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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 June 30, 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 July 31, 2003, the following shares of stock were outstanding: AT&T common
stock - 788,059,730
PART I - FINANCIAL INFORMATION
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
---------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------
Dollars in millions (except per share amounts)
Revenue $ 8,795 $ 9,580 $ 17,781 $ 19,128
Operating Expenses
Access and other connection 2,708 2,747 5,406 5,535
Costs of services and products (excluding depreciation
of $880, $865, $1,734 and $1,712 included below) 1,958 2,086 3,969 4,100
Selling, general and administrative 1,837 1,942 3,758 3,879
Depreciation and amortization 1,197 1,213 2,383 2,388
Net restructuring and other charges 66 - 70 -
---------------------------------------------------------------
Total operating expenses 7,766 7,988 15,586 15,902
---------------------------------------------------------------
Operating income 1,029 1,592 2,195 3,226
Other income (expense), net 86 (50) 96 (105)
Interest (expense) (296) (336) (628) (732)
---------------------------------------------------------------
Income from continuing operations before income taxes,
minority interest income, and net (losses) related to
equity investments 819 1,206 1,663 2,389
(Provision) for income taxes (308) (513) (605) (992)
Minority interest income - 33 1 53
Net earnings (losses) related to equity investments 25 (123) 6 (401)
---------------------------------------------------------------
Income from continuing operations 536 603 1,065 1,049
Net (loss) from discontinued operations (net of income tax
benefit of $0, $5,581, $0 and $5,806) - (13,433) - (13,998)
---------------------------------------------------------------
Income (loss) before cumulative effect of accounting changes 536 (12,830) 1,065 (12,949)
Cumulative effect of accounting changes [net of income taxes
of $0, $0, $(26) and $530] - - 42 (856)
---------------------------------------------------------------
Net income (loss) $ 536 $ (12,830) $ 1,107 $ (13,805)
---------------------------------------------------------------
Per basic share:
Earnings from continuing operations $ 0.68 $ 0.83 $ 1.36 $ 1.46
(Loss) from discontinued operations - (18.41) - (19.46)
Cumulative effect of accounting changes - - 0.05 (1.19)
---------------------------------------------------------------
Earnings (loss) per basic share $ 0.68 $ (17.58) $ 1.41 $ (19.19)
---------------------------------------------------------------
Per diluted share:
Earnings from continuing operations $ 0.68 $ 0.80 $ 1.36 $ 1.41
(Loss) from discontinued operations - (17.91) - (18.81)
Cumulative effect of accounting changes - - 0.05 (1.15)
---------------------------------------------------------------
Earnings (loss) per diluted share $ 0.68 $ (17.11) $ 1.41 $ (18.55)
---------------------------------------------------------------
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
At At
June 30, December 31,
2003 2002
------------------------------------------------
Dollars in millions
(except per share amounts)
ASSETS
Cash and cash equivalents $ 5,256 $ 8,014
Accounts receivable, less allowances of $709 and $669 4,771 5,286
Deferred income taxes 779 910
Other current assets 1,026 1,693
------------------------------------------------
TOTAL CURRENT ASSETS 11,832 15,903
Property, plant and equipment, net of accumulated depreciation of
$33,017 and $31,021 24,831 25,604
Goodwill 4,727 4,626
Other purchased intangible assets, net of accumulated amortization
of $280 and $244 530 556
Prepaid pension costs 3,723 3,596
Other assets 4,741 4,987
------------------------------------------------
TOTAL ASSETS $ 50,384 $ 55,272
------------------------------------------------
LIABILITIES
Accounts payable $ 3,300 $ 3,819
Payroll and benefit-related liabilities 963 1,519
Debt maturing within one year 3,915 3,762
Other current liabilities 2,895 2,924
------------------------------------------------
TOTAL CURRENT LIABILITIES 11,073 12,024
Long-term debt 13,563 18,812
Long-term benefit-related liabilities 4,185 4,001
Deferred income taxes 5,047 4,739
Other long-term liabilities and deferred credits 3,233 3,384
-----------------------------------------------
TOTAL LIABILITIES 37,101 42,960
SHAREOWNERS' EQUITY
AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares;
issued and outstanding 787,543,059 shares (net of 171,760,068
treasury shares) at June 30, 2003 and 783,037,580 shares
(net of 171,801,716 treasury shares) at December 31, 2002 788 783
Additional paid-in capital 27,980 28,163
Accumulated deficit (15,459) (16,566)
Accumulated other comprehensive (loss) (26) (68)
------------------------------------------------
TOTAL SHAREOWNERS' EQUITY 13,283 12,312
------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 50,384 $ 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 Six Months Ended
June 30,
2003 2002
------------------------------
Dollars in millions
AT&T Common Stock
Balance at beginning of year $ 783 $ 708
Shares issued, net:
Under employee plans 4 4
For funding AT&T Canada obligation - 46
Redemption of TCI Pacific preferred stock - 10
Other 1 1
Balance at end of period 788 769
Additional Paid-In Capital
Balance at beginning of year 28,163 54,798
Shares issued, net:
Under employee plans 71 265
For funding AT&T Canada obligation - 2,485
Redemption of TCI Pacific preferred stock - 2,087
Other 16 21
Dividends declared (295) (278)
Other 25 10
Balance at end of period 27,980 59,388
Accumulated deficit
Balance at beginning of year (16,566) (3,484)
Net income (loss) 1,107 (13,805)
Treasury shares issued at less than cost - 1
Balance at end of period (15,459) (17,288)
Accumulated Other Comprehensive (Loss)
Balance at beginning of year (68) (342)
Other comprehensive income 42 228
Balance at end of period (26) (114)
Total Shareowners' Equity $ 13,283 $ 42,755
Summary of Total Comprehensive Income (Loss):
Income (loss) before cumulative effect of accounting changes $ 1,065 $ (12,949)
Cumulative effect of accounting changes 42 (856)
Net income (loss) 1,107 (13,805)
Other Comprehensive Income (Loss):
Net foreign currency translation adjustment [net of income taxes
of $(80) and $(31)] 128 49
Net revaluation of certain financial instruments:
Unrealized gains (losses) [net of income taxes of $(60) and $425] 97 (688)
Recognition of previously unrealized (gains) losses [net of income
taxes of $110 and $(538)]* (177) 867
Net minimum pension liability adjustment [net of income taxes of $3 and $0] (6) -
Comprehensive Income (Loss) $ 1,149 $ (13,577)
*See note 4 for a summary of the "Recognition of previously unrealized (gains) losses."
AT&T accounts for treasury stock as retired stock. We have 100 million authorized shares of preferred stock at $1 par value.
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
June 30,
------------------------------
2003 2002
------------------------------
Dollars in millions
OPERATING ACTIVITIES
Net income (loss) $ 1,107 $ (13,805)
Deduct:
Loss from discontinued operations - net of income taxes - (13,998)
Cumulative effect of accounting changes - net of income taxes 42 (856)
--------------------------
Income from continuing operations 1,065 1,049
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 (37) (13)
Cost investment impairment charges - 141
Net restructuring and other charges 70 -
Depreciation and amortization 2,383 2,388
Provision for uncollectible receivables 406 485
Deferred income taxes 376 430
Net revaluation of certain financial instruments - 58
Minority interest income (1) (53)
Net pretax losses related to equity investments (33) 650
Decrease in receivables 140 226
Decrease in accounts payable (308) (298)
Net change in other operating assets and liabilities 336 (916)
Other adjustments, net (44) (128)
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 4,353 4,019
--------------------------
INVESTING ACTIVITIES
Capital expenditures and other additions (1,629) (1,964)
Proceeds from sale or disposal of property, plant and equipment 23 251
Investment sales and distributions 101 5
Net (acquisitions) dispositions of businesses, net of cash acquired (158) 16
Increase in restricted cash (30) (413)
Other investing activities, net (27) (17)
--------------------------
NET CASH (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS (1,720) (2,122)
--------------------------
FINANCING ACTIVITIES
Retirement of long-term debt, including redemption premiums (4,039) (509)
(Decrease) in short-term borrowings, net (1,270) (6,029)
Issuance of AT&T common shares 64 2,593
Dividends paid on common stock (294) (267)
Proceeds from long-term debt issuances - 57
Other financing activities, net 148 3
--------------------------
NET CASH (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS (5,391) (4,152)
--------------------------
Net cash (used in) discontinued operations - (2,776)
Net (decrease) in cash and cash equivalents (2,758) (5,031)
Cash and cash equivalents at beginning of year 8,014 10,680
--------------------------
Cash and cash equivalents at end of period $ 5,256 $ 5,649
--------------------------
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, and Form 10-Q for the quarter ended March 31, 2003. 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
AT&T has a Long-Term Incentive Program under which AT&T grants stock
options, performance shares, restricted stock and other awards in AT&T
common stock. We also have an Employee Stock Purchase Plan (ESPP).
Effective May 31, 2003, we suspended employee purchases of company stock
under the ESPP. 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 Principals 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 (loss) and earnings (loss) per share amounts would have
been as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
-------------------------------------------------
Dollars in millions (except per share amounts)
Net income (loss) $ 536 $(12,830) $1,107 $(13,805)
Add:
Stock-based employee compensation included in
reported results from continuing operations, net of taxes 24 14 34 35
Stock-based employee compensation included in
reported results from discontinued operations, net of taxes - 2 - 4
Deduct:
Total stock-based employee compensation expense
determined under the fair value method for all awards
relating to continuing operations, net of taxes (61) (61) (109) (127)
Total stock-based employee compensation expense
determined under the fair value method for all awards
relating to discontinued operations, net of taxes - (17) - (34)
-------------------------------------------------
Pro forma net income (loss) $ 499 $(12,892) $1,032 $(13,927)
-------------------------------------------------
Basic earnings (loss) per share $ 0.68 $ (17.58) $ 1.41 $ (19.19)
Proforma basic earnings (loss) per share $ 0.63 $ (17.66) $ 1.31 $ (19.36)
Diluted earnings (loss) per share $ 0.68 $ (17.11) $ 1.41 $ (18.55)
Proforma diluted earnings (loss) per share $ 0.63 $ (17.19) $ 1.31 $ (18.71)
Pro forma earnings from continuing operations were $499 million and $556
million for the three months ended June 30, 2003 and 2002, respectively,
and were $990 million and $957 million for the six months ended June 30,
2003 and 2002, respectively. Pro forma (loss) from discontinued operations
was $(13,448) million and $(14,028) million for the three and six months
ended June 30, 2002, respectively.
Pro forma earnings (loss) per basic share from continuing operations was
$0.63 and $0.77 for the three months ended June 30, 2003 and 2002,
respectively, and was $1.26 and $1.33 for the six months ended June 30,
2003 and 2002, respectively. Pro forma earnings (loss) per basic share from
discontinued operations was $(18.43) and $(19.50) for the three and six
months ended June 30, 2002, respectively.
Pro forma earnings (loss) per diluted share from continuing operations was
$0.63 and $0.74 for the three months ended June 30, 2003 and 2002,
respectively, and was $1.26 and $1.29 for the six months ended June 30,
2003 and 2002, respectively. Pro forma earnings (loss) per diluted share
from discontinued operations was $(17.93) and $(18.85) for the three and
six months ended June 30, 2002, respectively.
