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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
.X. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
One AT&T Way, Bedminster, New Jersey 07921
Telephone - Area Code 908-221-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ..X.. No .....
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes ..X.. No .....
At April 30, 2003, the following shares of stock were outstanding: AT&T common
stock - 786,256,486
PART I - FINANCIAL INFORMATION
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months Ended
March 31,
2003 2002
Dollars in millions
(except per share amounts)
Revenue $ 8,986 $ 9,548
Operating Expenses
Access and other connection 2,698 2,788
Costs of services and products (excluding depreciation of $854
and $847 included below) 2,011 2,014
Selling, general and administrative 1,921 1,937
Depreciation and amortization 1,186 1,175
Net restructuring and other charges 4 -
Total operating expenses 7,820 7,914
Operating income 1,166 1,634
Other income (expense), net 10 (55)
Interest (expense) (332) (396)
Income from continuing operations before income taxes,
minority interest income, and net (losses) related to
equity investments 844 1,183
(Provision) for income taxes (297) (479)
Minority interest income 1 20
Net (losses) related to equity investments (19) (278)
Income from continuing operations 529 446
Net (loss) from discontinued operations (net of income tax
benefit of $225 in 2002) - (565)
Income (loss) before cumulative effect of accounting changes 529 (119)
Cumulative effect of accounting changes [net of income taxes
of $(26) and $530] 42 (856)
Net income (loss) $ 571 $ (975)
Per basic share:
Earnings from continuing operations $ 0.67 $ 0.63
(Loss) from discontinued operations - (0.80)
Cumulative effect of accounting changes 0.06 (1.21)
Earnings (loss) per basic share $ 0.73 $ (1.38)
Per diluted share:
Earnings from continuing operations $ 0.67 $ 0.60
(Loss) from discontinued operations - (0.76)
Cumulative effect of accounting changes 0.06 (1.16)
Earnings (loss) per diluted share $ 0.73 $ (1.32)
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
March 31, December 31,
2003 2002
ASSETS
Cash and cash equivalents $ 4,900 $ 8,014
Accounts receivable, less allowances of $697 and $669 5,028 5,286
Deferred income taxes 779 910
Other current assets 1,150 1,693
TOTAL CURRENT ASSETS 11,857 15,903
Property, plant and equipment, net of accumulated depreciation of
$32,096 and $31,021 25,246 25,604
Goodwill 4,660 4,626
Other purchased intangible assets, net of accumulated amortization
of $262 and $244 542 556
Prepaid pension costs 3,655 3,596
Other assets 4,463 4,987
TOTAL ASSETS $ 50,423 55,272
LIABILITIES
Accounts payable $ 3,384 3,819
Payroll and benefit-related liabilities 941 1,519
Debt maturing within one year 4,346 3,762
Other current liabilities 3,046 2,924
TOTAL CURRENT LIABILITIES 11,717 12,024
Long-term debt 13,786 18,812
Long-term benefit-related liabilities 4,095 4,001
Deferred income taxes 4,768 4,739
Other long-term liabilities and deferred credits 3,359 3,384
TOTAL LIABILITIES 37,725 42,960
SHAREOWNERS' EQUITY
AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares;
issued and outstanding 785,563,631 shares (net of 171,748,905
treasury shares) at March 31, 2003 and 783,037,580 shares
(net of 171,801,716 treasury shares) at December 31, 2002 786 783
Additional paid-in capital 28,079 28,163
Accumulated deficit (15,995) (16,566)
Accumulated other comprehensive (loss) (172) (68)
TOTAL SHAREOWNERS' EQUITY 12,698 12,312
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 50,423 55,272
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(UNAUDITED)
For the Three Months Ended
March 31,
2003 2002
Dollars in millions
AT&T Common Stock
Balance at beginning of year $ 783 $ 708
Shares issued, net:
Under employee plans 3 1
Redemption of TCI Pacific preferred stock - 4
Balance at end of period 786 713
Additional Paid-In Capital
Balance at beginning of year 28,163 54,798
Shares issued, net:
Under employee plans 41 55
Redemption of TCI Pacific preferred stock - 796
Other 8 12
Dividends declared (147) (134)
Other 14 8
Balance at end of period 28,079 55,535
Accumulated deficit
Balance at beginning of year (16,566) (3,484)
Net income (loss) 571 (975)
Balance at end of period (15,995) (4,459)
Accumulated Other Comprehensive (Loss)
Balance at beginning of year (68) (342)
Other comprehensive (loss) (104) (182)
Balance at end of period (172) (524)
Total Shareowners' Equity $ 12,698 $51,265
Summary of Total Comprehensive Income (Loss):
Income (loss) before cumulative effect of accounting changes $ 529 $ (119)
Cumulative effect of accounting changes 42 (856)
Net income (loss) 571 (975)
Other Comprehensive Income (Loss):
Net foreign currency translation adjustment [net of taxes of $(28) and $10] 46 (18)
Net revaluation of certain financial instruments:
Unrealized gains (losses) [net of taxes of $(13) and $191] 21 (311)
Recognition of previously unrealized (gains) losses on
available-for-sale securities [net of income taxes of $106 and $(92)]* (171) 147
Comprehensive Income (Loss) $ 467 $(1,157)
AT&T accounts for treasury stock as retired stock.
We have 100 million authorized shares of preferred stock at $1 par value.
*See note 4 for a summary of the "Recognition of previously unrealized (gains)
losses on available-for-sale securities" and the Statements of Income line items
impacted.
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
March 31,
2003 2002
Dollars in millions
OPERATING ACTIVITIES
Net income (loss) $ 571 $ (975)
Deduct:
Loss from discontinued operations - net of income taxes - (565)
Cumulative effect of accounting changes - net of income taxes 42 (856)
Income from continuing operations 529 446
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities of continuing operations:
Net gains on sales of businesses and investments (24) (10)
Cost investment impairment charges - 102
Net restructuring and other charges 4 -
Depreciation and amortization 1,186 1,175
Provision for uncollectible receivables 200 244
Deferred income taxes 191 155
Net revaluation of certain financial instruments (7) 33
Minority interest income (1) (20)
Net pretax losses related to equity investments 8 450
Decrease in receivables 57 183
Decrease in accounts payable (219) (454)
Net change in other operating assets and liabilities 271 (490)
Other adjustments, net 21 (44)
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 2,216 1,770
INVESTING ACTIVITIES
Capital expenditures and other additions (859) (978)
Proceeds from sale or disposal of property, plant and equipment 11 19
Investment sales and distributions 82 2
Investment contributions and purchases (2) (1)
Net (acquisitions) of businesses, net of cash acquired (158) -
Other investing activities, net 3 (16)
NET CASH (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS (923) (974)
FINANCING ACTIVITIES
Retirement of long-term debt, including redemption premiums (4,028) (504)
(Decrease) in short-term borrowings, net (302) (6,328)
Issuance of AT&T common shares 35 38
Dividends paid on common stock (147) (133)
Other financing activities, net 35 3
NET CASH (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS (4,407) (6,924)
Net cash (used in) discontinued operations - (2,138)
Net (decrease) in cash and cash equivalents (3,114) (8,266)
Cash and cash equivalents at beginning of year 8,014 10,680
Cash and cash equivalents at end of period $ 4,900 $ 2,414
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T Corp.
(AT&T or the "Company") 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 for the year ended December 31, 2002. We have reclassified
certain prior period amounts to conform to our current presentation including a
restatement to reflect AT&T Broadband as a discontinued operation and a
restatement of shares and earnings per share to reflect the November 18, 2002,
1-for-5 reverse stock split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STOCK-BASED COMPENSATION
As of March 31, 2003, AT&T had a Long-Term Incentive Program, under which
AT&T grants stock options, performance shares, restricted stock and other awards
on AT&T common stock. We also have an Employee Stock Purchase Plan (ESPP). In
April 2003, we suspended employee purchases of company stock under the ESPP
effective May 31, 2003. Effective January 1, 2003, we adopted the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" and we began to record
stock-based compensation expense for all employee awards (including stock
options) granted or modified after January 1, 2003. For awards issued prior to
January 1, 2003, we applied Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for our plans. Under APB No. 25, no compensation expense was
recognized other than for our performance-based and restricted stock awards,
stock appreciation rights (SARs), and certain occasions when we modified the
terms of the stock option vesting schedule.
