AT&T and Comcast Corporation (Comcast)
shareowners approved the proposed merger between AT&T Broadband and
Comcast. The merger still remains subject to certain regulatory reviews
and approvals and certain other conditions and is expected to close by
the end of 2002. Under the terms of the agreement, AT&T will spin-off
AT&T Broadband and simultaneously AT&T Broadband and Comcast will merge
into subsidiaries of a new company to be called AT&T Comcast
Corporation (AT&T Comcast). AT&T shareowners will receive approximately
0.32 of a share of AT&T Comcast for each share of AT&T they own, based
on calculations using September 30, 2002 share prices. AT&T shareowners
will own an approximate 55% economic stake and have an approximate 61%
voting interest in the new company. The spin-off of AT&T Broadband
could result in the recognition of a gain or loss for the difference
between the fair value of the Comcast shares to be received by AT&T
shareholders in the merger and the net book value of AT&T Broadband.
On July 10, 2002, AT&T shareholders also approved a one-for-five
reverse stock split. The purpose of the reverse stock split is to seek
to adjust upward the trading price of AT&T common stock following
completion of the various transactions to effect AT&T's restructuring
plan. AT&T anticipates that the reverse stock split will be affected
immediately after the consummation of the AT&T Comcast transaction
described above.
TRACKING STOCKS
In 2001, AT&T had tracking stocks that reflected the financial
performance of Liberty Media Group (LMG) and AT&T Wireless Group. The
shares initially issued tracked 100% and approximately 16% of the
performance of LMG and AT&T Wireless Group, respectively.
In 2001, the earnings attributable to AT&T Wireless Group are
excluded from the earnings available to AT&T Common Stock Group and are
reflected as "(Loss) income from discontinued operations," net of
applicable taxes in the Consolidated Statement of Operations.
Similarly, the earnings and losses related to LMG are excluded from the
earnings available to AT&T Common Stock Group. The remaining results of
operations of AT&T, including the financial performance of AT&T
Wireless Group not represented by the tracking stock, are referred to
as the AT&T Common Stock Group and are represented by AT&T common
stock. The earnings of AT&T Wireless Group attributable to the AT&T
Common Stock Group for 2001 are also reflected as "(Loss) income from
discontinued operations," net of applicable taxes.
We did not have a controlling financial interest in LMG for
financial accounting purposes; therefore, our ownership in LMG was
reflected as an investment accounted for under the equity method in
AT&T's consolidated financial statements. The amounts attributable to
LMG are reflected in the accompanying Consolidated Statement of
Operations and Cash Flows as "Equity earnings (losses) from Liberty
Media Group" prior to its split-off from AT&T.
AT&T Wireless Group was an integrated business of AT&T, and LMG
was a combination of certain assets and businesses of AT&T, neither was
a stand-alone entity prior to its split-off from AT&T.
FORWARD-LOOKING STATEMENTS
This document may contain forward-looking statements with respect
to AT&T's restructuring plan, financial condition, results of
operations, cash flows, dividends, financing plans, business
strategies, operating efficiencies or synergies, budgets, capital and
other expenditures, network build out and upgrade, competitive
positions, availability of capital, growth opportunities for existing
products, benefits from new technologies, availability and deployment
of new technologies, plans and objectives of management, and other
matters.
These forward-looking statements, including, without limitation,
those relating to the future business prospects, revenue, working
capital, liquidity, capital needs, network build out, interest costs
and income, are necessary estimates reflecting the best judgment of
management and involve a number of risks and uncertainties that could
cause actual results to differ materially from those suggested by the
forward-looking statements. These forward-looking statements should,
therefore, be considered in light of various important factors that
could cause actual results to differ materially from estimates or
projections contained in the forward-looking statements including,
without limitation:
o the risks associated with each of AT&T's main business units,
operating as independent entities as opposed to as part of an
integrated telecommunications provider following completion of
AT&T's restructuring plan, including the inability of these units
to rely on the financial and operational resources of the
combined company and these units having to provide services that
were previously provided by a different part of the combined
company,
o the impact of existing and new competitors in the markets
in which these units compete, including competitors that may
offer less expensive products and services, desirable or
innovative products, technological substitutes, or have extensive
resources or better financing,
o the impact of oversupply of capacity resulting from excessive
deployment of network capacity,
o the ongoing global and domestic trend toward consolidation in
the telecommunications industry, which may have the effect of
making the competitors of these entities larger and better
financed and afford these competitors with extensive resources
and greater geographic reach, allowing them to compete more
effectively,
o the effects of vigorous competition in the markets in which the
company operates, which may decrease prices charged, increase
churn and change customer mix, profitability and average revenue
per user,
o the risks associated with possible disruptions to the
telecommunications industry related to the bankruptcy of major
telecommunications providers and vendors,
o the ability to enter into agreements to provide services, and the
cost of entering new markets necessary to provide services,
o the ability to establish a significant market presence in
new geographic and service markets,
o the availability and cost of capital and the consequences of
increased leverage,
o the impact of any unusual items resulting from ongoing
evaluations of the business strategies of the company,
o the requirements imposed on the company or latitude allowed
to competitors by the Federal Communications Commission (FCC) or
state regulatory commissions under the Telecommunications Act of
1996 or other applicable laws and regulations,
o the risks associated with technological requirements, technology
substitution and changes and other technological developments,
o the results of litigation filed or to be filed against the
company,
o the possibility of one or more of the markets in which the
company competes being impacted by changes in political, economic
or other factors, such as monetary policy, legal and regulatory
changes or other external factors over which these groups have no
control, and
o the risks related to AT&T's investments and joint ventures.
The words "estimate," "project," "intend," "expect," "believe,"
"plan" and similar expressions are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
document. Moreover, in the future, AT&T, through its senior management,
may make forward-looking statements about the matters described in this
document or other matters concerning AT&T.
The discussion and analysis that follows provides information
management believes is relevant to an assessment and understanding of
AT&T's consolidated results of operations for the three and nine months
ended September 30, 2002 and 2001, respectively, and financial
condition as of September 30, 2002, and December 31, 2001.
Critical Accounting Policies, Estimates and Judgments
AT&T's financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States.
The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses as well as the disclosure of
contingent assets and liabilities. Management continually evaluates its
estimates and judgments including those related to revenue recognition,
allowances for doubtful accounts, the carrying values and useful lives
of property, plant and equipment, internal use software and intangible
assets, investments, derivative contracts, pension and other
postretirement benefits and income taxes. Management bases its
estimates and judgments on historical experience and other factors that
are believed to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions or
conditions. For a detailed discussion of significant accounting polices
that may involve a higher degree of judgment or complexity, refer to
AT&T's Form 10-K/A for the year ended December 31, 2001.
CONSOLIDATED RESULTS OF OPERATIONS
The comparison of results for the third quarter and nine months
ended September 30, 2002, with the corresponding periods in 2001 was
impacted by events, such as net cable dispositions, which affect
comparability. For example, in 2001, we disposed of several cable
systems, which were therefore not included in 2002 results, but were
included in the prior period results until the date of disposition.
Year-over-year comparisons were also impacted by the
deconsolidation of At Home Corp. (Excite@Home). In 2001, Excite@Home
was fully consolidated for the period January 1, 2001, through
September 28, 2001, the date Excite@Home filed for Chapter 11
bankruptcy protection. As a result of the bankruptcy and AT&T removing
its members from the Excite@Home board of directors, AT&T no longer
consolidated Excite@Home as of September 30, 2001.
The comparison of 2002 results with 2001 results were also
affected by the unwind of Concert, our joint venture with British
Telecommunications plc (BT) on April 1, 2002. As a result of the unwind
of Concert, the venture's assets and customer accounts were distributed
back to the parent companies. AT&T combined these assets with its
existing international networking and other assets and began recording
revenue from multinational customers and foreign-billed revenue
previously recorded by Concert. In 2001, charges from Concert were
recorded as access and other connection expenses. Effective April 2002,
as AT&T took back the assets and customer relationships from Concert,
we began recording the expenses in each line based on how the assets
and customers are served and managed. As a result, beginning in the
second quarter of 2002, access and other connection expenses are lower
than 2001 as the costs associated with managing these assets and
customer relationships are recorded on other expense lines such as
costs of services and products, depreciation and amortization, and
selling, general and administrative expenses. In addition, in the
second quarter of 2002, AT&T ceased recording equity losses related to
Concert.
REVENUE
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
AT&T Business Services $ 6,700 $ 6,807 $19,970 $20,914
AT&T Consumer Services 2,794 3,770 8,791 11,423
AT&T Broadband 2,547 2,393 7,512 7,423
Corporate and Other (85) 65 (229) 13
Total Revenue $11,956 $13,035 $36,044 $39,773
Total revenue for the three months ended September 30, 2002,
decreased 8.3%, or $1.1 billion, compared with the same period in 2001.
The decline was primarily driven by declines in long distance voice
revenue of $1.3 billion and a $0.1 billion impact of the
deconsolidation of Excite@Home and net cable dispositions. Partially
offsetting the decline was increased revenue of $0.3 billion primarily
from growth in data/Internet Protocol (IP)/managed services within AT&T
Business Services and AT&T Broadband's advanced services (telephony,
high-speed data and digital video). In addition, revenue increased as a
result of the reintegration of customers and assets from the unwind of
Concert.
Total revenue for the first nine months of 2002 decreased 9.4%,
or $3.7 billion, compared with the same period in 2001. The decline was
primarily driven by declines in long distance voice revenue of $4.2
billion and a $0.9 billion impact of net cable dispositions and the
deconsolidation of Excite@Home. Partially offsetting the decline was
increased revenue of $1.0 billion from AT&T Broadband's advanced
services (telephony, high-speed data and digital video) and growth in
data/IP/managed services within AT&T Business Services. In addition,
revenue increased as a result of the reintegration of customers and
assets from the unwind of Concert.
Revenue by segment is discussed in more detail in the segment
results section.
OPERATING EXPENSES
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Costs of services and $3,333 $3,476 $9,962 $10,458
products
Costs of services and products include the cost of operating and
maintaining our networks, costs to support our outsourcing contracts,
programming for cable services, the provision for uncollectible
receivables and other service-related costs, including cost of
equipment sold.
