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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 1-1105
AT&T CORP.
A New York I.R.S. Employer
Corporation No. 13-4924710
32 Avenue of the Americas, New York, New York 10013-2412
Telephone - Area Code 212-387-5400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
At July 31, 2002, the following shares of stock were outstanding:
AT&T common stock - 3,845,513,811 shares
1
PART I - FINANCIAL INFORMATION
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenue $ 12,104 $ 13,265 $ 24,088 $ 26,738
-------- -------- -------- --------
Operating Expenses
Costs of services and products (excluding depreciation of
$1,437, $1,181, $2,774 and $2,368 included below) 3,339 3,410 6,629 6,982
Access and other connection 2,763 3,105 5,571 6,256
Selling, general and administrative 2,644 2,749 5,190 5,465
Depreciation and amortization 1,959 2,350 3,854 4,762
Net restructuring and other charges -- 287 56 1,095
Goodwill and franchise impairment charges 16,479 -- 16,479 --
-------- -------- -------- --------
Total operating expenses 27,184 11,901 37,779 24,560
-------- -------- -------- --------
Operating (loss) income (15,080) 1,364 (13,691) 2,178
Other (expense), net (829) (308) (991) (1,091)
Interest (expense) (716) (761) (1,483) (1,640)
-------- -------- -------- --------
(Loss) income from continuing operations before income
taxes, minority interest and dividends on subsidiary
preferred stock and net (losses) related to equity
investments (16,625) 295 (16,165) (553)
Benefit for income taxes 4,631 436 4,365 218
Minority interest and dividends on subsidiary preferred
stock (31) 198 (88) 838
Net (losses) related to other equity investments (724) (980) (1,021) (1,037)
Equity (losses) from Liberty Media Group -- (2,125) -- (2,822)
-------- -------- -------- --------
(Loss) from continuing operations (12,749) (2,176) (12,909) (3,356)
(Loss) income from discontinued operations (net of income
taxes of $44, $(119), $44 and $(158)) (88) 218 (88) 150
-------- -------- -------- --------
(Loss) before extraordinary gain and cumulative effect of
accounting changes (12,837) (1,958) (12,997) (3,206)
Extraordinary gain (net of income taxes of $(5) and $(30)) 7 -- 48 --
Cumulative effect of accounting changes (net of income
taxes of $530 and $(578)) -- -- (856) 904
-------- -------- -------- --------
Net (loss) (12,830) (1,958) (13,805) (2,302)
Dividend requirements of preferred stock, net -- (236) -- (417)
Premium on exchange of AT&T Wireless tracking stock -- (80) -- (80)
-------- -------- -------- --------
(Loss) attributable to common shareowners $(12,830) $ (2,274) $(13,805) $ (2,799)
======== ======== ======== ========
AT&T Common Stock Group - per basic and diluted share:
(Loss) from continuing operations $ (3.49) $ (0.10) $ (3.59) $ (0.28)
(Loss) income from discontinued operations (0.03) 0.05 (0.03) 0.03
Extraordinary gain -- -- 0.01 --
Cumulative effect of accounting changes -- -- (0.23) 0.10
-------- -------- -------- --------
(Loss) $ (3.52) $ (0.05) $ (3.84) $ (0.15)
======== ======== ======== ========
Dividends declared $ 0.0375 $ 0.0375 $ 0.075 $ 0.075
AT&T Wireless Group - per basic and diluted share:
Income from discontinued operations $ -- $ 0.08 $ -- $ 0.08
======== ======== ======== ========
Liberty Media Group - per basic and diluted share:
(Loss) before cumulative effect of accounting change $ -- $ (0.82) $ -- $ (1.09)
Cumulative effect of accounting change -- -- -- 0.21
-------- -------- -------- --------
(Loss) $ -- $ (0.82) $ -- $ (0.88)
======== ======== ======== ========
The notes are an integral part of the consolidated financial statements.
2
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AT AT
JUNE 30, DECEMBER 31,
2002 2001
---- ----
ASSETS
Cash and cash equivalents $ 5,606 $ 10,592
Accounts receivable, less allowances of $832 and $827 7,191 7,736
Other receivables 374 1,645
Investments 414 668
Deferred income taxes 1,981 1,230
Other current assets 978 657
--------- ---------
TOTAL CURRENT ASSETS 16,544 22,528
--------- ---------
Property, plant and equipment, net of accumulated depreciation of
$35,165 and $32,046 41,460 41,322
Goodwill, net of accumulated amortization of $1,307 in 2001 20,526 24,675
Franchise costs, net of accumulated amortization of $2,501 in 2001 29,083 42,819
Other purchased intangible assets, net of accumulated amortization
of $782 and $647 2,064 2,222
Investments and related advances 18,676 23,818
Prepaid pension costs 3,466 3,337
Other assets 6,076 4,561
--------- ---------
TOTAL ASSETS $ 137,895 $ 165,282
========= =========
LIABILITIES
Accounts payable $ 4,330 $ 4,744
Payroll and benefit-related liabilities 1,551 2,084
Debt maturing within one year 5,889 12,958
AT&T Canada obligation 3,664 --
Other current liabilities 4,779 5,641
--------- ---------
TOTAL CURRENT LIABILITIES 20,213 25,427
--------- ---------
Long-term debt 37,271 40,527
Long-term benefit-related liabilities 3,632 3,594
Deferred income taxes 23,911 28,160
Other long-term liabilities and deferred credits 3,991 7,614
--------- ---------
TOTAL LIABILITIES 89,018 105,322
--------- ---------
Minority Interest 1,397 3,560
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated Debt
Securities of AT&T 4,725 4,720
SHAREOWNERS' EQUITY
Common Stock:
AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares;
issued and outstanding 3,845,223,065 shares (net of 858,521,242
treasury shares) at June 30, 2002 and 3,542,405,744 shares (net
of 851,746,431 treasury shares) at December 31, 2001 3,845 3,542
Additional paid-in capital 56,312 51,964
Accumulated (deficit) (17,288) (3,484)
Accumulated other comprehensive (loss) (114) (342)
--------- ---------
TOTAL SHAREOWNERS' EQUITY 42,755 51,680
--------- ---------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 137,895 $ 165,282
========= =========
The notes are an integral part of the consolidated financial statements.
