UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
.X. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2003, the following shares of stock were outstanding: AT&T common
stock - 789,873,024
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
Dollars in millions (except per share amounts)
Revenue $ 8,649 $ 9,409 $ 26,430 $ 28,537
Operating Expenses
Access and other connection 2,785 2,679 8,191 8,214
Costs of services and products (excluding depreciation
of $874, $826, $2,608 and $2,538 included below) 1,954 2,066 5,923 6,166
Selling, general and administrative 1,793 2,032 5,551 5,911
Depreciation and amortization 1,224 1,243 3,607 3,631
Net restructuring and other charges 64 (26) 134 (26)
-------- -------- -------- --------
Total operating expenses 7,820 7,994 23,406 23,896
-------- -------- -------- --------
Operating income 829 1,415 3,024 4,641
Other (expense) income, net (7) (180) 89 (285)
Interest (expense) (289) (355) (917) (1,087)
-------- -------- -------- --------
Income from continuing operations before income taxes,
minority interest income, and net (losses) earnings
related to equity investments 533 880 2,196 3,269
(Provision) for income taxes (72) (370) (677) (1,362)
Minority interest income - 28 1 81
Net (losses) earnings related to equity investments (3) (13) 3 (414)
-------- -------- -------- --------
Income from continuing operations 458 525 1,523 1,574
Net (loss) from discontinued operations (net of income tax
benefit of $0, $81, $0 and $5,887) (13) (318) (13) (14,316)
-------- -------- -------- --------
Income (loss) before cumulative effect of accounting changes 445 207 1,510 (12,742)
Cumulative effect of accounting changes [net of income taxes
of $17, $0, $(9) and $530] (27) - 15 (856)
-------- -------- -------- --------
Net income (loss) $ 418 $ 207 $ 1,525 $(13,598)
-------- -------- -------- --------
Per basic share:
Earnings from continuing operations $ 0.58 $ 0.68 $ 1.94 $ 2.14
(Loss) from discontinued operations (0.02) (0.41) (0.02) (19.45)
Cumulative effect of accounting changes (0.03) - 0.02 (1.16)
-------- -------- -------- --------
Earnings (loss) per basic share $ 0.53 $ 0.27 $ 1.94 $ (18.47)
-------- -------- -------- --------
Per diluted share:
Earnings from continuing operations $ 0.58 $ 0.67 $ 1.93 $ 2.07
(Loss) from discontinued operations (0.02) (0.41) (0.01) (18.86)
Cumulative effect of accounting changes (0.03) - 0.02 (1.13)
-------- -------- -------- --------
Earnings (loss) per diluted share $ 0.53 $ 0.26 $ 1.94 $ (17.92)
-------- -------- -------- --------
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
At At
September 30, December 31,
2003 2002
------------- ------------
Dollars in millions
ASSETS
Cash and cash equivalents $ 6,751 $ 8,014
Accounts receivable, less allowances of $681 and $669 4,525 5,286
Deferred income taxes 617 910
Other current assets 1,109 1,693
---------- ----------
TOTAL CURRENT ASSETS 13,002 15,903
Property, plant and equipment, net of accumulated depreciation of
$33,689 and $31,021 24,719 25,604
Goodwill 4,691 4,626
Other purchased intangible assets, net of accumulated amortization
of $298 and $244 508 556
Prepaid pension costs 3,791 3,596
Other assets 4,596 4,987
---------- ----------
TOTAL ASSETS $ 51,307 $ 55,272
---------- ----------
LIABILITIES
Accounts payable $ 3,297 $ 3,819
Payroll and benefit-related liabilities 1,091 1,519
Debt maturing within one year 4,647 3,762
Other current liabilities 2,974 2,924
---------- ----------
TOTAL CURRENT LIABILITIES 12,009 12,024
Long-term debt 12,759 18,812
Long-term benefit-related liabilities 4,240 4,001
Deferred income taxes 5,580 4,739
Other long-term liabilities and deferred credits 3,180 3,384
---------- ----------
TOTAL LIABILITIES 37,768 42,960
SHAREOWNERS' EQUITY
AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and
outstanding 789,220,022 shares (net of 171,692,349 treasury shares) at
September 30, 2003 and 783,037,580 shares
(net of 171,801,716 treasury shares) at December 31, 2002 789 783
Additional paid-in capital 27,855 28,163
Accumulated deficit (15,044) (16,566)
Accumulated other comprehensive (loss) (61) (68)
---------- ----------
TOTAL SHAREOWNERS' EQUITY 13,539 12,312
---------- ----------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 51,307 $ 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 Nine Months Ended
September 30,
-------------- --------------
2003 2002
-------------- --------------
Dollars in millions
AT&T Common Stock
Balance at beginning of year $ 783 $ 708
Shares issued, net:
Under employee plans 5 5
For funding AT&T Canada obligation - 46
Redemption of TCI Pacific preferred stock - 10
Other 1 1
--------- ---------
Balance at end of period 789 770
--------- ---------
Additional Paid-In Capital
Balance at beginning of year 28,163 54,798
Shares issued, net:
Under employee plans 129 295
For funding AT&T Canada obligation - 2,485
Redemption of TCI Pacific preferred stock - 2,087
Other 25 33
Dividends declared (482) (422)
Other 20 34
--------- ---------
Balance at end of period 27,855 59,310
--------- ---------
Accumulated deficit
Balance at beginning of year (16,566) (3,484)
Net income (loss) 1,525 (13,598)
Treasury shares issued at less than cost (3) -
--------- ---------
Balance at end of period (15,044) (17,082)
--------- ---------
Accumulated Other Comprehensive (Loss)
Balance at beginning of year (68) (342)
Other comprehensive income 7 207
--------- ---------
Balance at end of period (61) (135)
--------- ---------
Total Shareowners' Equity $ 13,539 $ 42,863
--------- ---------
Summary of Total Comprehensive Income (Loss):
Income (loss) before cumulative effect of accounting changes $ 1,510 $ (12,742)
Cumulative effect of accounting changes 15 (856)
--------- ---------
Net income (loss) 1,525 (13,598)
Other Comprehensive Income 7 207
--------- ---------
Comprehensive Income (Loss) $ 1,532 $ (13,391)
--------- ---------
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 Nine Months Ended
September 30,
-------------- --------------
2003 2002
-------------- --------------
Dollars in millions
OPERATING ACTIVITIES
Net income (loss) $ 1,525 $ (13,598)
Deduct:
Loss from discontinued operations - net of income taxes (13) (14,316)
Cumulative effect of accounting changes - net of income taxes 15 (856)
------------ ------------
Income from continuing operations 1,523 1,574
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 (51) (42)
Cost investment impairment charges - 141
Net restructuring and other charges 87 (28)
Depreciation and amortization 3,607 3,631
Provision for uncollectible receivables 588 701
Deferred income taxes 1,105 556
Net revaluation of certain financial instruments (3) 74
Minority interest income (1) (81)
Net pretax (earnings) losses related to equity investments (28) 670
Decrease in receivables 231 290
Decrease in accounts payable (428) (180)
Net change in other operating assets and liabilities 443 (409)
Other adjustments, net 40 47
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 7,113 6,944
------------ ------------
INVESTING ACTIVITIES
Capital expenditures and other additions (2,413) (2,813)
Proceeds from sale or disposal of property, plant and equipment 134 464
Investment sales and distributions 120 9
Net (acquisitions) dispositions of businesses, net of cash acquired (158) 19
Increase in restricted cash (22) (418)
Other investing activities, net (50) 125
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS (2,389) (2,614)
------------- ------------
FINANCING ACTIVITIES
Retirement of long-term debt, including redemption premiums (4,576) (999)
(Decrease) in short-term borrowings, net (1,263) (5,196)
Issuance of AT&T common shares 92 2,640
Dividends paid on common stock (442) (411)
Proceeds from long-term debt issuances - 79
Other financing activities, net 202 5
------------ ------------
NET CASH (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS (5,987) (3,882)
------------ ------------
Net cash (used in) discontinued operations - (4,133)
Net (decrease) in cash and cash equivalents (1,263) (3,685)
Cash and cash equivalents at beginning of year 8,014 10,680
------------ ------------
Cash and cash equivalents at end of period $ 6,751 $ 6,995
------------ ------------
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 quarters ended March 31, 2003, and June 30,
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 apply Accounting Principals Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our plans. Under APB Opinion 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 Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions (except per share amounts)
Net income (loss) $ 418 $ 207 $ 1,525 $(13,598)
Add:
Stock-based employee compensation included in
reported results from continuing operations, net of taxes 22 (2) 56 33
Stock-based employee compensation included in
reported results from discontinued operations, net of taxes - 2 - 6
Deduct:
Total stock-based employee compensation expense
determined under the fair value method for all awards
relating to continuing operations, net of taxes (59) (44) (168) (171)
Total stock-based employee compensation expense
determined under the fair value method for all awards
relating to discontinued operations, net of taxes - (17) - (51)
------- ------- ------- --------
Pro forma net income (loss) $ 381 $ 146 $ 1,413 $(13,781)
------- ------- ------- --------
Basic earnings (loss) per share $ 0.53 $ 0.27 $ 1.94 $ (18.47)
Proforma basic earnings (loss) per share $ 0.48 $ 0.19 $ 1.79 $ (18.72)
Diluted earnings (loss) per share $ 0.53 $ 0.26 $ 1.94 $ (17.92)
Proforma diluted earnings (loss) per share $ 0.48 $ 0.18 $ 1.80 $ (18.16)
Pro forma earnings from continuing operations were $421 million and $479
million for the three months ended September 30, 2003 and 2002,
respectively, and $1,411 million and $1,436 million for the nine months
ended September 30, 2003 and 2002, respectively. Pro forma (loss) from
discontinued operations was $(13) million and $(333) million for the three
months ended September 30, 2003 and 2002, respectively, and $(13) million
and $(14,361) million for the nine months ended September 30, 2003 and
2002, respectively.
Pro forma earnings per basic share from continuing operations was $0.53 and
$0.62 for the three months ended September 30, 2003 and 2002, respectively,
and $1.79 and $1.95 for the nine months ended September 30, 2003 and 2002,
respectively. Pro forma (loss) per basic share from discontinued operations
was $(0.02) and $(0.43), for the three months ended September 30, 2003 and
2002, respectively, and $(0.02) and $(19.51) for the nine months ended
September 30, 2003 and 2002, respectively.
Pro forma earnings per diluted share from continuing operati ons was $0.53
and $0.61 for the three months ended September 30, 2003 and 2002,
respectively, and $1.79 and $1.89 for the nine months ended September 30,
2003 and 2002, respectively. Pro forma (loss) per diluted share from
discontinued operations was $(0.02) and $(0.43), respectively, for the
three months ended September 30, 2003 and 2002, respectively, and $(0.01)
and $(18.92), respectively, for the nine months ended September 30, 2003
and 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 its useful life. Upon
settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement.
AT&T historically included in its group depreciation rates an amount
related to the cost of removal for certain assets. However, such amounts
are not legally enforceable or unavoidable; therefore, upon adoption of
SFAS No. 143, AT&T reversed the amount accrued in accumulated depreciation.
As of January 1, 2003, AT&T recorded income of $42 million as the
cumulative effect of a change in accounting principle primarily related to
this reversal. The impact of no longer including the cost of removal in the
group depreciation rates, partially offset by the cumulative effect impact
on accumulated depreciation, has resulted 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."
Financial Accounting Standards Board Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities - an Interpretation of
Accounting Research Bulletin No. 51"
Effective July 1, 2003, AT&T early adopted FIN 46. This interpretation
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. 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 had no
ownership interest in either entity, but provided guarantees of the
residual values for the leased facilities with a maximum exposure of $427
million. The adoption of FIN 46 added approximately $433 million of assets
(included in property, plant and equipment of AT&T Business Services and
Corporate and Other group) and $477 million of liabilities (included in
short-term debt) to our consolidated balance sheet and resulted in a charge
of $27 million, net of income taxes, as the cumulative effect of an
accounting change in the third quarter of 2003. The noncash impacts of the
adoption of this interpretation include a $433 million increase in
property, plant and equipment and a $477 million increase in debt. (See
note 10 for discussion on exercise of purchase option).
Other Recently Adopted Accounting Pronouncements
During 2003, AT&T also adopted the following accounting pronouncements,
which did not have an impact upon the initial adoption:
- SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities,"
- SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity,"
- EITF 02-18, "Accounting for Subsequent Investments in an Investee
after Suspension of Equity Method Loss Recognition,"
- EITF 00-21, "Revenue Arrangements with Multiple Deliverables" and
- EITF 01-8, "Determing Whether an Arrangement Contains a Lease."
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 65 - 65
---------- ---------- ----------
Balance at September 30, 2003 $ 4,621 $ 70 $ 4,691
---------- ---------- ----------
Gross Carrying Accumulated Net
Amount Amortization Intangible Assets
-------------- ------------ -----------------
Dollars in millions
INTANGIBLE ASSETS
Amortizable purchased intangible assets at
September 30, 2003:
Customer lists and relationships $ 539 $ 152 $ 387
Other 267 146 121
---------- ---------- ----------
Total intangible assets $ 806 $ 298 $ 508
---------- ---------- ----------
The amortization expense associated with purchased intangible assets for
the three and nine months ended September 30, 2003, was $19 million and $52
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.
Nine months ended
September 30,
-------- --------
2003 2002
-------- --------
Dollars in millions
OTHER COMPREHENSIVE INCOME (LOSS):
Net foreign currency translation adjustment [net of income taxes of $(59) and $(38)] $ 97 $ 61
Net revaluation of certain financial instruments:
Unrealized gains (losses) [net of income taxes of $(66) and $443] 107 (717)
Recognition of previously unrealized (gains) losses [net of income taxes of $118
and $(535)] (1) (191) 863
Net minimum pension liability adjustment (net of income taxes of $3 and $0] (6) -
-------- --------
Total other comprehensive income $ 7 $ 207
-------- --------
(1) See below for a summary of the "Recognition of previously
unrealized (gains) losses" and the Statement of Operations line
items impacted.
For the Nine Months Ended September 30,
----------------------------------------------
SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED 2003 2002
(GAINS) LOSSES AND THE LINE ITEMS IMPACTED: ----------------------------------------------
Pretax After-tax Pretax After-tax
------ --------- ------ ---------
Dollars in millions
Other income/expense, net:
Other-than-temporary investment impairments $ - $ - $ 142 $ 88
Sale/exchange of various securities (1) (209) (129) - -
Other financial instrument activity (100) (62) - -
Income from discontinued operations - - 1,256 775
------ --------- ------ ---------
Total recognition of previously unrealized (gains) losses $ (309) $ (191) $1,398 $ 863
------ --------- ------ ---------
(1) 2003 includes a $0.2 billion pretax gain associated with the
redemption of exchangeable notes that were indexed to AT&T Wireless
common stock.
5. ACCESS AND OTHER CONNECTION
In September 2003, in conjunction with our review of accounting and
internal control systems, the Company determined that the liability on the
balance sheet (included in accounts payable) relating to costs incurred in
2001 and 2002 pertaining to access and other connection expense was
understated by $125 million. Since the impact to prior years' annual
financial statements was not material, the Company recorded an additional
expense of $125 million ($77 million after-tax) in the third quarter of
2003 to reflect the proper estimate of the liability.
A review was conducted by outside legal counsel, under the direction of the
Audit Committee. This review found that two employees, one lower-level and
one mid-level management employee, circumvented the internal controls
process, resulting in the financial impacts noted below. The Company made
the appropriate personnel changes and enhanced its internal controls
accordingly.