Costs of services and products decreased $0.1 billion, or 4.1%,
in the third quarter of 2002 and decreased $0.5 billion, or 4.7%, for
the nine months ended September 30, 2002, compared with the comparable
periods in 2001. Approximately $0.1 billion of the third quarter
decrease and $0.7 billion of the year-to-date decrease was due to 2001
net cable dispositions and the deconsolidation of Excite@Home. In
addition, approximately $0.2 billion of the third quarter decrease and
$0.3 billion of the year-to-date decrease was due to the overall impact
of lower revenue and related costs at AT&T Business Services and AT&T
Consumer Services. These decreases were partially offset by increased
costs of approximately $0.1 billion in the third quarter and $0.2
billion in the year-to-date period resulting from increased costs at
AT&T Broadband, primarily higher cable programming costs due to higher
rates. In addition, costs of services and products increased as a
result of the reintegration of customers and assets from the unwind of
Concert. AT&T Business Services also had a year-to-date increase of
$0.1 billion related to the provision for uncollectibles due to the
weak economy.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Access and other connection $2,696 $3,033 $8,267 $9,289
Access and other connection expenses decreased $0.3 billion, or
11.1%, in the third quarter of 2002 compared with the third quarter of
2001. Included within access and other connection expenses are costs we
pay to connect calls on the facilities of other service providers, as
well as the Universal Service Fund contributions and multi-line
per-line charges mandated by the FCC. The decrease was primarily due to
lower access rates, Universal Service Fund contributions, international
connection rates and per-line charges for multi-line business
customers. Access and other connection expenses also decreased as a
result of the reintegration of customers and assets from the unwind of
Concert. These decreases were partially offset by slightly higher local
connectivity costs.
Access and other connection expenses decreased $1.0 billion, or
11.0%, for the nine months ended September 30, 2002, compared with the
same period in 2001. The decrease was primarily due to lower Universal
Service Fund contributions, access rates, international connection
rates and per-line charges for multi-line business customers. Access
and other connection expenses also decreased as a result of the
reintegration of customers and assets from the unwind of Concert. These
decreases were partially offset by slightly higher local connectivity
costs.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Selling, general and
administrative $2,712 $2,488 $7,902 $7,953
Selling, general and administrative (SG&A) expenses increased $0.2
billion, or 9.0%, in the third quarter of 2002, compared with the third
quarter of 2001. The increase was primarily due to lower pension
credits of $0.1 billion resulting from a lower expected long-term rate
of return and decreased returns on plan assets, increased advertising
expense by AT&T Consumer Services for new local service offerings of
approximately $0.1 billion, and $0.1 billion of Comcast merger related
costs recorded in 2002. SG&A expenses also increased as a result of the
reintegration of customers and assets from the unwind of Concert. These
increases were partially offset by cost control efforts within AT&T
Business Services and AT&T Broadband, as well as lower costs associated
with decreased volumes at AT&T Consumer Services due to a reduction in
the number of customers, of approximately $0.2 billion.
Selling, general and administrative expenses decreased $0.1
billion, or 0.6%, for the nine months ended September 30, 2002,
compared with the same period in 2001. Approximately $0.1 billion of
the decrease was due to expenses associated with net cable dispositions
for the nine months ended September 30, 2001, and the deconsolidation
of Excite@Home. Also contributing to the decrease were lower costs of
approximately $0.6 billion as a result of cost control efforts at AT&T
Business Services and AT&T Broadband, as well as decreased volumes at
AT&T Consumer Services due to a reduction in the number of customers.
Partially offsetting these decreases were lower pension credits
resulting from a lower expected long-term rate of return and decreased
returns on plan assets, and higher transaction costs associated with
AT&T's restructuring announced in October of 2000 of approximately $0.4
billion. In addition, increased advertising expense by AT&T Consumer
Services for new local service offerings and AT&T Broadband, as well as
increased AT&T Broadband customer care expenses of approximately $0.3
billion partially offset the decrease. SG&A expenses also increased as
a result of the reintegration of customers and assets from the unwind
of Concert.
We expect that SG&A, and to a lesser extent costs of services and
products, will be unfavorably impacted in the future due to higher
compensation costs associated with changes in the accounting for
certain benefit plans as well as lower pension credits resulting from a
lower expected long-term rate of return on plan assets in 2003 than the
9% rate used in 2002 and a lower return on plan assets.
The changes in accounting for benefit plans include the decision
to expense stock option grants, commencing with options granted in
2003, the expense associated with restricted stock units issued in
exchange for the cancellation of employee stock options, as well as the
mark-to-market impacts of those stock options eligible for exchange but
not cancelled.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Depreciation and
amortization $1,981 $2,274 $5,835 $7,036
Depreciation and amortization expenses declined $0.3 billion and
$1.2 billion, or 12.8% and 17.1%, in the third quarter and first nine
months of 2002, respectively, compared with the corresponding periods
in 2001. The decline in both periods was primarily due to the adoption
of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" as of January 1, 2002, which
eliminated the amortization of goodwill and franchise costs. In the
third quarter and first nine months of 2001, we recorded $0.5 billion
and $1.6 billion, respectively, of amortization expense on goodwill and
franchise costs. The deconsolidation of Excite@Home and net cable
dispositions also contributed to the declines. The declines were
partially offset by increased depreciation expense due to a higher
asset base resulting from continued infrastructure investment. Total
capital expenditures were $2.1 billion and $2.0 billion for the three
months ended September 30, 2002 and 2001, respectively, and were $5.3
billion and $6.6 billion for the first nine months of 2002 and 2001,
respectively. We continue to focus the vast majority of our capital
spending on our growth businesses of broadband and data/IP/managed
services.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Net restructuring and
other charges $ (26) $399 $30 $1,494
In the third quarter of 2002, AT&T recorded a net reversal of $26
million of net restructuring and other charges. In light of current
unprecedented industry conditions, including the bankruptcy of several
significant competitors, AT&T's management reevaluated the business
restructuring plan established in the fourth quarter of 2001 and
determined that the plan needed to be modified primarily for certain
areas of AT&T Business Services, including network services. As a
result, approximately $137 million of net restructuring and other
charges were reversed which primarily consisted of $110 million for
employee separation costs. In addition, the reversals included $12
million of sales obligation liabilities associated with the
government-mandated disposition of AT&T Communications (U.K.) Ltd. that
were never incurred. However, in order to continue to properly manage
our cost structure, AT&T's management developed a new exit plan in
other areas of AT&T Business Services, including network services,
totaling $111 million. This plan primarily consists of $91 million for
employee separation costs related to approximately 1,400 employees
(slightly more than half of which are management), and $16 million for
facility closings related to buildings becoming vacant as a result of
previously announced restructuring plans.
Net restructuring and other charges for the nine months ended
September 30, 2002, totaled $30 million which primarily represents
costs associated with AT&T Broadband's efforts to reorganize and
streamline certain centralized and field functions, partially offset by
the reversal of reserves primarily for AT&T Business Services'
initiatives.
The $30 million is comprised of new exit plans totaling $207
million primarily consisting of $133 million associated with employee
separation costs and $66 million in connection with facility closings.
These charges were largely offset by total reversals of $177 million
which were primarily comprised of $127 million of employee separation
costs and $26 million related to excess vintage facility closing
restructuring reserves. In addition, the reversals included $12 million
from the third quarter relating to sales obligations associated with
AT&T Communications (U.K.) Ltd. The reversals were due primarily to
management's reevaluation of the restructuring plan established in the
fourth quarter of 2001 for certain areas of AT&T Business Services, as
discussed above, as well as the redeployment of certain employees to
different functions within the company.
Approximately 2,300 employees will be separated in conjunction
with the exit plans implemented in 2002 (about 17% of which will be
leaving voluntarily), with more than 60% of the total employees
impacted being management employees. Approximately 34% of the employees
affected by these exit plans have left their positions as of September
30, 2002, with the remaining reductions expected to be completed by the
end of the first quarter of 2003. Termination benefits of $38 million
were paid to employees through the third quarter of 2002 relative to
these exit plans.
The restructuring and exit plan recorded in the first quarter
of 2002 is expected to yield cash savings of approximately $4 million
(net of severance benefit payouts) in 2002. In subsequent years, the
net cash savings will continue to increase, due to the timing of actual
separations and associated payments, until the completion of the exit
plan at which time we expect to yield approximately $65 million of cash
savings per year. There will be no benefit to operating income (net of
restructuring charges recorded) in 2002. In subsequent years, the
operating income benefit will continue to increase, due to the timing
of actual separations, until the completion of the exit plan at which
time we expect a benefit to operating income of approximately $74
million per year. The net impact of the new restructuring and exit
plans and reversals recorded during the second and third quarters of
2002 materially offset with respect to total cash savings and any
benefit to operating income.
During the third quarter of 2001, $399 million of net
restructuring and other charges were recorded by Excite@Home, primarily
asset impairment charges due to continued weakness in the on-line media
market and the recent bankruptcy filing of Excite@Home. These charges
included the write-off of goodwill and other intangible assets,
warrants granted in connection with distributing the @Home service and
fixed assets.
Net restructuring and other charges for the nine months ended
September 30, 2001, totaled $1,494 million. The charges included $1,171
million of asset impairment charges related to Excite@Home and $323
million for restructuring and exits costs, which consisted of $151
million for severance costs, $156 million for facility closings and $16
million primarily related to termination of contractual obligations.
The severance costs, for approximately 7,700 employees, primarily
resulted from synergies created by the MediaOne merger as well as
continued cost reduction efforts by Excite@Home. These business
restructuring plans were substantially completed by March 31, 2002.
Almost 90% of the employees affected by the restructuring and exit
plan recorded in the fourth quarter of 2001 (as adjusted by third
quarter 2002 reversals) have left their positions as of September 30,
2002, and it is anticipated that substantially all affected employees
will have left their positions by December 31, 2002. A total of $221
million of termination benefits have been paid to employees associated
with this exit plan through September 30, 2002.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Goodwill and franchise
impairment charges $- $- $16,479 $-
In the second quarter of 2002, we noted significant changes in the
general business climate as evidenced by the severe downward movement
in the U.S. stock market (including the decline in values of publicly
traded cable industry stocks). At June 30, 2002, five of our cable
competitors as a group experienced an average decline in total market
capitalization of over 20% since January 1, 2002. We have also
witnessed corporate bankruptcies. We believe these factors coupled with
the pending merger of AT&T Broadband and Comcast (which was approved by
both companies' shareholders on July 10, 2002) created a "trigger
event" for our AT&T Broadband segment, which necessitated the testing
of goodwill and franchise costs for impairment as of the end of the
second quarter.
We assessed our impairment using the same principles employed
during the initial adoption of SFAS No. 142. Such testing resulted in
the recognition of a $12.3 billion franchise cost impairment charge and
a $4.2 billion goodwill impairment charge (aggregating to $11.8 billion
after-tax).