If we had elected to recognize compensation costs based on the fair value
at the date of grant of all awards, consistent with the provisions of SFAS No.
123, net income and earnings per share amounts would have been as follows:
For the Three Months Ended March 31, 2003 2002
Dollars in millions
(except per share amounts)
Net income (loss) $ 571 $ (975)
Add: Stock-based employee compensation included
in reported results, net of tax 10 23
Deduct: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of tax (48) (83)
Pro forma net income (loss) $ 533 $(1,035)
Basic earnings (loss) per share $ 0.73 $ (1.38)
Proforma basic earnings (loss) per share $ 0.68 $ (1.46)
Diluted earnings (loss) per share $ 0.73 $ (1.32)
Proforma diluted earnings (loss) per share $ 0.68 $ (1.40)
The stock-based employee compensation (expense), net of tax, included in
income from continuing operations was $(10) million and $(21) million for the
periods ended March 31, 2003 and 2002, respectively. Stock-based employee
compensation (expense), net of tax, included in discontinued operations for the
period ended March 31, 2002, was $(2) million. The amounts attributed to
discontinued operations in 2002 primarily related to grants of SARs of
affiliated companies held by certain employees subsequent to the
Tele-Communications, Inc. (TCI) merger and prior to the AT&T Broadband spin-off.
Total stock-based employee compensation (expense), net of tax, determined
under the fair value based method for all awards related to continuing
operations was $(48) million and $(66) million for the periods ended March 31,
2003 and 2002, respectively, and related to discontinued operations was $(17)
million for the period ended March 31, 2002.
Pro forma earnings from continuing operations were $491 million and $401
million for the periods ended March 31, 2003 and 2002, respectively. Pro forma
(loss) from discontinued operations was $(580) million for the period ended
March 31, 2002.
Pro forma earnings (loss) per basic share from continuing operations was
$0.62 and $0.57 for the periods ended March 31, 2003 and 2002, respectively, and
from discontinued operations was $(0.82) for the period ended March 31, 2002.
Pro forma earnings (loss) per diluted share from continuing operations was
$0.62 and $0.54 for the periods ended March 31, 2003 and 2002, respectively, and
from discontinued operations was $(0.78) for the period ended March 31, 2002.
For a detailed discussion of significant accounting policies, please refer
to AT&T's Form 10-K for the year ended December 31, 2002.
3. IMPACTS OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
SFAS No. 143, "Accounting for Asset Retirement Obligations"
Effective January 1, 2003, AT&T adopted SFAS No. 143. This standard
requires that obligations that are legally enforceable and unavoidable, and are
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. The offset to the initial asset
retirement obligation is an increase in the carrying amount of the related
long-lived asset. Over time, this liability is accreted to its future value, and
the asset 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.
AT&T historically included in its group depreciation rates an amount
related to the cost of removal for certain assets. However, such amounts are not
legally enforceable or unavoidable; therefore, upon adoption of SFAS No. 143,
AT&T reversed the amount accrued in accumulated depreciation. As of January 1,
2003, AT&T recorded income of $42 million as the cumulative effect of a change
in accounting principle primarily related to this reversal. The impact of no
longer including the cost of removal in the group depreciation rates, partially
offset by the cumulative effect impact on accumulated depreciation, will result
in a decrease to depreciation expense in 2003. However, the costs incurred to
remove these assets will be reflected as a cost in the period incurred as "Costs
of services and products."
4. SUPPLEMENTARY FINANCIAL INFORMATION
AT&T AT&T
Business Consumer Total
Services Services AT&T
Dollars in millions
GOODWILL
Balance at January 1, 2003 $ 4,556 $ 70 $ 4,626
Translation adjustment 34 - 34
Balance at March 31, 2003 $ 4,590 $ 70 $ 4,660
Gross Carrying Accumulated Net
Amount Amortization Intangible Assets
INTANGIBLE ASSETS Dollars in millions
Amortizable purchased
intangible assets at
March 31, 2003:
Customer lists and
relationships $ 559 $ 142 $ 417
Other 245 120 125
Total intangible assets $ 804 $ 262 $ 542
The amortization expense associated with purchased intangible
assets for the three months ended March 31, 2003, was $16 million. Amortization
expense for purchased intangible assets is estimated to be approximately $64
million for the year ending December 31, 2003, $50 million for the year ending
December 31, 2004, and $45 million for each of the years ending December 31,
2005, 2006, and 2007.
SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED (GAINS)LOSSES AND THE LINE ITEMS
IMPACTED
For the Three Months Ended March 31, 2003 2002
Pretax After-tax Pretax After-tax
Dollars in millions
Other income (expense), net:
Other-than-temporary investment
impairments $ - $ - $ 107 $ 66
Sale/exchange of various securities (177) (109) - -
Other financial instrument activity (100) (62) - -
Income from discontinued operations:
Other-than-temporary investment
impairments - - 132 81
Total recognition of previously
unrealized (gains) losses on
available-for-sale securities $(277) $(171) $ 239 $ 147
5. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
On November 18, 2002, a 1-for-5 reverse stock split of AT&T common stock as
approved by shareowners on July 10, 2002, was effected. Shares (except shares
authorized) and per share amounts were restated to reflect the stock split on a
retroactive basis.
Basic earnings per common share (EPS) is computed by dividing net income by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution (considering the combined income and share
impact) that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. The potential issuance of common
stock is assumed to occur at the beginning of the year, and the incremental
shares are included using the treasury stock method, which assumes the proceeds
(after-tax) from exercise are used by the Company to purchase common stock at
the average market price during the period. The incremental shares (difference
between the shares assumed to be issued and the shares assumed to be purchased),
to the extent they would have been dilutive, are included in the denominator of
the diluted EPS calculation.
A reconciliation of the share components for basic to diluted EPS is as
follows:
For the Three Months Ended March 31, 2003(1) 2002 (1)
Shares in millions
Weighted-average common shares 784 709
Effect of dilutive securities:
Stock options 1 1
Preferred stock of subsidiary - 10
Convertible quarterly income preferred
securities - 18
Weighted-average common shares and potential
common shares 785 738
(1) For 2003 and 2002 no adjustments were made to income for the computation of
diluted EPS.
Preferred Stock of Subsidiary
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 (TCI Pacific preferred stock) for
AT&T common stock. All outstanding shares of TCI Pacific preferred stock were
either exchanged or redeemed for AT&T common stock during 2001 and 2002.
Dividends were included in "Net (loss) from discontinued operations" for 2002.
Convertible Quarterly Income Preferred Securities
On June 16, 1999, AT&T Finance Trust I, a wholly owned subsidiary of AT&T,
completed the private sale of 100 million shares of 5.0% cumulative quarterly
income preferred securities (quarterly preferred securities) to Microsoft
Corporation. Such securities were convertible into AT&T common stock during
2002. However, in connection with the AT&T Broadband spin-off, Comcast assumed
the quarterly preferred securities and Microsoft agreed to convert these
preferred securities into shares of Comcast common stock. Dividends were
included in "Net (loss) from discontinued operations" for 2002.
6. NET RESTRUCTURING AND OTHER CHARGES
In the first quarter of 2003, net restructuring and other charges of $4
million reflected the operations of our consolidated subsidiary, AT&T Latin
America, which was accounted for as an asset held for sale. In the fourth
quarter of 2002, AT&T recorded a charge for the impairment of the net assets of
AT&T Latin America, and in December 2002, the AT&T Board of Directors approved a
plan for AT&T to sell its approximate 95% voting stake in AT&T Latin America in
its current condition. On December 31, 2002, we signed a non-binding term sheet
for the sale of our shares within one year for a nominal amount. As a result of
this plan, we classified AT&T Latin America as an asset held for sale at fair
market value, in accordance with SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." Consequently, there are approximately $160
million of assets (principally cash and accounts receivable) included in "Other
Current Assets" and approximately $160 million of liabilities (principally
secured short-term debt) included in "Other Current Liabilities." The $4 million
charge relating to its operations for the first quarter of 2003 was reported
within our AT&T Business Services segment. On April 21, 2003, AT&T Latin America
filed for Chapter 11 bankruptcy.