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 net 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 101 - 101
---------------------------------------------
Balance at June 30, 2003 $ 4,657 $ 70 $ 4,727
---------------------------------------------
Gross Carrying Accumulated Net
Amount Amortization Intangible Assets
-----------------------------------------------------
Dollars in millions
INTANGIBLE ASSETS
Amortizable purchased intangible assets
at June 30, 2003:
Customer lists and relationships $ 565 $ 153 $ 412
Other 245 127 118
-----------------------------------------------------
Total intangible assets $ 810 $ 280 $ 530
-----------------------------------------------------
The amortization expense associated with purchased intangible assets for
the three and six months ended June 30, 2003, was $17 million and
$33 million, respectively. Amortization expense for purchased intangible
assets is estimated to be approximately $70 million for the year ending
December 31, 2003, $60 million for the year ending December 31, 2004,
$55 million for each of the years ending December 31, 2005 and 2006, and
$30 million for the year ending 2007.
INCOME TAXES
The current income taxes payable balance included in Other Current
Liabilities on the Consolidated Balance Sheet at June 30, 2003 and December
31, 2002 was $758 million and $362 million, respectively.
SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS) AND THE LINE ITEMS IMPACTED
For the Six Months Ended June 30, 2003 2002
Pretax After-tax Pretax After-tax
Dollars in millions
Other income/expense, net:
Other-than-temporary investment impairments $ - $ - $ 140 $ 86
Sale/exchange of various securities (187) (115) - -
Other financial instrument activity (100) (62) - -
Income from discontinued operations - - 1,265 781
------------------------------------------
Total recognition of previously unrealized (gains) losses $(287) $(177) $1,405 $867
------------------------------------------
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 (or at time of issuance if later), and the incremental shares are
included using the treasury stock method. The proceeds utilized in applying
the treasury stock method consist of the amount, if any, the employee must
pay upon exercise, the amount of compensation cost attributed to future
service not yet recognized, and any tax benefits credited to
paid-in-capital related to the exercise. These proceeds are then assumed to
be 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 For the Six Months
Ended June 30, Ended June 30,
2003(1) 2002(1) 2003(1) 2002(1)
--------------------------------------------
Shares in millions
Weighted-average common shares 787 730 786 720
Effect of dilutive securities:
Stock options - - - -
Preferred stock of subsidiary - 2 - 6
Convertible quarterly income preferred securities - 18 - 18
----------------------------------------
Weighted-average common shares and potential common shares 787 750 786 744
----------------------------------------
(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 second quarter of 2003, net restructuring and other charges of $66
million reflected $57 million of separation costs and $9 million of benefit
plan curtailment costs associated with the Company's management realignment
efforts (impacting approximately 90 senior managers). Such management
realignment efforts will continue throughout 2003 and will result in
additional charges that are expected to be similar to or slightly higher
than the charges recorded in the current quarter. Approximately 36% of
affected employees have exited the business as of June 30, 2003, with the
remainder expected to be off-roll by the end of 2003.
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 57 - - 57
Deductions (199) (40) (1) (240)
---------------------------------------------------
Balance at June 30, 2003 $ 237 $ 243 $ 2 $ 482
---------------------------------------------------
Deductions primarily reflect cash payments, which included cash termination
benefits of $191 million, funded primarily through cash from operations.
Relative to the business restructuring reserves recorded during the third
and fourth quarters of 2002, approximately 64% of the employees affected by
these exit plans have left their positions as of June 30, 2003, with the
remaining reductions to occur throughout 2003.
Net restructuring and other charges of $70 million for the six months ended
June 30, 2003, primarily consisted of $66 million associated with the
Company's management realignment.
7. DISCONTINUED OPERATIONS
AT&T BROADBAND
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 have been restated to
reflect AT&T Broadband as a discontinued operation in all periods. As a
discontinued operation, the revenue, expenses and cash flows of AT&T
Broadband have been excluded from the respective captions in the
Consolidated Statements of Operations 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 $2,526 million and $4,965 million
for the three and six months ended June 30, 2002, respectively. Net (loss)
from discontinued operations before income taxes was $(18,882) million
[$(13,345) million after-tax] for the three months ended June 30, 2002, and
$(19,672) million [$(13,910) million after-tax] for the six months ended
June 30, 2002. For the three and six months ended June 30, 2002, interest
expense of $103 million and $173 million, respectively, was allocated to
discontinued operations based on the balance of intercompany debt between
AT&T Broadband and AT&T.
LUCENT TECHNOLOGIES INC.
Net (loss) from discontinued operations for the three and six months ended
June 30, 2002, included an estimated loss on a litigation settlement
associated with the business of Lucent Technologies Inc. (Lucent), which
was spun-off from AT&T in 1996. Sparks, et al. v. AT&T and Lucent. et al.,
was a class action lawsuit filed in 1996 in Illinois state court. On August
9, 2002, a settlement proposal was submitted to and accepted by the court.
In accordance with the separation and distribution agreement between AT&T
and Lucent, AT&T's estimated proportionate share of the settlement and
legal costs recorded in the second quarter of 2002 totaled $132 million
pretax ($88 million after-tax). (In the fourth quarter of 2002, this
initial estimate was reduced to $45 million [$33 million after-tax]).
Depending upon the number of claims submitted and accepted, the actual cost
of the settlement to AT&T may be less than stated amounts, but it is not
possible to estimate the amount at this time. While similar consumer class
actions are pending in various state courts, the Illinois state court has
held that the class it certified covers claims in the other state court
class actions.
8. INVESTMENTS
AT&T CANADA
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 a 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 second quarter of 2002, AT&T recorded charges of $0.1 billion
after-tax ($0.2 billion pretax) reflecting the accretion of the floor
price. Included in the first half of 2002, were charges of $0.3 billion
after-tax ($0.5 billion pretax) reflecting further deterioration in the
underlying value of AT&T Canada as well as accretion of the floor price.
The charges are included in "Net earnings (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. On June 11, 2002, AT&T completed a public
equity offering of 46 million shares of AT&T common stock for net proceeds
of $2.5 billion, to satisfy a portion of this obligation. Tricap and CIBC
Partners made a nominal payment to AT&T upon completion of the purchase in
October, 2002. 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 half of 2003, AT&T disposed of
all of its AT&T Canada shares.
At June 30, 2002, AT&T had a 31% ownership interest in AT&T Canada.
Summarized financial information for the three and six months ended June
30, 2002, for this investment accounted for under the equity method was as
follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2002
---------------------------------------------
(Dollars in millions)
Revenue $ 246 $ 487
Operating (loss) (841) (874)
(Loss) from continuing operations before extraordinary
items and cumulative effect of accounting changes (953) (1,052)
Net (loss) (1,932) (2,031)
CONCERT
On April 1, 2002, Concert, our 50% owned joint venture with British
Telecommunications plc (BT), was 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. In the second quarter of 2003, a $28 million
after-tax benefit ($45 million pretax) was recorded within "Net earnings
(losses) related to equity investments" due to the favorable settlement of
certain items in connection with the Concert unwind.
AT&T had various related party transactions with Concert until the joint
venture was unwound on April 1, 2002. Included in "Revenue" was $268
million for services provided to Concert for the six months ended June 30,
2002. Included in "Access and other connection" expense 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 six
months ended June 30, 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). Also
in February, AT&T sold its remaining investment in AT&T Wireless
(approximately 12.2 million shares) for $72 million, 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, "Accounting for Certain
Investments in Debt and Equity Securities," 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. FINANCIAL INSTRUMENTS
In the normal course of business, we use various financial instruments,
including derivative financial instruments, for purposes other than
trading. These instruments include letters of credit, guarantees of debt
and certain obligations of former affiliates, interest rate swap
agreements, foreign currency exchange contracts, option contracts, equity
contracts and warrants.
We enter into interest rate swaps to manage our exposure to changes in
interest rates. We enter into swap agreements to manage the fixed/floating
mix of our debt portfolio in order to reduce aggregate risk to interest
rate movements. These agreements involve the exchange of floating-rate for
fixed-rate payments or the exchange of fixed-rate for floating-rate
payments without the exchange of the underlying notional amount.
Floating-rate payments and receipts are primarily tied to the LIBOR. In the
second quarter of 2003, we entered into $1 billion of notional
fixed-to-floating interest rate swaps, which we designated as fair value
hedges in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The weighted-average receive rate and
pay rate for these swaps at June 30, 2003 was 4.23% and 2.57%,
respectively.
In addition, we have combined interest rate, foreign currency swap
agreements for foreign-currency-denominated debt, which hedge our risk to
both interest rate and currency movements. The fair value of such
arrangements has increased $530 million since December 31, 2002 to $1,190
million at June 30, 2003, primarily due to the strength of the EURO
currency compared with U.S. dollars.
In connection with the combined interest rate swap agreements, as of June
30, 2003, we had received $146 million of cash collateral (included in
"Cash" in the Consolidated Balance Sheet) and $29 million of security
collateral (included in "Other current assets" in the Consolidated Balance
Sheet).
11. EQUITY TRANSACTIONS
Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T was
required to redeem the outstanding TCI Pacific Communications, Inc. Class A
Senior Cumulative Exchangeable Preferred Stock for AT&T common stock. Each
share of TCI Pacific preferred stock was exchangeable at the option of the
holder for 1.673 shares of AT&T common stock. As of June 30, 2002, all
outstanding shares (approximately 6.2 million) of TCI Pacific preferred
stock were either exchanged or redeemed for approximately 10.4 million
shares of AT&T common stock. No gain or loss was recorded on the
exchange/redemption of the TCI Pacific preferred stock.
During 2002, AT&T issued 2.9 million shares of AT&T common stock to certain
current and former senior managers in settlement of their deferred
compensation accounts. Approximately 2.8 million shares were issued in the
second quarter of 2002 and 0.1 million shares in the third quarter of 2002.
Pursuant to AT&T's deferred compensation plan, senior managers may defer
short- and long-term incentive compensation awards. The impact of the
issuance of these shares resulted in an increase to total shareowners'
equity of $0.2 billion.
In June 2002, AT&T completed a public equity offering of 46 million shares
of AT&T common stock for net proceeds of $2.5 billion. AT&T utilized the
proceeds from the offering to satisfy a portion of its obligation to AT&T
Canada common shareholders (see note 8).
12. COMMITMENTS AND CONTINGENCIES
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
(Sparks, et al. v. AT&T Lucent Technologies, see note 7) , 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.
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.
Consequently, we are unable to ascertain the ultimate aggregate amount of
monetary liability or financial impact with respect to these matters at
June 30, 2003. However, we believe that after final disposition, any
monetary liability or financial impact to us beyond that provided for at
June 30, 2003, would not be material to our annual consolidated financial
statements.
13. 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 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 Business Services also provides outsourcing solutions
and other professional 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.