The expense, properly recorded in the respective periods, would have
impacted quarterly and annual income from continuing operations as follows:
-------------------------------------------------------------------------------------------------------------
Income From Earnings Per Diluted
Continuing Share--Continuing
Impact: (Decrease)/Increase Operations Operations
-------------------------------------------------------------------------------------------------------------
Dollars in millions (except per share amounts)
For the Three Months Ended:
September 30, 2001 $ (33) $ (0.04)
December 31, 2001 $ 1 $ 0.01
March 31, 2002 $ (64) $ (0.08)
June 30, 2002 $ 12 $ 0.02
September 30, 2002 $ 14 $ 0.01
December 31, 2002 $ (7) $ (0.01)
For the Year Ended:
December 31, 2001 $ (32) $ (0.04)
December 31, 2002 $ (45) $ (0.06)
6. 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 Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
------- -------- ------- --------
Shares in millions
Weighted-average common shares 789 770 787 736
Effect of dilutive securities:
Stock options 2 - 1 1
Preferred stock of subsidiary - - - 4
Convertible quarterly income preferred securities - 18 - 18
Weighted-average common shares and potential --- --- --- ---
common shares 791 788 788 759
--- --- --- ---
For the three and nine months ended September 30, 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. 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.
7. NET RESTRUCTURING AND OTHER CHARGES
For the three months ended September 30, 2003, net restructuring and other
charges of $64 million consisted of $75 million of costs associated with
the Company's management realignment efforts (involuntarily impacting
approximately 800 mid-level managers), primarily representing separation
costs, partially offset by the reversal of $11 million of sales obligation
liabilities recorded in a prior year, associated with the disposition of
AT&T Communications (U.K.) Ltd, where the liabilities incurred were below
the original estimate. This quarter's business restructuring activity
reflects the next step towards completion of the Company's initiative to
streamline its management structure, which is expected to be completed by
the end of 2003.
Net restructuring and other charges of $134 million for the nine months
ended September 30, 2003, consists of costs associated with the Company's
management realignment efforts, primarily separation costs. These exit
plans involuntarily impacted approximately 900 managers across the Company,
almost 30% of which have exited the business as of September 30, 2003, with
substantially all of the remainder expected to be off roll by the end of
2003. These activities were partially offset by the reversal of $11million
of sales obligation liabilities recorded in a prior year, associated with
the disposition of AT&T Communications (U.K.) Ltd, where the liabilities
incurred were below the original estimate.
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 124 - - 124
Deductions (300) (60) (1) (361)
---------- ---------- ---------- ---------
Balance at September 30, 2003 $ 203 $ 223 $ 2 $ 428
---------- ---------- ---------- ---------
Deductions primarily reflect cash payments, which included cash termination
benefits of $285 million, funded primarily through cash from operations.
For the three and nine months ended September 30, 2002, AT&T recorded a net
reversal of $26 million of net restructuring and other charges. At that
time, AT&T's management reevaluated the business restructuring plan
established in the fourth quarter of 2001 and determined that the plan
needed to be modified, primarily for certain areas of AT&T Business
Services, including network services, given the industry conditions at that
time, as well as the redeployment of certain employees to different
functions within the Company. As a result, approximately $137 million of
net restructuring and other charges were reversed, which primarily
consisted of $110 million for employee separation costs. The reversals also
included $12 million of sales obligation liabilities recorded in a prior
year associated with the disposition of AT&T Communications (U.K.) Ltd,
where the liabilities incurred were below the original estimate. AT&T's
management developed a new exit plan to ensure proper management of our
cost structure in other areas of AT&T Business Services, including network
services, with an offsetting additional charge of $111 million. This plan
primarily consisted of $91 million for employee separation costs and $16
million for facility closings related to buildings becoming vacant as a
result of previously announced restructuring plans. Of the 1,400 employees
affected by this exit plan, slightly more than half were management
employees and 17% left voluntarily.
Relative to the business restructuring reserves recorded during the third
and fourth quarters of 2002, approximately 70% of the employees affected by
these exit plans have left their positions as of September 30, 2003, with
the remaining reductions to occur by the end of 2003.
8. DISCONTINUED OPERATIONS
NCR CORPORATION
Net (loss) from discontinued operations for the three and nine months ended
September 30, 2003, reflects an estimated cost related to potential legal
liabilities for certain environmental clean-up matters associated with NCR
Corporation (NCR), which was spun-off from AT&T in 1996. NCR has been
formally notified by federal and state agencies that it is a potentially
responsible party (PRP) for environmental claims under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and
other statutes arising out of the presence of polychlorinated biphenyls
(PCBs) in sediments in the lower Fox River and in the Bay of Green Bay, in
Wisconsin. NCR was identified as a PRP because of alleged PCB discharges
from two carbonless copy paper manufacturing facilities it previously
owned, which were located along the Fox River. In July 2003, the government
clarified its planned approach for remediation of the contaminated
sediments, which caused NCR to increase its estimated liability. Under the
separation and distribution agreement between AT&T and NCR, AT&T is
required to pay a portion of such costs that NCR incurs above a certain
threshold. Therefore, in the third quarter of 2003, AT&T recorded its
estimated proportionate share of certain costs associated with the Fox
River matter, which totaled $13 million on both, a pretax and after-tax
basis. The extent of NCR's potential liability is subject to numerous
variables that are uncertain at this time, including the actual remediation
costs and the percentage NCR may ultimately be responsible for. As a
result, AT&T's actual liability may be different than the estimated amount.
Pursuant to the separation and distribution agreement, NCR is liable for
the first $100 million of costs in connection with this liability. AT&T is
liable for 37% of costs incurred by NCR beyond such $100 million threshold.
All such amounts are determined after reduction of any monies collected by
NCR from other parties.
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 $2,547 million and $7,512 million
for the three and nine months ended September 30, 2002, respectively. Net
(loss) from discontinued operations before income taxes was $(399) million
[$(318) million after-tax] for the three months ended September 30, 2002,
and $(20,071) million [$(14,228) million after-tax] for the nine months
ended September 30, 2002. For the three and nine months ended September 30,
2002, interest expense of $114 million and $287 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 nine months ended
September 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 different than amounts accrued as of
September 30, 2003. 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.
9. 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 nine months ended September 30, 2002, AT&T recorded charges
of $0.3 billion after-tax ($0.5 billion pretax) within "Net (losses)
earnings related to equity investments," reflecting further deterioration
in the underlying value of AT&T Canada as well as accretion of the floor
price.
During 2002, AT&T arranged for third parties (Tricap Investment Corporation
and CIBC Capital Partners) to purchase the remaining 69% equity in AT&T
Canada. As part of this agreement, AT&T agreed to fund the purchase price
on behalf of the third parties. Tricap and CIBC Partners made a nominal
payment to AT&T upon completion of the 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. As of
September 30, 2003, AT&T had disposed of all of its AT&T Canada shares.
Summarized financial information for the three and nine months ended
September 30, 2002, for this investment accounted for under the equity
method was as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2002
-------------------- -------------------
Dollars in millions
Revenue $ 232 $ 719
Operating income (loss) 5 (869)
(Loss) from continuing operations before extraordinary
items and cumulative effect of accounting changes (163) (1,215)
Net (loss) (163) (2,194)
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 (losses)
earnings 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 nine months ended
September 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 nine months ended September 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 10). 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 (expense) income, net."
10. DEBT OBLIGATIONS
LONG-TERM DEBT
On January 31, 2003, AT&T completed the early retirement of $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 (expense) income, net."
On September 15, 2003, AT&T completed the early retirement of $322 million
and $184 million long-term notes, with an interest rate of 8.125%, due in
January 2022 and July 2024, respectively. The notes were repurchased with
cash and resulted in a loss of $23 million recorded in "Other (expense)
income, net."
On October 22, 2003, AT&T completed the early retirement of three long-term
notes totaling approximately $1.1 billion (as previously called for early
redemption on September 22, 2003). The first note of $236 million, had an
interest rate of 8.625%, and was due in December 2031. The other two notes,
with $410 million and $439 million of principal amounts outstanding, bore
interest rates of 5.625% and 6.375%, respectively, and were each due in
March 2004. The notes were repurchased with cash and resulted in a loss of
$32 million recorded in "Other (expense) income, net."
In September 2003, AT&T gave notice to exercise its purchase option on
buildings we lease, which were consolidated in July along with debt of
approximately $477 million, as a result of our adoption of FIN 46 (see note
3). A $28 million loss on the early extinguishment of debt was recorded in
"Other (expense) income, 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)," 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)," 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 (expense) income, 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.
11. 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.
Interest Rate Swap Agreements
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 of 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 (London
Inter-Bank Offered Rate). In 2003, we entered into $1.0 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", as amended. The weighted-average
receive rate and pay rate for these swaps at September 30, 2003, was 4.23%
and 2.55%, 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 $514 million since December 31, 2002, to $1,174
million at September 30, 2003, primarily due to the strength of the Euro
currency compared with the U.S. dollar.
In connection with the combined interest rate swap agreements, as of
September 30, 2003, we had received $200 million of cash collateral
(included in "Cash" in the Consolidated Balance Sheet) and $10 million of
security collateral (included in "Other current assets" in the Consolidated
Balance Sheet).
Debt Securities
As of September 30, 2003, the carrying value of our long-term debt
(including currently maturing long-term debt), excluding capital leases,
was $15.9 billion. The market value associated with this debt was $17.5
billion. The carrying value of debt with an original maturity of less than
one year approximates market value. The fair values of long-term debt were
obtained based on quotes for these securities.
12. 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 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 9).
13. 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
if the settlement exceeds certain thresholds. With the exception of two
matters already reserved for (Sparks, et al. v. AT&T Lucent Technologies
and NCR's Fox River environmental clean-up matter, see note 8), 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 October 2003, the Federal Communications Commission (FCC) found that
AT&T violated Section 203 of the Communications Act of 1934 (Act) for
refusing to transfer the customers of one reseller to the service plans of
another reseller. The actions which gave rise to this finding were the
subject of a lawsuit filed in March 1995 in the United States District
Court for the District of New Jersey by Combined Companies, Inc, Winback &
Conserve, One Stop Financial, 800 Discounts and Group discounts, Inc.
against AT&T. AT&T intends to appeal this decision, as it believes its
actions were consistent with its obligations under the Act. In addition,
AT&T's liability in this matter is subject to the plaintiff proving it
sustained damages and demonstrating the amount to which it claims to be
entitled. Thus, the extent of liability cannot be estimated at this time.
In the original lawsuit plaintiff had sought an injunction requiring AT&T
to transfer customers from one reseller to another. Plaintiff has not filed
an amended complaint asserting damages.
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
September 30, 2003. However, we believe that after final disposition, any
monetary liability or financial impact to us beyond that provided for at
September 30, 2003, would not be material to our annual consolidated
financial statements.
LEASES AND OTHER COMMITMENTS
Under certain real estate operating leases (with entities consolidated as a
result of FIN 46, see note 3), AT&T could have been required to make
payments to the lessors of up to $427 million at the end of the lease term.
In September 2003, AT&T gave notice to exercise its purchase options under
these leases. As a result of the exercise of these options, AT&T will no
longer have a potential payment requirement.
14. 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 generally 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 Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
AT&T Business Services external revenue $ 6,282 $ 6,602 $ 19,125 $ 19,697
AT&T Business Services internal revenue - 98 - 273
-------- -------- -------- --------
Total AT&T Business Services revenue 6,282 6,700 19,125 19,970
AT&T Consumer Services external revenue 2,353 2,794 7,265 8,791
-------- -------- -------- --------
Total reportable segments 8,635 9,494 26,390 28,761
Corporate and Other 14 (85) 40 (224)
-------- -------- -------- --------
Total revenue $ 8,649 $ 9,409 $ 26,430 $ 28,537
-------- -------- -------- --------
RECONCILIATION OF OPERATING INCOME TO INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST INCOME,
AND NET (LOSSES) EARNINGS RELATED TO EQUITY INVESTMENTS
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
AT&T Business Services operating income $ 417 $ 854 $ 1,614 $ 2,577
AT&T Consumer Services operating income 500 595 1,621 2,203
-------- -------- -------- --------
Total reportable segments operating income 917 1,449 3,235 4,780
Corporate and Other operating (loss) (88) (34) (211) (139)
-------- -------- -------- --------
Operating income 829 1,415 3,024 4,641
Other (expense) income, net (7) (180) 89 (285)
Interest (expense) (289) (355) (917) (1,087)
-------- -------- -------- --------
Income from continuing operations before
income taxes, minority interest income, and
net (losses) earnings related to equity investments $ 533 $ 880 $ 2,196 $ 3,269
-------- -------- -------- --------
ASSETS
At At
September 30, December 31,
2003 2002
------------- ------------
Dollars in millions
AT&T Business Services assets $ 34,951 $ 36,389
AT&T Consumer Services assets 1,095 1,390
-------- --------
Total reportable segments assets 36,046 37,779
Corporate and Other assets* 15,261 17,493
-------- --------
Total assets $ 51,307 $ 55,272
-------- --------
* Includes cash of $6.4 billion at September 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATONS
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 nine months ended September 30, 2003,
and 2002, and financial condition as of September 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 and third quarters 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) earnings 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 Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
AT&T Business Services $ 6,282 $ 6,700 $ 19,125 $ 19,970
AT&T Consumer Services 2,353 2,794 7,265 8,791
Corporate and Other 14 (85) 40 (224)
-------- -------- -------- --------
Total revenue $ 8,649 $ 9,409 $ 26,430 $ 28,537
-------- -------- -------- --------
Total revenue decreased $0.8 billion, or 8.1%, in the third quarter of 2003,
compared with the third quarter of 2002, and decreased $2.1 billion, or 7.4%, in
the nine months ended September 30, 2003, compared with the nine months ended
September 30, 2002. The declines were driven by continued declines in
stand-alone long distance voice revenue of approximately $1.0 billion for the
third quarter of 2003, and $2.9 billion for the nine months ended September 30,
2003, compared with the respective prior year periods. The declines in
stand-alone long distance voice revenue reflect competition, which has led to
lower prices and loss of market share, the impact of substitution by consumers
and a decline in business retail volumes, partially offset by strength in
business wholesale volumes. Total long distance voice volumes (including long
distance volumes sold as part of a bundled product) increased about 6% for the
third quarter of 2003, and increased about 5% for the nine months ended
September 30, 2003, compared with the same periods of 2002, as growth in
lower-priced business wholesale 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 third quarter of 2003,
and $0.7 billion for the nine months ended September 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 in the third quarter of
2003, and $0.3 billion for the nine months ended September 30, 2003, compared
with the respective prior year periods.
Revenue by segment is discussed in greater detail in the Segment Results
section.
Operating Expenses
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
Access and other connection $ 2,785 $ 2,679 $ 8,191 $ 8,214
Costs of services and products 1,954 2,066 5,923 6,166
Selling, general and administrative 1,793 2,032 5,551 5,911
Depreciation and amortization 1,224 1,243 3,607 3,631
Net restructuring and other charges 64 (26) 134 (26)
--------- -------- -------- --------
Total operating expenses $ 7,820 $ 7,994 $ 23,406 $ 23,896
--------- -------- -------- --------
Operating income $ 829 $ 1,415 $ 3,024 $ 4,641
Operating margin 9.6% 15.0% 11.4% 16.3%
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 increased 4.0%, or $0.1 billion, in the
third quarter of 2003 and decreased 0.3%, or $23 million, for the nine months
ended September 30, 2003, compared with the same periods of 2002. Domestic
access charges for the third quarter and year-to-date period included a $125
million access expense adjustment to reflect the proper estimate of liability
relating to access costs incurred in 2001 and 2002 (see note 5). Excluding this
adjustment, domestic access charges declined $0.1 billion for the third quarter
and $0.4 billion for the year-to-date period. These declines were primarily due
to lower Universal Service Fund contributions and per-line charges of $0.1
billion for the quarter and $0.3 billion for the year-to-date period primarily
resulting from the decline in long distance voice revenue. In addition, the
declines were due to more efficient network usage and product mix aggregating
$0.2 billion for the third quarter and $0.3 billion for the year-to-date period.