The following table displays the activity and balances of the restructuring
reserve account:
Type of Cost
Employee Facility
Separations Closings Other Total
Dollars in millions
Balance at January 1, 2003 $ 379 $ 283 $ 3 $ 665
Additions - - - -
Deductions (90) (17) (1) (108)
Balance at March 31, 2003 $ 289 $ 266 $ 2 $ 557
Deductions primarily reflect cash payments which included cash termination
benefits of $88 million, funded primarily through cash from operations.
Relative to the business restructuring reserves recorded during the third
and fourth quarters of 2002, approximately 42% of the employees affected by
these exit plans have left their positions as of March 31, 2003, with the
remaining reductions to occur throughout 2003.
7. DISCONTINUED OPERATIONS
AT&T Broadband, composed primarily of the AT&T Broadband segment, was
spun-off to AT&T shareowners on November 18, 2002, and simultaneously combined
with Comcast Corporation (Comcast). Pursuant to SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," AT&T Broadband was accounted
for as a discontinued operation. In accordance with SFAS No. 144, prior period
financial statements had been restated to reflect AT&T Broadband as a
discontinued operation in all periods. As a discontinued operation, the revenue,
costs and expenses and cash flows of AT&T Broadband have been excluded from the
respective captions in the Consolidated Statements of Income and Consolidated
Statements of Cash Flows, and have been reported through the date of separation
within "Net (loss) from discontinued operations" and as "Net cash (used in)
discontinued operations."
Revenue for AT&T's Broadband business was $2,439 million for the three
months ended March 31, 2002. Net (loss) from discontinued operations before
income taxes was $(790) million ($(565) million after-tax) for the three months
ended March 31, 2002. For the three months ended March 31, 2002, interest
expense of $70 million was allocated to discontinued operations based on the
balance of intercompany debt between AT&T Broadband and AT&T.
8. INVESTMENTS
AT&T CANADA
Prior to the beginning of 2003, AT&T had an approximate 31% ownership
interest in AT&T Canada. Pursuant to a 1999 merger agreement, AT&T had a
commitment to purchase, or arrange for another entity to purchase, the publicly
owned shares of AT&T Canada for the Back-end Price, which was the greater of the
contractual floor price or the fair market value. The floor price accreted 4%
each quarter, commencing on June 30, 2000.
In 2001, AT&T recorded charges reflecting the difference between the
underlying value of publicly owned AT&T Canada shares and the price AT&T had
committed to pay for them, including the 4% accretion of the floor price. In the
first quarter of 2002, AT&T recorded a $0.2 billion after-tax charge ($0.3
billion pretax) reflecting further deterioration in the underlying value of AT&T
Canada as well as the accretion of the floor price. The charge is included in
"Net (losses) related to equity investments."
During 2002, AT&T arranged for third parties (Tricap Investment Corporation
and CIBC Capital Partners) to purchase the remaining 69% equity in AT&T Canada.
As part of this agreement, AT&T agreed to fund the purchase price on behalf of
the third parties. Tricap and CIBC Partners made a nominal payment to AT&T upon
completion of the transaction. Although AT&T held an equity interest in AT&T
Canada throughout 2002, it did not record equity earnings or losses since its
investment balance was written down to zero largely through losses generated by
AT&T Canada. During the first quarter of 2003, AT&T disposed of substantially
all of its AT&T Canada shares.
At March 31, 2002, AT&T had a 21.52% ownership interest in AT&T Canada
(through a joint venture). Summarized financial information for the three months
ended March 31, 2002, for this investment accounted for under the equity method
was as follows:
AT&T Canada
For the Three Months Ended March 31, 2002
Dollars in millions
Revenue $ 241
Operating (loss) (33)
(Loss) from continuing operations before
extraordinary items and cumulative effect
of accounting changes (100)
Net (loss) (100)
CONCERT
On April 1, 2002, Concert, our 50% owned 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, as agreed to in
2001. 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. In conjunction with the unwind of
Concert, AT&T paid BT $158 million in the first quarter of 2003.
AT&T had various related party transactions with Concert until the joint
venture was officially unwound on April 1, 2002. Included in "Revenue" was $268
million for services provided to Concert for the three months ended March 31,
2002. Included in "Access and other connection" are 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 totaling $491 million for the three months ended
March 31, 2002.
AT&T Wireless
In February 2003, AT&T redeemed exchangeable notes that were indexed to
AT&T Wireless common stock. The notes were settled with 78.6 million shares of
AT&T Wireless common stock and $152 million in cash (see note 9). Subsequently
in February, AT&T sold its remaining investment in AT&T Wireless (approximately
12.2 million shares) for $72 million in cash, resulting in a gain of $22 million
recorded in "Other income (expense), net."
9. DEBT OBLIGATIONS
LONG-TERM DEBT
On January 31, 2003, AT&T completed the early retirement of approximately
$1,152 million and $2,590 million long-term notes, with interest rates of 6.375%
and 6.50%, due in March 2004 and March 2013, respectively. The notes were
repurchased with cash and resulted in a loss of $178 million recorded in "Other
income (expense), net."
EXCHANGEABLE NOTES
During 2001, we issued long-term debt (exchangeable notes) that was indexed
to AT&T Wireless common stock and, at AT&T's option, was mandatorily redeemable
with a number of shares of AT&T Wireless common stock that was equal to the
underlying shares multiplied by an exchange ratio, or its cash equivalent. The
notes were accounted for as indexed debt instruments because the carrying value
of the debt was dependent upon the fair market value of the underlying
securities. In addition, the notes contained embedded derivatives, which were
designated as cash flow hedges and required separate accounting. These
designated options were carried at fair value with changes in fair value
recorded, net of income taxes, within "Accumulated other comprehensive (loss)"
as a component of shareowners' equity.
The shares of AT&T Wireless common stock were accounted for as
"available-for-sale" securities under SFAS No. 115 with changes in the carrying
value of the underlying securities that are not "other-than-temporary" being
recorded as unrealized gains or losses, net of income taxes, within "Accumulated
other comprehensive (loss)" as a component of shareowners' equity.
In February 2003, AT&T redeemed these exchangeable notes with 78.6 million
shares of AT&T Wireless common stock and $152 million in cash. The settlement
resulted in a pretax gain of approximately $176 million recorded in "Other
income (expense), net." The noncash impacts of this transaction include the use
of $0.5 billion of our investment in AT&T Wireless to settle long-term debt.
10. 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.
In connection with the separation of its former subsidiaries, AT&T has
entered into a number of separation and distribution agreements that provide,
among other things, for the allocation and/or sharing of certain costs
associated with potential litigation liabilities. For example, pursuant to these
agreements, AT&T shares in the cost of certain litigation (relating to matters
while affiliated with AT&T) if the settlement exceeds certain thresholds. With
the exception of one matter already reserved for, we have assessed that none of
the litigation liabilities allocated to former subsidiaries were probable of
incurring costs in excess of the threshold above which we would be required to
share in the costs. However, in the event these former subsidiaries were unable
to meet their obligations with respect to these liabilities due to financial
difficulties, AT&T could be held responsible for all or a portion of the costs,
irrespective of the sharing agreements.
Consequently, we are unable to ascertain the ultimate aggregate amount of
monetary liability or financial impact with respect to these matters at March
31, 2003. However, we believe that after final disposition, any monetary
liability or financial impact to us beyond that provided for at March 31, 2003,
would not be material to our annual consolidated financial statements.
11. SEGMENT REPORTING
AT&T's results are segmented according to the customers we service: AT&T
Business Services and AT&T Consumer Services. AT&T evaluates performance based
on several factors, of which the primary financial measure is operating income.