Collectively 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 For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------------------------------------------------------
Dollars in millions
AT&T Business Services external revenue $ 6,406 $ 6,650 $ 12,843 $ 13,095
AT&T Business Services internal revenue - 92 - 175
-------------------------------------------------------
Total AT&T Business Services revenue 6,406 6,742 12,843 13,270
AT&T Consumer Services external revenue 2,376 2,911 4,912 5,997
-------------------------------------------------------
Total reportable segments 8,782 9,653 17,755 19,267
Corporate and Other 13 (73) 26 (139)
-------------------------------------------------------
Total revenue $ 8,795 $ 9,580 $ 17,781 $ 19,128
-------------------------------------------------------
RECONCILIATION OF OPERATING INCOME TO INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST INCOME,
AND NET EARNINGS (LOSSES) RELATED TO EQUITY INVESTMENTS
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------------------------------------------------
Dollars in millions
AT&T Business Services operating income $ 597 $ 856 $1,197 $1,723
AT&T Consumer Services operating income 489 787 1,121 1,608
------------------------------------------------
Total reportable segments operating income 1,086 1,643 2,318 3,331
Corporate and Other operating (loss) (57) (51) (123) (105)
------------------------------------------------
Operating income 1,029 1,592 2,195 3,226
Other income (expense), net 86 (50) 96 (105)
Interest (expense) (296) (336) (628) (732)
------------------------------------------------
Income from continuing operations before
income taxes, minority interest income, and
net earnings(losses) related to equity $ 819 $1,206 $1,663 $2,389
investments ------------------------------------------------
ASSETS At At
June 30, December 31,
2003 2002
------------------------------------------
Dollars in millions
AT&T Business Services $ 35,432 $ 36,389
AT&T Consumer Services 1,152 1,390
------------------------------------------
Total reportable segments 36,584 37,779
Corporate and Other assets* 13,800 17,493
------------------------------------------
Total assets $ 50,384 $ 55,272
------------------------------------------
* Includes cash of $5.0 billion at June 30, 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 adjustments
to our operating segments in the future.
14. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities--an Interpretation of Accounting Research Bulletin (ARB) No. 51."
FIN 46, adopted by AT&T in July 2003, 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 46 applies immediately to VIEs created after January 31, 2003,
and to VIEs in which the entity obtains an interest after that date. Based
on the new standard, two entities that AT&T leases buildings from qualify
as VIEs and therefore became subject to consolidation as of July 1, 2003.
AT&T has no ownership interest in either entity, but provides guarantees of
the residual values for the leased facilities with a maximum exposure of
$427 million. FIN 46 will add $431 million of assets (principally the
properties we lease) and $476 million of liabilities (principally debt
secured by the properties) to our consolidated balance sheet. This will
result in a charge of approximately $28 million, net of income taxes, as
the cumulative effect of an accounting change in the third quarter of 2003.
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 is effective prospectively for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. SFAS No. 149 will not have an impact upon
initial adoption and is not expected to have a material effect on our
results of operations, financial position and cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires issuers to classify financial
instruments within its scope as liabilities (or an asset in some cases).
Prior to SFAS No. 150, many of these instruments may have been classified
as equity. This Statement is effective for financial instruments entered
into or modified after May 31, 2003. For instruments issued prior to May
31, 2003, this standard is to be implemented by reporting the cumulative
effect of a change in accounting principle as of July 1, 2003. SFAS No. 150
will not have an impact upon initial adoption and is not expected to
materially impact AT&T's ongoing results of operations, financial position
or cash flows.
In November 2002, the Emerging Issues Task Force (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. EITF 00-21 will not have an impact upon initial
adoption and is not expected to have a material impact to AT&T's ongoing
results of operations, financial position or cash flows.
In May 2003, the EITF reached a consensus on EITF 01-8 "Determining Whether
an Arrangement Contains a Lease," relating to new requirements on
identifying leases contained in contracts or other arrangements that sell
or purchase products or services. The evaluation of whether an arrangement
contains a lease within the scope of SFAS No. 13 "Accounting for Leases,"
should be based on the evaluation of whether an arrangement conveys the
right to use property, plant and equipment. This may result in a difference
in the timing of revenue recognition. The consensus requires sellers to
report the revenue from the leasing component of the arrangement as leasing
or rental income rather than revenue from product sales or services.
Purchaser's arrangements which previously would have been considered
service or supply contracts, but are now considered leases, could affect
the timing of their expense recognition and the classification of assets
and liabilities on their balance sheet as well as require footnote
disclosure of lease terms and future minimum lease commitments. This
consensus is effective prospectively for contracts entered into or
significantly modified after July 1, 2003. EITF 01-8 will not have an
impact upon initial adoption and based on arrangements in place today, will
not have a material effect on our results of operations, financial position
and cash flows.
15. SUBSEQUENT EVENTS
On August 6, 2003, AT&T received initial commitments from JP Morgan and
Citigroup for a portion of a new bank facility of up to $2.0 billion. The
banks have also agreed to act as lead arrangers to syndicate the balance of
the 364-day credit facility. The proposed new bank facility will replace
AT&T's existing undrawn $3.0 billion facility, which matures in October
2003.
On August 8, 2003, AT&T employees represented by the CWA (Communications
Workers of America) and the IBEW (International Brotherhood of Electrical
Workers) ratified the extension of their current contracts through December
10, 2005. Those contracts include the AT&T/CWA Operations agreement,
AT&T/CWA Local Network Services agreement in Mesa, Arizona, Independence,
Ohio and Maryland Heights, Missouri, and the AT&T/IBEW Operations
Agreement.
AT&T CORP. AND SUBSIDIARIES
MANAGEMENT'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:
|X| 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,
|X| the impact of oversupply of capacity resulting from excessive deployment of
network capacity,
|X| 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,
|X| 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,
|X| the ability to establish a significant market presence in new geographic
and service markets,
|X| 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,
|X| the risks associated with technological requirements, wireless, Internet or
other technology substitution and changes and other technological
developments,
|X| the results of litigation filed or to be filed against the Company, and
|X| 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 and six months ended June 30, 2003, and
2002, and financial condition as of June 30, 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, the results
for the second quarter of 2002 and year-to-date 2003 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."
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 to "Other current assets" and "Other current
liabilities" at December 31, 2002. The operating losses of AT&T Latin America
for the first half of 2003 are reflected in "Net restructuring and other
charges." On April 21, 2003, AT&T Latin America filed for Chapter 11 bankruptcy
and on June 30, 2003, the AT&T appointed members of the AT&T Latin America Board
of Directors resigned. They were replaced with three new independent directors.
This action resulted in the deconsolidation of AT&T Latin America as of June 30,
2003.
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, expenses and cash flows of AT&T Broadband have been
excluded from the respective captions in the Consolidated Statements of
Operations 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 For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
--------------------------------------------------------
Dollars in millions
AT&T Business Services $ 6,406 $ 6,742 $ 12,843 $ 13,270
AT&T Consumer Services 2,376 2,911 4,912 5,997
Corporate and Other 13 (73) 26 (139)
---------------------------------------------------------
Total revenue $ 8,795 $ 9,580 $ 17,781 $ 19,128
---------------------------------------------------------
Total revenue decreased $0.8 billion, or 8.2%, in the second quarter of 2003
compared with the second quarter of 2002, and decreased $1.3 billion, or 7.0%,
in the six months ended June 30, 2003, compared with the six months ended June
30, 2002. The declines were driven by the continued declines in stand-alone long
distance voice revenue, totaling approximately $1.1 billion for the second
quarter, and $1.9 billion for the six months ended June 30, 2003, compared with
the respective prior year periods. The declines in stand-alone long distance
revenue reflect competition, the impact of substitution by consumers, as well as
pricing pressures and a decline in business retail, partially offset by strength
in business wholesale. Total long distance volumes (including long distance
volumes sold as part of a bundled product) increased as growth in lower-priced
business wholesale and consumer prepaid volumes more than offset the declines in
business retail and traditional consumer long distance volumes.
Partially offsetting the decreases in stand-alone long distance voice revenue
were increases in bundled services revenue (local and long distance) at AT&T
Consumer Services of approximately $0.2 billion for the second quarter, and $0.4
billion for the six months ended June 30, 2003, compared with the respective
prior year periods. In addition, AT&T Business Services experienced increases in
local services revenue of $0.1 billion for the quarter, and $0.2 billion for the
six months ended June 30, 2003, compared with the respective prior year periods.
Revenue by segment is discussed in more detail in the segment results section.
Operating Expenses For the Three Months For the Six Months
Ended June 30, Ended June 30,
-----------------------------------------------------
2003 2002 2003 2002
-----------------------------------------------------
Dollars in millions
Access and other connection $ 2,708 $ 2,747 $ 5,406 $ 5,535
Costs of services and products 1,958 2,086 3,969 4,100
Selling, general and administrative 1,837 1,942 3,758 3,879
Depreciation and amortization 1,197 1,213 2,383 2,388
Net restructuring and other charges 66 - 70 -
-----------------------------------------------------
Total operating expenses $ 7,766 $ 7,988 $15,586 $15,902
-----------------------------------------------------
Operating income $ 1,029 $ 1,592 $ 2,195 $ 3,226
Operating margin 11.7% 16.6% 12.3% 16.9%
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 1.4%, or $39 million, in the
second quarter of 2003 and declined 2.3%, or $129 million, for the first half of
2003 compared with the same periods of 2002, primarily driven by reductions in
domestic access charges of $0.2 billion for the second quarter and $0.3 billion
for the first half of 2003. The declines in domestic access charges were
primarily due to lower Universal Service Fund contributions and per-line charges
of $0.1 billion for the quarter and $0.2 billion for the year-to-date period
primarily resulting from the decline in long distance voice revenue, as well as
more efficient network usage and product mix aggregating $0.1 billion for the
second quarter and $0.2 billion for the year-to-date period, partially offset by
higher costs of $0.1 billion for the quarter and year-to-date period as a result
of overall long distance volume growth. Also contributing to the decline in
access expense for the year-to-date period 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. These declines were
partially offset by an increase in local connectivity costs of $0.1 billion for
the quarter and $0.2 billion for the first half of 2003, primarily as a result
of new state entries and subscriber increases.
Since most of the Universal Service Fund contributions, 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 $128 million, or 6.2%, in the second
quarter of 2003 and $131 million, or 3.2%, in the first six months of 2003,
compared with comparable prior year periods. The declines were primarily driven
by the overall impact of lower revenue and the related costs. The decrease for
the six months ended June 30, 2003 was 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 $105 million, or
5.4%, in the second quarter of 2003 and $121 million, or 3.1%, in the first six
months of 2003 compared with the comparable prior year periods. The decreases
were driven by approximately $0.1 billion for the quarter and $0.3 billion for
the year-to-date period of lower expenses due to lower long distance and brand
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. In addition, expenses decreased approximately $30 million
for the quarter and $50 million for the year-to-date period due to transaction
costs associated with AT&T's restructuring recorded during 2002. Such decreases
were partially offset by approximately $0.1 billion for the quarter and $0.2
billion for the year-to-date period 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 $25 million
for the quarter and $70 million for the year-to-date period 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 decreased $16 million, or 1.4%, in the
second quarter of 2003, compared with the second quarter of 2002, and decreased
$5 million, or 0.2%, in the first six months of 2003 compared with the first six
months of 2002. The decreases were primarily due to the adoption of Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations," coupled with lower depreciation associated with our AT&T Latin
America subsidiary which was classified as an asset held for sale in December
2002. These declines were largely offset by an increase in the asset base. Total
capital expenditures were $0.8 billion and $1.0 billion for the three months
ended June 30, 2003 and 2002, respectively, and were $1.5 billion and $1.6
billion for the six months ended June 30, 2003 and 2002, respectively. We
continue to focus the majority of our capital spending on our growth businesses
of Internet protocol & enhanced services (IP&E services) and data services, both
of which include managed services, as well as local voice services.