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Operating income (loss) $1,260 $1,365 $(12,431) $3,543
Operating income (loss) decreased $0.1 billion and $16.0 billion
in the third quarter of 2002 and the nine months ended September 30,
2002, respectively, compared with the same periods in 2001. The decline
in the third quarter of 2002 compared with the third quarter of 2001
was primarily attributable to a decline in the long distance voice
business, and Comcast merger-related costs recorded in the third
quarter of 2002, partially offset by the deconsolidation of
Excite@Home, and lower amortization expense due to the adoption of SFAS
No. 142, "Goodwill and Other Intangible Assets." The September 30,
2002, year-to-date decrease was primarily attributable to the
recognition of a $12.3 billion franchise cost impairment charge and a
$4.2 billion goodwill impairment charge recorded in the second quarter
of 2002 by our AT&T Broadband segment. Also impacting the year-to-date
decline was the decline in the long distance voice business, partially
offset by the deconsolidation of Excite@Home, and lower amortization
expense.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Other income (expense),
net $ 56 $ 320 $(935) $(771)
Other income (expense), net for the third quarter of 2002 was
income of $56 million, a decrease of $0.3 billion compared with the
third quarter of 2001. The decrease was primarily due to impairments of
$0.2 billion in the third quarter of 2002 related to leveraged leases
of airplanes associated with certain carriers. Also contributing to the
decrease was lower net gains on sales of businesses and investments of
$0.1 billion. These were partially offset by higher income of $0.1
billion related to the revaluation of certain financial instruments.
Other income (expense), net for the first nine months of 2002 was
$0.9 billion of expense, an increase in expense of $0.2 billion
compared with the same period of 2001. The increase in expense
primarily resulted from higher cost investment impairment charges of
$1.2 billion in the first nine months of 2002 primarily related to our
investments in Cablevision Systems Corporation, Comcast, Vodafone plc,
Microsoft and Time Warner Telecom, as well as lower net gains on sales
of businesses and investments of $0.7 billion. In addition, we recorded
impairments of $0.2 billion in 2002 related to leveraged leases of
airplanes associated with certain carriers. Partially offsetting these
was the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" in 2001. In conjunction with the
adoption, we reclassified certain investment securities, which support
debt that is indexed to those securities, from "available-for-sale" to
"trading," resulting in a pretax charge of $1.2 billion. Also in 2001,
we recorded a $0.8 billion charge on the Excite@Home put obligation
settlement with Cox Communications, Inc. (Cox) and Comcast.
In conjunction with our annual review of leveraged lease
residual values, and in light of the recent problems with the airline
industry, we may record an impairment charge in the fourth quarter of
2002 associated with the residual values on leveraged leases of
airplanes, which may be material.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Interest (expense) $(748) $(786) $(2,231) $(2,426)
Interest expense decreased 4.7%, or $38 million, in the third
quarter of 2002 compared with the third quarter of 2001, and decreased
8.0%, or $0.2 billon, in the first nine months of 2002 compared with
the first nine months of 2001. The decrease in both periods was
primarily due to a lower average debt balance in 2002 compared with
2001, reflecting our debt reduction efforts, partially offset by a
higher average interest rate primarily driven by our $10 billion global
bond offering in November 2001.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
(Provision) benefit for
income taxes $ (312) $ 70 $ 4,053 $ 288
The (provision) benefit for income taxes increased $0.4
billion to a provision of $0.3 billion in the third quarter of 2002
compared with a benefit of $0.1 billion in the third quarter of 2001.
The increase was primarily due to the impact of the effective tax
rates, partially offset by lower income before income taxes in the
third quarter of 2002 compared with the third quarter of 2001. The
effective tax rate for the third quarter of 2002 was 55.0%, compared
with negative 7.9% for the prior year quarter. The third quarter 2002
effective tax rate was unfavorably affected by the impacts of charges
we recorded in connection with certain investments in leveraged leases
for which a limited tax benefit was recorded. The third quarter 2001
negative effective tax rate was favorably impacted by a significant net
tax benefit related to Excite@Home, including a benefit from the
deconsolidation, partially offset by the prior consolidation of its
operating losses, for which we were unable to record tax benefits. Also
favorably impacting the negative effective tax rate was the tax-free
gain associated with the disposal of a portion of AT&T's retained
interest in AT&T Wireless in a debt-for-equity exchange.
The benefit for income taxes increased $3.8 billion in the nine
months ended September 30, 2002, compared with the same period in 2001.
The increase was primarily due to a loss before income taxes in the
nine months ended September 30, 2002, compared with income before
income taxes in the same period in 2001, partially offset by the impact
of the effective tax rates. The effective tax rate for the nine months
ended September 30, 2002, was 26.0%, compared with negative 83.6% for
the prior year period. The effective tax rate for the nine months ended
September 30, 2002, was unfavorably impacted by non tax-deductible
expenses, primarily the AT&T Broadband goodwill impairment charge. The
2001 negative effective tax rate was favorably impacted by a
significant net tax benefit related to Excite@Home, including a benefit
from the deconsolidation and the put obligation settlement with Cox and
Comcast, partially offset by the prior consolidation of its operating
losses, for which we were unable to record tax benefits. Also favorably
impacting the negative effective tax rate was the tax-free redemption
of AT&T stock held by Comcast in exchange for an entity owning certain
cable systems and the tax-free gain associated with the disposal of a
portion of AT&T's retained interest in AT&T Wireless in a
debt-for-equity exchange. These impacts were partially offset by non
tax-deductible goodwill amortization.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Minority interest and
dividends on subsidiary
preferred stock $(38) $177 $(126) $1,015
Minority interest and dividends on subsidiary preferred stock,
which is recorded net of income taxes, was $38 million of expense in
the third quarter of 2002 compared with $0.2 billion of income in the
third quarter of 2001 and was $0.1 billion of expense for the nine
months ended September 30, 2002, compared with $1.0 billon of income
for the nine months ended September 30, 2001. These variances were due
to income recorded in the three and nine months ended September 30,
2001, primarily relating to losses generated by Excite@Home, including
asset impairment charges that were attributable to the other
shareholders of Excite@Home. In 2002, Excite@Home was not consolidated;
therefore we no longer recorded minority interest income (expense)
related to Excite@Home.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Net (losses) related to
other equity investments $(11) $(3,352) $(1,032) $(4,389)
Net (losses) related to other equity investments, which are
recorded net of income taxes, were $11 million in the third quarter of
2002 compared with $3.4 billion in the third quarter of 2001, a
decrease in net losses of $3.3 billion. The decrease was primarily
driven by a $1.8 billion after-tax charge related to the unwind of
Concert and a $1.5 billion after-tax charge related to the estimated
loss on AT&T's commitment to purchase the remaining public shares of
AT&T Canada recorded in the third quarter of 2001.
The after-tax amortization of excess basis associated with
nonconsolidated investments, recorded as a reduction of income, totaled
$14 million in the third quarter of 2001. Effective January 1, 2002, in
accordance with the provisions of SFAS No. 142, we no longer amortize
excess basis related to nonconsolidated investments.
Net (losses) related to other equity investments were $1.0
billion for the nine months ended September 30, 2002, and $4.4 billion
for the same period in 2001, a decrease in net losses of approximately
$3.4 billion. The decrease in net losses was due to after-tax charges
of $1.8 billion related to the unwind of Concert, $1.2 billion higher
after-tax charges related to the estimated losses on AT&T's obligation
to purchase the remaining shares of AT&T Canada and a $0.7 billion
after-tax impairment of our investment in Net2Phone recorded in 2001.
These decreases in net losses were partially offset by higher after-tax
cable partnership impairment charges of $0.6 billion recorded in 2002.
The after-tax amortization of excess basis associated with
nonconsolidated investments, recorded as a reduction of income, totaled
$111 million in the first nine months of 2001.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Equity income (losses) from
Liberty Media Group $ - $ 111 $ - $(2,711)
As a result of the split-off of LMG on August 10, 2001, we no
longer record the results of LMG.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
(Loss) income from discontinued
operations $ - $ - $ (88) $ 150
The loss from discontinued operations for the nine months ended
September 30, 2002, reflects an estimated loss on the litigation
settlement associated with the business of Lucent Technologies Inc.,
which was spun-off from AT&T in 1996. Sparks, et al. v. AT&T and Lucent
Technologies Inc. et al., is a class action lawsuit filed in 1996 in
Illinois state court. The complaint sought damages on behalf of present
and former customers based on a claim that the AT&T Consumer Products
business (which became part of Lucent in 1996) and Lucent had defrauded
and misled customers who leased telephones, resulting in payments in
excess of the cost to purchase the telephones. As a result of recent
negotiations, a settlement proposal was submitted to and accepted by
the court on August 9, 2002. In accordance with the separation and
distribution agreement between AT&T and Lucent, AT&T recorded its
proportionate share of the settlement and estimated legal costs, which
totaled $132 million pretax ($88 million after-tax).
Income from discontinued operations in 2001 represents the
results of AT&T Wireless Group, which was split-off from AT&T on July
9, 2001.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Gain on disposition of
discontinued operations $ - $ 13,503 $ - $ 13,503
In 2001, we realized a gain on the disposition of discontinued
operations of $13.5 billion, representing the difference between the
fair value of the AT&T Wireless tracking stock on July 9, 2001, the
date of the split-off, and AT&T's book value in AT&T Wireless Services.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Extraordinary gain - net
of income taxes $ - $ - $ 48 $ -
The year-to-date gain of $48 million, net of $30 million of income
taxes, relates to $1.5 billion of trust originated preferred securities
called for early redemption in the first half of 2002. The gains
represent the difference between the carrying value of the debt and the
cash paid to extinguish the debt.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Cumulative effect of
accounting changes - net
of income taxes $ - $ - $ (856) $ 904
Cumulative effect of accounting changes, net of applicable income
taxes, was a loss of $0.9 billion in the nine months ended September
30, 2002, compared with a gain of $0.9 billion in the nine months ended
September 30, 2001. Effective January 1, 2002, we adopted SFAS No. 142,
and in accordance with SFAS No. 142, franchise costs were tested for
impairment as of January 1, 2002, by comparing the fair value to the
carrying value (at the market level). As a result of this test, an
impairment loss of $0.9 billion, net of income taxes of $0.5 billion,
was recorded in 2002.