Our existing segments reflect certain managerial changes that were
implemented during 2003. The changes primarily include a redistribution of
property, plant and equipment in fixed assets from the Corporate and Other group
to AT&T Business Services and a transfer of deferred taxes from AT&T Consumer
Services to the Corporate and Other group.
AT&T Business Services provides a variety of communication services to
various sized businesses and government agencies including long distance,
international, toll-free and local voice, including wholesale transport
services, as well as data services and Internet protocol and enhanced (IP&E)
services, which includes the management of network servers and applications.
AT&T Consumer Services provides a variety of communication services to
residential customers. These services include traditional long distance voice
services such as domestic and international dial services (long distance or
local toll calls where the number "1" is dialed before the call), calling card
services and dial-up Internet. Transaction services, such as prepaid card and
operator-assisted calls, are also offered. These services represent stand-alone
long distance and are not offered in conjunction with any other service. AT&T
Consumer Services also provides all distance services which bundle long
distance, local and local toll.
The balance of AT&T's continuing operations is included in a "Corporate and
Other" group. This group primarily reflects corporate staff functions and the
elimination of transactions between segments.
Total assets for our reportable segments include all assets, except
intercompany receivables. AT&T prepaid pension assets, taxes and corporate-owned
or leased real estate are held at the corporate level and therefore are included
in the Corporate and Other group. Capital additions for each segment include
capital expenditures for property, plant and equipment, additions to
nonconsolidated investments, and additions to internal-use software (which are
included in "Other assets").
AT&T Business Services sells services to AT&T Consumer Services at
cost-based prices. Generally, AT&T Business Services accounts for these sales as
contra-expense.
REVENUE
For the Three Months Ended March 31, 2003 2002
Dollars in millions
AT&T Business Services external revenue $ 6,437 $ 6,445
AT&T Business Services internal revenue - 83
Total AT&T Business Services revenue 6,437 6,528
AT&T Consumer Services external revenue 2,536 3,086
Total reportable segments 8,973 9,614
Corporate and Other 13 (66)
Total revenue $ 8,986 $ 9,548
RECONCILIATION OF OPERATING INCOME TO INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST INCOME,
AND NET (LOSSES) RELATED TO EQUITY INVESTMENTS
For the Three Months Ended March 31, 2003 2002
Dollars in millions
AT&T Business Services operating income $ 600 $ 867
AT&T Consumer Services operating income 632 821
Total reportable segments operating income 1,232 1,688
Corporate and Other operating income (66) (54)
Operating income 1,166 1,634
Other income (expense), net 10 (55)
Interest (expense) (332) (396)
Income from continuing operations before
income taxes, minority interest income, and
net (losses) related to equity investments $ 844 $ 1,183
ASSETS At At
March 31, December 31,
2003 2002
Dollars in millions
AT&T Business Services $ 36,065 $ 36,389
AT&T Consumer Services 1,256 1,390
Total reportable segments 37,321 37,779
Corporate and Other assets* 13,102 17,493
Total Assets $ 50,423 $ 55,272
* Includes cash of $4.6 billion at March 31, 2003, and $7.8 billion at
December 31, 2002.
Geographic information is not presented due to the immateriality of revenue
attributable to international customers.
Reflecting the dynamics of our business, we continually review our
management model and structure, which may result in additional adjustment to our
operating segments in the future.
12. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities--an Interpretation of Accounting Research Bulletin (ARB) No.
51." FIN No. 46 requires the primary beneficiary to consolidate a variable
interest entity (VIE) if it has a variable interest that will absorb a majority
of the entity's expected losses if they occur, receive a majority of the
entity's expected residual returns if they occur, or both. FIN No. 46 applies
immediately to VIEs created after January 31, 2003, and to VIEs in which the
entity obtains an interest after that date. For VIEs acquired before February 1,
2003, the effective date for AT&T is July 1, 2003. Based on the new standard,
one or two entities that AT&T leases buildings from could qualify as VIEs. AT&T
provides guarantees of the residual values for these entities and the maximum
exposure related to these entities at March 31, 2003 is $427 million. The assets
that may by subject to consolidation total $467 million (principally the
properties we lease) and the total liabilities that may be subject to
consolidation total $496 million (principally debt secured by the properties) at
March 31, 2003.
In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the timing of revenue
recognition for arrangements in which goods or services or both are delivered
separately in a bundled sales arrangement. The EITF requires that when the
deliverables included in this type of arrangement meet certain criteria they
should be accounted for separately as separate units of accounting. This may
result in a difference in the timing of revenue recognition but will not result
in a change in the total amount of revenue recognized in a bundled sales
arrangement. The allocation of revenue to the separate deliverables is based on
the relative fair value of each item. If the fair value is not available for the
delivered items then the residual method must be used. This method requires that
the amount allocated to the undelivered items in the arrangement is their full
fair value. This would result in the discount, if any, being allocated to the
delivered items. This consensus is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003, which, for AT&T,
is July 1, 2003. AT&T is currently evaluating the impact of this consensus on
its results of operations, financial position and cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This standard amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement clarifies when a contract with an initial net investment meets
the characteristic of a derivative and when a derivative contains a financing
component. This statement also amends the definition of an underlying to conform
to the language contained in FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. AT&T is currently assessing the impact of this statement on its results of
operations, financial position and cash flows.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
AT&T Corp. (AT&T or the "Company") is among the world's communications
leaders, providing voice and data communications services to large and small
businesses, consumers and government agencies. We provide domestic and
international long distance, regional and local communications services, and
data and Internet communications services.
FORWARD-LOOKING STATEMENTS
This document may contain forward-looking statements with respect to AT&T's
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 senior management that rely on a
number of assumptions concerning future events, many of which are outside AT&T's
control, and involve a number of risks and uncertainties that could cause actual
results to differ materially from those suggested by the forward-looking
statements. These forward-looking statements should, therefore, be considered in
light of various important factors that could cause actual results to differ
materially from estimates or projections contained in the forward-looking
statements including, without limitation:
o the impact of existing and new competitors in the markets in which AT&T
competes, 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 and profitability,
o the ability to establish a significant market presence in new geographic
and service markets,
o the availability and cost of capital,
o the impact of any unusual items resulting from ongoing evaluations of the
business strategies of the Company,
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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, wireless, Internet or
other technology substitution and changes and other technological
developments,
o the results of litigation filed or to be filed against the Company, and
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 the Company has no control.
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 this document is filed. 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 months ended March 31, 2003, and 2002, and
financial condition as of March 31, 2003, and December 31, 2002.
Critical Accounting 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
useful lives of plant and equipment, pension and other postretirement benefits,
income taxes and legal contingencies. 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 policies that may involve a higher degree of judgment,
please refer to AT&T's Form 10-K for the year ended December 31, 2002.
CONSOLIDATED RESULTS OF OPERATIONS
The comparison of 2003 results with 2002 results was impacted by the April
1, 2002 unwind of Concert, our joint venture with British Telecommunications plc
(BT). 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. As a result, 2003 results
include revenue and expenses associated with these customers and businesses
while the period of January 1, 2002 through March 31, 2002, includes our
proportionate share of Concert's earnings and related charges in "Net (losses)
related to equity investments."
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
During 2002, AT&T's interest in AT&T Latin America was fully consolidated
in AT&T's results. In December 2002, AT&T signed a non-binding term-sheet for
the sale of its 69% economic interest (95% voting interest) in AT&T Latin
America and began accounting for AT&T Latin America as an asset held for sale
(the operations of AT&T Latin America did not qualify for treatment as a
discontinued operation). As a result of this action, in the fourth quarter of
2002 we wrote down AT&T Latin America's assets and liabilities to fair value and
reclassified these assets and liabilities of AT&T Latin America to "Other
current assets" and "Other current liabilities," where they remained at March
31, 2003. The operating losses of AT&T Latin America for the first quarter of
2003 are reflected in "Net restructuring and other charges." On April 21, 2003,
AT&T Latin America filed for Chapter 11 bankruptcy.
The consolidated financial statements of AT&T reflect AT&T Broadband as a
discontinued operation. AT&T Broadband was spun-off to AT&T shareowners on
November 18, 2002, and simultaneously combined with Comcast Corporation.