3
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
2002 2001
---- ----
AT&T Common Shares
Balance at beginning of year $ 3,542 $ 3,760
Shares issued, net:
Under employee plans 20 7
For acquisitions -- 44
Settlement of put option -- 155
Exchange of AT&T Wireless tracking stock -- (372)
For funding AT&T Canada obligation 230 --
Redemption of TCI Pacific preferred stock 52 --
Other* 1 (62)
-------- ---------
Balance at end of period 3,845 3,532
-------- ---------
AT&T Wireless Group Common Stock
Balance at beginning of year -- 362
Shares issued:
Under employee plans -- 2
Exchange of AT&T Wireless tracking stock -- 438
-------- ---------
Balance at end of period -- 802
-------- ---------
Liberty Media Group Class A Common Stock
Balance at beginning of year -- 2,364
Shares issued, net -- 14
-------- ---------
Balance at end of period -- 2,378
-------- ---------
Liberty Media Group Class B Common Stock
Balance at beginning of year -- 206
Shares issued, net -- 6
-------- ---------
Balance at end of period -- 212
-------- ---------
Additional Paid-In Capital
Balance at beginning of year 51,964 90,496
Shares issued, net:
Under employee plans 249 164
For acquisitions -- 827
For funding AT&T Canada obligation 2,301 --
Redemption of TCI Pacific preferred stock 2,045 --
Other* 21 (1,044)
Gain on issuance of common stock by affiliates -- 18
Exchange of AT&T Wireless tracking stock -- 14
Settlement of put option -- 3,237
Beneficial conversion value of preferred stock -- 295
Dividends declared - AT&T Common Stock Group (278) --
Other 10 6
-------- ---------
Balance at end of period 56,312 94,013
-------- ---------
(Accumulated Deficit)/Retained Earnings
Balance at beginning of year (3,484) 7,408
Net (loss) (13,805) (2,302)
Dividends declared - AT&T Common Stock Group -- (275)
Dividends accrued - preferred stock -- (417)
Premium on exchange of AT&T Wireless tracking stock -- (80)
Treasury shares issued at less than cost 1 (9)
-------- ---------
Balance at end of period (17,288) 4,325
-------- ---------
(CONTINUED)
4
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (CONT'D)
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
2002 2001
---- ----
Accumulated Comprehensive (Loss)
Balance at beginning of year (342) (1,398)
Other comprehensive income 228 2,118
-------- ---------
Balance at end of period (114) 720
-------- ---------
Total Shareowners' Equity $ 42,755 $ 105,982
======== =========
Summary of Total Comprehensive (Loss):
Net (loss) $(13,805) $ (2,302)
Net foreign currency translation adjustment (net of income
taxes of $(31) and $143)(1) 49 (247)
Net revaluation of securities and derivative instruments:
Unrealized gains (losses) (net of income taxes of $425 and
$(1,189))(1) (688) 1,782
Recognition of previously unrealized losses (gains) (net of
income taxes of $(538) and $(361))(2) 867 583
-------- ---------
Comprehensive (Loss) $(13,577) $ (184)
======== =========
* Other activity in 2001 represents AT&T stock received in exchange for
entities owning certain cable systems.
AT&T accounts for treasury stock as retired stock. We have 100 million
authorized shares of preferred stock at $1 par value.
(1) In the first six months of 2001, total comprehensive (loss) included LMG's
foreign currency translation adjustments totaling $(151), net of
applicable income taxes and unrealized gains (losses) on
available-for-sale securities totaling $2,056, net of applicable income
taxes.
(2) See note (d) for a summary of the "Recognition of previously unrealized
losses (gains)".
The notes are an integral part of the consolidated financial statements.
5
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
2002 2001
---- ----
OPERATING ACTIVITIES
Net (loss) $(13,805) $(2,302)
Deduct: (Loss) income from discontinued operations (88) 150
-------- -------
(Loss) from continuing operations (13,717) (2,452)
Adjustments to reconcile (loss) from continuing operations to net cash
provided by operating activities of continuing operations:
Goodwill and franchise impairment charges 16,479 --
Depreciation and amortization 3,854 4,762
Net equity losses from Liberty Media Group -- 2,822
Net losses related to other equity investments 1,653 1,639
Cost method investment impairment charges 1,416 195
Cumulative effect of accounting changes - net of income taxes 856 (904)
Provision for uncollectible receivables 614 531
Net restructuring and other charges 15 1,009
Deferred income taxes (4,610) (932)
Net revaluation of certain financial instruments (231) 913
Net gains on sales of businesses and investments (13) (577)
Minority interest and dividends on subsidiary preferred stock (49) (953)
Extraordinary gain - net of income taxes (48) --
Put option mark-to-market charge -- 838
Decrease in receivables 159 196
Decrease in accounts payable (425) (763)
Net change in other operating assets and liabilities (1,125) (1,576)
Other adjustments, net 86 (39)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 4,914 4,709
-------- -------
INVESTING ACTIVITIES
Capital expenditures and other additions (3,412) (4,666)
Investment contributions and purchases (20) (367)
Investment distributions and sales 21 1,560
Proceeds from sale or disposal of property, plant and equipment 254 14
Net dispositions of businesses, net of cash disposed 14 3,120
Increase in restricted cash (413) --
Other investing activities, net (143) (98)
-------- -------
NET CASH (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS (3,699) (437)
-------- -------
FINANCING ACTIVITIES
Decrease in short-term borrowings, net (6,029) (8,466)
Retirement of long-term debt (2,468) (814)
Dividends paid on common stock (267) (284)
Dividends paid on preferred securities (107) (106)
Proceeds from long-term debt issuances 106 195
Issuance of AT&T common shares 2,593 88
Net (acquisition) issuance of treasury shares (28) 19
Issuance of convertible preferred securities and warrants -- 9,811
Issuance of AT&T Wireless Group common shares -- 54
Other financing activities, net (1) (37)
-------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (6,201) 460
-------- -------
Net cash provided by discontinued operations -- 4,921
Net (decrease) increase in cash and cash equivalents (4,986) 9,653
Cash and cash equivalents at beginning of year 10,592 64
-------- -------
Cash and cash equivalents at end of period $ 5,606 $ 9,717
======== =======
The notes are an integral part of the consolidated financial statements.