These declines in domestic access charges were partially offset by higher costs
of $0.1 billion for the quarter and $0.2 billion for the year-to-date period as
a result of overall long distance volume growth. Also contributing to the
decline in access and other connection expenses 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 $0.4 billion for the
year-to-date period, 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 $0.1 billion, or 5.4%, in the third
quarter of 2003 and $0.2 billion, or 3.9%, in the first nine 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, a lower provision
for uncollectibles, as well as by the deconsolidation of AT&T Latin America.
These declines were partially offset by the impact of a weak U.S. dollar.
Additionally, the decrease for the nine months ended September 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 $0.2 billion, or
11.8%, in the third quarter of 2003 and $0.4 billion, or 6.1%, in the nine
months ended September 30, 2003, compared with the corresponding periods in
2002. The decreases were driven by approximately $0.2 billion for the quarter
and $0.3 billion for the year-to-date period of lower expenses due to reduced
volumes at AT&T Consumer Services resulting from a reduction in the number of
residential customers, as well as overall cost control efforts. The year-to-date
decrease was also driven by $0.1 billion of lower long distance and brand
advertising and promotional spending, partially offset by $0.1 billion of
increased marketing, customer care and sales expenses associated with new local
service offerings by AT&T Consumer Services.
DEPRECIATION AND AMORTIZATION EXPENSES decreased $19 million, or 1.5%, in the
third quarter of 2003, compared with the third quarter of 2002, and decreased
$24 million, or 0.7%, in the nine months ended September 30, 2003, compared with
the corresponding period in 2002. The decreases were primarily due to the
adoption of Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations," and 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 $1.2 billion and $1.0 billion
for the three months ended September 30, 2003 and 2002, respectively, and were
$2.7 billion and $2.6 billion for the nine months ended September 30, 2003 and
2002, respectively. These amounts include $0.4 billion recorded in the third
quarter of 2003 in connection with the adoption of Financial Accounting
Standards Board Interpretation (FIN) No. 46, "Consolidation of Variable Interest
Entities - an Interpretation of Accounting Research Bulletin No. 51." We
continue to focus the majority of our capital spending on Internet protocol &
enhanced services (IP&E services) and data services, both of which include
managed services, as well as local voice services.
In the third quarter of 2003, NET RESTRUCTURING AND OTHER CHARGES of $64 million
consisted of $75 million of costs associated with the Company's management
realignment efforts (involuntarily impacting approximately 800 mid-level
managers), primarily representing separation costs, partially offset by the
reversal of $11 million of sales obligation liabilities recorded in a prior
year, associated with the disposition of AT&T Communications (U.K.) Ltd, where
the liabilities incurred were below the original estimate. This quarter's
business restructuring activity reflects the next step towards completion of the
Company's initiative to streamline its management structure, which is expected
to be completed by the end of 2003. The completion of these activities will
require AT&T to record an additional charge in the fourth quarter of 2003.
However, it is anticipated that it will be lower than the charge recorded in the
third quarter of 2003.
Net restructuring and other charges of $134 million for the nine months ended
September 30, 2003, consists of costs associated with the Company's management
realignment efforts, primarily separation costs. These exit plans involuntarily
impacted approximately 900 managers across the company, almost 30% of which have
exited the business as of September 30, 2003, with substantially all of the
remainder expected to be off roll by the end of 2003. These activities were
partially offset by the reversal of $11 million of sales obligation liabilities
recorded in a prior year, associated with the disposition of AT&T Communications
(U.K.) Ltd, where the liabilities incurred were below the original estimate. The
exit plans are 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 $225 million of
cash savings and benefit to operating income in subsequent years, when the exit
plan is completed.
For the three and nine months ended September 30, 2002, AT&T recorded a net
reversal of $26 million of net restructuring and other charges. At that time,
AT&T's management reevaluated the business restructuring plan established in the
fourth quarter of 2001 and determined that the plan needed to be modified,
primarily for certain areas of AT&T Business Services, including network
services, given the industry conditions at that time, as well as the
redeployment of certain employees to different functions within the Company. As
a result, approximately $137 million of net restructuring and other charges were
reversed, which primarily consisted of $110 million for employee separation
costs. The reversals also included $12 million of sales obligation liabilities
recorded in a prior year associated with the disposition of AT&T Communications
(U.K.) Ltd, where the liabilities incurred were below the original estimate.
AT&T's management developed a new exit plan to ensure proper management of our
cost structure in other areas of AT&T Business Services, including network
services, with an offsetting additional charge of $111 million. This plan
primarily consisted of $91 million for employee separation costs and $16 million
for facility closings related to buildings becoming vacant as a result of
previously announced restructuring plans. Of the 1,400 employees affected by
this exit plan, slightly more than half were management employees and 17% left
voluntarily.
Relative to the business restructuring reserves recorded during the third and
fourth quarters of 2002, approximately 70% of the employees affected by these
exit plans have left their positions as of September 30, 2003, with the
remaining reductions to occur by the end of 2003.
AT&T's OPERATING INCOME in the third quarter of 2003 decreased $0.6 billion, or
41.4%, compared with the third quarter of 2002. For the nine months ended
September 30, 2003, AT&T's operating income declined $1.6 billion, or 34.8%,
compared with the sameperiod in 2002. AT&T's operating margin was 9.6% in the
third quarter of 2003 compared with 15.0% in the third quarter of 2002, and was
11.4% in the 2003 year-to-date period, compared with 16.3% in the 2002
year-to-date period. The margin declines were primarily due to the decline in
revenue coupled with a lower rate of decline in related operating expenses
reflecting 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. In addition, the margins were
negatively impacted by a $125 million access expense adjustment recorded in the
third quarter of 2003.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
Other (expense) income, net $ (7) $ (180) $ 89 $ (285)
OTHER (EXPENSE) INCOME, NET, in the third quarter of 2003 was expense of $7
million compared with expense of $0.2 billion in the third quarter of 2002. The
favorable variance of $0.2 billion was primarily due to impairments of $0.2
billion in the third quarter of 2002 related to certain leases of aircraft which
are accounted for as leveraged leases. Additionally, investment-related income
for the third quarter of 2003 increased compared with the comparable prior year
period. Unfavorably impacting other (expense) income, net was a loss of $0.1
billion, associated with the early call of certain debt instruments.
Other (expense) income, net, in the nine months ended September 30, 2003, was
income of $0.1 billion compared with expense of $0.3 billion in the nine months
ended September 30, 2002. The favorable variance of $0.4 billion was primarily
due to impairments of $0.2 billion in the third quarter of 2002 related to
certain leases of aircraft, which are accounted for as leveraged leases and
lower investment impairment charges of $0.1 billion, primarily driven by
impairment charges recorded in 2002 for Time Warner Telecom. Also contributing
to the favorable variance were gains related to mark-to-market adjustments on
financial instruments recorded in 2003 versus losses in 2002 and increased
investment-related income totaling $0.1 billion. Partially offsetting these
favorable items 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 (expense) income, net, in the first nine months of 2003 were losses of
$0.3 billion associated with the early call and repurchase of long-term debt
instruments. This loss was partially offset by a $0.2 billion gain, also in the
first nine months 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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
Interest (expense) $ (289) $ (355) $ (917) $(1,087)
INTEREST (EXPENSE) decreased 18.7%, or $0.1 billion, in the third quarter of
2003 compared with the third quarter of 2002, and decreased 15.7%, or $0.2
billion, in the nine months ended September 30, 2003 compared with the first
nine months 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.
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
(Provision) for income taxes $ (72) $ (370) $ (677) $(1,362)
Effective tax rate 13.5% 42.0% 30.8% 41.7%
The (PROVISION) FOR INCOME TAXES decreased $0.3 billion in the third quarter of
2003 compared with the third quarter of 2002. This decrease was primarily due to
the impact of a lower effective tax rate and lower income before income taxes in
the third quarter of 2003. The effective tax rate in the third quarter of 2003
was 13.5%, compared with 42.0% in the prior year quarter. The effective tax rate
in 2003 was positively impacted by approximately 22.5 percentage points due to
the recognition of approximately $120 million of tax benefits associated with
refund claims, which received governmental approval during the third quarter.
The tax refund claims related to additional research and experimentation tax
credits generated in prior years. The effective tax rate in 2002 was negatively
impacted by charges we recorded in connection with certain investments in
leveraged leases, for which a limited tax benefit was recorded.
The (provision) for income taxes decreased $0.7 billion in the first nine months
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 nine months of 2003. The effective tax rate in the first nine
months of 2003 was 30.8%, compared with 41.7% for the same period of 2002. The
effective tax rate in 2003 was positively impacted by approximately 5.5
percentage points due to the recognition of approximately $120 million of tax
benefits associated with tax refund claims related to additional research and
experimentation tax credits generated in prior years. In addition, the 2003
effective tax rate 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 AT&T Latin America's losses, for which the Company was
unable to record tax benefits, as well as by charges we recorded in 2002 in
connection with certain investments in leveraged leases for which a limited tax
benefit was recorded.
In the fourth quarter of 2002, AT&T recorded a valuation allowance against the
deferred tax asset attributable to the book and tax basis difference for our
investment in AT&T Latin America. AT&T's ability to realize the deferred tax
asset related to AT&T Latin America is dependent on factors outside of AT&T's
control. Based on the resolution of various matters, which are expected over the
next 12-15 months, AT&T may determine that all, or a portion of, the valuation
allowance established in 2002 would no longer be necessary.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
Minority interest income $ - $ 28 $ 1 $ 81
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 $28 million in the third quarter of 2003 compared with the
third quarter of 2002, and decreased $80 million in the nine months ended
September 30, 2003, compared with the comparable period in 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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
Net (losses) earnings related to equity investments $ (3) $ (13) $ 3 $ (414)
NET (LOSSES) EARNINGS RELATED TO EQUITY INVESTMENTS, which are recorded net of
income taxes, were losses of $3 million in the third quarter of 2003 compared
with losses of $13 million in the third quarter of 2002. The favorable variance
was primarily driven by a $13 million after-tax charge ($21 million pretax)
recorded in the third quarter of 2002 due to the accretion of the floor price of
AT&T's obligation to purchase the shares of AT&T Canada not owned by AT&T.
For the nine months ended September 30, 2003, net (losses) earnings related to
equity investments were earnings of $3 million compared with losses of $414
million for the nine months ended September 30, 2002. The favorable variance was
driven primarily by after-tax charges of $326 million ($528 million pretax)
recorded in 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 2003 related to the unwind of the Concert joint venture,
totaling $84 million after-tax ($136 million pretax).
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
Net (loss) from discontinued operations, net of
income taxes $ (13) $ (318) $ (13) $(14,316)
NET (LOSS) FROM DISCONTINUED OPERATIONS for the three and nine months ended
September 30, 2003, reflects an estimated cost related to potential legal
liabilities for certain environmental clean-up matters associated with NCR
Corporation (NCR), which was spun-off from AT&T in 1996. NCR has been formally
notified by federal and state agencies that it is a potentially responsible
party (PRP) for environmental claims under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA) and other statutes
arising out of the presence of polychlorinated biphenyls (PCBs) in sediments in
the lower Fox River and in the Bay of Green Bay, in Wisconsin. NCR was
identified as a PRP because of alleged PCB discharges from two carbonless copy
paper manufacturing facilities it previously owned, which were located along the
Fox River. In July 2003, the government clarified its planned approach for
remediation of the contaminated sediments, which caused NCR to increase its
estimated liability. Under the separation and distribution agreement between
AT&T and NCR, AT&T is required to pay a portion of such costs that NCR incurs
above a certain threshold. Therefore, in the third quarter of 2003, AT&T
recorded its estimated proportionate share of certain costs associated with the
Fox River matter, which totaled $13 million on both, a pretax and after-tax
basis. The extent of NCR's potential liability is subject to numerous variables
that are uncertain at this time, including the actual remediation costs and the
percentage NCR may ultimately be responsible for. As a result, AT&T's actual
liability may be different than the estimated amount. Pursuant to the separation
and distribution agreement, NCR is liable for the first $100 million of costs in
connection with this liability. AT&T is liable for 37% of costs incurred by NCR
beyond such $100 million threshold. All such amounts are determined after
reduction of any monies collected by NCR from other parties.
Net (loss) from discontinued operations for the three and nine months ended
September 30, 2002 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 September 30, 2002, was a loss of $318
million after-tax ($399 million pretax). For the nine months ended September 30,
2002, AT&T Broadband's operating loss was $14,228 million after-tax ($20,071
million pretax).
Also included in net (loss) from discontinued operations for the three and nine
months ended September 30, 2002, 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 different than amounts accrued at September 30,
2003. 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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
Cumulative effect of accounting changes $ (27) $ - $ 15 $ (856)
Effective July 1, 2003, we early adopted FIN 46, "Consolidation of Variable
Interest Entities - an Interpretation of Accounting Research Bulletin (ARB) No.
51," resulting in a charge of $27 million, net of income taxes of $17 million,
recognized as the CUMULATIVE EFFECT of accounting change in the third quarter of
2003. This interpretation 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. Based on this
standard, two entities that AT&T leases buildings from qualify as VIEs and,
therefore, were consolidated as of July 1, 2003.
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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Earnings from continuing operations per basic share $ 0.58 $ 0.68 $ 1.94 $ 2.14
Total earnings (loss) per basic share 0.53 0.27 1.94 (18.47)
Earnings from continuing operations per diluted share $ 0.58 $ 0.67 $ 1.93 $ 2.07
Total earnings (loss) per diluted share 0.53 0.26 1.94 (17.92)
EARNINGS PER DILUTED SHARE from continuing operations declined $0.09 to $0.58 in
the third quarter of 2003 compared with $0.67 per diluted share in the third
quarter of 2002. For the nine months ended September 30, 2003, earnings per
share from continuing operations declined $0.14 to $1.93 from $2.07 for the nine
months ended September 30, 2002. The decline for the quarter was primarily
driven by lower operating income, partially offset by favorable variances in
other (expense) income, interest expense and the provision for income taxes. The
decline for the year-to-date period was primarily due to lower operating income,
partially offset by favorable variances in net earnings (losses) related to
equity investments, other income and the provision for income taxes. Also
contributing to the decline in the year-to-date period 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 12).
In the third quarter of 2003, total diluted earnings per share of $0.53 included
income from continuing operations as discussed above of $0.58, a loss from
discontinued operations of $0.02 and a loss related to the cumulative effect of
an accounting change of $0.03. Total earnings per share of $1.94 for the nine
months ended September 30, 2003, included income from continuing operations as
discussed above of $1.93, a loss from discontinued operations of $0.01 and
income related to the cumulative effect of accounting changes of $0.02.
In the third quarter of 2002, total diluted earnings per share of $0.26 included
income from continuing operations as discussed above of $0.67 and a loss from
discontinued operations of $0.41. For the nine months ended September 30, 2002,
total diluted loss per share of $17.92 included income from continuing
operations as discussed above of $2.07, a loss from discontinued operations of
$18.86, and a loss related to the cumulative effect of an accounting change of
$1.13.
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 (e.g., e-mail, video or computer file) 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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
Services revenue* $ 6,199 $ 6,616 $ 18,903 $ 19,697
Equipment and product sales 83 84 222 273
-------- -------- -------- --------
Total revenue $ 6,282 $ 6,700 $ 19,125 $ 19,970
-------- -------- -------- --------
Operating income $ 417 $ 854 $ 1,614 $ 2,577
Capital additions $ 995 $ 912 $ 2,396 $ 2,418
At At
September 30, December 31,
2003 2002
------------- ------------
Total assets $ 34,951 $ 36,389
* For the three and nine months ended September 30, 2002, services revenue
included $98 million and $273 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 $0.4 billion, or 6.2%, in the third
quarter of 2003 and declined $0.8 billion, or 4.2%, for the nine months ended
September 30, 2003, compared with the same prior year periods. The decreases
were primarily driven by declines in long distance voice services, decreased
data services and lower outsourcing contract revenue, 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, which was fully consolidated in 2002,
but not in 2003.