In the nine months ended September 30, 2001, the cumulative effect
of accounting changes related to the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and was
comprised of $0.4 billion for AT&T Group (other than LMG) and $0.5
billion for LMG. The $0.4 billion recorded by AT&T Group was
attributable primarily to fair value adjustments of equity derivative
instruments related to indexed debt instruments and warrants held in
public and private companies. The $0.5 billion recorded by LMG
represented the impact of separately recording the embedded call option
obligations associated with LMG's senior exchangeable debentures.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Dividend requirements of
preferred stock, net $ - $(235) $ - $(652)
Dividend requirements of preferred stock were $0.2 billion in the
third quarter of 2001 and $0.7 billion for the nine months ended
September 30, 2001. The preferred stock dividend represented interest
in connection with convertible preferred stock issued to NTT DoCoMo in
January of 2001 as well as accretion of the beneficial conversion
feature. On July 9, 2001, in conjunction with the split-off of AT&T
Wireless Group, these preferred shares were converted into AT&T
Wireless common stock and accordingly were no longer outstanding. As a
result, we fully amortized the remaining beneficial conversion feature
balance of $0.2 billion in the third quarter of 2001.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Millions) 2002 2001 2002 2001
Premium on exchange of AT&T
Wireless tracking stock $ - $ - $ - $(80)
The premium on exchange of AT&T Wireless tracking stock was $0.1
billion for the nine months ended September 30, 2001. The premium
represents the excess of fair value of the Wireless tracking stock
issued over the fair value of the AT&T common stock exchanged and was
calculated based on the closing share prices of AT&T common stock and
AT&T Wireless tracking stock on May 25, 2001.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
AT&T Common Stock Group - per
basic and diluted share:
Earnings (loss) - continuing
operations $ 0.05 $ (0.69) $ (3.45) $ (0.94)
Total earnings (loss) $ 0.05 $ 3.13 $ (3.69) $ 2.86
In the third quarter of 2002, AT&T Common Stock Group had
earnings from continuing operations per diluted share of $0.05,
compared with a loss per diluted share of $0.69 in the third quarter of
2001. The improved earnings from continuing operations per diluted
share in the third quarter of 2002 compared with the third quarter of
2001 was primarily attributable to lower net losses related to other
equity investments primarily due to the impact of charges recorded for
Concert and AT&T Canada. These improvements were partially offset by
lower other income (expense), net (on an after-tax basis). For the nine
months ended September 30, 2002, AT&T Common Stock Group had a loss
from continuing operations of $3.45 per diluted share, compared with a
loss of $0.94 per diluted share in 2001. The increased loss in the nine
months ended September 30, 2002, compared with the same prior-year
period, was primarily driven by goodwill and franchise impairment
charges recorded in the second quarter of 2002, as well as lower other
income (expense), net (on an after-tax basis). These negative impacts
were partially offset by lower net losses related to other equity
investments, primarily due to the impact of charges for Concert and
AT&T Canada.
In the third quarter of 2002, the total earnings per diluted share
of AT&T Common Stock Group of $0.05 equaled the loss from continuing
operations per diluted share. In the third quarter of 2001, the total
earnings per diluted share of $3.13 included the loss from continuing
operations of $0.69, as discussed above, as well as a gain of $3.82 per
diluted share from the disposition of AT&T Wireless Group.
The total loss per diluted share of AT&T Common Stock Group for
the nine months ended September 30, 2002, of $3.69 included the loss
from continuing operations of $3.45, as discussed above, a loss related
to the cumulative effect of accounting change of $0.23 and a loss from
discontinued operations of $0.02, partially offset by an extraordinary
gain of $0.01. In the first nine months of 2001, the total earnings per
diluted share of AT&T Common Stock Group of $2.86 included the loss
from continuing operations of $0.94, as discussed above, income from
discontinued operations of $0.03, a gain from the disposition of AT&T
Wireless Group of $3.67, and income related to the cumulative effect of
accounting change of $0.10.
The earnings (loss) per diluted share attributable to Liberty
Media Group (LMG) were earnings of $0.04 and a loss of $0.84 for the
third quarter and year-to-date periods through July 31, 2001, the
deemed effective LMG split-off date for accounting purposes,
respectively.
AT&T Wireless Group reported income of $0.08 per diluted share for
the year-to-date period ended June 30, 2001, the deemed effective AT&T
Wireless Group split-off date for accounting purposes.
SEGMENT RESULTS
In support of the services we provide, we segment our results by
the operating units that support our primary lines of business: AT&T
Business Services, AT&T Consumer Services and AT&T Broadband. The
balance of AT&T's operations, excluding LMG, is included in a corporate
and other category. LMG was split-off from AT&T in August 2001.
EBIT is the primary measure used by AT&T's chief operating
decision makers to measure AT&T's operating results and to measure
segment profitability and performance. AT&T calculates EBIT as
operating income (loss) plus other income (expense), minority interest
and dividends on subsidiary preferred stock and net pretax (losses)
related to other equity investments. In addition to EBIT, we also use
EBITDA, excluding other income, to measure AT&T Broadband's segment
profitability and performance. EBITDA, excluding other income, for AT&T
Broadband is defined as EBIT, excluding other income (expense), net
pretax (losses) related to other equity investments, the 2002 goodwill
and franchise cost impairment charges and minority interest and
dividends on subsidiary preferred stock, plus depreciation and
amortization. Interest expense and income taxes are not factored into
the segment profitability measure used by the chief operating decision
makers; therefore, trends for these items are discussed on a
consolidated basis. Management believes EBIT, and EBITDA, excluding
other income, for AT&T Broadband, are meaningful to investors because
they provide analyses of operating results using the same measures used
by AT&T's chief operating decision makers. In addition, we believe that
EBIT allows investors a means to evaluate the financial results of each
segment in relation to total AT&T. EBIT for AT&T was $1,236 million and
a deficit of $3,654 million for the three months ended September 30,
2002 and 2001, respectively. EBIT was a deficit of $15,237 million and
a deficit of $3,455 million for the nine months ended September 30,
2002 and 2001, respectively. Our calculations of EBIT, and EBITDA,
excluding other income, for AT&T Broadband, may or may not be
consistent with the calculation of these measures by other public
companies. EBIT and EBITDA, excluding other income, should not be
viewed by investors as an alternative to generally accepted accounting
principles (GAAP) measures of income as a measure of performance or to
cash flows from operating, investing and financing activities as a
measure of liquidity. In addition, EBITDA, excluding other income, does
not take into account changes in certain assets and liabilities as well
as interest, income taxes and other income (expense) that can affect
cash flows.
The discussion of segment results includes revenue, EBIT,
capital additions and total assets. In addition, for AT&T Broadband, we
include EBITDA, excluding other income. Total assets for each segment
generally include all assets, except intercompany receivables. Prepaid
pension assets and corporate-owned or leased real estate are generally
held at the corporate level, and therefore are included in the
Corporate and Other group. The income from discontinued operations is
not reflected in the Corporate and Other group. Capital additions for
each segment include capital expenditures for property, plant and
equipment, internal-use software, additions to nonconsolidated
investments and increases in franchise costs.
Our existing segments reflect certain managerial changes that were
implemented during 2002. The changes primarily include the following:
revenue previously recorded by the AT&T Business Services segment as
"Internal Revenue" for services provided to certain other AT&T units
and then eliminated within the Corporate and Other group, is now
recorded as a contra-expense by AT&T Business Services; the results of
certain units previously included in the Corporate and Other group were
transferred to the AT&T Business Services segment; the financial
impacts of SFAS No. 133 that were previously recorded in the Corporate
and Other group were transferred to the appropriate segments. In
addition, AT&T Consumer Services and total AT&T revenue was restated in
accordance with EITF issue 01-9, "Accounting for Consideration Given by
a Vendor to a Customer," which requires cash incentives given to
customers previously recorded as advertising and promotion expense now
to be recorded as a reduction of revenue when recognized in the income
statement, unless an identifiable benefit is received in exchange. All
prior periods have been restated to reflect these changes.
Reflecting the dynamics of our business, we continuously review
our management model and structure, and make adjustments to our
operating segments accordingly.
AT&T BUSINESS SERVICES
AT&T Business Services offers a variety of global communications
services to small and medium-sized businesses, large domestic and
multinational businesses and government agencies. AT&T Business'
services include long distance, international, toll-free and local
voice; data and IP networking; managed networking services and
outsourcing solutions; and wholesale transport services (sales of
services to service resellers).
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
Dollars in millions 2002 2001 2002 2001
External revenue
Service revenue $ 6,518 $ 6,675 $ 19,423 $ 20,329
Equipment and product
sales revenue 84 71 274 207
Total external revenue 6,602 6,746 19,697 20,536
Internal revenue 98 61 273 378
Total revenue $ 6,700 $ 6,807 $ 19,970 $ 20,914
EBIT $ 826 $ (4,390) $ 1,969 $ (1,985)
OTHER ITEMS
Capital additions $ 912 $ 1,104 $ 2,418 $ 3,800
At September 30, 2002 At December 31, 2001
Total assets $ 38,621 $ 40,316
REVENUE
AT&T Business Services total revenue decreased $0.1 billion, or
1.6%, in the third quarter of 2002, and declined $0.9 billion, or 4.5%,
for the nine months ended September 30, 2002, compared with the same
periods in 2001. The decreases were primarily due to a decline in long
distance voice revenue of approximately $0.3 billion and $1.4 billion
in the third quarter of 2002 and the first nine months of 2002,
respectively. The decreases were partially offset by growth in
data/IP/managed services, including equipment and product sales, and
local voice services of approximately $0.2 billion and $0.6 billion for
the third quarter of 2002 and the first nine months of 2002,
respectively.
Long distance voice services revenue decreased approximately 8%
in the third quarter of 2002 and approximately 13% for the nine months
ended September 30, 2002. The decreases were primarily driven by a
lower average price per minute reflecting the competitive forces within
the industry. Also impacting the decreases was a change in the
wholesale-retail product mix, which was largely attributable to an
increase in our wholesale business sales, which had a lower price per
minute. Long distance voice minutes grew slightly in the third quarter
of 2002 and were flat for the nine months ended September 30, 2002, as
wholesale minute growth was essentially offset by retail minute
declines.
Data/IP/managed services, excluding equipment and product sales,
increased approximately 6% for the third quarter of 2002 and the nine
months ended September 30, 2002, compared with the same periods in
2001. When we include equipment and product sales, these services
increased approximately 7% in both periods. Growth was driven by
increased sales of packet services (IP, frame relay and Asynchronous
Transfer Mode, or "ATM") partially offset by a decline in private line
services, reflecting an industry trend of customers migrating from
private line services to the more cost effective and technologically
advanced packet services.
Local voice services revenue grew approximately 5% in the third
quarter of 2002 and approximately 9% for the nine months ended
September 30, 2002, compared with the same periods in 2001. This growth
reflects our continued focus on increasing the utilization of our
existing footprint. AT&T added approximately 170,000 access lines in
the third quarter of 2002 and had approximately 3.4 million access
lines in service at September 30, 2002. Access lines enable AT&T to
provide local service to customers by allowing direct connection from
customer equipment to the AT&T network.
AT&T Business Services internal revenue increased $37 million and
decreased $0.1 billion in the third quarter and first nine months of
2002 compared with the same periods in the prior year. Internal revenue
is included in the revenue by product discussions above. The increase
for the quarter was primarily due to greater sales of services to other
AT&T units that resell these services to their external customers,
particularly AT&T Broadband. The year-to-date decrease was primarily
due to the split-off of AT&T Wireless on July 9, 2001, as these sales
are now reported as external revenue, partially offset by an increase
in sales to AT&T Broadband.