6
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T
Corp. (AT&T) pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and, in the opinion of management, include all
adjustments necessary for a fair statement of the consolidated results of
operations, financial position and cash flows for each period presented.
The consolidated results for interim periods are not necessarily
indicative of results for the full year. These financial results should be
read in conjunction with AT&T's Form 10-K/A for the year ended December
31, 2001 and AT&T's Form 10-Q for the quarter ended March 31, 2002. We
have reclassified certain prior period amounts to conform to our current
presentation.
b) RESTRUCTURING OF AT&T
On October 25, 2000, AT&T announced a restructuring plan designed to
fully separate or issue separately tracked stocks intended to reflect the
financial performance and economic value of each of AT&T's four major
operating units.
On July 10, 2002, AT&T and Comcast Corporation (Comcast) shareowners
approved the proposed merger between AT&T Broadband and Comcast. The
merger still remains subject to certain regulatory reviews and approvals
and certain other conditions and is expected to close by the end of 2002.
Under the terms of the agreement, AT&T will spin-off AT&T Broadband and
simultaneously AT&T Broadband and Comcast will merge into subsidiaries of
a new company to be called AT&T Comcast Corporation (AT&T Comcast). AT&T
shareowners will receive approximately 0.32 of a share of AT&T Comcast for
each share of AT&T they own, based on calculations using June 30, 2002
share prices. AT&T shareowners will own an approximate 55% economic stake
and have an approximate 61% voting interest in the new company. The
spin-off of AT&T Broadband could result in the recognition of a loss for
the difference between the fair value of the Comcast shares to be received
by AT&T shareholders in the merger and the net book value of AT&T
Broadband. At June 30, 2002, the book value of AT&T Broadband approximated
the fair value of the Comcast shares to be received based on the June 30,
2002 Comcast stock trading price of $24.20 per share (see Note g). If the
Comcast stock price decreases below $24.20 per share, AT&T will need to
record a charge to adjust the AT&T Broadband book value to the fair value
of the Comcast shares.
On July 10, 2002, AT&T shareholders also approved the creation of a
separate tracking stock intended to reflect the financial performance and
economic value of its AT&T Consumer Services business. AT&T has not yet
determined the timing, if any, of the distribution. A decision on a
distribution will depend on market conditions and other factors. In
addition, AT&T shareowners approved a one-for-five reverse stock split.
The purpose of the reverse stock split is to seek to adjust the trading
price of AT&T common stock upward following completion of the various
transactions to effect AT&T's restructuring plan.
These restructuring activities are complicated and involve a
substantial number of steps and transactions, including obtaining various
approvals, such as Internal Revenue Service (IRS) rulings. AT&T
anticipates, however, that the transactions associated with AT&T's
restructuring plan will be tax-free to U.S. shareowners. Future financial
conditions, superior alternatives or other factors may arise or occur that
make it inadvisable to proceed with part or all of AT&T's restructuring
plans. Any or all of the elements of AT&T's restructuring plan may not
occur as we currently expect or in the time-frames that we currently
contemplate, or at all. Alternative forms of restructuring, including
sales of interests in these businesses, would reduce what is available for
distribution to AT&T shareowners in the restructuring.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. On August 10, 2001, AT&T completed
the split-off of Liberty Media Corporation as an independent, publicly
traded company.
7
c) SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 142, "GOODWILL AND
OTHER INTANGIBLE ASSETS"
Effective January 1, 2002, AT&T adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires that goodwill and
indefinite-lived intangible assets no longer be amortized, but instead be
tested for impairment at least annually. Intangible assets that have
finite useful lives will continue to be amortized over their useful lives.
In addition, the amortization period for intangible assets with finite
lives will no longer be limited to 40 years. We have determined that our
franchise costs are indefinite-lived assets, as defined in SFAS No. 142,
and therefore are not subject to amortization beginning in 2002. In
accordance with SFAS No. 142, goodwill was tested for impairment by
comparing the fair value of our reporting units to their carrying values.
As of January 1, 2002, the fair value of the reporting units' goodwill
exceeded their carrying value, and therefore no impairment loss was
recognized upon adoption. Franchise costs were tested for impairment as of
January 1, 2002, by comparing the fair value to the carrying value (at the
market level). An impairment loss of $0.9 billion, net of taxes of $0.5
billion, or $0.23 per basic and diluted share was recorded relating to our
AT&T Broadband segment in the first quarter of 2002 and is included in
"Cumulative effect of accounting changes" in the Consolidated Statement of
Operations. (See Note g for discussion of interim testing of goodwill and
franchise costs.)
The following tables present the impact of SFAS No. 142 on net
(loss) income and (loss) earnings per share had the standard been in
effect on January 1, 2001.