Long distance voice revenue for the third quarter of 2003 declined $328 million,
or 10.5%, to $2.8 billion and decreased $766 million, or 8.2%, to $8.6 billion,
for the nine months ended September 30, 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 combined with a decline in retail
volumes. These factors are expected to continue to negatively impact revenue.
Total long distance volumes grew nearly 15% in the third quarter 2003 and
approximately 13% for the nine months ended September 30, 2003, compared with
the same prior year periods, reflecting an increase in lower-priced wholesale
minutes more than offsetting the decrease in higher-priced retail minutes. This
volume increase was not enough to offset the price declines previously noted.
Data services revenue declined 6.5%, or $137 million, to $1.9 billion, compared
with the third quarter of 2002, and declined 3.8%, or $239 million, to $5.9
billion, for the nine months ended September 30, 2003, compared with the nine
months ended September 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. Excluding equipment and product
sales, data services revenue declined 5.7% in the third quarter of 2003 compared
with the third quarter of 2002, and declined 3.6% in the nine months ended
September 30, 2003, compared with the nine months ended September 30, 2002.
IP&E services revenue increased $55 million, or 13.0%, to $476 million in the
third quarter of 2003 compared with the third quarter of 2002 driven by
increases in managed internet access, hosting and related equipment and product
sales. For the nine months ended September 30, 2003, IP&E services revenue
increased $145 million, or 11.8% to $1.4 billion, compared with the nine months
ended September 30, 2002, driven primarily by increases in managed internet
access, hosting and related equipment and product sales. Excluding equipment and
product sales, IP&E services revenue increased 8.6% in the third quarter of 2003
compared with the third quarter of 2002, and increased 10.0% in the nine months
ended September 30, 2003, compared with the nine months ended September 30,
2002.
Local voice services revenue grew $105 million, or 37.9%, to $379 million in the
third quarter of 2003, and grew $279 million, or 33.9%, to $1.1 billion in the
nine months ended September 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 over 4.3 million access lines in service at
September 30, 2003, an increase of approximately 97 thousand since the end of
the second quarter of 2003.
OPERATING INCOME
Operating income declined $0.4 billion, or 51.2%, in the third quarter of 2003
and $1.0 billion, or 37.4%, in the nine months ended September 30, 2003,
compared with the same periods in 2002. The declines were primarily due to the
decrease in the long distance voice business resulting primarily from the impact
of continued decline in the average price per minute and declining retail
volumes tied to the weak economyand substitution. The decline in operating
income was also impacted by a $125 million access expense adjustment recorded in
the third quarter of 2003 and an increase in restructuring charges, partially
offset by cost control efforts.
Operating margin declined to 6.6% in the third quarter of 2003 from 12.7% in the
third quarter of 2002, and declined to 8.4% in the nine months ended September
30, 2003 from 12.9% in the comparable prior year period. The margin declines for
the third quarter and the year-to-date period reflect the declining long
distance retail voice business coupled with a shift from higher-margin long
distance voice services to lower-margin growth services, which include wholesale
services. The decline in operating margin was also impacted by the access
expense adjustment and an increase in restructuring charges, partially offset by
cost control efforts.
OTHER ITEMS
Capital additions were $995 million in the third quarter of 2003, and were $2.4
billion for the nine months ended September 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. The current period
capital additions also included $241 million of property, plant and equipment
resulting from the adoption of FIN 46.
Total assets declined $1.4 billion, or 4.0%, at September 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 in the second quarter of 2003.
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 represent
stand-alone long distance services 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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
Revenue $ 2,353 $ 2,794 $ 7,265 $ 8,791
Operating income 500 595 1,621 2,203
Capital additions 14 34 55 95
At At
September 30, December 31,
2003 2002
------------- ------------
Total assets $ 1,095 $ 1,390
REVENUE
AT&T Consumer Services revenue declined $0.4 billion, or 15.8%, in the third
quarter of 2003 and declined $1.5 billion, or 17.4%, in the nine months ended
September 30, 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 third quarter of
2003, and declined $2.2 billion to $5.6 billion in the first nine months of
2003, largely due to the impact of ongoing competition, which has led to a loss
of market share, and substitution. In addition, stand-alone long distance voice
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 and pricing actions. Bundled revenue rose $0.2 billion to $0.5
billion for the third quarter of 2003, and increased $0.7 billion to $1.4
billion for the nine months of 2003, reflecting an increase in subscribers
primarily due to penetration in existing markets, as well as new markets entered
into since September 30, 2002, including Indiana, Virginia, Maryland,
Massachusetts, Wisconsin, Minnesota and Arizona. The increase in bundled revenue
includes amounts previously incorporated in stand-alone long distance voice
revenue for existing customers that migrated to bundled offers. Also partially
offsetting the declines in stand-alone long-distance voice services were pricing
actions taken, including a monthly fee that we began billing in the third
quarter of 2003 to recover costs, including certain access charges and property
taxes.
Total long distance calling volumes (including long distance volumes sold as
part of a bundle) declined approximately 19% in the third quarter of 2003 and
declined approximately 16% for the year-to-date period in 2003, compared with
the same periods of 2002, as a result of competition and wireless and Internet
substitution. The year-to-date decline was 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.
OPERATING INCOME
Operating income declined $0.1 billion, or 16.1%, in the third quarter of 2003
and declined $0.6 billion, or 26.4%, in the nine months ended September 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 21.2% in the third quarter of 2003 from 21.3% in
the third quarter of 2002, and declined to 22.3% in the nine months ended
September 30, 2003, from 25.1% in the comparable prior year period. The margin
declines for the third quarter and the year-to-date period reflect the decrease
in revenue coupled with a slower rate of decline in related expenses. The margin
declines, particularly the third quarter decline, were partially mitigated by
pricing actions taken.
OTHER ITEMS
Capital additions decreased $20 million, or 58.0% in the third quarter of 2003,
and declined $40 million, or 42.2%, for the nine months ended September 30,
2003, compared with the same periods in 2002.
Total assets declined $0.3 billion to $1.1 billion at September 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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Dollars in millions
Revenue $ 14 $ (85) $ 40 $ (224)
Operating (loss) (88) (34) (211) (139)
Capital additions 198 23 210 47
At At
September 30, December 31,
2003 2002
------------- ------------
Total assets $ 15,261 $ 17,493
REVENUE
For the third quarter of 2003, Corporate and Other revenue was $14 million,
compared with negative $85 million for the third quarter of 2002. For the nine
months ended September 30, 2003, Corporate and Other revenue was $40 million,
compared with negative $224 million for the nine months ended September 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 third quarter of 2003, the operating loss grew $54 million to $88
million, compared with the third quarter of 2002. For the nine months ended
September 30, 2003, the operating loss grew $72 million to a loss of $211
million, compared with the nine months ended September 30, 2002. The increased
operating loss in 2003 compared with 2002 for both the quarter and year-to-date
periods was primarily due to higher compensation and benefit costs reflecting
higher postretirement and pension expense driven in part by a lower discount
rate and expected rate of return on plan assets. The year-to-date increases were
partly offset by transaction costs associated with AT&T's restructuring recorded
in 2002 and an asset impairment charge recorded in 2002.
OTHER ITEMS
Capital additions increased $0.2 billion for the third quarter and nine months
ended September 30, 2003, compared with the same periods in 2002, as a result of
$192 million of property, plant and equipment recorded in connection with the
adoption of FIN 46.
Total assets decreased $2.2 billion to $15.3 billion at September 30, 2003, from
December 31, 2002. The decrease was primarily driven by a lower cash balance of
$1.4 billion at September 30, 2003, and lower other current assets of $0.4
billion primarily due to a reduction in income taxes receivable as a result of
the receipt of tax refunds. In addition, other assets declined $0.4 billion,
primarily due to the disposal of our interest in AT&T Wireless common stock.
FINANCIAL CONDITION
September 30, December 31,
2003 2002
------------- ------------
Dollars in millions
Total assets $ 51,307 $ 55,272
Total liabilities 37,768 42,960
Total shareowners' equity 13,539 12,312
Total assets decreased $4.0 billion, or 7.2%, to $51.3 billion at September 30,
2003, compared with December 31, 2002. This decrease was largely driven by a
$1.3 billion decrease in cash and cash equivalents. Property, plant and
equipment declined $0.9 billion as a result of depreciation recorded during the
period, partially offset by capital expenditures and assets added as a result of
the adoption of FIN 46. Accounts receivable decreased by $0.8 billion, primarily
driven by lower revenue and improved collections. In addition, other current
assets declined $0.6 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. Other assets declined by $0.4 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. The decline in other assets
was partially offset by increased mark-to-market adjustments on financial
instruments.
Total liabilities decreased $5.2 billion, or 12.1%, to $37.8 billion at
September 30, 2003, from $43.0 billion at December 31, 2002. This decrease was
primarily the result of $5.2 billion in lower debt, reflecting the early
retirement of $4.8 billion of debt, including exchangeable notes indexed to AT&T
Wireless common stock we owned, and the $1.3 billion repayment of one-year notes
and commercial paper. These reductions in debt were partially offset by a $0.5
billion increase as a result of the adoption of FIN 46 and an increase of $0.4
billion due to mark-to-market adjustments. Also contributing to the decline in
total liabilities was lower accounts payable of $0.5 billion as payments were
made against year-end capital expenditures and other accruals and lower payroll
and short-term benefit-related liabilities of $0.4 billion, as payments for
salary and other compensation accruals were made during the period. Partially
offsetting these declines was an increase in deferred taxes of $0.8 billion,
reflecting greater tax deductions related to property, plant and equipment.
Total shareowners' equity increased $1.2 billion, or 10.0%, to $13.5 billion at
September 30, 2003, from $12.3 billion at December 31, 2002. This increase was
primarily due to $1.5 billion of net income, partially offset by dividends
declared.
We expect the market value of AT&T's pension assets at December 31, 2003, to
continue to be lower than the accumulated benefit obligation (ABO) for the AT&T
Management Pension Plan. Under SFAS No. 87, "Employer's Accounting for
Pensions," a company is required to record an additional minimum liability equal
to the amount of the unfunded ABO. The actual 2003 minimum pension liability
will be calculated on the next measurement date of the plan, which is December
31, 2003, and is dependent on plan asset values at that time, as well as
assumptions used to measure pension obligations and could result in a net charge
to equity. There is a wide range of possible outcomes depending on the
securities' market performance and interest rate fluctuations during the fourth
quarter.
LIQUIDITY
Cash Flows
For the Nine Months Ended September 30,
2003 2002
------------------- -------------------
Dollars in millions
Provided by operating activities of continuing operations 7,113 6,944
(Used in) investing activities of continuing operations (2,389) (2,614)
(Used in) financing activities of continuing operations (5,987) (3,882)
(Used in) discontinued operations - (4,133)
-------- --------
Net (decrease) in cash and cash equivalents $ (1,263) $ (3,685)
-------- --------
Net cash provided by operating activities of AT&T's continuing operations of
$7.1 billion for the nine months ended September 30, 2003, was generated
primarily by $6.9 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 $0.4 billion primarily due to tax refunds partially
offset by lower payroll and benefit related liabilities due to payments of
accruals. In addition, accounts receivable decreased $0.2 billion reflecting
cash collections. Partially offsetting these sources of cash was a $0.4 billion
decrease in accounts payable primarily due to payments of year-end operating
accruals.
Net cash provided by operating activities of continuing operations of $6.9
billion for the nine months ended September 30, 2002, primarily included $7.2
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 from operating activities was a decrease in accounts
receivable of $0.3 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 $0.4 billion due to decreases in payroll and benefit-related liabilities and
other short-term liabilities and a decrease of $0.2 billion in accounts payable,
all of which were primarily attributable to payments made against year-end
accruals.
AT&T's investing activities resulted in a net use of cash of $2.4 billion in the
nine months ended September 30, 2003, compared with $2.6 billion in 2002. During
the nine months ended September 30, 2003, AT&T spent $2.4 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 nine months ended September 30, 2002, AT&T
spent $2.8 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 $0.5 billion from the
sale of fixed assets.
During the nine months ended September 30, 2003, net cash used in financing
activities was $6.0 billion, compared with $3.9 billion in the nine months ended
September 30, 2002. During the nine months ended September 30, 2003, AT&T made
net payments of $5.8 billion to reduce debt, including early termination of debt
(see "Financial Condition" discussion above), paid dividends of $0.4 billion and
received $0.2 billion of cash collateral related to favorable positions of
certain combined interest rate swap agreements. During the nine months ended
September 30, 2002, AT&T made net payments of $6.1 billion to reduce debt, paid
dividends of $0.4 billion, and received $2.6 billion from the issuance of AT&T
common stock, primarily due to the sale of 46 million shares, 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 September 30, 2003, our working capital ratio (current assets divided by
current liabilities) was 1.08.
On October 8, 2003, we closed a $2.0 billion syndicated 364-day credit facility
led by J.P. Morgan Securities Inc. and Citigroup Global Markets Inc. that
replaced our existing undrawn $3.0 billion facility. This new credit facility
provides the option to extend the terms of the agreement for an additional
364-day period beyond October 7, 2004. Up to $0.3 billion of the facility can be
utilized for letters of credit, which reduces the amount available. In October
2003, approximately $0.1 billion of letters of credit were issued under this
facility. Additionally, 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 and an EBITDA interest coverage ratio (as
defined in the credit agreement) of at least 3.50 to 1.00 for four consecutive
quarters ending on the last day of each fiscal quarter.
At September 30, 2003, we were in compliance with the $3.0 billion credit
facility covenants. Pursuant to the definitions in the new and previous credit
facility, business restructuring and asset impairment charges have no impact on
the EBITDA financial covenant in the credit facility.
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 September 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
credit 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
$2.0 billion credit facility. The maximum amount of commercial paper outstanding
during the third quarter of 2003 and during the first nine months of 2003 was
approximately $1.0 billion and $1.1 billion, respectively. 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) 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 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
September 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
telecommunications 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.
AT&T Corp. is generally the obligor for debt issuance. However we have some
instances where AT&T Corp. is not the obligor, for example, the securitization
facilities and certain capital leases. The total debt of these entities, which
are fully consolidated, is approximately $0.7 billion at September 30, 2003, is
included within short-term and long-term debt on the Consolidated Balance Sheet.
AT&T expects to repay approximately $0.5 billion of this debt by the end of
November 2003.
Cash Requirements
Our cash needs for 2003 will be primarily related to capital expenditures,
repayment of debt and payment of dividends. We continue to expect our capital
expenditures for 2003 to be approximately $3.4 billion (including the $0.4
billion noncash impact of assets consolidated as a result of FIN 46). 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. On September 15, 2003, we completed
the cash repurchase of $0.5 billion of notes with interest rates of 8.125% and
maturities of 2022 and 2024. On October 22, 2003, we completed the cash
repurchase of notes called for redemption in September 2003, totaling $1.1
billion with interest rates of 5.625%, 6.375% and 8.625%, and maturities of 2004
and 2031. In addition, by the end of November 2003, AT&T expects to repay, with
cash, $0.5 billion of debt associated with the exercise of its purchase option
on buildings we leased. These transactions are expected to save approximately
$0.3 billion of interest expense in 2003. In addition, we anticipate
contributing approximately $0.5 billion to the postretirement benefit trusts in
the fourth quarter of 2003.
In September 2003, the Board of Directors declared the third quarter dividend of
$0.2375 per share (payable in November 2003), an increase of $0.05 per share
compared with previous quarterly dividends.
Contractual Cash Obligations
Prior to the spin-off of AT&T Broadband, AT&T had guaranteed certain debt of
AT&T Broadband, which as of September 30, 2003, we continued to provide. In
October 2003, Comcast called this debt, which relieved AT&T of this $0.5 billion
commitment.
Additionally, AT&T had guaranteed various other 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 $262 million as of
September 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.
Under certain real estate operating leases (with entities consolidated as a
result of FIN 46, see note 3), AT&T could have been required to make payments to
the lessors of up to $427 million at the end of the lease term. On September 18,
2003, AT&T gave notice to exercise its purchase options under these leases. As a
result of the exercise of these options, AT&T will no longer have a potential
payment requirement.