EBIT
EBIT increased $5.2 billion, or 118.8%, in the third quarter of
2002 and $4.0 billion, or 199.2%, for the nine months ended September
30, 2002, compared with the same periods in 2001. The increase in both
periods was primarily due to higher equity losses of $5.4 billion in
the third quarter of 2001 and $5.2 billion for the nine months ended
September 30, 2001, primarily related to charges associated with
Concert and the estimated losses on AT&T's obligation to purchase the
remaining shares of AT&T Canada. These increases were slightly offset
by lower operating income of $0.1 billion in the third quarter of 2002
and $0.7 billion for the nine months ended September 30, 2002,
resulting from the impact of lower prices within the long distance
business, which reflects competitive pricing pressures as well as a
shift from higher margin long distance services to lower margin
products. In addition, the year-to-date increase was partially offset
by a gain of approximately $0.5 billion recorded on the sale of our
stake in Japan Telecom in the second quarter of 2001.
OTHER ITEMS
Capital additions decreased $0.2 billion, or 17.4%, in the third
quarter of 2002 and declined $1.4 billion, or 36.4%, in the first nine
months of 2002 compared with the same periods in 2001 as we continue to
maintain a disciplined focus on capital spending. These declines
reflect significantly lower capital expenditures for network assets
that support all services provided by AT&T Business.
Total assets decreased $1.7 billion, or 4.2%, at September 30,
2002, compared with December 31, 2001. The decrease reflects lower
receivables primarily driven by the settlement of receivables from
Concert in connection with the Concert unwind and lower long distance
revenue.
AT&T CONSUMER SERVICES
AT&T Consumer Services provides a variety of communications
services to residential customers including domestic and international
long distance; transaction-based long distance, such as
operator-assisted service and prepaid phone cards; local and local toll
(intrastate calls outside the immediate local area); and dial-up
Internet.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
Dollars in millions 2002 2001 2002 2001
Revenue $2,794 $3,770 $8,791 $11,423
EBIT $ 618 $1,282 $2,252 $ 3,817
OTHER ITEMS
Capital additions $ 34 $ 43 $ 95 $ 96
At September 30, 2002 At December 31, 2001
Total assets $ 1,762 $2,141
REVENUE
AT&T Consumer Services revenue decreased $1.0 billion, or
25.9%, in the third quarter of 2002, and $2.6 billion, or 23.0%, for
the nine months ended September 30, 2002, compared with the same
periods in 2001. The revenue decline in both periods reflects the
impact of long distance volume reductions, primarily in traditional
long distance voice services such as domestic and international dial
services (long distance calls where the number "1" is dialed before the
call), and domestic calling card services. Calling volumes declined at
a mid-teens percentage rate for the three and nine-month periods ended
September 30, 2002, as a result of competition and wireless and
Internet substitution, partially offset by prepaid card usage. The
traditional long distance voice services revenue was negatively
impacted by substitution and the impact of ongoing competition, which
has led to a loss of market share. In addition, the continued migration
of customers to optional calling plans and lower-priced products has
also negatively impacted revenue.
EBIT
EBIT declined $0.7 billion, or 51.7%, in the third quarter of 2002
compared with the third quarter of 2001. EBIT declined $1.6 billion, or
41.0%, for the nine months ended September 30, 2002, compared with the
same period in 2001. The decline in both periods was primarily due to
the revenue declines in the long distance business.
EBIT margin declined to 22.1% in the third quarter of 2002 from
34.0% in the third quarter of 2001. EBIT margin declined to 25.6% for
the nine months ended September 30, 2002, from 33.4% for the nine
months ended September 30, 2001. The declining EBIT margins primarily
reflect the impact of customers who substitute long distance calling
with wireless and Internet services and remain AT&T Consumer Services
customers generating less revenue, while their billing, customer care
and fixed costs remain. The declining EBIT margins also reflect calling
volume declines, primarily due to the migration of customers to
optional calling plans as well as declining long distance prices,
including prepaid cards. EBIT margin in the third quarter of 2002 was
also negatively impacted by the recording of an estimated loss on a
long-term contract.
OTHER ITEMS
Capital additions were about the same in the third quarter of 2002
and the nine months ended September 30, 2002, compared with the same
periods in 2001.
Total assets declined $0.4 billion to $1.8 billion at
September 30, 2002, compared with $2.1 billion at December 31, 2001.
The decline was primarily due to lower accounts receivable, reflecting
lower revenue and slightly improved cash collections.
AT&T BROADBAND
AT&T Broadband offers a variety of services through our cable
broadband network, including traditional analog video and advanced
services such as high-speed data (HSD) service, broadband telephony
service and digital video service.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
Dollars in Millions 2002 2001 2002 2001
External revenue $ 2,546 $ 2,390 $ 7,506 $ 7,411
Internal revenue 1 3 6 12
Total revenue $ 2,547 $ 2,393 $ 7,512 $ 7,423
EBIT $ 45 $ (789) $(18,840) $(3,150)
EBITDA, excluding
other income $ 569 $ 602 $ 1,575 $ 1,496
OTHER ITEMS
Capital additions $ 1,092 $ 782 $ 2,799 $ 2,641
At September 30, 2002 At December 31, 2001
Total assets $ 81,933 $ 103,060
REVENUE
AT&T Broadband revenue increased $0.2 billion, or 6.4%, for the
three months ended September 30, 2002, compared with the corresponding
prior year period primarily due to growth in advanced services
(broadband telephony, HSD and digital video) and a basic cable rate
increase on January 1, 2002, partially offset by a decline due to 2001
net cable dispositions and a loss of basic subscribers.
AT&T Broadband revenue increased $0.1 billion, or 1.2%, for the
nine months ended September 30, 2002, compared with the first nine
months of 2001 primarily due to $0.5 billion of growth from advanced
services (broadband telephony, HSD and digital video) and a $0.1
billion increase in other basic video services. The increase in basic
video services was primarily due to a basic cable rate increase, as
well as increased advertising and pay-per-view revenue, partially
offset by subscriber losses. These were largely offset by a decline in
revenue of $0.6 billion due to 2001 net cable dispositions.
AT&T Broadband continues to experience a decline in the number of
basic subscribers primarily reflecting the impact of increased
competition and, to a lesser extent, current economic conditions. A
continued loss of basic subscribers could have a significant impact on
projected growth in revenue, EBIT, and EBITDA, excluding other income.
Growth in revenue, EBIT, and EBITDA, excluding other income, is also
largely dependent on AT&T Broadband's ability to offer advanced
services, and the completion of AT&T Broadband's plant upgrade is an
important factor in offering such services. Failure to complete AT&T
Broadband's plant upgrade as anticipated could have a significant
impact on future growth in revenue, EBIT, and EBITDA, excluding
other income.
At September 30, 2002, AT&T Broadband serviced 13.1 million basic
cable customers, passing 25.1 million homes, compared with 13.7 million
basic cable customers, passing 24.6 million homes, at September 30,
2001. At September 30, 2002, we provided digital video service to 4.2
million customers, HSD service to 1.9 million customers and broadband
telephony service to 1.3 million customers. This compares with 3.2
million digital-video customers, 1.4 million HSD customers, and 0.9
million broadband telephony customers at September 30, 2001.
EBIT/EBITDA, Excluding Other Income
EBIT increased $0.8 billion in the third quarter of 2002
compared with the third quarter of 2001 primarily as a result of higher
other income due to lower losses of $0.4 billion on the sale of
businesses and investments and lower depreciation and amortization
expenses of $0.3 billion primarily as a result of the adoption of SFAS
No. 142. In addition, higher contributions from advanced services also
contributed to the EBIT improvement. These were partially offset by
$0.1 billion of Comcast merger related costs recorded in 2002.
EBIT declined $15.7 billion for the first nine months of 2002
compared with the same period of 2001 primarily due to goodwill and
franchise impairment charges of $16.5 billon, higher cost and equity
method investment impairment charges of $2.2 billion and Comcast merger
related costs of $0.2 billion recorded in 2002. These were partially
offset by a $1.2 billion charge taken in the first quarter of 2001 due
to the adoption of SFAS No. 133 and lower depreciation and amortization
expenses of $1.0 billion primarily as a result of the adoption of SFAS
No. 142. In addition, EBIT was positively impacted by higher other
income of $0.7 billion due to lower losses on sales of businesses and
investments and higher income due to the revaluation of certain
financial instruments. Higher contributions from advanced services, as
well as lower restructuring charges of $0.1 billion, also partially
offset the EBIT decline.
EBITDA, excluding other income, declined $33 million, or 5.6%, in
the third quarter of 2002 compared with the third quarter of 2001
primarily due to Comcast merger related costs recorded in 2002 as well
as decreased contributions from video services, partially offset by
higher contributions from advanced services. EBITDA excluding other
income increased $0.1 billion, or 5.3%, for the first nine months of
2002 compared with the same period of 2001 primarily due to higher
contributions from advanced services, as well as lower restructuring
charges. These were partially offset by Comcast merger related costs
recorded in 2002, and a decline related to net cable dispositions in
2001.
OTHER ITEMS
Capital additions increased $0.3 billion, or 39.6%, for the three
months ended September 30, 2002, and increased $0.2 billion, or 6.0%,
for the first nine months of 2002, compared with the same periods of
2001. The capital spending in both periods was primarily related to
support of advanced services and network construction and upgrade.
Total assets at September 30, 2002, were $81.9 billion compared
with $103.1 billion at December 31, 2001. The decrease in total assets
was primarily due to a $13.7 billion decrease in franchise costs and a
$4.2 billion decrease in goodwill, primarily reflecting asset
impairment charges including the impact of adopting SFAS No. 142. In
addition, we recorded approximately $2.3 billion of impairment charges
on investments.
AT&T Broadband and Bresnan Broadband Holdings, LLC ("Bresnan")
continue efforts toward closing the transactions contemplated by the
Asset Purchase Agreement dated as of April 5, 2002, pursuant to which
AT&T Broadband will sell to Bresnan cable systems in the States of
Colorado, Wyoming, Montana and Utah. Closing is subject to satisfaction
of specified conditions, including a requirement that the systems have
no fewer than 305,000 subscribers, that certain consents of franchising
authorities and other third parties have been obtained, and that there
has not occurred (a) a material adverse change in the business,
operations, financial condition, results of operations or prospects of
the systems or the business, (b) a material market disruption, or (c) a
material change in the financial, banking, capital or syndication
markets. The management of AT&T Broadband does not believe the
transaction will close prior to the closing of the merger between AT&T
Broadband and Comcast.
CORPORATE AND OTHER
This group reflects the results of corporate staff functions, the
elimination of transactions between segments, as well as the results of
Excite@Home in 2001.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
Dollars in millions 2002 2001 2002 2001
External revenue $ 14 $ 129 $ 50 $ 403
Internal revenue (99) (64) (279) (390)
Total revenue $ (85) $ 65 $(229) $ 13
EBIT $ (253) $ 243 $(618) $(2,137)
OTHER ITEMS
Capital additions $ 23 $ 51 $ 47 $ 311
At September 30, 2002 At December 31, 2001
Total assets $15,722 $19,765
REVENUE
Revenue for Corporate and Other decreased $0.2 billion in the
third quarter of 2002 compared with the third quarter of 2001 and
decreased $0.2 billion in the nine months ended September 30, 2002,
compared with the same prior year period. The deconsolidation of
Excite@Home contributed $0.1 billion and $0.3 billion to the external
revenue decrease for the quarter and year-to-date periods,
respectively. Partially offsetting the decline in revenue for the
year-to-date period was lower internal revenue eliminations of $0.1
billion primarily as a result of the split-off of AT&T Wireless on July
9, 2001.