AT&T COMMON STOCK AT&T WIRELESS LIBERTY MEDIA
GROUP GROUP GROUP
----- ----- -----
FOR THE THREE MONTHS ENDED JUNE 30, 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
NET (LOSS) INCOME:
Reported (loss) from continuing operations
before extraordinary gain $(12,749) $ (51) $ -- $ -- $ -- $(2,125)
Dividend requirements of preferred stock -- (236) -- -- -- --
Premium on exchange of AT&T Wireless
tracking stock -- (80) -- -- -- --
-------- ----- -------- -------- -------- -------
Reported (loss) form continuing operations
available to common shareowners (12,749) (367) -- -- -- (2,125)
Add back amortization, net of tax:
Goodwill* -- 194 -- -- -- 148
Equity method excess basis -- 47 -- -- -- 107
Franchise costs -- 192 -- -- -- 2
-------- ----- -------- -------- -------- -------
Adjusted (loss) income from continuing
operations before extraordinary gain
available to common shareowners $(12,749) $ 66 $ -- $ -- $ -- $(1,868)
Reported (loss) income from discontinued
operations (88) 176 -- 42 -- --
Add back discontinued operations
amortization, net of tax -- 75 -- 21 -- --
Extraordinary gain 7 -- -- -- -- --
-------- ----- -------- -------- -------- -------
ADJUSTED NET (LOSS) INCOME AVAILABLE TO
COMMON SHAREOWNERS $(12,830) $ 317 $ -- $ 63 $ -- $(1,868)
======== ===== ======== ======== ======== =======
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE:
Reported basic and diluted (loss)
per share from continuing operations
before extraordinary gain $ (3.49) $(0.10) $ -- $ -- $ -- $ (0.82)
Add back amortization, net of tax:
Goodwill* -- 0.06 -- -- -- 0.06
Equity method excess basis -- 0.01 -- -- -- 0.04
Franchise costs -- 0.05 -- -- -- --
-------- ----- -------- -------- -------- -------
Adjusted basic and diluted (loss) earnings
per share from continuing operations
before extraordinary gain $ (3.49) $0.02 $ -- $ -- $ -- $ (0.72)
Reported (loss) income from discontinued
operations (0.03) 0.05 -- (0.08) -- --
Add back discontinued operations
amortization, net of tax -- 0.02 -- 0.04 -- --
Extraordinary gain -- -- -- -- -- --
-------- ----- -------- -------- -------- -------
ADJUSTED BASIC AND DILUTED (LOSS) EARNINGS
PER SHARE $ (3.52) $0.09 $ -- $ (0.04) $ -- $ (0.72)
======== ===== ======== ======== ======== =======
* Goodwill amortization is net of the Excite@Home minority interest impact
on goodwill.
8
AT&T COMMON STOCK AT&T WIRELESS LIBERTY MEDIA
GROUP GROUP GROUP
----- ----- -----
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
NET (LOSS) INCOME:
Reported (loss) from continuing operations
before extraordinary gain and cumulative
effect of accounting changes $(12,909) $ (534) $ -- $ -- $ -- $(2,822)
Dividend requirements of preferred stock -- (417) -- -- -- --
Premium on exchange of AT&T Wireless
tracking stock -- (80) -- -- -- --
-------- ------- -------- -------- -------- -------
Reported (loss) form continuing operations
available to common shareowners (12,909) (1,031) -- -- -- (2,822)
Add back amortization, net of tax:
Goodwill* -- 405 -- -- -- 300
Equity method excess basis -- 97 -- -- -- 322
Franchise costs -- 391 -- -- -- 3
-------- ------- -------- -------- -------- -------
Adjusted (loss) from continuing operations
before extraordinary gain and
cumulative effect of accounting changes $(12,909) $ (138) $ -- $ -- $ -- $(2,197)
Reported (loss) income from discontinued
operations (88) 115 -- 35 -- --
Add back discontinued operations
amortization, net of tax -- 152 -- 36 -- --
Extraordinary gain 48 -- -- -- -- --
Cumulative effect of accounting changes (856) 359 -- -- -- 545
-------- ------- -------- -------- -------- -------
ADJUSTED NET (LOSS) INCOME $(13,805) $ 488 $ -- $ 71 $ -- $(1,652)
======== ======= ======== ======== ======== =======
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE:
Reported basic and diluted (loss) per share
from continuing operations before
extraordinary gain and cumulative effect
of accounting changes $ (3.59) $ (0.28) $ -- $ -- $ -- $ (1.09)
Add back amortization, net of tax:
Goodwill* -- 0.12 -- -- -- 0.12
Equity method excess basis -- 0.02 -- -- -- 0.12
Franchise costs -- 0.10 -- -- -- --
-------- ------- -------- -------- -------- -------
Adjusted basic and diluted (loss) per share
from continuing operations before
extraordinary gain and cumulative effect
of accounting changes $ (3.59) $ (0.04) $ -- $ -- $ -- $ (0.85)
Reported (loss) earnings from discontinued
operations (0.03) 0.03 -- 0.08 -- --
Add back discontinued operations
amortization, net of tax -- 0.04 -- 0.08 -- --
Extraordinary gain 0.01 -- -- -- -- --
Cumulative effect of accounting changes (0.23) 0.10 -- -- -- 0.21
-------- ------- -------- -------- -------- -------
ADJUSTED BASIC AND DILUTED (LOSS) EARNINGS
PER SHARE $ (3.84) $ 0.13 $ -- $ 0.16 $ -- $ (0.64)
======== ======= ======== ======== ======== =======
* Goodwill amortization is net of the Excite@Home minority interest impact
on goodwill.