Accordingly, the revenue, costs and expenses and cash flows of AT&T Broadband
have been excluded from the respective captions in the Consolidated Statements
of Income and Consolidated Statements of Cash Flows, and have been reported as
"Net (loss) from discontinued operations" and as "Net cash (used in)
discontinued operations" for all applicable periods.
REVENUE
For the Three Months Ended March 31, 2003 2002
Dollars in millions
AT&T Business Services $ 6,437 $ 6,528
AT&T Consumer Services 2,536 3,086
Corporate and Other 13 (66)
Total Revenue $ 8,986 $ 9,548
Total revenue decreased $0.6 billion, or 5.9%, in the first quarter of 2003
compared with the first quarter of 2002. The decline was driven by the continued
declines in stand-alone long distance voice revenue, totaling approximately $0.8
billion, partially offset by an increase in bundled services revenue (local and
long distance) of approximately $0.2 billion at AT&T Consumer Services. The
decline in stand-alone long distance revenue reflects the impact of substitution
by consumers, competition and migration to optional calling plans, as well as a
decline in business retail and pricing pressures, partially offset by strength
in business wholesale.
Revenue by segment is discussed in more detail in the segment results
section.
Operating Expenses
For the Three Months Ended March 31, 2003 2002
Dollars in millions
Access and other connection $ 2,698 $ 2,788
Costs of services and products 2,011 2,014
Selling, general and administrative 1,921 1,937
Depreciation and amortization 1,186 1,175
Net restructuring and other charges 4 -
Total operating expenses $ 7,820 $ 7,914
Operating income $ 1,166 $ 1,634
Operating margin 13.0% 17.1%
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Included within access and other connection expenses are costs we pay to
connect calls using the facilities of other service providers, as well as the
Universal Service Fund contributions and per-line charges mandated by the FCC.
Costs paid to telephone companies outside of the United States to connect
international calls are also included within access and other connection
expenses.
Access and other connection expenses decreased 3.2%, or $90 million, in the
first quarter of 2003 compared with the first quarter of 2002. Approximately
$0.1 billion of this decrease was due to lower Universal Service Fund
contributions and per-line charges, which were primarily driven by the decline
in long distance voice revenue. Also contributing to the decline were lower
international connection charges of $0.1 billion as a result of lower rates as
well as the reintegration of customers and assets from the unwind of Concert.
Partially offsetting the expense declines was an increase in local connectivity
costs of $0.1 billion primarily as a result of new state entries and subscriber
increases. Since most of the Universal Service Fund contributions, per-minute
access-rate reductions and per-line charges are passed through to the customer,
these reductions generally result in a corresponding reduction in revenue.
Costs of services and products include costs of operating and maintaining
our networks, costs to support our outsourcing contracts, the provision for
uncollectible receivables and other service-related costs, including cost of
equipment sold.
Costs of services and products decreased $3 million, or 0.1%, in the first
quarter of 2003 compared with the first quarter of 2002, primarily driven by the
overall impact of lower revenue, partially offset by increased costs as a result
of the reintegration of customers and assets from the unwind of Concert.
Selling general and administrative (SG&A) expenses decreased $16 million,
or 0.8%, in the first quarter of 2003 compared with the first quarter of 2002.
The decrease was driven by approximately $175 million of lower expenses due to
lower advertising and promotional spending, cost control efforts, as well as
reduced volumes at AT&T Consumer Services resulting from a reduction in the
number of residential customers. These decreases were partially offset by
approximately $75 million of increased spending by AT&T Business Services for
sales and customer development costs as well as increased marketing and sales
expenses associated with new local service offerings by AT&T Consumer Services.
The declines were also partially offset by approximately $50 million of lower
pension credits (income) and higher postretirement benefit costs resulting from
a lower expected long-term rate of return and the effects of lower actual plan
assets.
Depreciation and amortization expenses increased $11 million, or 1.0%, in
the first quarter of 2003, compared with the corresponding period in 2002. The
increase was primarily due to a larger asset base partially offset by the
adoption of Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations." Total capital expenditures were
$662 million and $613 million for the three months ended March 31, 2003 and
2002, respectively. We continue to focus the vast majority of our capital
spending on our growth businesses of data services and Internet protocol &
enhanced services (IP&E services), both of which include managed services, as
well as local voice services.
In the first quarter of 2003, net restructuring and other charges were $4
million. The charge was recorded by AT&T Business Services and represented the
results of operations of AT&T Latin America, an asset held for sale.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
AT&T's operating income in the first quarter of 2003 decreased $0.5
billion, or 28.7%, compared with the first quarter of 2002. AT&T's operating
margin was 13.0% in the first quarter of 2003 compared with 17.1% in the first
quarter of 2002. The decline in 2003 was primarily due to the decline in revenue
coupled with a lower rate of decline in access and other connection expenses,
selling, general and administrative expenses and costs of services and products,
and a slight increase in depreciation and amortization expense as compared with
the revenue rate of decline. The operating margin decline reflects pricing
pressures and a shift from higher-margin retail long distance services to
lower-margin wholesale long distance service and other lower-margin services
such as lower-priced optional calling plans.
For the Three Months Ended March 31, 2003 2002
Dollars in millions
Other income (expense), net $ 10 $ (55)
Other income (expense), net, in the first quarter of 2003 was income of $10
million compared with expense of $55 million in the first quarter of 2002. The
favorable variance of $65 million was primarily due to $0.1 billion of lower
investment impairment charges primarily driven by impairment charges for Time
Warner Telecom recorded in the first quarter of 2002. Also contributing to the
increase was greater income related to mark-to-market adjustments on financial
instruments and income from the sale of our remaining holdings in AT&T Wireless,
totaling $0.1 billion. Partially offsetting these increases was a reserve
recorded in 2003 related to certain leases of aircraft which are accounted for
as leveraged leases and lower investment-related income totaling $0.1 billion.
Also included within other income (expense) in the first quarter of 2003 was a
$0.2 billion loss associated with the early repurchase of $3.7 billion of
long-term debt. This loss was offset by a $0.2 billion gain, also in the first
quarter of 2003, associated with the early retirement of exchangeable notes that
were indexed to AT&T Wireless common stock.
We continue to hold investments in leveraged leases of commercial aircraft,
which we lease to domestic airlines as well as aircraft related companies.
Should the financial difficulties in the U.S. airline industry lead to further
bankruptcies or lease restructurings, AT&T could be expected to record
additional losses associated with its aircraft lease portfolio.
For the Three Months Ended March 31, 2003 2002
Dollars in millions
Interest (expense) $ (332) $ (396)
Interest expense decreased 16.0%, or $64 million, in the first quarter of
2003 as compared with the first quarter of 2002. The decrease was primarily due
to a lower average debt balance in 2003 compared with 2002, reflecting our debt
reduction efforts, and was partially offset by higher overall interest rates.
For the Three Months Ended March 31, 2003 2002
Dollars in millions
(Provision) for income taxes $ (297) $ (479)
Effective tax rate 35.2% 40.5%
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The (provision) for income taxes decreased $182 million, or 38.0%, in the
first quarter of 2003 as compared with the first quarter of 2002. This decrease
was primarily due to lower income before income taxes and the impact of a lower
effective tax rate in the first quarter of 2003. The effective tax rate in the
first quarter of 2003 was positively impacted by 5.3 percentage points due to
the recognition of tax benefits recorded in connection with the exchange and
sale of AT&T's remaining interest in AT&T Wireless common stock.
For the Three Months Ended March 31, 2003 2002
Dollars in millions
Minority interest income $ 1 $ 20
Minority interest income represents an adjustment to AT&T's income to
reflect the less than 100% ownership of consolidated subsidiaries. Minority
interest income decreased $19 million in the first quarter of 2003 as compared
to the first quarter of 2002, primarily as we no longer record minority interest
income related to AT&T Latin America. In December 2002, AT&T fully utilized the
minority interest balance related to AT&T Latin America.