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.
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. Other than as described
below, 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.
In September 2003, in conjunction with our review of accounting and internal
control systems, the Company determined that the liability on the balance sheet
(included in accounts payable) relating to costs incurred in 2001 and 2002
pertaining to access and other connection expense was understated by $125
million. Since the impact to prior years' annual financial statements was not
material, the Company recorded an additional expense of $125 million ($77
million after-tax) in the third quarter of 2003 to reflect the proper estimate
of the liability.
A review was conducted by outside legal counsel, under the direction of the
Audit Committee. This review found that two employees, one lower-level and one
mid-level management employee, circumvented the internal controls process
resulting in the financial impacts noted below. The Company made the appropriate
personnel changes and enhanced its internal controls accordingly.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Refer to Part 1, Footnote 13, "Commitments and Contingencies"
for discussion of certain legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number
10(iii)(A)1 Form of Amendment to AT&T Excess Benefit and
Compensation Plan dated as of July 28, 2003
to AT&T Excess Benefit and Compensation
Plan, as amended and restated effective
October 1, 1996 (incorporated by reference
to Exhibit (10)(iii)(A)9 to Form 10-K for
1996, File No. 1-1105).
10(iii)(A)2 Form of Amendment to AT&T Non-Qualified
Pension Plan dated as of July 28, 2003 to
AT&T Non-Qualified Pension Plan, as amended
and restated January 1, 1995 (incorporated
by reference to Exhibit (10)(iii)(A)10 to
Form 10-K for 1996, File No. 1-1105).
10(iii)(A)3 Form of Amendment to AT&T Senior Management
Incentive Award Deferral Plan dated as of
July 28, 2003 to AT&T Senior Management
Incentive Award Deferral Plan, as amended
effective January 21, 1998 (incorporated by
reference to Exhibit (10)(iii)(A)11 to Form
10-K for 1998, File No. 1-1105).
10(iii)(A)4 Form of Amendment to AT&T Corp. Senior
Management Universal Life Insurance Program
dated as of July 28, 2003 to AT&T Corp.
Senior Management Universal Life Insurance
Program effective October 1, 1999
(incorporated by reference to Exhibit
(10)(iii)(A)16 to Form 10-K for 2000, File
No. 1-1105).
10(iii)(A)5 Form of Amendment of Appendix A of AT&T
Senior Officer Separation Plan dated as of
July 28, 2003 to AT&T Senior Officer
Severance Plan, as amended October 30, 1997
(incorporated by reference to Exhibit
(10)(iii)(A)18 to Form 10-K for 1997, File
No. 1-1105), and as amended, restated and
renamed AT&T Senior Officer Separation Plan
as of January 1, 2003 (incorporated by
reference to Exhibit (10)(iii)(A)18 to Form
10-K for 2002, File No. 1-1105).
10(iii)(A)6 Form of Employment Agreement between AT&T
Corp. and Betsy J. Bernard as amended on
July 25, 2003 to original agreement dated
April 9, 2001 (incorporated by reference to
Exhibit (10)(iii)(A)21 to Form 10-K for
2001. File No. 1-1105) including amendment
dated October 1, 2002 (incorporated by
reference to Exhibit (10)(iii)(A)21 to Form
10-K for 2002, File No. 1-1105).
10(iii)(A)7 Form of Employment Agreement between AT&T
Corp. and David W. Dorman as amended on July
25, 2003 to original agreement dated May 18,
2001 (incorporated by reference to Exhibit
(10)(iii)(A)35 to Form 10-K for 2001)
including amendment dated December 31, 2002
(incorporated by reference to Exhibit
(10)(iii)(A)34 to Form 10-K for 2002, File
No. 1-1105).
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 July 16, 2003 was filed pursuant to Item 5 on
July 17, 2003. Form 8-K dated July 24, 2003 was furnished
pursuant to Item 7 and Item 9 on July 24, 2003. Form 8-K
dated July 24, 2003 was furnished pursuant to Item 12 on
July 28, 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: November 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: November 11, 2003 /s/ David W. Dorman
-------------------------
By: 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: November 11, 2003 /s/ Thomas W. Horton
-----------------------
By: Thomas W. Horton
Chief Financial Officer
Exhibit Index
Exhibit
Number
10(iii)(A)1 Form of Amendment to AT&T Excess Benefit and Compensation Plan
dated as of July 28, 2003 to AT&T Excess Benefit and
Compensation Plan, as amended and restated effective October
1, 1996 (incorporated by reference to Exhibit (10)(iii)(A)9 to
Form 10-K for 1996, File No. 1-1105).
10(iii)(A)2 Form of Amendment to AT&T Non-Qualified Pension Plan dated as
of July 28, 2003 to AT&T Non-Qualified Pension Plan, as
amended and restated January 1, 1995 (incorporated by
reference to Exhibit (10)(iii)(A)10 to Form 10-K for 1996,
File No. 1-1105).
10(iii)(A)3 Form of Amendment to AT&T Senior Management Incentive Award
Deferral Plan dated as of July 28, 2003 to AT&T Senior
Management Incentive Award Deferral Plan, as amended effective
January 21, 1998 (incorporated by reference to Exhibit (10)
(iii)(A)11 to Form 10-K for 1998, File No. 1-1105).
10(iii)(A)4 Form of Amendment to AT&T Corp. Senior Management Universal
Life Insurance Program dated as of July 28, 2003 to AT&T Corp.
Senior Management Universal Life Insurance Program effective
October 1, 1999 (incorporated by reference to Exhibit (10)
(iii)(A)16 to Form 10-K for 2000, File No. 1-1105).
10(iii)(A)5 Form of Amendment of Appendix A of AT&T Senior Officer
Separation Plan dated as of July 28, 2003 to AT&T Senior
Officer Severance Plan, as amended October 30, 1997
(incorporated by reference to Exhibit (10)(iii)(A)18 to Form
10-K for 1997, File No. 1-1105), and as amended, restated and
renamed AT&T Senior Officer Separation Plan as of January 1,
2003 (incorporated by reference to Exhibit (10)(iii)(A)18 to
Form 10-K for 2002, File No. 1-1105).
10(iii)(A)6 Form of Employment Agreement between AT&T Corp. and Betsy J.
Bernard as amended on July 25, 2003 to original agreement
dated April 9, 2001 (incorporated by reference to Exhibit (10)
(iii)(A)21 to Form 10-K for 2001. File No. 1-1105) including
amendment dated October 1, 2002 (incorporated by reference to
Exhibit (10)(iii)(A)21 to Form 10-K for 2002, File No.
1-1105).
10(iii)(A)7 Form of Employment Agreement between AT&T Corp. and David W.
Dorman as amended on July 25, 2003 to original agreement dated
May 18, 2001 (incorporated by reference to Exhibit (10)(iii)
(A)35 to Form 10-K for 2001) including amendment dated
December 31, 2002 (incorporated by reference to Exhibit (10)
(iii)(A)34 to Form 10-K for 2002, File No. 1-1105).
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 10(iii)(A)1
AT&T EXCESS BENEFIT AND COMPENSATION PLAN
AT&T
and
such of its Subsidiary Companies that are
Participating Companies
ARTICLE 4
RETIREMENT AND DEATH BENEFITS
* * * *
4.9. Change in Control Provisions
(a) In accordance with the preceding provisions of Article 3 and this
Article 4, following the occurrence of a "change in control," as that term is
defined in the AT&T Management Pension Plan, the benefit determined pursuant to
Section 4.2 and/or Section 4.3 for a "CIC eligible employee," as that term is
defined in the AT&T Management Pension Plan, shall be determined taking into
account the change in control provisions of such plan. Pursuant to the Board
resolution of January 21, 1998, the Company may elect to pay a Participant's
benefit from this Plan in a single sum payment.
(b) Notwithstanding the provisions of Section 9.1, or any other provision
of the Plan, unless required by applicable law, this Section 4.9 may not be
amended in any manner adverse to the interests of Participants without their
consent and, further, upon the occurrence of a CIC, no amendment may be made to
this Section 4.9 by the Board, the Company, (including any successor to the
Company), any committee, any officer, or any other party to suspend, modify, or
eliminate any benefit provisions that are applicable upon occurrence of a CIC.
Exhibit 10(iii)(A)2
AT&T NON-QUALIFIED PENSION PLAN
AT&T
and
such of its Subsidiary Companies that are
Participating Companies
ARTICLE 9.
GENERAL PROVISIONS
* * * *
9.18 CIC Provision
(a) Applicability
This Section 9.18 applies only to an individual who, as of the
date a Change in Control ("CIC") occurs (as defined in the
Pension Plan), is an employee of a Participating Company and a
Participant in this Plan.
(b) Nonforfeitable Benefits
Notwithstanding any other provisions of this Plan, on and after
the date a CIC occurs, solely for purposes of determining
entitlement to benefits from this Plan, an individual described
in Section 9.18(a) shall be deemed to be vested under the Pension
Plan, whether or not such Participant is otherwise entitled to a
vested benefit from the Pension Plan.
(c) Amendments to CIC Provisions
Notwithstanding the provisions of Section 8.02, or any other
provision of the Plan, unless required by applicable law, this
Section 9.18 may not be amended in any manner adverse to the
interests of Participants without their consent and, further,
upon the occurrence of a CIC, no amendment may be made to this
Section 9.18 by the Board, the Company, (including any successor
to the Company), any committee, any officer, or any other party
to suspend, modify, or eliminate any benefit provisions that are
applicable upon occurrence of a CIC.
Exhibit 10(iii)(A)3
AT&T SENIOR MANAGEMENT
INCENTIVE AWARD DEFERRAL PLAN
AT&T SENIOR MANAGEMENT INCENTIVE AWARD DEFERRAL PLAN
* * * *
6. CHANGE IN CONTROL/POTENTIAL CHANGE IN CONTROL
(a) Upon the occurrence of a "Change in Control" or a "Potential Change in
Control", as those terms are defined in the AT&T Corp. Benefits Protection Trust
(as in effect on October 23, 2000), the Senior Manager (active and former)
individual deferral agreements (including any individual non-qualified pension
arrangements) for the deferral of compensation, retirement and/or severance
benefits (and the deferral account balance, if any, under each such agreement)
identified by the AT&T Executive Vice President - Human Resources, in her sole
discretion, shall be deemed to be deferred compensation obligations under the
Plan. Notwithstanding any other provision of the Plan to the contrary, (i) each
of the individual deferral agreements (including each of the individual
non-qualified pension arrangements) deemed to be a deferred compensation
obligation of the Plan pursuant to the provisions of this Section 6(a) shall be
treated under the Plan in a manner that is consistent with the express terms and
conditions of the respective agreement; and (ii) the deferred compensation
(including non-qualified pension benefit) entitlement of a Senior Manager under
the Plan with respect to any such individual deferral agreement (including
individual non-qualified pension arrangements) shall be limited solely to the
benefit provided under the express terms and conditions of the respective
agreements. Nothing contained in this Section 6 shall entitle a Senior Manager
to any other deferred compensation benefits under the Plan other than as
expressly provided in the individual deferral agreement (including any
individual non-qualified pension arrangement).
(b) Upon the occurrence of a "Change in Control", as defined in the AT&T
1997 Long Term Incentive Program (as in effect on October 23, 2000), the portion
of each account balance under the Plan (including the account balance under any
individual deferral agreement and the benefits under any individual
non-qualified pension arrangement) deemed pursuant to the provisions of Section
6(a) to be an obligation of the Plan), that was not vested immediately prior to
such change in control, shall become fully vested.
(c) After the occurrence of a "Change in Control", as defined in the AT&T
1997 Long Term Incentive Program (as in effect on October 23, 2000), the
interest credited to an account balance (including the account balance of any
former Senior Manager and the account balance under any individual deferral
agreement deemed pursuant to the provisions of Section 6(a) to be an obligation
of the Plan) for any period, to the extent applicable, shall not be less than
the interest derived under the interest rate formula applicable to such account
balance (and used to calculate the interest credited to such account balance)
for the interest crediting period immediately prior to the occurrence of such
change in control (unless the provisions of any individual deferral agreement
provide otherwise).
(d) Notwithstanding any provision of any Senior Manager's deferral election
to the contrary, after the occurrence of a "Change in Control", as defined in
the AT&T 1997 Long Term Incentive Program (as in effect on October 23, 2000), no
payment of any Senior Manager's short term incentive award, if any, under the
AT&T Short Term Incentive Plan for the performance year during which such change
in control occurs shall be deferred under the Plan.
Exhibit 10(iii)(A)4
AT&T CORP.
SENIOR MANAGEMENT
UNIVERSAL LIFE INSURANCE PROGRAM
AT&T CORP. SENIOR MANAGEMENT UNIVERSAL LIFE INSURANCE PROGRAM
Section
8.
Amendment and Termination
* * * *
8.2 Continued Maintenance of Program After Change in Control. Notwithstanding
any other provision of the Program to the contrary (including, but not
limited to the provisions of Section 8.0 and Section 8.1), if a Change in
Control occurs, the Company (or its successor) shall continue to maintain
the Program in accordance with its terms and conditions prior to the
occurrence of the Change in Control (including, but not limited to, the
provisions in Section 5.1 and Section 5.2 that require the Company to make
applicable premium payments and tax adjustment payments, respectively, and
any amendment to such terms and conditions that was duly adopted prior to
the occurrence of the Change in Control), without any material reduction in
any Program benefits, features or Participant or Policyholder rights, for a
minimum of two (2) years after the Change in Control occurs.
8.3 Prohibition on Amendments After Change in Control. Notwithstanding any
other provision of the Program to the contrary (including, but not limited
to, the amendment provisions set forth in Section 8.0 and Section 8.1),
unless required by applicable law, after the occurrence of a Change in
Control, no amendment shall be made by the Board (or the successor board of
directors), a delegate, the Company (or the successor of the Company), any
committee, any officer, any employee of the Company (or the successor of
the Company) or by any other party, to suspend, modify, or eliminate the
Program continuation provisions set forth in Section 8.2, or to eliminate
the restrictions contained in this Section 8.3, and no such amendment to
the Program made in violation of this Section 8.3 shall be effective.
Nothing in Section 8.2 or this Section 8.3 shall be construed to preclude
the Company (or the successor of the Company) from implementing any
amendment to the Program that was duly adopted prior to the occurrence of
the Change in Control, but does not become effective until after the Change
in Control occurs.
* * * *
Exhibit 10(iii)(A)5
Appendix A
AT&T SENIOR OFFICER SEPARATION PLAN
CHANGE IN CONTROL PROVISIONS
1. PURPOSE:
The Change in Control benefits described in Appendix A will not apply unless a
Change in Control occurs.
Notwithstanding any terms of the Plan to the contrary, for the two-year period
following a Change in Control (as defined below), (i) the definitions of "Senior
Officer", "Cause" and "Good Reason" that otherwise would have been governed by
Sections A and B, respectively, of the Plan, (ii) the procedure to be followed
in the case of termination of employment for Good Reason that otherwise would
have been governed by Section E.2 of the Plan, and (iii) the Plan benefits that
otherwise would have been governed by Section F of the Plan, shall be determined
exclusively pursuant to the provisions of this Appendix A. Accordingly, the
definition of Senior Officer in Section A of the Plan, the definitions of
"Cause" and "Good Reason" in Section B of the Plan, and Sections E.2 and F of
the Plan shall not apply for the two-year period following a Change in Control.
Except to the extent otherwise specified in this Appendix A, the applicable
definitional, operational, procedural and administrative provisions detailed in
Sections A (other than the definition of "Senior Officer"), B, (other than the
definitions of "Cause" and "Good Reason"), C, D, E (other than the notification
requirements set forth in Section E.2), G, H, I, J, K, L, M, N, O, P, Q and R of
the Plan remain unchanged and will govern the operation of the Plan, including
the provisions of this Appendix A, following a Change in Control.