At June 30, 2002, goodwill declined $4.1 billion from December 31,
2001 primarily as a result of impairment losses recorded related to AT&T
Broadband in the second quarter of 2002 (see Note g). Goodwill at June 30,
2002, by reportable segment is as follows:
CARRYING AMOUNT
---------------
AT&T Broadband $15,180
AT&T Business Services 5,275
AT&T Consumer Services 71
-------
Total goodwill $20,526
=======
Identifiable intangible assets at June 30, 2002 are comprised of:
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
------ ------------
Non-amortizable intangible assets:
Franchise costs $29,083 $ --
Amortizable other purchased
intangible assets:
Customer lists and relationships 2,735 720
Other 111 62
------- ----
Total identifiable intangible assets $31,929 $782
======= ====
The amortization expense associated with other purchased intangible
assets for the three and six months ended June 30, 2002 was $69 and $136,
respectively. Amortization expense for other purchased intangible assets
is estimated to be approximately $270 for each of the years ended December
31, 2002 and 2003, $250 for the year ended December 31, 2004 and $240 for
each of the years ended December 31, 2005 and 2006.
9
The following table presents the impact of SFAS No. 142 on net
(loss) income and (loss) earnings per share had the standard been in
effect for the three years ended December 31, 2001. AT&T Wireless Group
tracking stock was issued in April 2000, therefore data for this group is
not applicable for 1999.
($ in millions, except per share amounts) AT&T Common Stock AT&T Wireless Liberty Media
Group Group Group
-------------------------- -------------- ---------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999 2001 2000 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
NET (LOSS) INCOME:
Reported (loss) income from continuing
operations before cumulative effect of
accounting change $(4,131) $2,645 $5,883 $ -- $ -- $(2,711) $1,488 $(2,022)
Dividend requirements of preferred stock (652) -- -- -- -- -- -- --
Premium on exchange of AT&T Wireless
tracking stock (80) -- -- -- -- -- -- --
------- ------ ------ ----- ----- ------- ------ -------
Reported (loss) income from continuing
operations available to common
shareowners (4,863) 2,645 5,883 -- -- (2,711) 1,488 (2,022)
Add back amortization, net of tax:
Goodwill* 766 687 135 -- -- 350 568 424
Equity method excess basis 128 337 294 -- -- 346 654 285
Franchise costs 754 645 445 -- -- 4 8 5
------- ------ ------ ----- ----- ------- ------ -------
Adjusted (loss) income from continuing
operations before cumulative effect
of accounting change available to
common shareowners $(3,215) $4,314 $6,757 $ -- $ -- $(2,011) $2,718 $(1,308)
------- ------ ------ ----- ----- ------- ------ -------
Reported income (loss) from discontinued
Operations 115 460 (433) 35 76 -- -- --
Add back discontinued operations
Amortization, net of tax 152 222 204 36 27 -- -- --
Gain on disposition of discontinued
Operations 13,503 -- -- -- -- -- -- --
Cumulative effect of accounting change 359 -- -- -- -- 545 -- --
------- ------ ------ ----- ----- ------- ------ -------
ADJUSTED NET INCOME (LOSS) $10,914 4,996 $6,528 $ 71 $ 103 $(1,466) $2,718 $(1,308)
======= ====== ====== ===== ===== ======= ====== =======
BASIC (LOSS) EARNINGS PER SHARE:
Reported basic (loss) earnings per share
from continuing operations before
cumulative effect of accounting change $ (1.33) $ 0.76 $ 1.91 $ -- $ -- $ (1.05) $ 0.58 $ (0.80)
Add back amortization, net of tax:
Goodwill* 0.21 0.20 0.04 -- -- 0.14 0.22 0.17
Equity method excess basis 0.03 0.10 0.10 -- -- 0.13 0.25 0.11
Franchise costs 0.21 0.18 0.14 -- -- -- 0.01 --
------- ------ ------ ----- ----- ------- ------ -------
Adjusted basic (loss) earnings per share
from continuing operations before
cumulative effect of accounting change $ (0.88) $ 1.24 $ 2.19 $ -- $ -- $ (0.78) $ 1.06 $ (0.52)
Reported earnings (loss) per share from
discontinued operations 0.03 0.13 (0.14) 0.08 0.21 -- -- --
Add back discontinued operations
amortization, net of tax 0.04 0.06 0.07 0.08 0.08 -- -- --
Gain on disposition of discontinued
operations 3.70 -- -- -- -- -- -- --
Cumulative effect of accounting change 0.10 -- -- -- -- 0.21 -- --
------- ------ ------ ----- ----- ------- ------ -------
ADJUSTED BASIC EARNINGS (LOSS)
PER SHARE $ 2.99 $ 1.43 $ 2.12 $0.16 $0.29 $ (0.57) $ 1.06 $ (0.52)
======= ====== ====== ===== ===== ======= ====== =======
10
AT&T Common Stock AT&T Wireless Liberty Media
($ in millions, except per share amounts) Group Group Group
----------------- ------------- -------------
FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999 2001 2000 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
DILUTED (LOSS) EARNINGS PER SHARE:
Reported diluted (loss) earnings per share
from continuing operations before
cumulative effect of accounting change $ (1.33) $ 0.75 $ 1.87 $ -- $ -- $ (1.05) $ 0.58 $ (0.80)
Add back amortization, net of tax:
Goodwill* 0.21 0.19 0.04 -- -- 0.14 0.22 0.17
Equity method excess basis 0.03 0.10 0.10 -- -- 0.13 0.25 0.11
Franchise costs 0.21 0.18 0.14 -- -- -- 0.01 --
------- ------ ------ ----- ----- ------- ------ -------
Adjusted diluted (loss) earnings per share
from continuing operations before
cumulative effect of accounting change $ (0.88) $ 1.22 $ 2.15 $ -- $ -- $ (0.78) $ 1.06 $ (0.52)
Reported earnings (loss) per share from
discontinued operations 0.03 0.13 (0.13) 0.08 0.21 -- -- --
Add back discontinued operations
amortization, net of tax 0.04 0.06 0.07 0.08 0.08 -- -- --
Gain on disposition of discontinued
Operations 3.70 -- -- -- -- -- -- --
Cumulative effect of accounting change 0.10 -- -- -- -- 0.21 -- --
------- ------ ------ ----- ----- ------- ------ -------
ADJUSTED DILUTED EARNINGS (LOSS) PER SHARE $ 2.99 $ 1.41 $ 2.09 $0.16 $0.29 $ (0.57) $ 1.06 $ (0.52)
======= ====== ====== ===== ===== ======= ====== =======
* Goodwill amortization is net of the Excite@Home minority interest
impact on goodwill.