In the second quarter of 2003, net restructuring and other charges of $66
million reflected $57 million of separation costs and $9 million of benefit plan
curtailment costs associated with the company's management realignment efforts
(impacting approximately 90 senior managers). Such management realignment
efforts will continue throughout 2003 and will result in additional charges that
are expected to be similar to or slightly higher than the charges recorded in
the current quarter. Approximately 36% of affected employees exited the business
as of June 30, 2003, with the remainder expected to be off roll by the end of
2003. The exit plan is not expected to yield cash savings (net of severance
benefit payouts) or a benefit to operating income (net of the restructuring
charge recorded) in 2003, however, we expect to realize approximately $50
million of cash savings and benefit to operating income in subsequent years,
when the exit plan is completed.
Net restructuring and other charges of $70 million for the six months ended June
30, 2003 primarily consisted of $66 million associated with the company's
management realignment.
AT&T's operating income in the second quarter of 2003 decreased $0.6 billion, or
35.3%, compared with the second quarter of 2002. In the first half of 2003,
AT&T's operating income decreased $1.0 billion, or 31.9%, compared with the
first half of 2002. AT&T's operating margin was 11.7% in the second quarter of
2003 compared with 16.6% in the second quarter of 2002 and 12.3% in the first
half of 2003, compared with 16.9% in the first half of 2002. The margin declines
in 2003 compared with the prior quarter and year-to-date periods were primarily
due to the decline in revenue coupled with a lower rate of decline in operating
expenses as compared with the revenue rate of decline. The operating margin
decline reflects pricing pressures, product substitution and a shift from
higher-margin retail long distance services to lower-margin wholesale long
distance service and other lower-margin services.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------------------------
2003 2002 2003 2002
----------------------------------------------
Dollars in millions
Other income (expense), net $ 86 $ (50) $ 96 $ (105)
Other income (expense), net, in the second quarter of 2003 was income of $86
million compared with expense of $50 million in the second quarter of 2002. The
favorable variance of $136 million was primarily due to greater
investment-related income, lower investment impairment charges, primarily driven
by impairment charges for Time Warner Telecom recorded in the second quarter of
2002, and lower losses related to mark-to-market adjustments on financial
instruments.
Other income (expense), net, in the first half of 2003 was income of $96 million
compared with expense of $105 million in the first half of 2002. The favorable
variance of $201 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 half of 2002. Also contributing to the favorable
variance were lower losses related to mark-to-market adjustments on financial
instruments and increased gains on the sales of businesses and investments,
primarily AT&T Wireless, totaling $0.1 billion. Partially offsetting these
improvements was a $0.1 billion reserve recorded in 2003 related to certain
leases of aircraft which are accounted for as leveraged leases. Also included in
other income (expense), net, in the first half 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 half 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 For the Six Months
Ended June 30, Ended June 30,
-----------------------------------------------
2003 2002 2003 2002
-----------------------------------------------
Dollars in millions
Interest (expense) $ (296) $ (336) $ (628) $ (732)
Interest (expense) decreased 12.1%, or $40 million, in the second quarter of
2003 compared with the second quarter of 2002, and decreased 14.2%, or $104
million, in the first half of 2003 compared with the first half of 2002. The
decrease was primarily due to a lower average debt balance in 2003 compared with
2002, reflecting our debt reduction efforts, slightly offset by interest rate
step-ups within our existing debt portfolio.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-----------------------------------------------
2003 2002 2003 2002
-----------------------------------------------
Dollars in millions
(Provision) for income taxes $ (308) $ (513) $ (605) $ (992)
Effective tax rate 37.7% 42.6% 36.4% 41.5%
The (provision) for income taxes decreased $205 million in the second quarter of
2003 compared with the second 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 second quarter of 2003. The effective tax rate in the second quarter of
2003 was 37.7%, compared with 42.6% in the prior year quarter. The effective tax
rate in 2002 was negatively impacted by the consolidation of AT&T Latin America
losses, for which the Company was unable to record tax benefits.
The (provision) for income taxes decreased $387 million in the first half
of 2003 compared with the same period 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 half of 2003. The effective tax rate in the first half of 2003 was
36.4%, compared with 41.5% for the same period of 2002. The effective tax rate
in 2003 was positively impacted by the recognition of tax benefits in connection
with the exchange and sale of AT&T's remaining interest in AT&T Wireless common
stock. The effective tax rate in 2002 was negatively impacted by the
consolidation of higher AT&T Latin America losses, for which the Company was
unable to record tax benefits.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------
Dollars in millions
Minority interest income $ - $ 33 $ 1 $ 53
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 $33 million in the second quarter of 2003 compared with the
second quarter of 2002, and decreased $52 million in the first half of 2003
compared with the first half of 2002. The decreases were primarily due to our no
longer recording 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 For the Six Months
Ended June 30, Ended June 30,
---------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------
Dollars in millions
Net earnings (losses)
related to equity
investments $ 25 $ (123) $ 6 $ (401)
Net earnings (losses) related to equity investments, which are recorded net of
income taxes, were earnings of $25 million in the second quarter of 2003
compared with losses of $123 million in the second quarter of 2002. The
favorable variance was driven primarily by a $105 million after-tax charge ($169
million pretax) recorded in the second quarter of 2002 due to the accretion of
the floor price of AT&T's obligations to purchase the shares of AT&T Canada not
owned by AT&T. Also contributing to the variance was a $28 million after-tax
favorable settlement in 2003 ($45 million pretax) of certain items in connection
with the unwind of the Concert joint venture.
For the six months ended June 30, 2003, net earnings (losses) related to equity
investments were earnings of $6 million compared with losses of $401 million for
the six months ended June 30, 2002. The favorable variance was driven primarily
by after-tax charges of $313 million ($507 million pretax) recorded in the first
half 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 charges 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. The variance
was also positively impacted by equity losses from the Concert joint venture
recorded in 2002 (prior to the unwind on April 1, 2002), combined with a
favorable settlement in the second quarter of 2003 related to the unwind of the
Concert joint venture, totaling $84 million after-tax ($136 million pretax).
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------------------------
2003 2002 2003 2002
------------------------------------------------
Dollars in millions
Net (loss) from discontinued
operations, net of income
taxes $ - $ (13,433) $ - $ (13,998)
Net (loss) from discontinued operations, net of income taxes, primarily
represents the operating results of AT&T Broadband, which AT&T disposed of on
November 18, 2002. Accordingly, the revenue and expenses of AT&T Broadband have
been excluded from the respective captions in the Consolidated Statements of
Operations.
The operating results for AT&T Broadband for the three months ended June 30,
2002, was a loss of $13,345 million after-tax ($18,882 million pretax). For the
six months ended June 30, 2002, AT&T Broadband's operating loss was $13,910
million after-tax ($19,672 million pretax).
Also included in the three and six months ended June 30, 2002 results was an
estimated loss on a litigation settlement associated with the business of Lucent
Technologies Inc. (Lucent), which was spun-off from AT&T in 1996. Sparks, et al.
v. AT&T and Lucent Technologies Inc. et al., was a class action lawsuit filed in
1996 in Illinois state court. On August 9, 2002, a settlement proposal was
submitted to and accepted by the court. In accordance with the separation and
distribution agreement between AT&T and Lucent, AT&T's estimated proportionate
share of the settlement and legal costs recorded in the second quarter of 2002
totaled $88 million after-tax ($132 million pretax). (In the fourth quarter of
2002, this initial estimate was reduced to $33 million after-tax [$45 million
pretax]). Depending upon the number of claims submitted and accepted, the actual
cost of the settlement to AT&T may be less than stated amounts, but it is not
possible to estimate the amount at this time. While similar consumer class
actions are pending in various state courts, the Illinois state court has held
that the class it certified covers claims in the other state court class
actions.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------------------------------
2003 2002 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 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, the cumulative effect impact primarily reflects the
reversal of such amounts accrued in accumulated depreciation.
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.
Earnings Per Share
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------------------
2003 2002 2003 2002
---------------------------------------------
Earnings from continuing
operations per basic share $ 0.68 $ 0.83 $ 1.36 $ 1.46
Total earnings (loss) per basic
share 0.68 (17.58) 1.41 (19.19)
Earnings from continuing
operations per diluted share $ 0.68 $ 0.80 $ 1.36 $ 1.41
Total earnings (loss) per diluted
share 0.68 (17.11) 1.41 (18.55)
Earnings per diluted share (EPS) from continuing operations declined $0.12 to
$0.68 in the second quarter of 2003 compared with $0.80 per diluted share in the
second quarter of 2002. For the six months ended June 30, 2003, EPS from
continuing operations declined $0.05 to $1.36 compared with $1.41 for the six
months ended June 30, 2002. The decline in both periods was primarily driven by
lower operating income. Also contributing to the decline in both periods was
higher average shares primarily resulting from AT&T common stock issued in
conjunction with various equity transactions that took place during 2002 (see
note 11). The decline in both periods was partially offset by favorable
variances in net earnings related to equity investments, other income (expense)
and interest expense.
In the second quarter of 2002, the total diluted loss per share of $17.11
included income from continuing operations as discussed above of $0.80 and a
loss from discontinued operations of $17.91. Total EPS of $1.41 for the six
months ended June 30, 2003, included earnings from continuing operations as
discussed above of $1.36 and income related to the cumulative effect of an
accounting change of $0.05. For the six months ended June 30, 2002, the total
diluted loss per share of $18.55 included income from continuing operations as
discussed above of $1.41, a loss from discontinued operations of $18.81, and a
loss related to the cumulative effect of an accounting change of $1.15.
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.
Our existing segments reflect certain managerial changes that were implemented
during 2003. The changes primarily include a redistribution of property, plant
and equipment 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 For the Six Months
Ended June 30, Ended June 30,
--------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------
Dollars in millions
Services revenue* $ 6,336 $ 6,650 $ 12,703 $ 13,080
Equipment and product sales 70 92 140 190
--------------------------------------------------
Total revenue $ 6,406 $ 6,742 $ 12,843 $ 13,270
--------------------------------------------------
Operating income $ 597 $ 856 $ 1,197 $ 1,723
Capital additions 763 930 1,401 1,506
At At
June 30, December 31,
2003 2002
--------- ------------
Total assets $ 35,432 $ 36,389
*For the three and six months ended June 30, 2002, services revenue included $92
million and $175 million, respectively, of sales to AT&T Broadband, which were
recorded as internal revenue through the November 18, 2002, date of
disposition. Currently, sales to AT&T Broadband, now Comcast Corporation, are
recorded as external revenue.
REVENUE
AT&T Business Services revenue decreased $336 million, or 5.0%, in the second
quarter of 2003 and $427 million, or 3.2%, in the first half of 2003, compared
with the same prior year periods. The decreases were primarily driven by
declining long distance voice services, lower outsourcing contract revenue and
related equipment and product sales and decreased data services, partially
offset by growth in local voice services and IP&E services. The year to date
growth rate was favorably impacted by the reintegration of Concert businesses on
April 1, 2002. Additionally, both the quarter and year to date period growth
rates were negatively impacted by AT&T Latin America being accounted for as an
asset held for sale in 2003 (versus consolidated in 2002).