For the Three Months Ended March 31, 2003 2002
Dollars in millions
Net (losses) related to equity investments $ (19) $ (278)
Net (losses) related to equity investments, which are recorded net of
income taxes, were $19 million in the first quarter of 2003 compared with $278
million in the first quarter of 2002. The lower loss was driven primarily by a
$209 million after-tax charge ($338 million pretax) recorded in the first
quarter of 2002 related to the estimated loss on AT&T's commitment to purchase
the shares of AT&T Canada not owned by AT&T. The charge reflected further
deterioration in the underlying value of AT&T Canada as well as accretion of the
floor price of AT&T's obligation to purchase AT&T Canada shares.
For the Three Months Ended March 31, 2003 2002
Dollars in millions
Net (loss) from discontinued operations,
net of income taxes $ - $ (565)
Net (loss) from discontinued operations, net of income taxes, represents
the operating results of AT&T Broadband, which AT&T disposed of on November 18,
2002, and accounted for as a discontinued operation. Accordingly, the revenue,
costs and expenses of AT&T Broadband have been excluded from the respective
captions in the Consolidated Statements of Income.
For the Three Months Ended March 31, 2003 2002
Dollars in millions
Cumulative effect of accounting changes $ 42 $ (856)
Effective January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations," resulting in $42 million of income, net of income taxes
of $26 million, as the cumulative effect of this accounting principle. This
standard requires that obligations that are legally enforceable and unavoidable,
and are 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. AT&T included in its group
depreciation rates an amount related to the cost of removal for certain assets.
However, such amounts are not legally enforceable or unavoidable; therefore, the
cumulative effect impact primarily reflects the reversal of such amounts accrued
in accumulated depreciation.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." 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 (related to discontinued operations) of $0.9 billion, net of income taxes
of $0.5 billion, was recorded in 2002.
For the Three Months Ended March 31, 2003 2002
Earnings from continuing operations per
basic share $ 0.67 $ 0.63
Total earnings (loss) per basic share 0.73 (1.38)
Earnings from continuing operations per
diluted share $ 0.67 $ 0.60
Total earnings (loss) per diluted share 0.73 (1.32)
Earnings per diluted share (EPS) from continuing operations were $0.67 in
the first quarter of 2003 compared with $0.60 per diluted share in the first
quarter of 2002. The increase of $0.07 was primarily due to favorable variances
in net losses related to equity investments and other income (expense) as well
as lower interest expense, offset somewhat by lower operating income in 2003
compared with 2002. Also offsetting the increase were higher average shares
primarily resulting from the public equity offering of 46 million shares of AT&T
common stock, the proceeds of which were utilized to satisfy a portion of its
obligation to AT&T Canada common shareholders (see note 8).
In the first quarter of 2003, AT&T total EPS per diluted share of $0.73
included earnings from continuing operations as discussed above of $0.67 and
income related to the cumulative effect of an accounting change of $0.06. In the
first quarter of 2002, the total diluted loss of $1.32 included income from
continuing operations as discussed above of $0.60, a loss from discontinued
operations of $0.76 and a loss related to the cumulative effect of an accounting
change of $1.16.
SEGMENT RESULTS
AT&T's results are segmented according to the customers we service: AT&T
Business Services and AT&T Consumer Services. The balance of AT&T's continuing
operations is included in a "Corporate and Other" group. This group primarily
reflects corporate staff functions and the elimination of transactions between
segments. The discussion of segment results includes revenue, operating income,
capital additions and total assets.
Operating income 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.
Total assets for each segment generally include all assets, except
intercompany receivables. Prepaid pension assets, taxes 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 (loss) 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,
additions to nonconsolidated investments and additions to internal-use software.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Our existing segments reflect certain managerial changes that were
implemented during 2003. The changes primarily include a redistribution of
property from the Corporate and Other group to AT&T Business Services and a
transfer of deferred taxes from AT&T Consumer Services to the Corporate and
Other group.
Reflecting the dynamics of our business, we continuously review our
management model and structure, which may result in additional adjustments to
our operating segments in the future.
AT&T BUSINESS SERVICES
AT&T Business Services provides 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, including wholesale
transport services (sales of services to service resellers), as well as data
services and Internet protocol and enhanced (IP&E) services, which includes the
management of network servers and applications. Data services and IP&E services
are broad categories of services in which data (i.e., e-mail, video or computer
files) is transported from one location to another. Data Services includes
bandwidth services (dedicated private line services through high-capacity
optical transport), packet services and managed data services. In packet
services, data is divided into efficiently sized components and transported
between packet switches until it reaches its final destination, where it is
reassembled. Packet services includes frame relay and Asynchronous Transfer Mode
(ATM). IP&E services includes all services that ride on the IP common backbone
or that use IP technology, including managed IP services, as well as application
services (e.g., hosting or security). Managed services delivers end-to-end
enterprise networking solutions by managing networks, servers and applications.
AT&T Business Services also provides outsourcing solutions and other
professional services.
For the Three Months Ended March 31, 2003 2002
Dollars in millions
Services revenue* $ 6,367 $ 6,430
Equipment and product sales 70 98
Total revenue $ 6,437 $ 6,528
Operating income $ 600 $ 867
Capital additions 638 576
At At
March 31, December 31,
2003 2002
Total assets $ 36,065 $ 36,389
*2002 Services revenue included $83 million of sales to AT&T Broadband,
which were recorded as internal revenue through the November 18, 2002, date of
disposition. Subsequently, sales to AT&T Broadband, now Comcast Corporation,
were recorded as external revenue. The impact of internal revenue is included in
individual product discussions below.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
REVENUE
AT&T Business Services revenue decreased $91 million, or 1.4%, in the first
quarter of 2003 compared with the first quarter of 2002. The decline was
primarily driven by a decline in long distance voice services as well as lower
outsourcing contract revenue and related equipment and product sales. Partially
offsetting the decline was growth in local voice services and IP&E services.
Long distance voice revenue for the first quarter of 2003 declined 2.9 %,
or $87 million, on a year-over-year basis to $3.0 billion. The decline was
driven by the decline in the retail business and pricing pressures, partially
offset by strength in the wholesale business. These factors are expected to
continue to negatively impact revenue throughout 2003. Long distance volumes
grew approximately 12% on a year-over-year basis, driven by growth in lower
priced wholesale minutes, which more than offset the decline in higher priced
retail minutes.
Data services revenue declined $18 million, or 0.9%, on a year-over-year
basis to $2.0 billion, driven by the continued decline in private line services
(a service in which the connection is dedicated to the customer). This decline
was offset by an increase in packet services, reflecting an industry trend of
customers migrating from private line services to more cost-effective and
technologically-advanced packet services. Excluding equipment and product sales,
data services revenue declined 0.3% in the first quarter of 2003 compared with
the first quarter of 2002.
IP&E services revenue increased $37 million, or 9.1%, to $445 million in
the first quarter of 2003 compared with the first quarter of 2002.
Local voice services revenue grew 24.8%, or $67 million, in the first
quarter of 2003 compared with the first quarter of 2002 to $335 million. This
growth reflects our continued focus on increasing the utilization of our
existing footprint. AT&T added approximately 157 thousand access lines in 2003.
Access lines at the end of the first quarter of 2003 and 2002 were approximately
3.8 million and 3.0 million, respectively.
OPERATING INCOME
Operating income declined $0.3 billion, or 30.7%, in the first quarter of
2003 compared with the first quarter of 2002. The decline was primarily due to
the decrease in the long distance voice business resulting primarily from the
impact of pricing pressures, as well as a shift from higher-margin long distance
services to lower-margin growth services, which include wholesale services.
OTHER ITEMS
Capital additions were $638 million in the first quarter of 2003. We
continue to concentrate the majority of capital spending on our growth
businesses, focusing on improving the customer experience and AT&T's overall
cost structure.