EITF ISSUE 01-9, "ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO A
CUSTOMER"
The Emerging Issues Task Force (EITF) recently reached a consensus
on Issue 01-9, "Accounting for Consideration Given by a Vendor to a
Customer," that cash incentives given to customers should be characterized
as a reduction of revenue when recognized in the income statement, unless
an identifiable benefit is received in exchange. Prior to this consensus,
cash incentives to acquire customers were recorded as advertising and
promotion expense within selling, general and administrative expenses.
These cash incentives are now recorded as a reduction of revenue and prior
periods have been reclassified to conform with this presentation. Total
AT&T revenue and AT&T Consumer Services revenue for the quarters ended
March 31, 2002, December 31, 2001, September 30, 2001, June 30, 2001 and
March 31, 2001 was reduced by $39, $45, $52, $61, and $78, respectively.
Net income was not affected by this reclassification.
SFAS NO. 144,"ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS"
On January 1, 2002, AT&T adopted SFAS No. 144,"Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all
long-lived assets, including discontinued operations, and consequently
amends Accounting Principles Board (APB) Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 also amends Accounting Research Bulletin No.
51, "Consolidated Financial Statements" to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. The adoption had no impact on AT&T's results of operations,
financial position or cash flows.
For a detailed discussion of significant accounting polices, refer
to AT&T's Form 10-K/A for the year ended December 31, 2001.
d) SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS) IN OTHER
COMPREHENSIVE INCOME
AT&T has investment holdings classified as "available-for-sale"
under the scope of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." These securities are carried at fair value
with any unrealized gains or losses, net of income taxes, included within
"Accumulated other comprehensive (loss)" as a component of shareowners'
equity. Under SFAS No. 115, when the "available-for-sale" securities are
sold or when we believe a decline in the investment value is
other-than-temporary, the previously unrealized gains or losses are
recognized in earnings in "Other (expense), net"
11
in the Consolidated Statement of Operations. In addition, upon the
adoption of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," in January 2001, we reclassified certain securities
to "trading," resulting in the recognition in earnings of previously
unrealized losses. Following is a summary of the previously unrealized
losses (gains) that were recognized in the Consolidated Statements of
Operations for the six months ended June 30, 2002 and 2001.
RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS)
2002 2001
-------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, PRETAX AFTER-TAX PRETAX AFTER-TAX
------ --------- ------ ---------
AT&T GROUP:
Other expense, net:
Reclassification of securities to "trading"
in conjunction with the adoption of SFAS No. 133 $ -- $ -- $ 1,154 $ 713
Sale of various securities -- -- (239) (148)
Other-than-temporary investment impairments 1,405 867 -- --
LIBERTY MEDIA GROUP:
Equity earnings (losses) from Liberty Media Group:
Sales of various securities -- -- 173 105
Cumulative effect of accounting change -- -- (144) (87)
------ ---- ------- -----
Total recognition of previously unrealized losses $1,405 $867 $ 944 $ 583
====== ==== ======= =====
e) DISCONTINUED OPERATIONS
Discontinued operations for the three and six months ended June 30,
2002 reflects an estimated loss on the settlement of a litigation
associated with the business of Lucent Technologies Inc., which was
spun-off from AT&T in 1996. Sparks, et al. v. AT&T and Lucent Technologies
Inc. et al., is a class action lawsuit filed in 1996 in Illinois state
court. As a result of recent negotiations, a settlement proposal was
submitted to and accepted by the court on August 9, 2002. In accordance
with the separation and distribution agreement between AT&T and Lucent,
AT&T recorded its proportionate share of the settlement and estimated
legal costs, which totaled $132 pretax ($88 after-tax, or $0.03 per
share). (See Note l for a complete discussion of this matter.)
Pursuant to APB Opinion No. 30, the consolidated financial
statements of AT&T reflect the disposition of AT&T Wireless, which was
split-off from AT&T on July 9, 2001, as discontinued operations.
Accordingly, the revenue, costs and expenses, and cash flows of AT&T
Wireless through June 30, 2001, the effective split-off date for
accounting purposes, have been excluded from the respective captions in
the 2001 Consolidated Statements of Operations and Consolidated Statements
of Cash Flows and have been reported as "Income from discontinued
operations," net of applicable income taxes; and as "Net cash provided by
discontinued operations." Revenue from discontinued operations was $3,380
and $6,592 for the three and six months ended June 30, 2001, respectively.
Interest expense of $70 and $153 for the three and six months ended June
30, 2001, respectively, was allocated to discontinued operations based on
the debt of AT&T that was attributable to AT&T Wireless.
f) CONCERT AND AT&T CANADA
On April 1, 2002, Concert, our joint venture with British
Telecommunications plc (BT) was officially unwound and the venture's
assets and customer accounts were distributed back to the parent
companies. Under the partnership termination agreement, each of the
partners generally reclaimed the customer contracts and assets that were
initially contributed to the joint venture, including international
transport facilities and gateway assets. In addition, AT&T assumed certain
other assets that BT originally contributed to the joint venture.
At June 30, 2002, AT&T had a 31% equity ownership in AT&T Canada.