Long distance voice revenue for the second quarter of 2003 declined $351
million, or 10.9 %, to $2.9 billion and $438 million, or 7.0%, to $5.8 billion
in the first half of 2003, compared with the same prior year periods. The
declines were driven by a decrease in the average price per minute in both the
retail and wholesale businesses compounded by a negative mix shift where volume
declines in the retail business, are more than offset by strength in lower
priced wholesale volumes. These factors are expected to continue to negatively
impact revenue throughout 2003. Long distance volumes grew approximately 12% in
both the second quarter and year to date periods of 2003 compared with 2002.
Data services revenue declined 4.1%, or $84 million, to $2.0 billion, compared
with the second quarter of 2002, and declined 2.5%, or $102 million, to $4.0
billion, for the six months ended June 30, 2003, compared with the six months
ended June 30, 2002. The declines were primarily due to the continued decline in
private line services (a service in which the connection is dedicated to the
customer) driven by pricing and volume weakness. Excluding equipment and product
sales, data services revenue declined 3.7% in the second quarter of 2003
compared with the second quarter of 2002, and declined 2.6% in the six months
ended June 30, 2003, compared with the six months ended June 30, 2002.
IP&E services revenue increased $53 million, or 13.1%, to $459 million in the
second quarter of 2003 compared with the second quarter of 2002 driven by
increases in managed internet access, hosting and related equipment and product
sales. For the six months ended June 30, 2003, IP&E services revenue increased
$90 million, or 11.1% to $904 million, compared with the six months ended June
30, 2002, driven primarily by increases in managed internet access and hosting.
Excluding equipment and product sales, IP&E services revenue increased 9.9% in
the second quarter of 2003 compared with the second quarter of 2002, and
increased 10.7% in the six months ended June 30, 2003, compared with the six
months ended June 30, 2002.
Local voice services revenue grew $107 million, or 38.7%, to $384 million in the
second quarter of 2003, and grew $174 million, or 31.9%, to $719 million in the
six months ended June 30, 2003, compared with the same prior year periods. This
growth reflects our continued focus on increasing the utilization of our
existing footprint. There were approximately 4.2 million access lines in service
at June 30, 2003, an increase of approximately 135 thousand since the end of the
first quarter of 2003, after taking into account approximately 300 thousand
broadband access lines not previously included in AT&T's total access lines.
AT&T had approximately 3.3 million access lines in service at June 30, 2002.
OPERATING INCOME
Operating income declined $0.3 billion, or 30.3%, in the second quarter of 2003
compared with the second quarter of 2002, and declined $0.5 billion, or 30.5%,
in the six months ended June 30, 2003, compared with the six months ended June
30, 2002. The declines were primarily due to the decrease in the long distance
voice business resulting primarily from the impact of pricing pressures, volume
declines due to weak demand in the retail business, 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 $763 million in the second quarter of 2003, and were $1.4
billion for the six months ended June 30, 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 $957 million, or 2.6%, at June 30, 2003, compared with
December 31, 2002, primarily driven by lower net property, plant and equipment,
a decrease in accounts receivable resulting from improved cash collections and
lower revenue and a decrease in other current assets as a result of the
deconsolidation of AT&T Latin America as of June 30, 2003. These declines were
partially offset by favorable foreign currency adjustments and higher
internal-use software.
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. Collectively, these services
represent stand-alone long distance and are not offered in conjunction with any
other service. In addition, AT&T Consumer Services provides all distance
services, which bundle long distance, local and local toll.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------
Dollars in millions
Revenue $ 2,376 $ 2,911 $ 4,912 $ 5,997
Operating income 489 787 1,121 1,608
Capital additions 19 33 41 61
At At
June 30, December 31,
2003 2002
------------------------
Total assets $ 1,152 $ 1,390
REVENUE
AT&T Consumer Services revenue declined $0.5 billion, or 18.4%, in the second
quarter of 2003 and declined $1.1 billion, or 18.1%, in the first half of 2003,
compared with the same prior year periods. The decline in both periods was
primarily due to a decline in stand-alone long distance voice services, which
declined $0.7 billion to $1.8 billion in the second quarter of 2003 and declined
$1.5 billion to $3.9 billion in the first half of 2003, largely due to the
impact of ongoing competition, which has led to a loss of market share, and
substitution. In addition, these services have been negatively impacted by the
continued migration of customers to lower priced optional calling plans and
other products offered by AT&T such as bundled services. Partially offsetting
these declines was an increase in bundled revenue of $0.2 billion to $0.5
billion for the second quarter of 2003, and an increase of $0.4 billion to $0.9
billion for the first half of 2003, reflecting an increase in subscribers
primarily due to new markets entered into since June 30, 2002, including
California, New Jersey, Indiana, Virginia, Maryland and Massachusetts as well as
penetration in existing markets. The increase in bundled revenue includes
amounts previously incorporated in stand-alone long distance voice revenue for
existing customers that migrated to bundled offers. Total long distance calling
volumes declined approximately 17% in the second quarter of 2003 and declined
approximately 14% for the first half of 2003, compared with the same periods of
2002, as a result of competition and wireless and Internet substitution,
partially offset by an increase in prepaid card usage. We expect product
substitution, competition (including the continued entry of the Regional Bell
Operating Companies (RBOC's) into the long distance market) and customer
migration to lower-priced calling plans and products to continue to negatively
impact AT&T Consumer Services revenue throughout 2003.
OPERATING INCOME
Operating income declined $0.3 billion, or 37.9%, in the second quarter of 2003
and declined $0.5 billion, or 30.3%, in the six months ended June 30, 2003,
compared with the same periods in 2002. The declines were primarily due to the
decline in the stand-alone long distance business.
Operating margin declined to 20.6% in the second quarter of 2003 from 27.0% in
the second quarter of 2002, and declined to 22.8% in the first half of 2003 from
26.8% in the first half of 2002. The declining margins primarily reflect the
revenue declines in these periods coupled with a lower rate of decline in SG&A.
OTHER ITEMS
Capital additions decreased $14 million, or 41.1%, in the second quarter of
2003, and declined $20 million, or 33.2%, for the first half of 2003 compared
with the same periods of 2002.
Total assets declined $0.2 billion to $1.2 billion at June 30, 2003, from
December 31, 2002. The decline was primarily due to lower accounts receivable,
reflecting lower revenue and improved cash collections.
CORPORATE AND OTHER
This group primarily reflects the results of corporate staff functions, brand
licensing fee revenue and the elimination of transactions between segments.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------
Dollars in millions
Revenue $ 13 $ (73) $ 26 $ (139)
Operating (loss) (57) (51) (123) (105)
Capital additions 8 14 12 24
At At
June 30, December 31,
2003 2002
-------------------------
Total assets $ 13,800 $ 17,493
REVENUE
For the second quarter of 2003, Corporate and Other revenue was $13 million,
compared with negative $73 million for the second quarter of 2002. For the six
months ended June 30, 2003, Corporate and Other revenue was $26 million,
compared with negative $139 million for the six months ended June 30, 2002. The
year-over-year changes were primarily due to lower eliminations of internal
revenue in 2003 as a result of the split-off of AT&T Broadband in November 2002.
OPERATING INCOME
For the second quarter of 2003, the operating loss grew $6 million to $57
million, compared with the second quarter of 2002. For the six months ended June
30, 2003, the operating loss grew $18 million to a loss of $123 million,
compared with the six months ended June 30, 2002. The increased operating loss
in 2003 compared with 2002 for both the quarter and year-to-date periods 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, partly offset by transaction costs associated with
AT&T's restructuring recorded during 2002. Also somewhat offsetting the
year-to-date increase in losses was an asset impairment charge recorded in 2002.
OTHER ITEMS
Capital additions decreased $6 million in the second quarter of 2003 and
declined $12 million in the first half of 2003, compared with the same periods
in 2002.
Total assets decreased $3.7 billion to $13.8 billion at June 30, 2003, from
December 31, 2002. The decrease was primarily driven by a lower cash balance at
June 30, 2003.
FINANCIAL CONDITION
At At
June 30, December 31,
2003 2002
-------------------------------
Dollars in millions
Total assets $ 50,384 $ 55,272
Total liabilities 37,101 42,960
Total shareowners' equity 13,283 12,312
Total assets decreased $4.9 billion, or 8.8%, to $50.4 billion at June 30, 2003,
compared with December 31, 2002. This decrease was largely driven by a $2.8
billion decrease in cash and cash equivalents. Property, plant and equipment
declined $0.8 billion as a result of depreciation during the period, partially
offset by capital expenditures. Other current assets declined $0.7 billion
primarily due to a reduction in income taxes receivable as a result of the
receipt of tax refunds, and due to the deconsolidation of AT&T Latin America,
partially offset by mark-to-market adjustments on financial instruments. In
addition, accounts receivable decreased by $0.5 billion, primarily driven by
improved collections and lower revenue. Other assets declined by $0.2 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
which was used to redeem exchangeable notes that were indexed to AT&T Wireless
common stock and the remaining interest was sold, partially offset by increased
mark-to-market adjustments on financial instruments.
Total liabilities decreased $5.9 billion, or 13.6%, to $37.1 billion at June 30,
2003, from $43.0 billion at December 31, 2002. This decrease was primarily the
result of $5.1 billion in lower debt, reflecting the early retirement of $3.7
billion in long-term debt, the $1.3 billion repayment of one-year notes and
commercial paper, 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. These reductions in debt were partially
offset by a $0.4 billion increase to debt as a result of mark-to-market
adjustments. Also contributing to the decline in total liabilities were lower
payroll and benefit-related liabilities of $0.6 billion, as payments for salary
and other compensation accruals were made during the period and lower accounts
payable of $0.5 billion as payments were made against year-end capital
expenditures and other accruals.
Total shareowners' equity increased $1.0 billion, or 7.9%, to $13.3 billion at
June 30, 2003, from $12.3 billion at December 31, 2002. This increase was
primarily due to $1.1 billion of net income, somewhat offset by dividends
declared.
LIQUIDITY
Cash Flows For the Six Months Ended June 30,
2003 2002
---------------------------------
Dollars in millions
Provided by operating activities of
continuing operations $ 4,353 $ 4,019
(Used in) investing activities of
continuing operations (1,720) (2,122)
(Used in) financing activities of
continuing operations (5,391) (4,152)
(Used in) discontinued operations - (2,776)
-----------------------------
Net (decrease) in cash and cash equivalents $(2,758) $(5,031)
-----------------------------
Net cash provided by operating activities of AT&T's continuing operations of
$4.4 billion for the six months ended June 30, 2003, was generated primarily by
$4.2 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 due to tax refunds partially offset by lower payroll
and benefit related liabilities due to payments of accruals. In addition,
accounts receivable decreased $0.1 billion reflecting cash collections.
Partially offsetting these sources of cash was a $0.3 billion decrease in
accounts payable due to payments of year-end operating accruals.