2. EFFECTIVE DATE:
The effective date of the Change In Control related provisions of the Plan, as
set forth in this Appendix A, is October 23, 2000.
3. DEFINITIONS:
Business Relocation Beyond a Reasonable Commuting Distance - shall mean:
a change in the Senior Officer's principal work location to a location that
(i) is more than thirty five (35) highway miles from the Senior Officer's
principal work location immediately prior to the Change in Control;
and
(ii) increases the Senior Officer's commuting distance in highway mileage.
The terms "highway miles" and "highway mileage" shall have the same meanings as
these terms have when used to express the distances between locations by
mapmakers such as the Hagstrom Map Company.
Cause - shall mean:
(i) commission of a crime, or conviction of a crime, including by 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, which causes significant harm to the Company;
(iii)gross omission or gross dereliction of any statutory or common law
duty of loyalty to the Company, which causes significant harm to the
Company; or
(iv) willful violation of the Company's Code of Conduct or any other
written Company policy, where said violation causes significant harm
to the Company
Change in Control ("CIC") - shall have the same meaning assigned to that
term in the AT&T 1997 Long Term Incentive Program, as in effect on October 23,
2000.
CIC Eligible Senior Officer - shall mean a Senior Officer who, within two
(2) years following a CIC, (a) has his or her employment terminated for reasons
other than (i) Cause or (ii) by reason of becoming eligible for benefits under
any AT&T long-term disability plan, or (b) terminates employment for Good Reason
occurring after a CIC, provided that the Senior Officer has followed the
Notification Procedure set forth in Section 4 of this Appendix A.
Good Reason - with respect to a Senior Officer, shall mean the occurrence
of any of the following events without the Senior Officer's express written
consent:
(i) a Reduction In Authority or Responsibility (as defined below); or
(ii) a Reduction in Compensation (as defined below); or
(iii)a Business Relocation Beyond a Reasonable Commuting Distance (as
defined above).
Reduction in Authority or Responsibility - shall mean:
(i) the assignment to the Senior Officer of any duties materially
inconsistent in any respect with the Senior Officer's position
(including status, offices, titles and reporting requirements),
authority, duties or responsibilities to which the Senior Officer was
assigned immediately prior to the date of the Change in Control; or
(ii) any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities.
Reduction in Authority or Responsibility shall not include:
(a) an isolated, insubstantial and inadvertent action taken in good faith
and which is remedied by the Company promptly after receipt of notice
thereof given by the Senior Officer; or
(b) any temporary reduction in authority or responsibility while the
Senior Officer is absent from active service on any approved
disability or approved leave of absence.
By way of example, and not by way of limitation, Reduction in
Authority or Responsibility shall include:
(1) The removal of any division, business or operating unit or other
business organization from the direct managerial responsibility
of the Senior Officer, or
(2) The material reduction in the size or scope of responsibility or
operating budget of any division, business or operating unit or
other business organization for which the Senior Officer has
direct managerial responsibility, or
(3) A reduction in the Senior Officer's authority to legally bind the
Company under the Company's Schedule of Authorization, as in
effect immediately prior to the Change in Control, without first
obtaining any additional authority or approval.
Reduction in Compensation - shall mean, with respect to a Senior Officer, a
reduction in any of the following amounts of compensation from the amounts of
such compensation that existed immediately prior to the Change in Control:
a. the Senior Officer's annual base salary rate; or
b. the Senior Officer's Target Annual Bonus (as defined below)
without an offsetting increase in the Senior Officer's annual
base salary rate, or
c. the Senior Officer's Target Annual Long Term Incentive
Compensation (as defined below), without an offsetting increase
in the Senior Officer's annual base salary rate and/or the Senior
Officer's Target Annual Bonus.
A Senior Officer's Target Annual Bonus shall mean the value determined by
multiplying the Senior Officer's Target Annual Bonus percentage in effect on the
day preceding the date of the CIC by his or her annual base salary rate in
effect on the day preceding the date of the CIC.
A Senior Officer's Target Annual Long Term Incentive Compensation shall mean the
total value of the annual equity-based incentive compensation grants to the
Senior Officer, including the following: (a) "full value equity" compensation,
including, but not limited to, restricted stock, restricted stock units
("RSUs"), and performance shares, and (b) "non-full value equity" based
compensation including, but not limited to, stock options and stock appreciation
rights, in each case granted as part of the Senior Officer's annual
compensation, but shall not include any special one-time or periodic grants or
awards, granted or awarded as part of a hiring package or retention program,
agreement or arrangement.
(a) The value of each "full value equity" grant, if any, shall be the fair
market value ("FMV") of such grant on the date the grant is approved by the
Compensation and Employee Benefits Committee of the AT&T Board of
Directors, by such other management committee or committee of the AT&T
Board of Directors, or by the duly authorized officers of the successor to
AT&T Corp. (for the purpose of this definition, separately and collectively
referred to as the "Committee"). The FMV of each "full value equity" grant
shall be determined by multiplying the number of related AT&T common shares
by the applicable average of the daily high and low sale prices of AT&T
common shares on the New York Stock Exchange, or by multiplying the number
of related common shares of the successor to AT&T by the applicable average
of the daily high and low sale prices of such successor's common shares on
the New York Stock Exchange or other national exchange on which such shares
are listed, as appropriate, for the date the grant was approved by the
Committee. For 2003, the average of the high and low sales prices of AT&T
common shares on the NYSE on the date RSU grants were approved, January 21,
2003, was $25.925.
(b) The value of each "non-full value equity" grant, such as stock options
and stock appreciation rights ("SARs"), shall equal the per option or per
SAR value on the date the grant was approved by the Committee, based on
Black Scholes estimates (or such other option-pricing model, deemed
acceptable by the Financial Accounting Standards Board for valuing options
and SARs and utilized by the Committee when considering such grant)
multiplied by the number of related AT&T common shares in such grant,
and/or other such amounts determined in the same manner and approved by the
Committee for the year in which the grant being valued was granted. For
2003, the Black Scholes value per stock option approved on January 21, 2003
for the AT&T 2003 annual grant was $10.
For this purpose, the Black Scholes and FMV values of the respective
components of AT&T Target Annual Long Term Incentive Compensation shall be
updated annually as approved by the Committee.
Senior Officer - Shall mean a Senior Officer (as defined in the Plan) who,
immediately prior to a CIC, was an employee of AT&T or an Affiliate (including a
Senior Officer who was receiving benefits under any AT&T short term disability
plan, or was on an approved leave of absence with guaranteed reinstatement
rights), or was a Senior Officer immediately prior to an event which constitutes
Good Reason, and who remains continuously employed by the Company following a
CIC.
Special Pension Enhancement - shall mean the CIC Credit as defined in the
AT&T Management Pension Plan (as amended by the resolutions of the AT&T Board of
Directors dated October 23, 2000), without regard to whether it is payable under
the AT&T Management Pension Plan or under the AT&T Excess Benefit and
Compensation Plan, or both..
Target Annual Full-Value Equivalent Award - Shall mean the equity-based
award, designated in full-value shares or share equivalents, such as performance
shares, restricted stock, restricted stock units or cash, and not a derivative
value, such as stock options or stock appreciation rights, granted as part of a
Senior Officer's annual compensation and not a special one-time or periodic
grant, such as part of a hiring package or retention program.
4. NOTIFICATION REQUIREMENTS FOR TERMINATION FOR GOOD REASON:
In the event a Senior Officer determines that Good Reason exists to terminate
his or her employment with the Company, the Senior Officer must notify the
Company in writing of the specific event, within sixty (60) days of the
occurrence of such event, and such notice shall also include the date on which
the Senior Officer will terminate employment with the Company, which date shall
be no earlier than 15 days from the date of such notice. The date set forth in
the notice for termination, or such earlier or later date as the Senior Officer
and the Company shall mutually agree in writing, shall be the Senior Officer's
Final Payroll Date.
Within seven (7) days of the Company's receipt of such written notice, the
Company shall notify the Senior Officer that it agrees or disagrees with the
Senior Officer's determination that the event specified in the Senior Officer's
notice constitutes Good Reason. Notwithstanding any provision of the Plan or
this Appendix A giving the Company discretionary authority regarding
administration of the Plan, the Company's determination whether it agrees or
disagrees with the Senior Officer's determination that the event specified in
the Senior Officer's notice constitutes Good Reason shall be reasonable, based
on all the relevant facts and circumstances. The Arbitrator in any arbitration
proceeding initiated pursuant to Section M of the Plan, in which the existence
of Good Reason is an issue, shall be expressly empowered and directed to review,
de novo, the facts and circumstances claimed by the Senior Officer to constitute
Good Reason.
In the event the Company notifies the Senior Officer that it agrees with the
Senior Officer's determination that the event specified in the Senior Officer's
notice constitutes Good Reason, the Senior Officer will terminate employment
with the Company on his or her Final Payroll Date.
In the event the Company notifies the Senior Officer that it disagrees with the
Senior Officer's determination that the event specified in the Senior Officer's
notice constitutes Good Reason, the Senior Officer may elect to terminate his or
her employment on the date specified in the Notice (or such later date as the
Senior Officer and the Company may mutually agree in writing) or may elect to
continue his or her employment. In either event, the Senior Officer shall be
entitled to pursue a claim in accordance with the procedures set forth in
Section L of the Plan, or pursue the Arbitration procedures set out in Section M
of the Plan without first filing a claim. If the Senior Officer's claim, or
arbitration, is ultimately concluded in the Senior Officer's favor, the Senior
Officer shall retain the right to receive the benefits under this Appendix A.
5. SEVERANCE PAYMENT:
In addition to the Special Pension Enhancement provided under the terms of the
AT&T Management Pension Plan and the AT&T Excess Benefit and Compensation Plan,
a CIC Eligible Senior Officer shall be provided a Severance Payment that is a
lump sum cash payment equal to the sum of (a) three hundred percent (300%) of
the CIC Eligible Senior Officer's highest annual base salary rate in effect on
or after the day preceding the date of the CIC (but ignoring increases in annual
base salary rate attributable solely to any decreases in the value of the CIC
Eligible Senior Officer's Target Annual Bonus and/or Target Annual Long-Term
Incentive, as contemplated by the definition of Reduction in Compensation),,
plus (b) three hundred percent (300%) of the CIC Eligible Senior Officer's
Target Annual Bonus for the year in which the CIC occurs, plus (c) three hundred
percent (300%) of the fair market value (FMV) of the CIC Eligible Senior
Officer's Target Annual Full-Value Equivalent Award for the calendar year in
which the CIC occurs, minus (d) an amount equal to ninety percent (90%) of the
CIC Eligible Senior Officer's Special Pension Enhancement. For purposes of this
Section 5 the FMV of a CIC Eligible Senior Officer's Target Annual Full-Value
Equivalent Award shall be determined by multiplying the number of performance
shares, or shares of restricted stock, or restricted stock units, as the case
may be, by the average of the daily high and low sale prices of AT&T common
shares on the New York Stock Exchange (NYSE) on the date the Committee approved
the annual grant for the calendar year in which the CIC occurs. For 2003, the
average of the high and low sales prices of AT&T target common shares on the
NYSE on the date the RSU grant was approved, January 21, 2003, was $25.925.
The Severance Payment under this Section 5 will be paid in a single lump sum as
soon as administratively feasible after the expiration of the revocation period
indicated in the CIC Eligible Senior Officer's Release without revocation,
unless deferral of such Severance Payment is elected in accordance with Section
6 of this Appendix A below.
6. DEFERRAL OPTION:
The CIC Eligible Senior Officer may elect to defer receipt of the Severance
Payment. The CIC Eligible Senior Officer's written election must be submitted to
the AT&T Executive Benefits Organization, or successor organization, not later
than the day prior to the date on which the Release is executed. A copy of the
election form to be completed is attached as Appendix C. Deferral may be for a
period of up to five (5) years following the date of the CIC Eligible Senior
Officer's Final Payroll Date, in whole year increments. Payout of the deferred
Severance Payment may be in the form of a lump sum, or up to a maximum of five
(5) approximately equal annual installments, as indicated on the election form.
The first installment from the deferred account (or the single payment, if the
CIC Eligible Senior Officer so elected), including interest thereon, will be
paid by the end of the calendar quarter which immediately follows the first,
second, third, fourth or fifth anniversary (as so elected by the CIC Eligible
Senior Officer) of the CIC Eligible Senior Officer's Final Payroll Date. All
unpaid deferred amounts will continue to accrue interest at the rate of return
set forth below. In the event of a CIC Eligible Senior Officer's death prior to
the payment of all deferred amounts, the unpaid balance shall be paid to his or
her named beneficiary (or to his or her estate, if no beneficiary has been
named) in a lump sum not later than the end of the calendar quarter immediately
following the calendar quarter in which the AT&T Executive Benefits
Organization, or successor organization, receives written notice of such death.
For individuals who were designated as Senior Officers (as defined in the Plan)
as of January 1, 2003, deferred amounts will be credited quarterly with interest
equal to one-quarter (1/4) of the average rate applicable to actively traded
10-year U.S. Treasury Notes for the prior calendar quarter, plus 1.25 percent.
For individuals who were designated as Senior Officers after January 1, 2003,
the interest rate credited on their deferred amounts will be as determined by
the Board. The crediting of interest on deferred amounts, will commence with the
CIC Eligible Senior Officer's Final Payroll Date, and will be calculated in
accordance with rules and procedures in place for the AT&T Senior Management
Incentive Award Deferral Plan, or the successor to such plan, in effect
immediately prior to the date of the CIC. CIC Eligible Senior Officers who elect
to defer amounts under this arrangement shall be unsecured general creditors of
the Company. The Company shall establish for each CIC Eligible Senior Officer,
an unfunded bookkeeping account to which deferred amounts (and interest) will be
credited, but the Company shall have no obligation to fund or set aside assets
for the payment of any deferred amounts under this arrangement.
7. ANNUAL BONUS:
Subject to the second and third sentences of this Section 7, a CIC Eligible
Senior Officer who has performed at least eighty-eight (88) consecutive days of
service to the Company during his or her Termination Year, will be eligible to
receive a prorated portion of the annual incentive applicable to the Termination
Year based on the CIC Eligible Senior Officer's time on the active payroll
during the Termination Year. The prorated portion shall equal the product of the
actual achievement level for the CIC Eligible Senior Officer's annual incentive
for such year, as determined by the Company, calculated in a manner consistent
with the calculation of the annual incentive for similarly situated senior
management employees who were employed throughout the year for which the
calculation is being made, multiplied by a fraction, the numerator of which is
the number of completed months of the CIC Eligible Senior Officer's employment
during the Termination Year (including the last month of employment if the CIC
Eligible Senior Officer's Final Payroll Date is on or after the 15th of the
month) and the denominator of which is 12. If the CIC Eligible Senior Officer's
Final Payroll Date occurs in the same calendar year as the CIC, the CIC Eligible
Senior Officer will have received a prorated portion of his or her annual
incentive with respect to service during such calendar year through the date of
the CIC, in accordance with the terms of the AT&T Management Pay Plan. In such
event, the numerator of the fraction referred to in the second sentence of this
Section 7 shall equal the number of complete months of the CIC Eligible Senior
Officer's employment during the Termination Year after the date of the CIC
(including the month in which the CIC occurs if the CIC occurs prior to the 15th
of the month, as well as the last month of employment if the CIC Eligible Senior
Officer's Final Payroll Date is on or after the 15th of the month).
8. OUTSTANDING LONG TERM INCENTIVES:
The disposition of all grants under any AT&T long term incentive program,
including any plan previously maintained by McCaw, LIN, TCG, TCI or MediaOne,
including the AT&T Wireless Adjustment Plan, shall be governed by the provisions
of the applicable AT&T long term incentive program.
9. CASH AWARDS/PAYMENTS:
Cash awards/payments, including cash retention, unpaid signing bonuses and any
other cash payments or awards which have not yet vested, will vest as of the
Participant's Final Payroll Date and upon expiration of the revocation period
indicated in the Release without revocation, and will be paid as soon as
administratively feasible following such revocation period.