EBIT
EBIT declined $0.5 billion in the third quarter of 2002 to a
deficit of $0.3 billion, and improved $1.5 billion in the nine months
ended September 30, 2002, to a deficit of $0.6 billion, compared with
the corresponding periods in 2001. The decline in the third quarter of
2002 was primarily due to a $0.5 billion tax-free gain recorded in the
third quarter of 2001 associated with the disposal of a portion of
AT&T's retained interest in AT&T Wireless in a debt-for-equity
exchange. Also contributing to the EBIT decline was a $0.2 billion
impairment charge recorded in 2002 of certain leases of aircraft, which
are accounted for as leveraged leases, and a lower pension credit of
$0.1 billion, primarily driven by a lower long-term expected rate of
return and decreased returns on plan assets. These declines were
partially offset by $0.3 billion from the impact of the deconsolidation
of Excite@Home. The improvement in EBIT for the nine months ended
September 30, 2002, was largely due to lower losses related to equity
investments of approximately $1.2 billion, primarily related to the
impairment of our investment in Net2Phone in the second quarter of
2001. The improvement was also the result of a $0.8 billion loss on the
second quarter 2001 Excite@Home put obligation settlement with Cox and
Comcast, the impact of the deconsolidation of Excite@Home of $0.7
billion, and lower transaction costs of $0.1 billion associated with
AT&T's restructuring announced in October of 2000. The EBIT
improvements were partially offset by the $0.5 billion gain associated
with the disposal of a portion of AT&T's retained interest in AT&T
Wireless as noted above, a $0.2 billion decline related to the on-going
valuation activity of certain financial instruments, a lower pension
credit of $0.3 billion, primarily driven by a lower long-term expected
rate of return and decreased returns on plan assets, and a $0.2 billion
impairment charge recorded in 2002 of certain leases of aircraft which
are accounted for as leveraged leases.
OTHER ITEMS
Capital additions decreased $28 million, or 56.1% in the third
quarter of 2002 and $0.3 billion, or 85.1%, in the nine months ended
September 30, 2002, compared with the corresponding 2001 periods. The
decrease in both periods was primarily attributable to the impact of
the deconsolidation of Excite@Home.
Total assets decreased $4.0 billion at September 30, 2002,
compared with December 31, 2001. The decrease was primarily driven by a
lower cash balance held at September 30, 2002.
LIQUIDITY
For the Nine Months Ended
September 30,
2002 2001
(Dollars in Millions)
CASH FLOWS:
Provided by operating activities of continuing operations $ 7,688 $ 7,221
Used in investing activities of continuing operations (5,251) (515)
Used in financing activities of continuing operations (6,103) (7,432)
Provided by discontinued operations - 4,860
Net cash provided by operating activities of continuing
operations of $7.7 billion for the nine months ended September 30,
2002, was primarily from $9.2 billion of income from continuing
operations, excluding non-cash income items. This source of cash was
partially offset by net changes in other operating assets and
liabilities of $1.4 billion primarily due to lower payroll and benefit
related liabilities and income taxes payable. Also offsetting the cash
source was a decrease in accounts payable of $0.3 billion. Net cash
provided by operating activities of continuing operations of $7.2
billion for the nine months ended September 30, 2001, was primarily
from income from continuing operations, excluding non-cash income items
and the adjustment for net gains on sales of businesses of $8.7
billion. These cash sources were partially offset by a net change in
other operating assets and liabilities of $0.9 billion primarily due to
payments to Liberty Media Group, partially offset by higher income
taxes payable. Also offsetting the source of cash was a decrease in
accounts payable of $0.5 billion.
AT&T's investing activities of continuing operations resulted in
a net use of cash of $5.3 billion for the nine months ended September
30, 2002, compared with $0.5 billion for the comparable period in 2001.
In the first nine months of 2002, AT&T spent $5.3 billion on capital
expenditures. For the nine months ended September 30, 2001, AT&T spent
approximately $6.7 billion on capital expenditures and received
approximately $4.8 billion primarily from the net dispositions of cable
systems and approximately $1.8 billion from the sale of various
investments.
For the nine months ended September 30, 2002, net cash used in
financing activities of continuing operations was $6.1 billion,
compared with $7.4 billion for the nine months ended September 30,
2001. In the first nine months of 2002, AT&T made net payments of $8.1
billion to reduce debt and received $2.6 billion from the issuance of
AT&T common stock. In the first nine months of 2001, AT&T made net
payments of $11.0 billion to reduce debt and paid AT&T Wireless $5.8
billion to settle an intercompany loan in conjunction with its
split-off from AT&T. In addition, AT&T received $9.8 billion from the
issuance of convertible preferred stock and warrants to NTT DoCoMo.
At September 30, 2002, we had current assets of $17.7 billion and
current liabilities of $20.7 billion. The current assets were primarily
comprised of trade and other receivables of $7.3 billion and cash of
$6.9 billion. The current liabilities were primarily comprised of debt
maturing within one year of $6.6 billion, other current liabilities of
$4.7 billion, accounts payable of $4.3 billion and AT&T's obligation
for AT&T Canada of $3.5 billion. We expect to fund our operations
primarily with cash from operations, cash on hand, commercial paper and
our securitization program. If economic conditions worsen or do not
improve and/or competition and product substitution accelerate beyond
current expectations, our cash flow from operations would decrease,
negatively impacting our liquidity.
In June 2002, AT&T registered $7.0 billion of private
placement notes issued in November 2001 in conjunction with our $10.0
billion global bond offering and commenced a tender on the private
notes for registered notes. The note exchange was completed on August
2, 2002. Due to certain rating downgrades described below, the coupon
on the entire $10.0 billion global bond offering increased by 50 basis
points primarily effective with the interest payment period that begins
after the November 15, 2002, interest payment is due. The additional
interest expense associated with this increase is estimated to be $8
million in 2002 and $50 million in 2003.
On October 9, 2002, we closed a $4.0 billion syndicated
364-day credit facility led by Citibank, Credit Suisse First Boston,
Goldman Sachs and JP Morgan that replaced our existing undrawn $8.0
billion credit facility. The new facility is expected to remain in
effect following the spin-off of AT&T Broadband and the close of its
proposed merger with Comcast. The new facility is also expected to be
adequate to back up any AT&T commercial paper or other short-term debt
maturing over the course of the next year. The previous credit facility
contained a financial covenant that required AT&T to maintain a net
debt-to-EBITDA ratio (as defined in the credit agreement) not exceeding
3.00 to 1.00 for four consecutive quarters ending on the last day of
each fiscal quarter. At September 30, 2002, we were in compliance with
this covenant. The new credit facility contains a financial covenant
that requires AT&T to meet a net debt-to-EBITDA ratio (as defined in
the credit agreement) not exceeding 3.75 to 1.00 for four consecutive
quarters ending on the last day of each fiscal quarter. After the
Broadband spin-off, the net debt-to-EBITDA requirement will change to
2.25 to 1.00 and the facility amount will reduce to $3.0 billion.
The holders of certain private debt with an outstanding balance
of $0.8 billion at September 30, 2002, have an annual right to cause
AT&T to repay the debt upon payment of an exercise fee. In exchange for
the elimination of this put right for 2002, AT&T posted a
cash-collateralized letter of credit totaling $0.4 billion. The
creditor could accelerate repayment of the debt if unfavorable local
law changes were to occur in its country of operation.
During the second and third quarters of 2002, AT&T renewed both
its AT&T Business Services and AT&T Consumer Services customer accounts
receivable securitization facilities. Together the programs provide up
to $2.0 billion of available financing, limited by the eligible
receivables balance, which varies from month to month. Proceeds from
the securitization are recorded as a borrowing and included in
short-term debt. At September 30, 2002, approximately $1.5 billion was
outstanding. The terms of these facilities have been extended to June
(AT&T Business Services) and July (AT&T Consumer Services) of 2003.
In June 2002, AT&T sold 230 million shares of AT&T common stock
receiving net proceeds of $2.5 billion. On October 8, 2002, these
funds, along with funds from other short-term sources, which are
reflected in the cash balance at September 30, 2002, were used to
satisfy AT&T's obligation to the AT&T Canada shareholders.
On May 29, 2002, Moody's lowered its rating of long-term debt
issued or guaranteed by AT&T to Baa2 from A3. Moody's also confirmed
AT&T's short-term rating as Prime-2. On October 8, 2002, Moody's
confirmed AT&T's Baa2 rating on senior long term debt with a negative
outlook. Moody's ratings outlook for AT&T remains negative but AT&T is
not currently on review for any additional downgrade by Moody's. On
June 3, 2002, Fitch Ratings also downgraded AT&T's long-term debt
rating to BBB+ from A-, with the rating remaining on Rating Watch
Negative pending completion of the AT&T Comcast transaction. On October
4, 2002, Fitch reiterated the BBB+ rating on AT&T and indicated the
rating outlook would be stable. AT&T's long-term debt ratings remain
BBB+ and Credit Watch with negative implications by Standard & Poor's
Ratings Group (Standard & Poor's). On October 10, 2002, Standard &
Poor's confirmed AT&T's BBB+ rating and stated that following the AT&T
Comcast transaction, Standard & Poor's expects AT&T to have a stable
outlook. Additional debt rating downgrades could require AT&T to pay
higher rates on certain existing debt and pay higher rates or prepay
certain operating leases. If our ratings are downgraded below
investment grade by Standard & Poors or Moody's, there are provisions
in our securitization programs which could require the outstanding
balances to be paid by the collection of the receivables. In addition,
there are provisions in several of our debt instruments that require us
to pay the present value of up to $0.6 billion of future interest
payments if our credit ratings are downgraded below investment grade.
As of September 30, 2002, this amount would be $0.2 billion excluding
the debt expected to go to AT&T Broadband in conjunction with the
spin-off. We do not believe downgrades below investment grade are
likely to occur.
On February 27, 2002, AT&T signed an agreement with AT&T Latin
America (ALA) that restructured ALA's short-term and long-term debt,
preferred stock and interest dividends held by AT&T. At September 30,
2002, $0.9 billion was outstanding, which included interest and
dividends. ALA's senior secured vendor financing of $0.3 billion became
effective on March 27, 2002. The AT&T-provided debt and preferred
facilities are subordinated to the ALA senior secured vendor financing.