Net cash provided by operating activities of continuing operations of $4.0
billion for the six months ended June 30, 2002, primarily included $5.0 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 from operating activities was a decrease in accounts receivable
of $0.2 billion primarily due to the collection of a receivable from Liberty
Media Corporation and improved cash collections. Partially offsetting these
sources of cash were net changes in other operating assets and liabilities of
$0.9 billion due to decreases in payroll and benefit-related liabilities and
other short-term liabilities and a decrease of $0.3 billion in accounts payable,
both of which were attributable to payments made against year-end accruals.
AT&T's investing activities resulted in a net use of cash of $1.7 billion in the
first six months of 2003, compared with $2.1 billion in the first six months of
2002. During the first six months of 2003, AT&T spent $1.6 billion on capital
expenditures, made payments of $0.2 billion to BT primarily associated with
assets assumed by AT&T that BT originally contributed to the Concert joint
venture, and received $0.1 billion of proceeds from the sale of its remaining
AT&T Wireless shares. During the first six months of 2002, AT&T spent $2.0
billion on capital expenditures, had an increase in restricted cash of $0.4
billion as a result of the posting of a cash-collateralized letter of credit
associated with certain private debt, and received $0.3 billion from the sale of
fixed assets.
During the first half of 2003, net cash used in financing activities was
$5.4 billion, compared with $4.2 billion in the first half of 2002. During the
first half of 2003, AT&T made net payments of $5.3 billion to reduce debt,
including early termination of debt (see "Financial Condition" discussion
above), paid dividends of $0.3 billion and received $0.1 billion of cash
collateral related to favorable positions of certain combined interest rate swap
agreements. During the first half of 2002, AT&T made net payments of $6.5
billion to reduce debt, paid dividends of $0.3 billion, and received $2.6
billion from the issuance of AT&T common stock, primarily due to the sale of 46
million shares in the second quarter of 2002, the proceeds of which were used in
October, 2002 to settle a portion of AT&T's obligation to the AT&T Canada
shareholders.
Working Capital and Other Sources of Liquidity
At June 30, 2003, our working capital ratio (current assets divided by current
liabilities) was 1.07.
At June 30, 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 or marketable securities. At June 30, 2003, we were in compliance
with these covenants.
In July 2003, AT&T renewed its AT&T Consumer Services 364-day customer accounts
receivable securitization facility and entered into a new AT&T Business Services
364-day customer accounts receivable securitization facility. Together the
programs provide up to $1.65 billion of available financing, limited by the
eligible receivables balance, which varies from month to month. Proceeds from
the securitizations are recorded as borrowings and included in short term debt.
At June 30, 2003, approximately $0.2 billion was outstanding. The new facilities
do not include the provision that previously required the outstanding balances
to be paid by the collection of the receivables in the event AT&T's ratings were
downgraded below investment grade. In addition, the new facilities require AT&T
to meet a net debt-to-EBITDA ratio (as defined in the agreements) not exceeding
2.25 to 1.00.
We anticipate continuing to fund 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, $2.4
billion remaining under a universal shelf registration, an up to $1.65 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.
Credit Ratings and Related Debt Implications
In July 2003, AT&T's long-term credit ratings were lowered by both Standard and
Poor's and Fitch to BBB from BBB+. Standard and Poor's (S&P) has removed the
ratings from CreditWatch. The Company's short term credit and commercial paper
ratings were affirmed by S&P and Fitch at A-2 and F-2, respectively. The rating
action by S&P triggered a 25 basis point interest rate step-up on $11 billion of
debt, $1.7 billion of which matures in November 2003. This step-up will result
in an increase in interest expense of approximately $25 million in 2004. On
July 24, 2003, Moody's affirmed AT&T's current ratings at Baa2 for long term and
P-2 for short term. Moody's continues to hold AT&T's outlook at negative. The
table below reflects the most recent actions of the rating agencies as described
above:
Short-Term Long-Term
Credit Rating Agency Rating Rating Outlook
Standard & Poor's A-2 BBB Stable
Fitch F-2 BBB Negative
Moody's P-2 Baa2 Negative
Further debt rating downgrades could require AT&T to pay 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 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 June 30,
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.
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 were 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.
In July 2003, the Board of Directors stated its intention to increase the
quarterly dividend by $0.05 per share, starting with the third quarter dividend
payable in November 2003. The actual declaration of the third quarter dividend
has not yet taken place and will be subject to the usual review of the financial
condition of the Company and other relevant factors by the Board of Directors at
the time of the declaration. Additionally, in July 2003, the Board of Directors
authorized the repurchase of up to $2 billion in debt. The timing and method of
any such repurchases will depend on various market conditions and all other
relevant factors and may take the form of tender offers, open market purchases
or calls, potentially including make-whole calls.
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 to $237
million as of June 30, 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.
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. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities--an
Interpretation of Accounting Research Bulletin (ARB) No. 51." FIN 46, adopted by
AT&T in July 2003, 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 46 applies
immediately to VIEs created after January 31, 2003, and to VIEs in which the
entity obtains an interest after that date. Based on the new standard, two
entities that AT&T leases buildings from qualify as VIEs and therefore became
subject to consolidation as of July 1, 2003. AT&T has no ownership interest in
either entity, but provides guarantees of the residual values for the leased
facilities with a maximum exposure of $427 million. FIN 46 will add $431 million
of assets (principally the properties we lease) and $476 million of liabilities
(principally debt secured by the properties) to our consolidated balance sheet.
This will result in a charge of approximately $28 million, net of income taxes,
as the cumulative effect of an accounting change in the third quarter of 2003.
In April 2003, the FASB issued Statement of Financial Standards (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 is effective prospectively for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. SFAS No. 149 will not have an impact upon
initial adoption and is not expected to have a material effect on our results of
operations, financial position and cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires issuers to classify financial instruments within its scope as
liabilities (or an asset in some cases). Prior to SFAS No. 150, many of these
instruments may have been classified as equity. This Statement is effective for
financial instruments entered into or modified after May 31, 2003. For
instruments issued prior to May 31, 2003, this standard is to be implemented by
reporting the cumulative effect of a change in accounting principle as of July
1, 2003. SFAS No. 150 will not have an impact upon initial adoption and is not
expected to materially impact AT&T's ongoing results of operations, financial
position or cash flows.
In November 2002, the Emerging Issues Task Force (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. EITF 00-21 will not have an
impact upon initial adoption and is not expected to have a material impact to
AT&T's ongoing results of operations, financial position or cash flows.
In May 2003, the EITF reached a consensus on EITF 01-8 "Determining Whether an
Arrangement Contains a Lease," relating to new requirements on identifying
leases contained in contracts or other arrangements that sell or purchase
products or services. The evaluation of whether an arrangement contains a lease
within the scope of SFAS No. 13 "Accounting for Leases" should be based on the
evaluation of whether an arrangement conveys the right to use property, plant
and equipment. This may result in a difference in the timing of revenue
recognition. The consensus requires sellers to report the revenue from the
leasing component of the arrangement as leasing or rental income rather than
revenue from product sales or services. Purchaser's arrangements which
previously would have been considered service or supply contracts, but are now
considered leases, could affect the timing of their expense recognition and the
classification of assets and liabilities on their balance sheet as well as
require footnote disclosure of lease terms and future minimum lease commitments.
This consensus is effective prospectively for contracts entered into or
significantly modified after July 1, 2003. EITF 01-8 will not have an impact
upon initial adoption based on arrangements in place today, will not have a
material effect on our results of operations, financial position and cash flows.
SUBSEQUENT EVENTS
On August 6, 2003, AT&T received initial commitments from JP Morgan and
Citigroup for a portion of a new bank facility of up to $2.0 billion. The banks
have also agreed to act as lead arrangers to syndicate the balance of the
364-day credit facility. The proposed new bank facility will replace AT&T's
existing undrawn $3.0 billion facility, which matures in October 2003.
On August 8, 2003, AT&T employees represented by the CWA (Communications Workers
of America) and the IBEW (International Brotherhood of Electrical Workers)
ratified the extension of their current contracts through December 10, 2005.
Those contracts include the AT&T/CWA Operations agreement, AT&T/CWA Local
Network Services agreement in Mesa, Arizona, Independence, Ohio and Maryland
Heights, Missouri, and the AT&T/IBEW Operations Agreement.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we completed an evaluation,
under the supervision and with the participation of our management including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures are effective in alerting them timely to material information
required to be included in our Exchange Act filings. There have not been any
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The annual meeting of the shareholders of the registrant was held on June
11, 2003.
(b) Election of Directors
Votes
(Millions)
Nominee For Withheld
Kenneth T. Derr 640 30
David W. Dorman 640 30
M. Kathryn Eickhoff 616 53
Frank C. Herringer 617 53
Amos B. Hostetter, Jr. 616 53
Shirley Ann Jackson 640 29
Jon C. Madonna 617 53
Donald F. McHenry 616 53
Tony L. White 640 30
(c) Holders of common shares voted at this meeting on the following matters,
which were set forth in the registrant's proxy statement dated April 17,
2003.
(i) Ratification of Auditors
For Against Abstain
Ratification of the firm of
PricewaterhouseCoopers, LLP
as the independent auditors to 614 45 11
audit the registrant's financial (93.13%) (6.87%)
statements for the year 2003. (*)
(ii) Shareholders' Proposals Non-
For Against Abstain Vote
Establish Term Limit For
Directors(*) 41 491 14 124
(7.63%) (92.37%)
Equal Opportunity Statement (*) 17 487 42 124
(3.31%) (96.69%)
Executive Compensation (*) 40 491 14 124
(7.56%) (92.44%)
Employee Pension Plan (*) 45 484 16 124
(8.59%) (91.41%)
*Percentages are based on the total common shares voted. Approval of
this proposal required a majority of the votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number
3(a) Restated Certificate of Incorporation of the
registrant filed July 17, 2003
10(iii)(A)1 Form of Special Incentive Agreement between AT&T Corp.
and Hossein Eslambolchi dated June 2, 2003.
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 April 23, 2003 was furnished pursuant to Item 7 and
Item 9 on April 23, 2003. Form 8-K dated June 4, 2003 was furnished
pursuant to Item 9 on June 5, 2003. Form 8-K dated June 11, 2003 was
furnished pursuant to Item 9 on June 16, 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: August 11, 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 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting ; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 11, 2003
/s/ David W. Dorman
---------------------------
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 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting ; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 11, 2003
/s/ Thomas W. Horton
-----------------------------
Thomas W. Horton
Chief Financial Officer
Exhibit Index
Exhibit
Number
3(a) Restated Certificate of Incorporation of the registrant filed
July 17, 2003
10(iii)(A)1 Form of Special Incentive Agreement between AT&T Corp. and
Hossein Eslambolchi dated June 2, 2003.
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 3(a)
AT&T CORP.
----------
RESTATED CERTIFICATE
OF
INCORPORATION OF AT&T CORP.
FILED JULY 17, 2003
----------
RESTATED
CERTIFICATE OF INCORPORATION
OF
AT&T CORP.
UNDER SECTION 807 OF THE BUSINESS
CORPORATION LAW
We, the undersigned, being a Vice President and an Assistant Secretary,
respectively, of AT&T Corp., do hereby certify as follows:
1. The name of the corporation is AT&T Corp.
2. The Certificate of Incorporation of the corporation was filed in
the office of the Secretary of State of New York on March 3, 1885.