10. SENIOR MANAGER UNIVERSAL LIFE INSURANCE PROGRAM:
Notwithstanding the terms and conditions of the AT&T Corp. Senior Manager
Universal Life Insurance Program ("SMULIP"), with respect to a CIC Eligible
Senior Officer who is a participant in SMULIP, but has not attained his or her
Normal Termination Date (as defined in SMULIP) as of his or her Final Payroll
Date, the Company shall pay a lump sum cash payment ("SMULIP Payment") to the
CIC Eligible Senior Officer (or to his or her assignee, as applicable) as soon
as administratively feasible after the expiration of the revocation period
indicated in the CIC Eligible Senior Officer's Release without revocation. The
SMULIP Payment shall equal to the sum of (x) plus (y) where (x) equals the
present value, as of the date of the CIC Eligible Senior Officer's Final Payroll
Date and assuming that the discount rate equals 8%, of any necessary additional
premium payments, estimated, but not guaranteed, which, together with the SMULIP
policy cash value as of the month end immediately prior to the CIC Eligible
Senior Officer's Final Payroll Date, to be sufficient to provide for the
continuation of the insurance coverage under the SMULIP Policy (based on
assumptions that are consistent with the assumptions under the SMULIP policy
used immediately prior to the CIC including, but not limited to, the annual
crediting rate of the SMULIP policy) with projected coverage equal to the
applicable benefit amount (as defined in SMULIP) as if the CIC Eligible Senior
Officer had continued in active employment until attaining his or her Normal
Termination Date (as defined in SMULIP) and assuming that his or her annual base
salary rate remains fixed in an amount equal to his or her highest base salary
rate in effect on or after the day preceding the date of the CIC, (but ignoring
increases in annual base salary rate attributable solely to any decreases in the
value of the CIC Eligible Senior Officer's Target Annual Bonus and/or Target
Annual Long-Term Incentive, as contemplated by the definition of "Reduction in
Compensation" set forth above) and (y) equals the amount (the "tax adjustment
payment"), calculated in accordance with AT&T's practice for Senior Officers as
in effect immediately prior to the CIC, to cover the Federal income and FICA
(Medicare portion) taxes estimated to be incurred by the CIC Eligible Senior
Officer by reason of the lump sum cash payment and the tax adjustment payment
provided for in this section. Such CIC Eligible Senior Officer shall not be
entitled to any additional or future payments from the Company under SMULIP.
11. FINANCIAL COUNSELING:
A CIC Eligible Senior Officer shall receive a lump sum payment estimated by the
Company in its sole discretion to be sufficient to provide, for a period of two
(2) years after the CIC Eligible Senior Officer's Final Payroll Date, financial
counseling services from a qualified financial counselor, plus a tax adjustment
payment equal to the amount, calculated in accordance with AT&T's practice for
Senior Officers as in effect immediately prior to the CIC, to cover the Federal
income and FICA (Medicare portion) taxes estimated to be incurred by the CIC
Eligible Senior Officer by reason of the lump sum payment for financial
counseling services and the tax adjustment payment provided for in this section.
Payment shall be made as soon as administratively feasible following the CIC
Eligible Senior Officer's Final Payroll Date and the expiration of the
revocation period indicated in the Release without revocation. A CIC Eligible
Senior Officer shall not be entitled to any additional or future payments from
the Company with respect to financial counseling or related services provided to
the CIC Eligible Senior Officer after his or her Final Payroll Date.
12. AT&T TOLL DISCOUNT:
The CIC Eligible Senior Officer will be eligible for toll reimbursement through
the AT&T Toll Discount Program under the terms and conditions that apply to
senior management employees Eligible for Retirement-Related Benefits, under the
same terms and conditions that applied immediately prior to the CIC to active
senior management employees.
13. VACATION:
A CIC Eligible Senior Officer should make every reasonable effort, consistent
with the needs of the business, to use all vacation, personal days, and floating
holidays to which he or she is eligible before his or her Final Payroll Date. If
the CIC Eligible Senior Officer is unable to do so, he or she will be paid for
any unused (earned and unearned) vacation days for the calendar year in which
his or her Final Payroll Date occurs and any approved and un-expired carry-over
days from the prior year in accordance with AT&T policy at that time. The CIC
Eligible Senior Officer will not receive pay in lieu of floating holidays and
management personal days if these days are not taken prior to his or her Final
Payroll Date, except for those CIC Eligible Senior Officers in the states of
California, Illinois or Ohio, who will receive such payments as may be mandated
by state law.
14. MEDICAL/DENTAL COVERAGE:
The extension and cost of medical and dental coverage for a CIC Eligible Senior
Officer who is Eligible for Retirement-Related Benefits will be in accordance
with the terms of the AT&T Corp. Post-Retirement Welfare Benefits Plan, or the
successor to such plan, as amended from time to time. The Company will provide
continuation of medical coverage and dental coverage under the AT&T Medical
Expense Plan and/or the AT&T Dental Expense Plan for Active Employees,
respectively, for each CIC Eligible Senior Officer who is not Eligible for
Retirement-Related Benefits, and his or her Class I dependents, Domestic Partner
and Domestic Partner's Children (as those terms are defined in the AT&T Medical
Expense Plan) (provided that such Class I dependents, Domestic Partner and
Domestic Partner's Children were covered by the AT&T Medical Expense Plan and/or
the AT&T Dental Expense Plan for Active Employees, or the successors to such
plans, immediately prior to the CIC Eligible Senior Officer's Final Payroll
Date), for up to eighteen (18) months following the month in which occurs the
CIC Eligible Senior Officer's Final Payroll Date. Company-provided continuation
of coverage under the AT&T Medical Expense Plan and/or the AT&T Dental Expense
Plan for Active Employees, or the successors to such plans, as the plans may be
amended from time to time, shall run concurrently with any rights to
continuation of coverage the CIC Eligible Senior Officer and/or his or her
eligible dependents may otherwise have under COBRA.
If, at the end of the 18-month COBRA period, the CIC Eligible Senior Officer is
not covered under another group health plan, the Company will make medical
coverage (not dental coverage) available for the CIC Eligible Senior Officer and
his or her Class I dependents, Domestic Partner and Domestic Partner's Children
under the AT&T Separation Medical Plan, or the successor to such plan, on the
same basis as for certain former senior managers. Should the Participant elect
to take this coverage, the CIC Eligible Senior Officer will be responsible for
the same portion of the annual premium for this medical coverage as is then
applicable to similarly situated former senior managers covered under the AT&T
Separation Medical Plan. Continuation of coverage under the AT&T Separation
Medical Plan after the CIC Eligible Senior Officer's death is available to the
CIC Eligible Senior Officer's spouse, if the spouse pays 100% of the annual
premium for coverage. There will be no continuing dental coverage for the CIC
Eligible Senior Officer or his or her Class I dependents, Domestic Partner and
Domestic Partner's Children after the end of eighteen (18) months following the
month in which occurs the CIC Eligible Senior Officer's Final Payroll Date,
except as may otherwise be required by law. The Participant should immediately
notify the Company if he or she becomes covered under another group health plan,
at which time the Company's provision of medical coverage for the Participant
and his or her Class I dependents, Domestic Partner and Domestic Partner's
Children will cease.
All coverage continued for a CIC Eligible Senior Officer (and his or her
eligible dependent(s)) will be the same as the coverage provided to the CIC
Eligible Senior Officer while an active employee, to the extent available,
subject to the terms of the AT&T Medical Expense Plan and/or the AT&T Dental
Expense Plan or the AT&T Separation Medical Plan or the successors to such
plans, as those plans may be amended from time to time.
15. TRANSITION COUNSELING:
A CIC Eligible Senior Officer will be entitled to receive the services of a
Company-paid and Company-approved outplacement or career transition consultant
in accordance with AT&T's current practices for Senior Officers in effect as of
the CIC Eligible Senior Officer's Final Payroll Date; provided, however, that
commencement of such transition counseling services, if desired, must begin
prior to the first anniversary of the CIC Eligible Senior Officer's Final
Payroll Date.
16. EXCISE TAX:
(a) If any element of compensation or benefit provided to a CIC Eligible Senior
Officer under the terms of the Plan, or under any other plan, program, policy or
other arrangement ("Benefit"), either alone or in combination with other
elements of compensation and benefits paid or provided to such CIC Eligible
Senior Officer, constitutes an "excess parachute payment", as that term is
defined in Section 280G of the Internal Revenue Code and the regulations
thereunder, and subjects such CIC Eligible Senior Officer to the excise tax
pursuant to Section 4999 of the Internal Revenue Code, and any interest and
penalties thereon (collectively, the "Excise Tax"), then such CIC Eligible
Senior Officer shall be entitled to an additional lump-sum cash payment from the
Company (the "Excise Tax Adjustment Payment"), subject to mandatory withholding,
in an amount equal to the Excise Taxes (including the Excise Tax attributable to
the Excise Tax Adjustment Payment related to the Benefit) plus any income and
FICA taxes and any interest and penalties thereon attributable to the Excise Tax
Adjustment Payment. For purposes of calculating an Excise Tax Adjustment Payment
to any CIC Eligible Senior Officer in any year, it shall be assumed that the CIC
Eligible Senior Officer is subject to Federal and applicable state and local
income taxes at the highest marginal Federal and applicable state and local
income tax rates, respectively, for the year in which the Excise Tax Adjustment
Payment is paid. Also, the Excise Tax Adjustment Payment to any CIC Eligible
Senior Officer shall reflect the Federal tax benefits attributable to the
deduction of applicable state and local income taxes.
(b) Subject to the provisions of Section 16(c) below, all determinations
required to be made under this Section 16, including whether and when an Excise
Tax Adjustment Payment is required and the amount of such Excise Tax Adjustment
Payment and the assumptions utilized in arriving at such determinations, shall
be made by an independent accounting firm chosen by the Company (the "Accounting
Firm"). The Accounting Firm shall provide detailed supporting calculations to
the Company and to the CIC Eligible Senior Officer within thirty (30) business
days of the receipt of notice from the Company or the CIC Eligible Senior
Officer that there has been a Benefit provided to which this Section 16 applies
(or such earlier time as requested by the Company). Any Excise Tax Adjustment
Payment, as determined pursuant to this Section 16(b), shall be paid by the
Company to the CIC Eligible Senior Officer within fifteen (15) business days of
the receipt of the Accounting Firm's determination.
(c) (i) If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding, or in the opinion of independent counsel
agreed upon by the Company and the CIC Eligible Senior Officer, that the Excise
Tax payable by the CIC Eligible Senior Officer on the Benefit is less than the
amount initially taken into account under Section 16(a) for purposes of
calculating the Excise Tax Adjustment Payment related to such Benefit, the
Accounting Firm shall recalculate the Excise Tax Adjustment Payment to reflect
the actual Excise Tax related to such Benefit. Within thirty (30) business days
following the CIC Eligible Senior Officer's receipt of notice of the results of
such recalculation from the Accounting Firm and/or the Company, the CIC Eligible
Senior Officer shall repay to the Company the excess of the initial Excise Tax
Adjustment Payment over the recalculated Excise Tax Adjustment Payment.
(ii) If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding, or in the opinion of an independent counsel
agreed upon by the Company and the CIC Eligible Senior Officer, that the Excise
Tax payable by the CIC Eligible Senior Officer on the Benefit is more than the
amount initially taken into account under Section 16(a) for purposes of
calculating the Excise Tax Adjustment Payment, the Accounting Firm shall
recalculate the Excise Tax Adjustment Payment to reflect the actual Excise Tax.
Within fifteen (15) business days following the Company's receipt of notice of
the results of such recalculation from the Accounting Firm, the Company shall
pay to the CIC Eligible Senior Officer the excess of the recalculated Excise Tax
Adjustment Payment over the initial Excise Tax Adjustment Payment.
(d) All fees and expenses of the Accounting Firm shall be borne solely by the
Company.
(e) The CIC Eligible Senior Officer shall notify the Company in writing of any
written claim by the Internal Revenue Service that, if successful, would require
the payment by the Company of an Excise Tax Adjustment Payment or the
recalculation of an Excise Tax Adjustment Payment. The notification shall
apprise the Company of the nature of such claim, including (1) a copy of the
written claim from the Internal Revenue Service, (2) the identification of the
element of compensation and/or benefit that is the subject of such Internal
Revenue Service claim, and (3) the date on which such claim is requested to be
paid. Such notification shall be given as soon as practicable but no later than
ten (10) business days after the CIC Eligible Senior Officer actually receives
notice in writing of such claim.
Within ten (10) business days following receipt of the notification of the
Internal Revenue Service written claim from the CIC Eligible Senior Officer, the
Company shall pay to the CIC Eligible Senior Officer an Excise Tax Adjustment
Payment, or the excess of a recalculated Excise Tax Adjustment Payment over the
initial Excise Tax Adjustment Payment, as applicable, related to the element of
compensation and/or benefit which is the subject of the Internal Revenue Service
claim. Within ten (10) business days following such payment to the CIC Eligible
Senior Officer, the CIC Eligible Senior Officer shall provide to the Company
written evidence that he or she had paid the claim to the Internal Revenue
Service (the United States Treasury).
The failure of the CIC Eligible Senior Officer to properly notify the Company of
the Internal Revenue Service claim (or to provide any required information with
respect thereto) shall not affect any rights granted to the CIC Eligible Senior
Officer under this Section 16, except to the extent that the Company is
materially prejudiced in the challenge to such claim as a direct result of such
failure. If the Company notifies the CIC Eligible Senior Officer in writing,
within sixty (60) business days following receipt from the CIC Eligible Senior
Officer of notification of the Internal Revenue Service claim, that it desires
to contest such claim, the CIC Eligible Senior Officer shall:
(i) give the Company any information reasonably requested by the Company
relating to such claim;
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time
including, without limitation, accepting legal representation with
respect to such claim by an attorney selected by the Company and
reasonably acceptable to the CIC Eligible Senior Officer;
(iii)cooperate with the Company in good faith in order to effectively
contest such claim; and
(iv) permit the Company to participate in any proceedings relating to such
claim if the Company elects not to assume and control the defense of
such claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the CIC Eligible
Senior Officer harmless, on an after-tax basis, for any Excise Tax, income
tax and FICA tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section
16, the Company shall have the right, at its sole option, to assume the
control of all proceedings in connection with such contest, in which case
it may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such
claim, and may direct the CIC Eligible Senior Officer to sue for a refund
or contest the claim in any permissible manner, and the CIC Eligible Senior
Officer agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine; provided, that any
extension of the statute of limitations relating to payment of tax for the
taxable year of the CIC Eligible Senior Officer with respect to which such
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's rights to assume the control of the
contest shall be limited to issues with respect to which an Excise Tax
Adjustment Payment would be payable hereunder, and the CIC Eligible Senior
Officer shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority. To the extent that the contest to the Internal Revenue Service
claim is successful, the Excise Tax Adjustment Payment related to the
element of compensation and/or benefit that was the subject of the claim
shall be recalculated in accordance with the provisions of Section
16(c)(ii).
17. LEGAL FEES:
In the event that it shall be necessary or desirable for a CIC Eligible Senior
Officer to retain legal counsel or incur other costs and expenses in connection
with enforcement of his or her rights under the Plan, including this Appendix A,
or other matters directly related to the CIC Eligible Senior Officer's
termination from employment with the Company , the Company shall reimburse the
CIC Eligible Senior Officer for his or her reasonable attorneys' fees and costs
and expenses if a final decision in connection with a material issue of the
litigation (or arbitration) is issued in the CIC Eligible Senior Officer's favor
by an arbitrator or a court of competent jurisdiction.