Under the terms of the 1999 merger agreement, AT&T has the right to
trigger, at any time, the purchase by AT&T or another entity the remaining
equity of AT&T Canada for the Back-end Price which is the greater of the
floor price and the fair market value. The floor price accretes at 4% each
quarter, commencing on June 30, 2000. In the third and fourth quarters of
2001, AT&T recorded charges reflecting the difference between the
underlying value of AT&T Canada shares and the price AT&T has committed to
pay for them, including the 4% accretion of the floor price. At December
31, 2001, this liability of $3.0 billion was included in "Other long-term
liabilities and deferred credits" in the Consolidated
12
Balance Sheet. In the second quarter and first half of 2002, AT&T recorded
after-tax charges of $0.1 billion ($0.2 billion pretax) and after-tax
charges of $0.3 billion ($0.5 billion pretax), respectively, reflecting
further deterioration in the underlying value of AT&T Canada as well as
the accretion of the floor price. The charges are included in "Net
(losses) related to other equity investments" in the Consolidated
Statement of Operations and the related liability of $3.7 billion within
"AT&T Canada obligation" in the Consolidated Balance Sheet. The liability
at June 30, 2002, also reflects foreign currency translation losses due to
fluctuations in the Canadian dollar of $0.2 billion pretax. AT&T has a
hedge related to this obligation and at June 30, 2002, had realized and
unrealized gains of $0.2 billion pretax relating to this hedge.
On June 25, 2002, AT&T provided notice triggering the requirement to
purchase in cash the outstanding shares of AT&T Canada from the public.
Under the terms of the 1999 merger agreement, the June 25 notification
effectively ceases further accretion on the publicly held shares. AT&T has
arranged for Tricap Investments Corporation, a wholly owned subsidiary of
Brascan Financial Corporation, to purchase an approximate 63% equity
interest in AT&T Canada and CIBC Capital Partners to acquire an
approximate 6% equity interest in AT&T Canada. AT&T has agreed to pay the
purchase price for the AT&T Canada shares on behalf of Tricap and CIBC
Capital Partners The purchase of AT&T Canada shares is expected to occur
in the fourth quarter of this year, subject to the terms and conditions of
the 1999 agreement, including obtaining the required regulatory approval.
AT&T will fund the purchase price of the AT&T Canada shares partly with
the net proceeds of approximately $2.5 billion received from the sale of
230 million shares of AT&T common stock on June 11, 2002. The remaining
portion of the obligation will be financed through short-term sources.
Tricap and CIBC Partners will make a nominal payment to AT&T upon
completion of the transaction. After the transaction closes, AT&T will
continue to hold a 31% ownership interest.
g) IMPAIRMENT CHARGES
Goodwill and Franchise Impairment Charges
SFAS No. 142 requires that intangible assets not subject to
amortization and goodwill shall be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset
might be impaired. The impairment test shall consist of a comparison of
the fair value of the intangible asset/goodwill with its carrying amount.
In the second quarter of 2002, we noted significant changes in the
general business climate as evidenced by the severe downward movement in
the U.S. stock market (including the decline in values of publicly traded
cable industry stocks). At June 30, 2002, five of our cable competitors as
a group experienced an average decline in total market capitalization of
over 20% since January 1, 2002. We have also witnessed corporate
bankruptcies. We believe these factors coupled with the pending merger of
AT&T Broadband and Comcast (which was approved by both companies'
shareholders on July 10, 2000) created a "trigger event" for our AT&T
Broadband segment, which necessitated the testing of goodwill and
franchise costs for impairment as of the end of the second quarter.
We assessed our impairment on the same principles employed during
the initial adoption of SFAS No. 142. Such testing resulted in the
recognition of a $12.3 billion franchise cost impairment charge and a $4.2
billion goodwill impairment charge (aggregating to $11.8 billion
after-tax) recorded in "Goodwill and franchise impairment charges" in the
Consolidated Statement of Operations.
Investment Impairment Charges
In accordance with SFAS No. 115 and APB Opinion No. 18 "The Equity
Method of Accounting for Investments in Common Stock," we evaluated our
portfolio of investments as of June 30, 2002 for potential impairments.
SFAS No. 115 and APB Opinion No. 18 both require the recognition in
earnings of declines in value of cost and equity method securities which
are "other than temporary."
Given the significant decline in stock prices in the last six
months, the length of time these investments have been below market and
industry specific issues, we believe that certain investments would not
recover our cost basis in the foreseeable future. Accordingly, we believe
the declines in value are "other than temporary" and, as a result, AT&T
recorded total investment impairments of $2.2 billion pretax ($1.3 billion
after-
13
tax). The following is a breakout of the investment impairment charges
recorded in the second quarter by type of investment.
Cost Method Investments
In the second quarter of 2002, we recorded investment impairment
charges on cost method investments of $1.2 billion pretax ($0.7 billion
after tax), within "Other (expense), net" in the Consolidated Statement of
Operations. These charges relate to securities that are classified as
"available-for-sale" and were marked-to-market through "Other
comprehensive income" as a component of shareowners' equity. These charges
primarily consisted of impairments on our investments in Cablevision
Systems Corporation ($0.6 billion pretax, $0.4 billion after-tax), Comcast
($0.3 billion pretax, $0.2 billion after-tax) and Microsoft Corporation
($0.2 billion pretax, $0.1 billion after-tax). In the first half of 2002,
we recorded impairment charges on cost method investments of $1.4 billion
on a pretax basis.
Our investment in Cablevision stock is monetized by debt which is
indexed to the value of Cablevision shares. The debt contains an embedded
derivative which is designated as a cash-flow hedge under the provisions
of SFAS No. 133 and is marked-to-market through "Other comprehensive
income." At the time we recognized the other than temporary decline in the
value of the Cablevision stock as an expense, as permitted by SFAS No.
133, we also recognized, in earnings, the unrealized gain on the embedded
derivative that was previously recorded in "Other comprehensive income,"
resulting in the $0.6 billion pretax impairment discussed above.