3. The text of the Certificate of Incorporation is hereby restated
without amendments to read as herein set forth in full:
FIRST. The name assumed to distinguish such association and to
be used in its dealings, and by which it may sue and be sued, is AT&T Corp.
SECOND. The purposes for which the corporation is formed are to
engage in any lawful act or activity for which corporations may be organized
under the Business Corporation Law of the State of New York, provided that the
corporation is not formed to engage in any act or activity which requires the
consent or approval of any New York state official, department, board, agency or
other body, without such consent or approval first being obtained.
THIRD.
PART A. The aggregate number of shares which the corporation is
authorized to issue is two billion six hundred million (2,600,000,000) shares,
consisting of one hundred million (100,000,000) preferred shares having a par
value of $1.00 per share ("Preferred Stock") and two billion five hundred
million (2,500,000,000) common shares having a par value of $1.00 per share
("Common Stock").
PART B. The Preferred Stock may be issued from time to time in one or
more series. All shares of Preferred Stock of all series shall rank equally and
be identical in all respects except that the Board of Directors is authorized to
fix the number of shares in each series, the designation thereof and, subject to
the provisions of this Article Third, the relative rights, preferences and
limitations of each series and the variations in such rights, preferences and
limitations as between series and specifically is authorized to fix with respect
to each series:
(a) the dividend rate on the shares of such series and the
date or dates from which dividends shall be cumulative;
(b) the times when, the prices at which, and all other terms
and conditions upon which, shares of such series shall be redeemable;
(c) the amounts which the holders of shares of such series
shall be entitled to receive upon the liquidation, dissolution or
winding up of the corporation, which amounts may vary depending on
whether such liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates;
(d) whether or not the shares of such series shall be subject
to the operation of a purchase, retirement or sinking fund and, if so,
the extent to and manner in which such purchase, retirement or sinking
fund shall be applied to the purchase or redemption of the shares of
such series for retirement or for other corporate purposes and the
terms and provisions relative to the operation of the said fund or
funds;
(e) whether or not the shares of such series shall be
convertible into or exchangeable for shares of any other class or
series or for any class of common shares and, if so, the price of
prices or the rate or rates of conversion or exchange and the method,
if any, of adjusting the same;
(f) the restrictions, if any, upon the payment of dividends or
making of other distributions on, and upon the purchase or other
acquisition of, common shares;
(g) the restrictions, if any, upon the creation of
indebtedness, and the restrictions, if any, upon the issue of any
additional shares ranking on a parity with or prior to the shares of
such series in addition to the restrictions provided for in this
Article Third;
(h) the voting powers, if any, of the shares of such series in
addition to the voting powers provided for in this Article Third; and
(i) such other rights, preferences and limitations as shall
not be inconsistent with this Article Third.
All shares of any particular series shall rank equally and be identical
in all respects except that shares of any one series issued at different times
may differ as to the date from which dividends shall be cumulative.
Dividends on shares of Preferred Stock of each series shall be
cumulative from the date or dates fixed with respect to such series and shall be
paid or declared or set apart for payment for all past dividend periods and for
the current dividend period before any dividends (other than dividends payable
in common shares) shall be declared or paid or set apart for payment on common
shares. Whenever, at any time, full cumulative dividends for all past dividend
periods and for the current dividend period shall have been paid or declared and
set apart for payment on all then outstanding shares of Preferred Stock and all
requirements with respect to any purchase, retirement or sinking fund or funds
for all series of Preferred Stock shall have been complied with, the Board of
Directors may declare dividends on the common shares and the shares of Preferred
Stock shall not be entitled to share therein.
Upon any liquidation, dissolution or winding up of the corporation, the
holders of shares of Preferred Stock of such series shall be entitled to receive
the amounts to which such holders are entitled as fixed with respect to such
series, including all dividends accumulated to the date of final distribution,
before any payment or distribution of assets of the corporation shall be made to
or set apart for the holders of common shares and after such payments shall have
been made in full to the holders of shares of Preferred Stock, the holders of
common shares shall be entitled to receive any and all assets remaining to be
paid or distributed to shareholders and the holders of shares of Preferred Stock
shall not be entitled to share therein. For the purposes of this paragraph, the
voluntary sale, conveyance, lease, exchange or transfer of all or substantially
all the property or assets of the corporation or a consolidation or merger of
the corporation with one or more other corporations (whether or not the
corporation is the corporation surviving such consolidation or merger) shall not
be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary.
The aggregate amount which all shares of Preferred Stock outstanding at
any time shall be entitled to receive on involuntary liquidation, dissolution or
winding up shall not exceed $8,000,000,000.
So long as any shares of Preferred Stock are outstanding, the
corporation will not (a) without the affirmative vote or consent of the holders
of at least 66 2/3% of all the shares of Preferred Stock at the time
outstanding, (i) authorize shares of stock ranking prior to the shares of
Preferred Stock, or (ii) change any provision of this Article Third so to affect
adversely the shares of Preferred Stock; (b) without the affirmative vote or
consent of the holders of at least 66 2/3% of any series of Preferred Stock at
the time outstanding, change any of the provisions of such series so as to
affect adversely the shares of such series; (c) without the affirmative vote or
consent of the holders of at least a majority of all the shares of Preferred
Stock at the time outstanding, (i) increase the authorized number of shares of
Preferred Stock or (ii) increase the authorized number of shares of any class of
stock ranking on a parity with the Preferred Stock.
Whenever, at any time or times, dividends payable on shares of
Preferred Stock shall be in default in an aggregate amount equivalent to six
full quarterly dividends on any series of Preferred Stock at the time
outstanding, the number of directors then constituting the Board of Directors of
the corporation shall ipso facto be increased by two, and the outstanding shares
of Preferred Stock shall, in addition to any other voting rights, have the
exclusive right, voting separately as a class and without regard to series, to
elect two directors of the corporation to fill such newly created directorships
and such right shall continue until such time as all dividends accumulated on
all shares of Preferred Stock to the latest dividend payment date shall have
been paid or declared and set apart for payment.
No holder of shares of Preferred Stock of any series, irrespective of
any voting or other right of shares of such series, shall have, as such holder,
any preemptive right to purchase any other shares of the corporation or any
securities convertible into or entitling the holder to purchase such other
shares.
If in any case the amounts payable with respect to any requirements to
retire shares of Preferred Stock are not paid in full in the case of all series
with respect to which such requirements exist, the number of shares to be
retired in each series shall be in proportion to the respective amounts which
would be payable on account of such requirements if all amounts payable were
paid in full.
PART C. The following provision states the number, designation,
relative rights, preferences and limitations of a series of the corporation's
authorized preferred shares designated as Subsidiary Exchangeable Preferred
Stock (the "Subsidiary Preferred Stock").
(A) Number and Designation. 2,000,000 shares of the Preferred Stock
of the corporation shall constitute a series designated as Subsidiary Preferred
Stock.
(B) Dividends and Distributions.
(1)(i) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and superior to
the Subsidiary Preferred Stock with respect to dividends, the holders of shares
of Subsidiary Preferred Stock, in preference to the holders of Common Stock (as
defined in Article THIRD of the Certificate of Incorporation) of the
corporation, and of any other junior stock, shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the first day of March,
June, September and December in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Subsidiary Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of:
(a) $1 or
(b) subject to the provision for adjustment set forth in
paragraph (A)(ii) below, (1) 1000 times the aggregate per share amount of all
cash dividends, and (2) 1000 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions (including dividends or
other distributions of common shares other than Common Stock), declared on the
Common Stock since the immediately preceding Quarterly Dividend Payment Date or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Subsidiary Preferred Stock
provided however that in lieu of any dividends payable in shares of Common Stock
or payable as a result of a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), the adjustments set forth in this
Certificate of Designations shall be made.
(ii) In the event the corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Subsidiary Preferred
Stock were entitled immediately prior to such event under clause (b) of the
preceding paragraph (A)(i) shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(2) The corporation shall declare a dividend or distribution on the
Subsidiary Preferred Stock as provided in paragraph (A)(i) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the
Subsidiary Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(3) Dividends shall begin to accrue and be cumulative on outstanding
shares of Subsidiary Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Subsidiary Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Subsidiary Preferred Stock in an amount less than the
total amount of such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among all such shares at
the time outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Subsidiary Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be the same date as that fixed for the determination of holders of
Common Stock entitled to receive payment of the corresponding dividend or
distribution, or if there is no corresponding dividend or distribution on the
Common Stock, which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
(C) Voting Rights. The holders of shares of Subsidiary Preferred Stock
shall have the following voting rights:
(1) Subject to the provision for adjustment hereinafter set forth, each
share of Subsidiary Preferred Stock shall entitle the holder thereof to 1000
votes on all matters submitted to a vote of the stockholders of the corporation.
In the event the corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Subsidiary
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(2) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Subsidiary Preferred Stock and the holders of
shares of Common Stock and any other capital stock of the corporation having
general voting rights shall vote together as one class on all matters submitted
to a vote of stockholders of the corporation. (3) Except as set forth herein, or
as otherwise provided by law, holders of Subsidiary Preferred Stock shall have
no special voting rights and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
(D) Certain Restrictions.
(1) Whenever quarterly dividends or other dividends or distributions
payable on the Subsidiary Preferred Stock as provided in Section 2 are in
arrears (which for purposes of clarification shall not include any failure to
make any payment as a result of a waiver by the holders thereof), thereafter and
until all accrued and unpaid dividends and distributions, whether or not
declared, on shares of Subsidiary Preferred Stock outstanding shall have been
paid in full, the corporation shall not:
First: declare or pay dividends, or make any other distributions, on any shares
of stock ranking junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Subsidiary Preferred Stock;
Second: declare or pay dividends, or make any other distributions, on any shares
of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Subsidiary Preferred Stock, except dividends
paid ratably on the Subsidiary Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
Third: redeem or purchase or otherwise acquire for consideration shares of any
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Subsidiary Preferred Stock, provided that the corporation may
at any time redeem, purchase or otherwise acquire shares of any such junior
stock in exchange for shares of any stock of the corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up) to the
Subsidiary Preferred Stock; or
Fourth: redeem or purchase or otherwise acquire for consideration any shares of
Subsidiary Preferred Stock, or any shares of stock ranking on a parity with the
Subsidiary Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
(2) The corporation shall not permit any subsidiary of the corporation
to purchase or otherwise acquire for consideration any shares of stock of the
corporation unless the corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
(E) Liquidation, Dissolution or Winding Up. Subject to the provisions
of the Certificate of Incorporation (including limitations on distributions to
Preferred Stock), upon any liquidation, dissolution or winding up of the
corporation, no distribution shall be made (1) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Subsidiary Preferred Stock unless, prior thereto, the holders
of shares of Subsidiary Preferred Stock shall have received $1000 per share,
plus an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment, provided that the holders
of shares of Subsidiary Preferred Stock shall be entitled to receive an
aggregate amount per share, subject to the provision for adjustment hereinafter
set forth, equal to 1000 times the aggregate amount to be distributed per share
to holders of shares of Common Stock, provided, further, that on involuntary
liquidation, dissolution or winding up of the corporation, the aggregate amount
that all shares of Subsidiary Preferred Stock shall be entitled to receive
(prior to shares of stock ranking junior to it) shall be no greater than
$500,000,000, with holders of Subsidiary Preferred Stock entitled to any
shortfall or any amount otherwise payable on a pro rata basis with holders of
Common Stock or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Subsidiary Preferred Stock, except distributions made ratably on the Subsidiary
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Subsidiary Preferred Stock were entitled immediately prior
to such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(F) Consolidation, Merger, etc. In case the corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Subsidiary Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Subsidiary Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(G) Redemption.