18. NO AMENDMENT:
Notwithstanding any other provision of this Plan, unless required by applicable
law, upon the occurrence of a CIC, no amendment shall be made to the Plan,
including this Appendix A, by the AT&T Board of Directors (or the successor
board), by the Company (or the successor to the Company), by any committee, any
officer, any employee of the Company (or the successor to the Company) or by any
other party, to suspend, modify, or eliminate the level or types of benefits
that are applicable upon the occurrence of a CIC, or to eliminate the
restrictions contained in this sentence, and no such amendment to the AT&T
Senior Officer Separation Plan, including this Appendix A, made in violation of
this provision, shall be effective.
19. SUCCESSORS:
The obligation of the Company under this Appendix A shall be binding upon any
assignee or successor in interest thereto. The Company shall not merge or
consolidate with any other corporation, or liquidate or dissolve, or transfer
assets or business operations, in a transaction in which the employment of
employees is transferred to such other corporation, or to the purchaser of such
assets or business operations, without making suitable arrangements for the
payment of any benefits which are or may become payable under this Appendix A,
and for the assumption by such successor employer of the obligations set forth
in this Appendix A.
Exhibit 10(iii)(A)6
July 29, 2003
Ms. Betsy Bernard
Dear Betsy:
This letter agreement ("the Agreement") completely replaces Section (3)
Paragraph (e) of your employment agreement dated October 1, 2002 detailing your
special individual non-qualified pension agreement, and supercedes all other
oral and written communication on the subject.
This Agreement will establish an individual non-qualified pension
arrangement ("Individual Pension"), which, subject to the terms and conditions
below, will provide you a benefit payable from AT&T Corp. (the "Company")
operating assets upon your retirement from the Company. This Individual Pension
will vest on April 1, 2006 contingent upon continued employment with the
Company, provided, however, that the Individual Pension will immediately vest
for Company-initiated terminations for other than "Cause" (as defined), for
terminations due to death, disability, or Good Reason (as defined) occurring on
or after the effective date of this Agreement, or if the Company is subject to a
Change in Control ("CIC"), as defined in the AT&T 1997 Long Term Incentive
Program. Only for termination for Cause or in the event of your voluntary
termination prior to vesting will this Individual Pension be null and void in
its entirety. In addition, this Individual Pension is subject to the provisions
of the AT&T Non-Competition Guideline.
With respect to the amount payable under this Individual Pension at your
retirement/termination, the single life annual annuity amount payable will be
determined as (a) minus (b) as set forth in the charts below.
(a) the single life annual pension annuity benefits calculated in
accordance with the table set forth below:
- -------------------------------------------------------------------
Year of Retirement/ Termination Percentage of Final 3 Year
Average Total Cash Compensation
(Base Pay plus Actual Bonus Paid
in Year)
- -------------------------------------------------------------------
- -------------------------------------------------------------------
2003 10.25%
- -------------------------------------------------------------------
2004 12.30%
- -------------------------------------------------------------------
2005 15.20%
- -------------------------------------------------------------------
2006 17.25%
- -------------------------------------------------------------------
2007 19.30%
- -------------------------------------------------------------------
2008 21.35%
- -------------------------------------------------------------------
2009 23.40%
- -------------------------------------------------------------------
2010 25.45%
- -------------------------------------------------------------------
2011 27.50%
- -------------------------------------------------------------------
2012 29.55%
- -------------------------------------------------------------------
2013 31.60%
- -------------------------------------------------------------------
2014 33.65%
- -------------------------------------------------------------------
2015 36.40%
- -------------------------------------------------------------------
2016 39.15%
- -------------------------------------------------------------------
2017 41.90%
- -------------------------------------------------------------------
2018 44.65%
- -------------------------------------------------------------------
2019 47.40%
- -------------------------------------------------------------------
2020 50.00%
- -------------------------------------------------------------------
(b) any single life annual annuity benefits payable from AT&T, i.e.
pension benefits under the AT&T Management Pension Plan (AT&TMPP),
AT&T Non Qualified Pension Plan (AT&TNQPP), AT&T Excess Benefit and
Compensation Plan (AT&TEBCPP), minimum retirement benefits under the
AT&T Senior Management Long Term Disability and Survivor Protection
Plan (AT&TSMLTD&SPP) if applicable, as well as by any qualified and
nonqualified pension benefits from prior employers.
Joint and survivor benefits on your death, whether your death occurs as an
active employee or following your termination, will be governed by the
administrative guidelines applicable to this Agreement.
In the event of your involuntary termination within two years following a
CIC for reasons other than for Cause or if you terminate employment for Good
Reason within two years following a CIC, your benefit under this Individual
Pension will be calculated by accelerating the Individual Pension schedule above
by adding three years to the schedule, i.e. the applicable percentage will be
that associated with the "Year of Retirement/Termination" three years from your
+actual termination year. In addition, the cash compensation used in calculating
the final three year average cash compensation will not use cash compensation
for years in which you did not hold the position of President- AT&T Corp.
For purposes of this Agreement:
a) "Cause" shall mean:
i. your conviction (including a plea of guilty or nolo contendere)
of a crime including theft, fraud, dishonesty or moral turpitude;
ii. violation by you of the Company's Code of Conduct or
Non-Competition Guideline;
iii. gross omission or gross dereliction of any statutory, common law
or other duty of loyalty to the Company or any of its affiliates;
or
iv. repeated failure to carry out the duties of your position despite
specific instruction to do so.
b) "Good Reason" prior to a CIC shall mean the occurrence without your
express written consent of any of the following events:
i. Your demotion to a position which is not of a rank and
responsibility comparable to members of the current Operations
Group or those of a similar/replacing governance body; provided,
however, that the Company's decision not to continue the
Operations Group shall not be Good Reason, and provided, further,
that (1) changes in reporting relationships shall not, alone,
constitute Good Reason and/or (2) a reduction in your business
unit's budget or a reduction of your business unit's head count,
by themselves, do not constitute Good Reason; or
ii. A reduction in your "Total Annual Compensation" (defined as the
sum of your Annual Base Salary Rate, Target Annual Incentive and
"Target Annual Long Term Incentive Grants") for any calendar or
fiscal year, as applicable, to an amount that is less than the
Total Annual Compensation that existed in the prior calendar or
fiscal year, as applicable. For purposes of this Paragraph
(b)(ii) the dollar value of the "Target Annual Long Term
Incentive Grants" shall exclude the value of any special one-time
or periodic long-term incentive grants, and shall be determined
by valuing Performance Shares, Stock Units, Restricted Stock,
Restricted Stock Units, etc., at the market share price utilized
in valuing the annual Senior Management compensation structures
in the materials presented to the Compensation and Employee
Benefits Committee of the Company's Board of Directors ("the
Committee") when authorizing such grants, and assuming 100%
performance achievement if such grants include performance
criteria. Stock Options and Stock Appreciation Rights will be
valued by the Black-Scholes methodology (and related share price)
as utilized in the materials presented to the Committee when
authorizing such grants.
c) "Good Reason" within two years following a CIC shall be in accordance
with the October 23, 2000 CIC Board Resolutions, which include
reduction in authority or responsibility, reduction in compensation,
and business relocation beyond a reasonable commuting distance.
Notwithstanding the foregoing, the Company may require you to change to an
equivalent executive position within the Company with substantially similar
levels of duties or responsibilities without causing Good Reason to occur.
You must notify the Company within 60 days following knowledge of an event
you believe constitutes Good Reason, or such event shall not constitute
Good Reason hereunder.
This agreement may not be amended or waived, unless the amendment or waiver
is in a writing signed by you and the Company's Executive Vice President-Human
Resources.
It is understood and agreed that you will not talk about, write about, or
otherwise publicize 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, legal and/or financial counselor, 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 OR
INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT
RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS
MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME
FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR
EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON.
You understand that the terms of this Agreement shall apply to the Company
and its successors. The Company specifically reserves the right to assign the
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 or any combination or form thereof by the Company
shall be construed as a termination of your employment and will not be
considered a termination for purposes of this Agreement.
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.
In addition, all of the benefits provided under this Agreement are subject
to forfeiture if you violate the AT&T Non-Competition Guideline, a copy of which
has been previously provided to you.
Betsy, I am happy to present this special pension arrangement to you. It
recognizes the extraordinary contributions that we expect you to continue to
make to our business. If you agree with the terms and conditions detailed above,
sign and date this Agreement in the spaces provided below and return the
original executed copy to me.
Sincerely,
Acknowledged and Agreed to:
/s/ Betsy Bernard July 30, 2003
- ------------------------- -------------------
Betsy Bernard Date
Exhibit 10(iii)(A)7
July 29, 2003
Mr. David Dorman
Dear Dave:
This letter agreement ("the Agreement") completely replaces Attachment E of
your employment agreement dated December 1, 2000 detailing your special
individual non-qualified pension agreement, and supercedes all other oral and
written communication on the subject.
This Agreement will establish an individual non-qualified pension
arrangement ("Individual Pension"), which, subject to the terms and conditions
below, will provide you a benefit payable from AT&T Corp. (the "Company")
operating assets upon your retirement from the Company. This Individual Pension
will be immediately vested and only for termination for "Cause" (as defined)
will this Individual Pension be null and void in its entirety. In addition, this
Individual Pension is subject to the provisions of the AT&T Non-Competition
Guideline.
With respect to the amount payable under this Individual Pension at your
retirement/termination, the single life annual annuity amount payable will be
determined as (a) minus (b) as set forth in the charts below:
(a) the single life annual pension annuity benefits calculated in
accordance with the table set forth below:
- -------------------------------------------------------------------
Year of Retirement/ Termination Percentage of Final 3 Year
Average Total Cash Compensation
(Base Pay plus Actual Bonus Paid
in Year)
- -------------------------------------------------------------------
- -------------------------------------------------------------------
2003 27.50%
- -------------------------------------------------------------------
2004 31.10%
- -------------------------------------------------------------------
2005 34.70%
- -------------------------------------------------------------------
2006 38.30%
- -------------------------------------------------------------------
2007 41.90%
- -------------------------------------------------------------------
2008 45.50%
- -------------------------------------------------------------------
2009 49.10%
- -------------------------------------------------------------------
2010 52.70%
- -------------------------------------------------------------------
2011 56.30%
- -------------------------------------------------------------------
2012 60.00%
- -------------------------------------------------------------------
2013 60.00%
- -------------------------------------------------------------------
2014 60.00%
- -------------------------------------------------------------------
2015 60.00%
- -------------------------------------------------------------------
2016 60.00%
- -------------------------------------------------------------------
2017 60.00%
- -------------------------------------------------------------------
2018 60.00%
- -------------------------------------------------------------------
2019 60.00%
- -------------------------------------------------------------------
(b) any single life annual annuity benefits payable from AT&T, i.e.
pension benefits under the AT&T Management Pension Plan (AT&TMPP),
AT&T Non Qualified Pension Plan (AT&TNQPP), AT&T Excess Benefit and
Compensation Plan (AT&TEBCPP), minimum retirement benefits under the
AT&T Senior Management Long Term Disability and Survivor Protection
Plan (AT&TSMLTD&SPP) if applicable, as well as by any qualified and
nonqualified pension benefits from prior employers.
Joint and survivor benefits on your death, whether your death occurs as an
active employee or following your termination, will be governed by the
administrative guidelines applicable to this Agreement.
In the event of your involuntary termination within two years following a
Change in Control ("CIC"), as defined in the AT&T 1997 Long Term Incentive
Program, for reasons other than for Cause or if you terminate employment for
Good Reason (as defined) within two years following a CIC, your benefit under
this Individual Pension will be calculated by accelerating the Individual
Pension schedule above by adding three years to the schedule, i.e. the
applicable percentage will be that associated with the "Year of
Retirement/Termination" three years from your actual termination year. In
addition, the cash compensation used in calculating the final three year average
cash compensation will not use cash compensation for years in which you did not
hold the position of Chief Executive Officer.
For purposes of this Agreement:
a) "Cause" shall mean:
i. your conviction (including a plea of guilty or nolo contendere)
of a crime including theft, fraud, dishonesty or moral turpitude;
ii. violation by you of the Company's Code of Conduct or
Non-Competition Guideline;
iii. gross omission or gross dereliction of any statutory, common law
or other duty of loyalty to the Company or any of its affiliates;
or
iv. repeated failure to carry out the duties of your position despite
specific instruction to do so.
b) "Good Reason" prior to a CIC shall mean the occurrence without your
express written consent of any of the following events:
i. Your demotion to a position which is not of a rank and
responsibility comparable to members of the current Operations
Group or those of a similar/replacing governance body; provided,
however, that the Company's decision not to continue the
Operations Group shall not be Good Reason, and provided, further,
that (1) changes in reporting relationships shall not, alone,
constitute Good Reason and/or (2) a reduction in your business
unit's budget or a reduction of your business unit's head count,
by themselves, do not constitute Good Reason; or
ii. A reduction in your "Total Annual Compensation" (defined as the
sum of your Annual Base Salary Rate, Target Annual Incentive and
"Target Annual Long Term Incentive Grants") for any calendar or
fiscal year, as applicable, to an amount that is less than the
Total Annual Compensation that existed in the prior calendar or
fiscal year, as applicable. For purposes of this Paragraph
(b)(ii) the dollar value of the "Target Annual Long Term
Incentive Grants" shall exclude the value of any special one-time
or periodic long-term incentive grants, and shall be determined
by valuing Performance Shares, Stock Units, Restricted Stock,
Restricted Stock Units, etc., at the market share price utilized
in valuing the annual Senior Management compensation structures
in the materials presented to the Compensation and Employee
Benefits Committee of the Company's Board of Directors ("the
Committee") when authorizing such grants, and assuming 100%
performance achievement if such grants include performance
criteria. Stock Options and Stock Appreciation Rights will be
valued by the Black-Scholes methodology (and related share price)
as utilized in the materials presented to the Committee when
authorizing such grants.
c) "Good Reason" within two years following a CIC shall be in
accordance with the October 23, 2000 CIC Board Resolutions, which
include reduction in authority or responsibility, reduction in
compensation, and business relocation beyond a reasonable
commuting distance.
Notwithstanding the foregoing, the Company may require you to change
to an equivalent executive position within the Company with
substantially similar levels of duties or responsibilities without
causing Good Reason to occur.
You must notify the Company within 60 days following knowledge of an
event you believe constitutes Good Reason, or such event shall not
constitute Good Reason hereunder.
This agreement may not be amended or waived, unless the amendment or waiver
is in a writing signed by you and the Company's Executive Vice President-Human
Resources.
It is understood and agreed that you will not talk about, write about, or
otherwise publicize 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, legal and/or financial counselor, 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 OR
INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT
RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS
MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME
FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR
EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON.
You understand that the terms of this Agreement shall apply to the Company
and its successors. The Company specifically reserves the right to assign the
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 or any combination or form thereof by the Company
shall be construed as a termination of your employment and will not be
considered a termination for purposes of this Agreement.
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.
In addition, all of the benefits provided under this Agreement are subject
to forfeiture if you violate the AT&T Non-Competition Guideline, a copy of which
has been previously provided to you.
Dave, I am happy to present this special pension arrangement to you. It
recognizes the extraordinary contributions that we expect you to continue to
make to our business. If you agree with the terms and conditions detailed above,
sign and date this Agreement in the spaces provided below and return the
original executed copy to me.
Sincerely,
Acknowledged and Agreed to:
/s/ Dave Dorman July 30, 2003
- ------------------------- -------------------
Dave Dorman Date
Exhibit 12
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Unaudited) (Dollars in millions)
For the Nine Months Ended
September 30, 2003
-------------------------
Income from continuing operations before income taxes $ 2,196
Add: distributions of less than 50% owned affiliates 5
Add: fixed charges, excluding capitalized interest 1,039
-------
Total earnings from continuing operations before income
taxes and fixed charges $ 3,240
-------
Fixed Charges:
Total interest expense $ 917
Capitalized interest 26
Interest portion of rental expense 122
-------
Total fixed charges $ 1,065
-------
Ratio of earnings to fixed charges 3.0
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 September
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: November 11, 2003 /s/ David W. Dorman
-------------------------
By: 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 September
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: November 11, 2003 /s/ Thomas W. Horton
---------------------------
By: 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.