Total assets declined $0.3 billion, or 0.9%, at March 31, 2003, compared
with December 31, 2002, primarily driven by lower net property, plant and
equipment and a decrease in accounts receivable resulting from improved cash
collections and lower revenue.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
AT&T CONSUMER SERVICES
AT&T Consumer Services provides a variety of communication services to
residential customers. These services include traditional long distance voice
services such as domestic and international dial services (long distance or
local toll calls where the number "1" is dialed before the call), calling card
services and dial-up Internet. Transaction services, such as prepaid card and
operator-assisted calls, are also offered. These services represent stand-alone
long distance and are not offered in conjunction with any other service. AT&T
Consumer Services provides all distance services which bundle long distance,
local and local toll.
For the Three Months Ended March 31, 2003 2002
Dollars in millions
Revenue $ 2,536 $ 3,086
Operating income 632 821
Capital additions 22 28
At At
March 31, December 31,
2003 2002
Total assets $ 1,256 $ 1,390
REVENUE
AT&T Consumer Services revenue declined $0.6 billion, or 17.8%, in the
first quarter of 2003 compared with the first quarter of 2002. This decrease was
primarily due to a decline in stand-alone long distance voice services, which
declined $0.8 billion to $2.0 billion in the first quarter of 2003, largely due
to substitution and the impact of ongoing competition, which has led to a loss
of market share. In addition, these services have been negatively impacted by
the continued migration of customers to optional calling plans and other
products offered by AT&T such as bundled services. Partially offsetting these
declines was a $0.2 billion increase in bundled revenue to $0.4 billion for the
three months ended March 31, 2003, reflecting an increase in subscribers
primarily due to new markets entered into since March 31, 2002, including
California, Illinois, Ohio and New Jersey. Total long distance calling volumes
declined approximately 12% in the first quarter of 2003 compared with the first
quarter of 2002 as a result of competition and wireless and Internet
substitution, partially offset by an increase in prepaid card usage.
OPERATING INCOME
Operating income declined $189 million, or 22.9%, in the first quarter of
2003 compared with the first quarter of 2002. The decline was primarily due to
the decline in the stand-alone long distance business.
Operating margin declined to 24.9% in the first quarter of 2003 from 26.6%
in the first quarter of 2002. The declining margin primarily reflects the
revenue decline coupled with a lower rate of decline in SG&A.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
OTHER ITEMS
In the first quarter of 2003, capital additions decreased $6 million, or
24.2%, compared with the first quarter of 2002.
Total assets declined $134 million to $1.3 billion at March 31, 2003. This
decline was primarily due to lower accounts receivable, reflecting lower revenue
and slightly improved cash collections.
CORPORATE AND OTHER
This group primarily reflects the results of corporate staff functions and
the elimination of transactions between segments.
For the Three Months Ended March 31, 2003 2002
Dollars in millions
Revenue $ 13 $ (66)
Operating (loss) (66) (54)
Capital additions 4 10
At At
March 31, December 31,
2003 2002
Total assets $ 13,102 $ 17,493
REVENUE
For the first quarter of 2003, Corporate and Other revenue was positive $13
million, compared with negative $66 million for the first quarter of 2002. The
year-over-year change was primarily due to the split-off of AT&T Broadband in
November 2002, resulting in AT&T no longer recording internal revenue with AT&T
Broadband in the first quarter of 2003 compared with the elimination of this
revenue in 2002.
OPERATING INCOME
For the first quarter of 2003, operating income declined $12 million to
negative $66 million, compared with the first quarter of 2002. The decline was
primarily due to a lower pension credit (income) primarily driven by a lower
long-term expected rate of return and the effects of lower actual plan assets
and higher postretirement expense primarily driven by revised actuarial
estimates and assumptions. Partially offsetting the decline was an asset
impairment charge in the first quarter of 2002.
OTHER ITEMS
Capital additions decreased $6 million in the first quarter of 2003
compared with the first quarter of 2002.
Total assets decreased $4.4 billion to $13.1 billion at March 31, 2003. The
decrease was primarily driven by a lower cash balance at March 31, 2003.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION
At At
March 31, December 31,
2003 2002
Dollars in millions
Total assets $ 50,423 $ 55,272
Total liabilities 37,725 42,960
Total shareowners' equity 12,698 12,312
Total assets decreased $4.8 billion, or 8.8%, to $50.4 billion at March 31,
2003, as compared with December 31, 2002. This decrease was largely driven by a
$3.1 billion decrease in cash and cash equivalents. Other current assets
decreased by $0.5 billion, primarily due to the collection of income tax
receivables in the first quarter. Other assets decreased by $0.5 billion,
primarily due to the disposal of our interest in AT&T Wireless common stock,
which had a carrying amount of $0.5 billion at December 31, 2002. A portion of
our investment was used to redeem exchangeable notes that were indexed to AT&T
Wireless common stock and the remaining interest was sold.
Total liabilities decreased $5.2 billion, or 12.2%, to $37.7 billion at
March 31, 2003, from $43.0 billion at December 31, 2002. This decrease was
primarily a result of $4.4 billion in lower debt, reflecting the early
retirement of $3.7 billion in long-term debt and the early redemption of
exchangeable notes that were indexed to the AT&T Wireless common stock we owned,
which had a carrying value of $0.5 billion at December 31, 2002. Accounts
payable was reduced by $0.4 billion as payments were made against year-end
capital expenditures and other accruals, and payroll and benefit-related
liabilities were reduced by $0.6 billion as payments for salary and other
compensation accruals were made in the first quarter.
Total shareowners' equity increased $0.4 billion, or 3.1%, to $12.7 billion
at March 31, 2003, from $12.3 billion at December 31, 2002. This increase was
primarily due to $0.6 billion of net income, offset somewhat by dividends
declared and increased accumulated other comprehensive (loss), which was driven
by the redemption of the exchangeable notes.
LIQUIDITY
For the Three Months Ended March 31, 2003 2002
Dollars in millions
CASH FLOWS:
Provided by operating activities of
continuing operations $ 2,216 $ 1,770
(Used in) investing activities of
continuing operations (923) (974)
(Used in) financing activities of
continuing operations (4,407) (6,924)
(Used in) discontinued operations - (2,138)
Net (decrease) in cash and cash
equivalents $(3,114) $(8,266)
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Net cash provided by operating activities of AT&T's continuing operations
of $2.2 billion for the three months ended March 31, 2003, was generated
primarily by $2.1 billion of income from continuing operations, adjusted to
exclude noncash income items and net gains on sales of businesses and
investments. Also contributing to the source of cash was a net change in other
assets and liabilities of $0.3 billion reflecting a net tax refund partially
offset by a decrease in payroll and benefit-related liabilities attributable to
payments made against year-end accruals. Partially offsetting these sources of
cash was a $0.2 billion decrease in accounts payable due to payments of year-end
operating accruals.
Net cash provided by operating activities of continuing operations of $1.8
billion for the three months ended March 31, 2002, primarily included $2.5
billion of income from continuing operations, adjusted to exclude noncash income
items and net gains on sales of businesses and investments, and a decrease in
accounts receivable of $0.2 billion primarily due to the collection of a
receivable from Liberty Media Corporation. Partially offsetting these sources of
cash were net changes in other operating assets and liabilities of $0.5 billion
due to payments made against year-end accruals, and a $0.5 billion decrease in
accounts payable due to the payment of year-end operating accruals.
AT&T's investing activities resulted in a net use of cash of $0.9 billion
in the first quarter of 2003, compared with $1.0 billion in the first quarter of
2002. AT&T spent $0.9 billion and $1.0 billion on capital expenditures in the
first quarter of 2003 and the first quarter of 2002, respectively. Also included
in the net cash used in investing activities in the first quarter of 2003 were
payments made to BT primarily associated with assets assumed by AT&T that BT
originally contributed to the joint venture of $0.2 billion, partially offset by
$0.1 billion of proceeds from the sale of our remaining AT&T Wireless shares.
During the first quarter of 2003, net cash used in financing activities was
$4.4 billion, compared with $6.9 billion in the first quarter of 2002. During
the first quarter of 2003, AT&T made net payments of $4.3 billion to reduce
debt, including the early termination of debt (see "Financial Condition"
discussion, above) and paid dividends of $0.1 billion. During the first quarter
of 2002, AT&T made net payments of $6.8 billion to reduce debt and paid
dividends of $0.1 billion.