The agreement between AT&T and ALA, which also took effect on March 27,
2002, extends the maturity and redemption dates of all ALA debt and
preferred stock payable to AT&T to October 2008. ALA may be required to
make earlier prepayments of debt or redemptions of preferred stock out
of the net proceeds of certain future equity and debt offerings. In
addition, while the vendor financing is outstanding, the agreement
defers interest payments on all AT&T debt and dividend payments on AT&T
preferred stock until October 2008.
On October 21, 2002, ALA announced that it anticipates a
liquidity shortfall commencing in the fourth quarter of 2002. ALA's
current situation has no impact on AT&T's ability to meet global
business customers' needs whether those operations are based in or
extend to the Latin America region. ALA is consolidated with AT&T's
operations, however, on an unconsolidated basis, AT&T's investment in
ALA currently has a book value of approximately $1.2 billion including
the financing and preferred stock discussed above. The recorded value
of AT&T's investment could be impacted by actions taken by ALA. AT&T
holds a 69% economic stake and a 95% voting stake in AT&T Latin
America.
If the proposed spin-off of AT&T Broadband occurs as currently
structured, the debt of TCI and MediaOne will be included in the net
assets spun-off and will be included in AT&T Comcast. The amount of
this third-party debt at September 30, 2002, was $15.0 billion. The
amount of intercompany debt of AT&T Broadband payable to AT&T that is
outstanding at the time of the spin-off will be paid immediately prior
to the spin-off. At September 30, 2002, such intercompany debt amounted
to approximately $7.8 billion. On October 4, 2002, AT&T and Comcast
announced an exchange offer of an aggregate of $11.8 billion of AT&T's
existing debt securities as part of the planned combination of Comcast
and AT&T Broadband. The exchange closed on November 8, 2002, and
involved two kinds of exchanges. In the first kind of exchange, AT&T
exchanged $3.5 billion for notes that, upon completion of the AT&T
Comcast transaction, will become new Broadband notes and will be
unconditionally guaranteed by AT&T Comcast Corporation and certain of
its subsidiaries. The new Broadband notes reduced the amount that AT&T
Broadband was required to pay to AT&T upon the spin-off. In the second
kind of exchange, AT&T exchanged $4.7 billion for new AT&T notes that
will remain solely obligations of AT&T and upon completion of the AT&T
Comcast transaction, will have revised terms described in the
prospectus, including the revised maturity date and/or interest rate.
In addition, AT&T's quarterly convertible income preferred securities,
which had a book value of $4.7 billion at September 30, 2002, will be
included in the net assets spun-off and will be transferred to AT&T
Comcast. These securities will be settled by being converted into
shares of AT&T Broadband, which will then be converted into shares of
AT&T Comcast. If the transfer to AT&T Comcast does not occur within a
specified period as prescribed in the merger agreement, AT&T Broadband
will pay AT&T an amount equal to the fair value of the securities,
determined pursuant to an appraisal process.
In August 2002, AT&T and Comcast Corporation reached an agreement
with AOL Time Warner to restructure the Time Warner Entertainment (TWE)
partnership. As part of the AT&T Broadband merger agreement, AT&T
Comcast will assume AT&T's interest in TWE upon the closing of the
merger of AT&T Broadband with Comcast. Under the TWE agreement, AT&T
Broadband will receive $2.1 billion in cash, $1.5 billion in common
stock of AOL Time Warner, Inc. and an effective 21% passive equity
interest in a new cable company. This agreement is expected to close in
the first half of 2003.
AT&T owns a 49% economic interest in Alestra S. de R.L. de C.V.,
a telecommunications company in Mexico. Alestra announced that it will
not be able to make a $35 million bond payment due on November 15,
2002, and that it is working with Morgan Stanley in restructuring its
capital structure of the company. Alestra is currently seeking SEC
approval on a Registration Statement and hopes to launch an offer to
its bondholders in late November/early December. Standard and Poor's
had downgraded Alestra's corporate credit rating and said it would
likely default on its debt obligations during financial year 2002,
probably by way of a bond restructuring. Moody's also downgraded all
rating of Alestra stating that "based upon current long distance
network asset valuations, Moody's considers that unsecured debt holders
face poor recovery prospects in a distress scenario." AT&T cannot
predict what the impact of these developments will be. If Alestra is
able to restructure its debt, AT&T may provide funding to Alestra.
If AT&T's debt ratings are further downgraded or any of the risks
or covenants noted above are triggered, AT&T may not be able to obtain
sufficient financing in the timeframe required, and/or such replacement
financing may be more costly or have additional covenants than we had
in connection with our debt at September 30, 2002. In addition, the
market environment for financing in general, and within the
telecommunications sector in particular, has been adversely affected by
economic conditions and bankruptcies of other telecommunication
providers. If the financial markets become more cautious regarding the
industry/ratings category we operate in, our ability to obtain
financing would be further reduced. This could negatively impact our
ability to pursue acquisitions, make capital expenditures to expand our
network and cable plant or to pay dividends.
In light of recent publicly reported developments, AT&T is
examining the impact to it if various telecommunications companies and
vendors are unable to satisfy their agreement with AT&T, including the
separation agreements between AT&T and Lucent Technologies, Inc. While
AT&T has not completed its review and can not quantify the impact, if
any, it is possible that under certain circumstances any such inability
by telecommunications companies and vendors, including the inability of
Lucent to meet its obligations under such agreements, could have
negative financial and operational impacts on AT&T, which may be
material.
Contractual Cash Obligations
At September 30, 2002, AT&T had an approximate 31% equity
ownership in AT&T Canada. On June 25, 2002, under the terms of the 1999
merger agreement, AT&T triggered the purchase of the remaining equity
of AT&T Canada for the Back-end Price, which is the greater of the
floor price and the fair market value. AT&T arranged for Tricap
Investments Corporation, a wholly owned subsidiary of Brascan Financial
Corporation, to purchase an approximate 63% equity interest in AT&T
Canada and CIBC Capital Partners to acquire an approximate 6% equity
interest in AT&T Canada. As part of this agreement, which closed on
October 8, 2002, AT&T agreed to pay the purchase price for the AT&T
Canada shares on behalf of Tricap Invetments Corporation and CIBC
Capital Partners. AT&T funded the purchase price partly with the net
proceeds of approximately $2.5 billion raised in the sale of 230
million shares of AT&T common stock on June 11, 2002. The remaining
portion of the obligation was financed through short-term sources.
Tricap and CIBC Partners made a nominal payment to AT&T upon completion
of the transaction. AT&T continues to hold a 31% ownership interest in
AT&T Canada. The liability at September 30, 2002, of $3.5 billion, was
reflected as "AT&T Canada Obligation" in the Consolidated Balance
Sheet.
AT&T has contractual obligations to utilize network facilities
from local exchange carriers with terms greater than one year. These
contracts are based on volumes and have penalty fees if certain volume
levels are not met. We assessed our minimum exposure based on penalties
to exit the contracts. At December 31, 2001, penalties to exit these
contracts in any given year totaled approximately $1.5 billion. At
September 30, 2002, this amount has increased to approximately $2.1
billion, primarily as a result of the company entering into additional
contracts.
FINANCIAL CONDITION
September 30, December 31,
2002 2001
Dollars in Millions
Total assets $ 138,038 $ 165,282
Total liabilities 89,076 105,322
Total shareowners' equity 42,863 51,680
Total assets decreased $27.2 billion, or 16.5%, to $138.0
billion at September 30, 2002, compared with December 31, 2001. This
decrease was largely driven by a $13.7 billion decrease in franchise
costs and a $4.2 billion decrease in goodwill, primarily reflecting the
asset impairment charges related to our AT&T Broadband segment,
including the impact of adopting SFAS No. 142. The decrease in assets
was also due to $6.1 billion of lower investments and related advances
resulting from unfavorable mark-to-market adjustments on monetized
investments and permanent impairments on certain investments, as well
as a $3.7 billion reduction in cash.
Total liabilities decreased $16.2 billion, or 15.4%, to $89.1
billion at September 30, 2002, from $105.3 billion at December 31,
2001. This decrease was primarily a result of $10.6 billion in lower
debt, primarily reflecting the pay down of short-term debt, as well as
favorable mark-to-market adjustments on certain derivatives embedded in
debt that are indexed to various investments, partially offset by
unfavorable mark-to-market adjustments on foreign debt resulting from
fluctuations in exchange rates. The decrease in liabilities also
includes $3.7 billion of lower deferred income taxes, primarily
resulting from the deferred tax benefits associated with the impairment
of franchise costs and certain investments, partially offset by the
reclassification of the tax liabilities associated with our AT&T Canada
obligation to current deferred income tax asset and the recording of
deferred tax liabilities associated with deductible 2002 tax
depreciation in excess of depreciation recorded in accordance with
generally accepted accounting principles. Although not impacting total
liabilities, our obligation related to AT&T Canada was reclassified
from other long-term liabilities and deferred credits to the short-term
liability, AT&T Canada obligation, as a result of our satisfaction of
the obligation in October 2002.
Minority interest decreased $2.2 billion, or 61.5%, to $1.4
billion at September 30, 2002, from $3.6 billion at December 31, 2001.
This decrease was primarily due to the exchange and redemption of all
TCI Pacific preferred shares for AT&T common shares.
Total shareowners' equity decreased $8.8 billion, or 17.1%, to
$42.9 billion at September 30, 2002, from $51.7 billion at December 31,
2001. This decrease was primarily due to an increase in the accumulated
deficit resulting from net losses of $13.6 billion, which were largely
driven by the asset impairments recorded related to our AT&T Broadband
segment, partially offset by a $2.5 billion increase in additional
paid-in capital and AT&T common stock resulting from our June 2002
common stock offering and $2.1 billion resulting from the exchange and
redemption of all TCI Pacific preferred shares for AT&T common shares.
During the first three quarters of 2002, when AT&T declared its
quarterly dividends to the AT&T Common Stock Group shareowners, the
company was in an accumulated deficit position. As a result, the
company reduced additional paid-in capital by $0.4 billion, the entire
amount of the dividends declared.
The ratio of total debt to total capital for AT&T (total debt
divided by total debt and equity) was 47.4% at September 30, 2002,
compared with 47.7% at December 31, 2001. For purposes of this
calculation, equity includes the convertible trust preferred securities
and subsidiary redeemable preferred stock. In addition, included in
total debt was approximately $5.4 billion and $8.6 billion of notes at
September 30, 2002, and December 31, 2001, respectively, which are
exchangeable into or collateralized by securities we own. Excluding
this debt, the debt ratio at September 30, 2002, was 44.0%, compared
with 43.4% at December 31, 2001.