(1) At any time, the Board of Directors may redeem shares of Subsidiary
Preferred Stock for Common Stock at a ratio of 1000 shares of Common Stock per
share of Subsidiary Preferred Stock. In the event the corporation shall at any
time declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the number of shares of Common
Stock set forth in the preceding sentence with respect to the redemption of
shares of Subsidiary Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(2) At any time following the first issuance of a class or series of
common stock of the corporation intended to represent the financial performance
of the corporation's broadband business ("Broadband Group Common Stock"), the
Board of Directors may redeem shares of Subsidiary Preferred Stock for Broadband
Group Common Stock at a ratio to be determined by the Board of Directors based
on the fair market values of Broadband Group Common Stock and Subsidiary
Preferred Stock, as determined by the Board of Directors. All such
determinations shall be in the sole discretion of the Board of Directors, and
all such determinations shall be final and binding.
(3) Any redemption pursuant to this Section 7 shall be pursuant to
notice and other procedures as determined by the Board of Directors.
(H) Rank. The Subsidiary Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of the corporation's Preferred Stock.
(I) Amendment. The Certificate of Incorporation of the corporation
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Subsidiary Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Subsidiary Preferred Stock, voting
together as a single class.
FOURTH. The number of directors shall be as provided for in the By-Laws.
FIFTH. The duration of the corporation shall be perpetual.
SIXTH. The office of the corporation is located in the County of New
York, State of New York.
SEVENTH. The Secretary of State of the State of New York is designated
as agent of the corporation upon whom process against it may be served. The post
office address to which the Secretary of State shall mail a copy of any process
served upon him as agent of the corporation is CT Corporation System, 111 8th
Avenue, New York, New York, 10011.
EIGHTH. No holder of common shares shall have, as such holder, any
preemptive right to purchase any shares or other securities of the corporation.
NINTH. No director shall be personally liable to the Corporation or any
of its shareholders for damages for any breach of duty as a director; provided,
however, that the foregoing provision shall not eliminate or limit (i) the
liability of a director if a judgment or other final adjudication adverse to him
or her establishes that his or her acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law or that he or she
personally gained in fact a financial profit or other advantage to which he or
she was not legally entitled or that his or her acts violated Section 719 of the
New York Business Corporation Law; or (ii) the liability of a director for any
act or omission prior to the adoption of this Article NINTH by the shareholders
of the Corporation.
TENTH. (a) The required vote for authorization by shareholders of a
merger or consolidation of the corporation, pursuant to Section 903 of the
Business Corporation Law, shall be a majority of the votes of the shares of the
corporation entitled to vote thereon. Such vote shall be in addition to any
class vote that may be required by Section 903 of the Business Corporation Law.
(b) The required vote for approval by shareholders of a sale, lease,
exchange or other disposition of all or substantially all the assets of the
corporation, pursuant to Section 909 of the Business Corporation Law, shall be a
majority of the votes, of all outstanding shares of the corporation entitled to
vote thereon.
(c) The required vote for authorization by shareholders of a dissolution
of the corporation, pursuant to Section 1001 of the Business Corporation Law,
shall be a majority of the votes of all outstanding shares of the corporation
entitled to vote thereon.
4. The manner in which this restatement of the Certificate of
Incorporation was authorized was by a resolution of the Board of Directors of
the corporation.
In Witness Whereof, we have signed and verified this Restated Certificate of
Incorporation of AT&T Corp. this 16th day of July 2003.
/s/ Robert S. Feit
---------------------------
By: Robert S. Feit
Vice President - Law
and Secretary
/s/ John W. Thomson
---------------------------
By: John W. Thomson
Assistant Secretary
Exhibit 10(iii)(A)1
[GRAPHIC OMITTED]
June 2, 2003
Mr. Hossein Eslambolchi
RE: Special Incentive Agreement
Dear Hossein:
The purpose of this letter agreement ("Agreement") is to detail a
special incentive agreement AT&T Corp. ("The Company"/"AT&T") has developed for
you. The payout criteria, amounts, forfeiture and distribution of the incentive
payments shall be in accordance with the following terms and conditions.
You will be eligible to receive up two (2) special incentive payments,
approved by the Compensation Committee of the Board of Directors and the
Chairman and Chief Executive Officer, subject to the performance, terms and
conditions contained in Attachment A. These special cash payments ("Special
Payment") will be made within thirty (30) business days following confirmation
of the attainment of meeting the performance metrics following the close of each
performance year:
Amount Performance Period Dates
$600,000 12/31/2003
$600,000 12/31/2004
If, prior to any scheduled payment, you resign from the Company or, at
any time, you are terminated for "Cause", as defined below, all payments shall
be forfeited. In the event of your Long Term Disability as defined below, your
death, or a Company initiated termination not for Cause (pursuant to the Senior
Officer Separation Plan (SOSP) or its successor) prior to December 31, 2004, a
pro-rated portion of the remaining incentive payment shall be distributed to you
or your named beneficiary (or your estate if no beneficiary has been named), in
a lump sum payment. Such pro-rated amounts shall equal to the entire amount of
the remaining payments multiplied by a fraction, (a) the numerator of which is
the number of days you are employed by the Company from May 1, 2003, up to a
maximum of 365 days, and (b) the denominator of which is 365 days.
In the event of your Long Term Disability or death, the lump sum
payment will be made as soon as administratively feasible in the calendar
quarter in which your Long Term Disability or death occurs. In the event of your
termination under the SOSP or its successor, the payment will be made as soon as
administratively possible following the revocation period of the waiver and
release that you will be required to sign as a condition of receiving benefits
under the SOSP or its successor. Notwithstanding any contrary provisions in the
SOSP or its successor, the remaining incentive payment will be prorated in
accordance with the terms of this Agreement.
The Special Cash Payments referred to in this Agreement are subject to
IRS rules and regulations with respect to withholding and taxation. Moreover,
these Special Cash Payments will not be included in your compensation base for
purposes of calculating any employee benefits.
Further, in the event of your violation of the Non-Competition
Guideline prior to the full distribution of the final incentive amount, any
unpaid incentives and all prior amounts paid to you under the Agreement shall be
deemed forfeitable. The Company shall provide you with a letter, within five (5)
business days of the violation, detailing the total amount you will be required
to pay back to the Company within fifteen (15) days following the receipt of
such letter.
For purposes of this Agreement:
(a) "Long Term Disability" shall mean termination of your employment
with the Company with eligibility to receive a disability
allowance under any long term disability plan of the Company or
any affiliate of the Company;
(b) "Cause" shall mean:
i. commission of a crime, or conviction of a crime (including
a plea of guilty or nolo contendere) involving theft,
fraud, dishonesty or moral turpitude;
ii. intentional or grossly negligent disclosure of confidential
or trade secret information of the Company to anyone not
entitled to such information;
iii. omission or dereliction of any statutory or common law duty
of loyalty to the Company;
iv. violation of the Non-Competition Guideline (attached
hereto) or violation of the Company's Code of Conduct or
any other written Company policy; or
v. repeated failure to carry out the Executive's duties
despite specific instruction to do so.
In the event the Company determines that there is Cause for termination
of employment, the Company shall provide you with written notice specifying the
grounds upon which its determination is based.
This Agreement may not be amended or waived, unless the amendment or
waiver is in writing signed by you and AT&T's Executive Vice President - Human
Resources.
This Agreement contains the entire agreement regarding the terms and
conditions of this special retention arrangement and fully supersede all prior
written or oral agreements or understandings pertaining to the subject matter
hereof. You represent and acknowledge that in signing this Agreement you have
not relied upon any representation or statement not set forth herein made by the
Company or Company's agents, representatives, or attorneys with regard to the
subject matter of this Agreement. Furthermore, the construction, interpretation
and performance of this Agreement shall be governed by the laws of the state of
New Jersey, without regard to its conflict of laws rule.
It is agreed and understood that you will not talk about, write about,
or otherwise disclose the terms or existence of this Agreement or any fact
concerning its execution or implementation unless required by law or to enforce
the terms of this agreement. You may, however, discuss its contents with your
spouse, your legal and/or financial consultant, provided that you advise them of
your obligations of confidentiality and that any disclosures made by any of them
may be treated by the Company as disclosures made by you for purposes of this
provision.
This Agreement is not an Employment Contract and should not be
construed nor interpreted as containing any guarantee of continued employment.
The employment relationship at AT&T is by mutual consent ("Employment at Will").
This means that managers have the right to terminate employment at any time and
for any reason. Likewise, the Company reserves the right to discontinue your
employment with or without cause at any time and for any reason.
By acceptance of this offer, you further understand that these terms
shall apply to the Company and its successors. The Company specifically reserves
the right to assign th terms of this agreement to any successor, whether the
successor is the result of a sale, purchase, merger, consolidation, asset sale,
divestiture or spin-off or any combination or form thereof. No sale, purchase,
merger, consolidation, asset sale, divestiture or spin-off any combination or
form thereof by the Company shall be construed as a termination of your
employment and will not trigger the Company's obligation to make payments under
this Agreement.
Payments from the Special Incentive Award are in addition to and not in
lieu (nor will it or anything in these agreements postpone, reduce or negate
impact) of qualified or non-qualified pension, savings, or other retirement
plan, program or arrangement covering you. The payments provided under this
Agreement are subject to payroll tax withholding and reporting, and amounts paid
are not included in the base for calculating benefits (nor shall such amounts
offset any benefits) under any employee or Senior Management benefit plan,
program or practice.
Hossein, I am happy to present this special incentive arrangement to
you. It recognizes the extraordinary contribution you have made to our business.
If you agree with the terms and conditions detailed herein, please sign this
Agreement in the space provided below, prior to June 16, 2003, make a copy for
your records and return the executed copy to me.
Sincerely,
/s/ Mirian M. Graddick-Weir
---------------------------------
Mirian M. Graddick-Weir
Executive Vice President -
Human Resources
Attachments
/s/ H. Eslambolchi July 24, 2003
- ----------------------------- -------------------------
Agreed and Accepted Date
H. Eslambolchi
Exhibit 12
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Unaudited)
(Dollars in millions)
For the Six Months Ended
June 30, 2003
------------------------
Income from continuing operations before
income taxes $ 1,663
Add distributions of less than 50% owned
affiliates 5
Add fixed charges, excluding capitalized
interest 710
------------------------
Total earnings from continuing operations
before income taxes and fixed charges $ 2,378
------------------------
Fixed Charges:
Total interest expense 628
Capitalized interest 18
Interest portion of rental expense 82
------------------------
Total fixed charges $ 728
------------------------
Ratio of earnings to fixed charges 3.3
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 June
30, 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: August 11, 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 June
30, 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: August 11, 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.