Working Capital and Other Sources of Liquidity
At March 31, 2003, our working capital ratio (current assets divided by
current liabilities) was 1.01.
At March 31, 2003, we had a $3.0 billion 364-day credit facility available
to us that was entered into on October 9, 2002. The 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 2.25 to 1.00 for four consecutive
quarters ending on the last day of each fiscal quarter. It also contains a
covenant that requires AT&T to maintain $1.27 billion in unencumbered cash, cash
equivalents and marketable securities. At March 31, 2003, we were in compliance
with these covenants.
We anticipate funding our operations in 2003 primarily with cash and cash
equivalents on hand as well as cash from operations. 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. However, we believe our access to the
capital markets is adequate to provide the flexibility in funding our operations
that we desire. Sources of liquidity include the commercial paper market, a $2.4
billion universal shelf registration, an up to $2.0 billion securitization
program (limited by eligible receivables) and the $3.0 billion credit facility.
However, we cannot provide any assurances that any or all of these sources of
funding will be available at the time they are needed or in the amounts
required.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Credit Ratings and Related Debt Implications
In April 2003, Standard and Poor's placed AT&T's long-term credit ratings
on CreditWatch with negative implications, while affirming the Company's
short-term credit and commercial paper ratings at A-2. Additional debt rating
downgrades could require AT&T topay higher rates on certain existing debt,
prepay certain operating leases and post cash collateral for certain
interest-rate and equity swaps if we are in a net payable position.
If our ratings were downgraded below investment grade by Standard & Poor's
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. We do not believe downgrades below investment grade are likely to
occur.
The holders of certain private debt with an outstanding balance of $0.9
billion at March 31, 2003, have an annual put right to cause AT&T to repay the
debt upon payment of an exercise fee. In exchange for the debt holders agreeing
not to exercise their put right, AT&T posted a cash-collateralized letter of
credit in 2002 now totaling $0.5 billion and expiring in March 2005. The annual
put right for 2003 expired on February 13, 2003, without exercise by the debt
holders. The holders could accelerate repayment of the debt based on certain
events such as the occurrence of unfavorable local law or regulation changes in
their country of operation.
If AT&T's debt ratings are further downgraded, AT&T's access to the capital
markets may be restricted and/or such replacement financing may be more costly
or have additional covenants than we had in connection with our debt at March
31, 2003. 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 or to pay dividends.
Cash Requirements
Our cash needs for 2003 will be primarily related to capital expenditures,
repayment of debt and payment of dividends. We expect our capital expenditures
for 2003 to be approximately $3 billion. On January 31, 2003, we completed the
repurchase, with cash, of $3.7 billion of notes with interest rates of 6.375%
and 6.5% and maturities of 2004 and 2013. In addition, in connection with the
early retirement in February 2003 of exchangeable notes that are indexed to AT&T
Wireless common stock, we made cash payments of $152 million to the debt
holders, funded in part by $72 million of proceeds from the sale of our
remaining AT&T Wireless shares. These transactions are expected to save over
$200 million of interest expense in 2003.
Contractual Cash Obligations
Prior to the spin-off of AT&T Broadband, AT&T had guaranteed various
obligations of AT&T Broadband, including operating leases for real estate,
surety bonds, and equity hedges, which we continue to provide. The notional
amount of such guarantees totaled $458 million at December 31, 2002, and have
decreased $170 million to $288 million as of March 31, 2003, primarily resulting
from third parties releasing us from guarantees we provided for surety bonds.
Comcast continues to provide indemnifications for the full amount of the
remaining guarantees.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RISK MANAGEMENT
We are exposed to market risk from changes in interest and foreign exchange
rates, as well as changes in equity prices associated with previously affiliated
companies. In addition, we are exposed to market risk from fluctuations in the
prices of securities, some of which we had 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.
At December 31, 2002, we had certain notes, with embedded derivatives,
which were indexed to the market price of equity securities we owned. Changes in
the market prices of these securities resulted in changes in the fair value of
the derivatives. In February 2003, we redeemed these notes.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities - an Interpretation of Accounting Research Bulletin (ARB) No.
51." FIN No. 46 requires the primary beneficiary to consolidate a variable
interest entity (VIE) if it has a variable interest that will absorb a majority
of the entity's expected losses if they occur, receive a majority of the
entity's expected residual returns if they occur, or both. FIN No. 46 applies
immediately to VIEs created after January 31, 2003, and to VIEs in which the
entity obtains an interest after that date. For VIEs acquired before February 1,
2003, the effective date for AT&T is July 1, 2003. Based on the new standard,
one or two entities that AT&T leases buildings from could qualify as VIEs. AT&T
provides guarantees of the residual values for these entities and the maximum
exposure related to these entities at March 31, 2003, is $427 million. The
assets that may by subject to consolidation total $467 million (principally the
properties we lease) and the total liabilities that may be subject to
consolidation total $496 million (principally debt secured by the properties) at
March 31, 2003.
In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the timing of revenue
recognition for arrangements in which goods or services or both are delivered
separately in a bundled sales arrangement. The EITF requires that when the
deliverables included in this type of arrangement meet certain criteria they
should be accounted for separately as separate units of accounting. This may
result in a difference in the timing of revenue recognition but will not result
in a change in the total amount of revenue recognized in a bundled sales
arrangement. The allocation of revenue to the separate deliverables is based on
the relative fair value of each item. If the fair value is not available for the
delivered items then the residual method must be used. This method requires that
the amount allocated to the undelivered items in the arrangement is their full
fair value. This would result in the discount, if any, being allocated to the
delivered items. This consensus is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003, which, for AT&T,
is July 1, 2003. AT&T is currently evaluating the impact of this consensus on
its results of operations, financial position and cash flows.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This standard amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement clarifies when a contract with an initial net investment meets
the characteristic of a derivative and when a derivative contains a financing
component. This statement also amends the definition of an underlying to conform
to the language contained in FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. AT&T is currently assessing the impact of this statement on its results of
operations, financial position and cash flows.
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 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 January 6, 2003 was filed pursuant to Item 5 and Item 7 on
January 6, 2003. Form 8-K dated January 23, 2003 was filed pursuant to Item 5
and Item 7 on January 24, 2003. Form 8-K dated April 23, 2003 was filed pursuant
to Item 7 and Item 9 on April 23, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T Corp.
/s/ N. S. Cyprus
--------------------------------
By: N. S. Cyprus
Vice President and Controller
(Principal Accounting Officer)
Date: May 13, 2003
Chief Executive Officer and Chief Financial Officer Certifications
AT&T Corp.
Certifications Pursuant To Section 302 of
The Sarbanes-Oxley Act of 2002
CERTIFICATION
I, David W. Dorman, 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 officer 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 officer 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 officer 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: May 13, 2003
/s/ David W. Dorman
-------------------------
Chief Executive Officer
CERTIFICATION
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 officer 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 officer 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 officer 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: May 13, 2003
/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 Corp.
Computation of Ratio of Earnings to Fixed Charges
(Unaudited)
For the 3 Months Ended March 31, 2003
(Dollars in millions)
Income from continuing operations before income taxes $ 844
Add distributions of less than 50% owned affiliates 2
Add fixed charges, excluding capitalized interest 373
Total earnings from continuing operations before income
taxes and fixed charges $ 1,219
Fixed Charges:
Total interest expense 332
Capitalized interest 9
Interest portion of rental expense 41
Total fixed charges $ 382
Ratio of earnings to fixed charges 3.2
Exhibit 99.1
CERTIFICATION OF PERIODIC FINANCIAL REPORTS
I, David W. Dorman, Chairman of the Board and 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 March
31, 2003 (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: May 13, 2003
/s/ David W. Dorman
-----------------------
David W. Dorman
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Exhibit 99.2
CERTIFICATION OF PERIODIC FINANCIAL REPORTS
I, Thomas W. Horton, Senior Executive Vice President, 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 March
31, 2003 (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: May 13, 2003
/s/ Thomas W. Horton
-------------------------
Thomas W. Horton
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.