Given the decline in the value of equity holdings in AT&T's
pension trust, we expect that the market value of these pension assets
at December 31, 2002, will be lower than previously anticipated, and
may be lower than the accumulated benefit obligation (ABO) for the AT&T
Management Pension Plan. Under SFAS No. 87, "Employer's Accounting for
Pensions," a company is required to record an additional minimum
liability equal to the amount of the unfunded ABO. This liability would
be offset by an intangible asset equal to the amount of unrecognized
prior service cost, and a charge to equity, net of taxes. The actual
2002 minimum liability will be calculated on the next measurement date
of the plan, which is December 31, 2002, and is dependent on plan asset
values at that time, as well as assumptions used to measure pension
obligations and could result in a net charge to equity.
RISK MANAGEMENT
We are exposed to market risk from changes in interest and foreign
exchange rates. In addition, we are exposed to market risk from
fluctuations in the prices of securities, some of which are monetized
through the issuance of debt. On a limited basis, we use certain
derivative financial instruments, including interest rate swaps,
options, forwards, equity hedges and other derivative contracts to
manage these risks. We do not use financial instruments for trading or
speculative purposes. All financial instruments are used in accordance
with board-approved policies.
We have entered into combined interest rate forward contracts to
hedge foreign-currency-denominated debt. Assuming a 10% downward shift
in interest rates, the fair value of the contracts at September 30,
2002, would have changed by $2 million.
We have certain notes which are indexed to the market price of
equity securities we own. Certain of these notes contain embedded
derivatives, while other debt was issued in conjunction with net
purchased options. Changes in the market prices of these securities
result in changes in the fair value of the derivatives. Assuming an
upward 10% change in the market price of these securities, the fair
value of the combined collars and underlying debt would increase by
$342 million at September 30, 2002. The change in fair value referenced
above does not represent the actual change in fair value we would incur
under normal market conditions because all variables other than the
equity prices were held constant in the calculations.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
This standard requires that obligations associated with the retirement
of tangible long-lived assets be recorded as liabilities when those
obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an
asset retirement obligation, an entity must capitalize the cost by
recognizing an increase in the carrying amount of the related
long-lived asset. Over time, this liability is accreted to its future
value, and the capitalized cost is depreciated over the useful life of
the related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. For AT&T, this
means that the standard will be adopted on January 1, 2003. AT&T is
evaluating the impact that the adoption of this statement will have on
AT&T's results of operations, financial position or cash flows.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of
SFAS Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13
and Technical Corrections." SFAS No. 145 eliminates the requirement (in
SFAS No. 4) that gains and losses from the extinguishments of debt be
aggregated and classified as extraordinary items, net of the related
income tax. An entity is not prohibited from classifying such gains and
losses as extraordinary items, as long as they meet the criteria of APB
No. 30. In addition, SFAS No. 145 requires sale-lease back treatment
for certain modifications of a capital lease that result in the lease
being classified as an operating lease. The rescission of SFAS No. 4 is
effective for fiscal years beginning after May 15, 2002, which for AT&T
would be January 1, 2003. Earlier application is encouraged. Any gain
or loss on extinguishment of debt that was previously classified as an
extraordinary item would be reclassified to other income (expense). The
remainder of the statement is generally effective for transactions
occurring after May 15, 2002. AT&T does not expect that the adoption of
SFAS No. 145 will have a material impact on AT&T's results of
operations, financial position or cash flows.
On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for
Exit or Disposal Activities". This statement addresses the recognition,
measurement and reporting of costs that are associated with exit and
disposal activities. This statement includes the restructuring
activities that are currently accounted for pursuant to the guidance
set forth in EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)," costs related to
terminating a contract that is not a capital lease and one-time benefit
arrangements received by employees who are involuntarily terminated-
nullifying the guidance under EITF 94-3. Under SFAS No. 146 the cost
associated with an exit or disposal activity is recognized in the
periods in which it is incurred rather than at the date the company
committed to the exit plan. This statement is effective for exit or
disposal activities initiated after December 31, 2002, with earlier
application encouraged. Previously issued financial statements will not
be restated. The provisions of EITF 94-3 shall continue to apply for
exit plans initiated prior to the adoption of SFAS No. 146.
Accordingly, the initial adoption of SFAS No. 146 will not have an
effect on AT&T's results of operations, financial position or cash
flows. Liabilities associated with future exit and disposal activities
will not be recognized until actually incurred.
SUBSEQUENT EVENTS
On November 5, 2002, AT&T was served with a shareholder
lawsuit filed on October 29, 2002, in the Court of Chancery of the
State of Delaware. The lawsuit names AT&T and each member of the board
of directors of AT&T Latin America (ALA) as defendants, asserting,
among other things, that AT&T as a majority shareholder and the named
directors breached fiduciary duties to ALA. AT&T will vigorously
contest the allegations set forth in the lawsuit.
On November 7, 2002, certain creditors of At Home Corp. (At Home)
filed a class action against AT&T in California state court asserting
claims relating to the conduct of AT&T and its designees on the At Home
board of directors in connection with At Home's declaration of
bankruptcy and subsequent efforts to dispose of some of its businesses
or assets, as well as in connection with other aspects of AT&T's
relationship with At Home. As described in the joint proxy statement
and prospectus of AT&T and Comcast, dated May 14, 2002, liability (if
any) arising from this lawsuit would be shared equally between AT&T and
AT&T Broadband, and then following the merger of Comcast and AT&T
Broadband, any such liability would be shared equally between AT&T and
AT&T Comcast.
Item 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we completed an
evaluation, under the supervision and with the participation of our
management including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective in alerting them timely to material
information required to be included in our Exchange Act filings. There
have not been any significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent
to the date of the evaluation.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The annual meeting of the shareholders of the registrant was held on
July 10, 2002.
(b) Election of Directors
Votes
(Millions)
Nominee For Withheld
C. Michael Armstrong 2,978 162
J. Michael Cook 2,995 145
Kenneth T. Derr 2,994 146
David W. Dorman 2,996 144
M. Kathryn Eickhoff 2,994 146
George M. C. Fisher 3,006 134
Frank C. Herringer 3,007 133
Amos B. Hostetter, Jr. 2,999 141
Shirley A. Jackson 3,004 136
Donald F. McHenry 2,993 147
Charles H. Noski 3,005 136
Louis A. Simpson 3,006 134
Michael I. Sovern 2,993 147
Sanford I. Weill 3,002 138
Tony L. White 2,995 146
(c) Holders of common shares voted at this meeting on the following matters,
which were set forth in the registrant's proxy statement dated May 14,
2002.
(i) Ratification of Auditors
For Against Abstain
Ratification of the firm of PricewaterhouseCoopers, LLP as
the independent auditors to audit the registrant's financial 2,935 117
statements for the year 2002. (*) (96.18%) (3.82%) 89
(ii) Directors' Proposals:
For Against Abstain Non-Vote
Approve the merger of AT&T Broadband and Comcast Corp.(**) 2,523 86 38 493
(70.12%) (2.40%) (1.05%)
Approve the AT&T Comcast Charter (*) 2,431 177 39 493
(91.85%) (6.69%) (1.46%)
Approve the creation of Consumer Services Group Tracking 2,218 384 45 493
Stock (**) (61.65%) (10.66%) (1.26%)
Approve the Consumer Services Incentive Plan(*) 2,139 439 69 493
(82.98%) (17.02%)
Approve an amendment to the Employee Stock Purchase Plan (*) 2,393 194 60 493
(92.49%) (7.51%)
Approve the Reverse Stock Split (**) 2,913 165 63
(80.96%) (4.57%) (1.75%)
(iii) Shareholders' Proposals
For Against Abstain Non-Vote
Equal Opportunity Statement (*) 293 2,254 100 493
(11.50%) (88.50%)
Employee Pension Plan (*) 255 2,301 90 493
(9.97%) (90.03%)
Future Restructuring Matter (*) 1,049 1,507 91 493
(41.06%) (58.94%)
Severance Contracts (*) 546 1,987 114 493
(21.55%) (78.45%)
Executive Compensation (*) 397 2,140 110 493
(15.64%) (84.36%)
*Percentages are based on the total common shares voted. Approval of this proposal required a majority of the votes.
** Percentages are based on the total number of outstanding common shares. Approval of this proposal required a majority of the
outstanding shares of AT&T common stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number
12 Computation of Ratio of Earnings to Fixed Charges
99.1 CEO Certification of Periodic Financial Reports
99.2 CFO Certification of Periodic Financial Reports
(b) Reports on Forms 8-K
Form 8-K dated August 23, 2002, was filed pursuant to Item 5 and
Item 7 on August 23, 2002.
Form 8-K dated August 14, 2002, was filed pursuant to Item 9 on
August 14, 2002.
Form 8-K dated August 13, 2002, was filed pursuant to Item 5 and
Item 7 on August 13, 2002.
Form 8-K dated August 13, 2002, was filed pursuant to Item 9 on
August 13, 2002.
Form 8-K dated August 12, 2002, was filed pursuant to Item 5 and
Item 7 on August 12, 2002.
Form 8-K dated July 30, 2002, was filed pursuant to Item 5 on
July 30, 2002.
Form 8-K dated July 23, 2002, was filed pursuant to Item 5 and
Item 7 on July 29, 2002.
Form 8-K dated July 17, 2002, was filed pursuant to Item 5 and
Item 7 on July 22, 2002.
Form 8-K dated July 10, 2002, was filed pursuant to Item 5 and
Item 7 on July 11, 2002.
Form 8-K dated July 1, 2002, was filed pursuant to Item 5 on
July 3, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1034,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AT&T Corp.
/s/ N.S. Cyprus
---------------------
By: N.S. Cyprus
Vice President and Controller
(Principal Accounting Officer)
Date: November 12, 2002
CERTIFICATIONS
I, C. Michael Armstrong, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AT&T;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ C. Michael Armstrong
---------------------------
Chief Executive Officer
I, Thomas W. Horton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AT&T;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Thomas W. Horton
-------------------------
Chief Financial Officer
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges
99.1 CEO Certification of Periodic Financial Reports
99.2 CFO Certification of Periodic Financial Reports
Exhibit 12
AT&T's loss for the nine months ended September 30, 2002, was
inadequate to cover fixed charges, dividend requirements on subsidiary
preferred stock and interest on trust preferred securities in the
amount of $16.0 billion.
Exhibit 99.1
CERTIFICATION OF PERIODIC FINANCIAL REPORTS
I, C. Michael Armstrong, Chief Executive Officer of AT&T Corp., certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002 (the "Periodic Report") which this statement
accompanies fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d))
and
(2) information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of
AT&T Corp.
Dated: November 12, 2002
/s/ C. Michael Armstrong
----------------------------
C. Michael Armstrong
Exhibit 99.2
CERTIFICATION OF PERIODIC FINANCIAL REPORTS
I, Thomas W. Horton, Chief Financial Officer of AT&T Corp., certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002 (the "Periodic Report") which this statement
accompanies fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d))
and
(2) information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of
AT&T Corp.
Dated: November 12, 2002
/s/ Thomas W. Horton
---------------------------
Thomas W. Horton