Equity Method Investments
In the second quarter of 2002, we recorded investment impairment
charges on equity method investments of $1.0 billion pretax ($0.6 billion
after-tax) within "Net (losses) related to other equity investments" in
the Consolidated Statement of Operations. These charges consisted of
impairments of our cable partnerships, primarily Texas Cable Partners, LP
($0.4 billion pretax, $0.2 billion after-tax), Insight Midwest LP ($0.2
billion pretax, $0.1 billion after-tax), Kansas City Cable Partners ($0.2
billion pretax, $0.1 billion after-tax), Parnassos Communications, LP
($0.1 billion pretax and after-tax) and Century-TCI California
Communications, LP ($0.1 billion pretax and after-tax). Parnassos
Communications, LP and Century-TCI California Communications, LP represent
the only partnership investments we have with Adelphia Communications
Corporation. Adelphia Communications Corporation and subsidiaries
(including Parnassos Communications, LP and Century-TCI California
Communications, LP) filed for Chapter 11 bankruptcy on June 25, 2002.
h) NET RESTRUCTURING AND OTHER CHARGES
In the second quarter of 2002, AT&T recorded $23 of restructuring
and other charges for facility closing costs in connection with buildings
that have been vacated as a result of previously announced employee exit
plans. These charges were entirely offset by the reversal of $23 of excess
vintage facility closing restructuring reserves that are no longer
necessary. These reserves became unnecessary due to recent changes in
certain commercial real estate markets enabling AT&T to relieve itself of
certain contractual obligations for which the reserves were originally
established.
Net restructuring and other charges for the six months ended June
30, 2002, totaled $56 which represents the restructuring and exit costs
associated with AT&T Broadband's efforts to reorganize and streamline
certain centralized and field functions.
The $56 is comprised of headcount reductions of $42 associated with
employee separation costs resulting from this exit plan, $50 in connection
with facility closings and $4 for other charges. These charges were
partially offset by the reversal of $40, $23 related to excess vintage
facility closing restructuring reserves and $17 related to the business
restructuring plan from the second quarter of 2001, primarily due to the
redeployment of certain employees to different functions within AT&T
Broadband. Approximately 900 employees will be involuntarily separated in
conjunction with this exit plan, approximately 75% of which are management
and 25% are non-management. Approximately 75% of the employees affected by
this exit plan have left their positions as of June 30, 2002, with the
remaining reductions occurring throughout the remainder of 2002. More than
$32 of termination benefits were paid to employees during the first half
of 2002 related to this exit plan.
14
The following table displays the activity and balances of the
restructuring reserve account from January 1, 2002 to June 30, 2002:
TYPE OF COST
EMPLOYEE FACILITY
SEPARATIONS CLOSINGS OTHER TOTAL
----------- -------- ----- -----
Balance at January 1, 2002 $ 508 $ 316 $ 19 $ 843
Additions 42 50 4 96
Deductions (269) (62) (9) (340)
----- ----- ---- -----
Balance at June 30, 2002 $ 281 $ 304 $ 14 $ 599
===== ===== ==== =====
Deductions reflect cash payments of $291, of which $243 represents
cash termination benefits funded primarily through cash from operations.
Deductions also reflect reversals of $40, $23 related to excess vintage
facility closing restructuring reserves and $17 personnel-related. In
addition, deductions include $9 primarily due to the issuance of common
stock to satisfy restricted stock obligations that vested upon separation,
primarily to executives.
During the second quarter of 2001, AT&T recorded $287 of net
restructuring and other charges, which included $56 of asset impairment
charges related to Excite@Home including the write-off of property, plant
and equipment, and $231 for restructuring and exits costs which consisted
of $88 of severance costs, $136 related to facility closings and $7
primarily related to termination of contractual obligations.
The severance costs for approximately 4,500 employees primarily
resulted from synergies created by the MediaOne merger. Approximately 27%
of the affected employees were management employees and 73% were
non-management employees. This business restructuring plan was
substantially completed by March 31, 2002.
Net restructuring and other charges for the six months ended June
30, 2001, totaled $1,095. The charge included $795 of asset impairment
charges related to At Home Corporation (Excite@Home), $300 for
restructuring and exits costs, which consisted of $147 for severance
costs, $142 for facilities closing and $11 primarily related to the
termination of contractual obligations. The severance costs, for
approximately 6,900 employees, primarily resulted from synergies created
by the MediaOne merger. Approximately 21% of the affected employees were
management employees and 79% were non-management employees. These business
restructuring plans were substantially completed by March 31, 2002.
The asset impairment charges included $656 recorded by Excite@Home
associated with the write-down of goodwill and other intangible assets,
warrants granted in connection with distributing the @Home service and
fixed assets. These charges were due to continued deterioration in the
business climate of, and reduced levels of venture capital funding
activity for, Internet advertising and other Internet-related companies,
continued significant declines in the market values of Excite@Home's
competitors in the Internet advertising industry, and changes in their
operating and cash flow forecasts for the remainder of 2001. These charges
were also impacted by Excite@Home's decision to sell or shut down
narrowband operations. In addition, AT&T recorded a related goodwill
impairment charge of $139 associated with its acquisition goodwill of
Excite@Home. Since we consolidated, but only owned approximately 23% of
Excite@Home, a portion of the charges recorded by Excite@Home was not
included as a reduction to AT&T's net income, but rather was eliminated in
our Consolidated Statement of Operations as a component of "Minority
interest and dividends on subsidiary preferred stock."
Of the approximately 10,300 employees impacted by the exit plan
announced in the fourth quarter of 2001, nearly 64% have left their
positions as of June 30, 2002, with the remaining reductions to occur
throughout the remainder of 2002. Nearly $171 of termination benefits were
paid to employees during the first half of 2002.
i) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
(Loss) earnings attributable to the different classes of AT&T common
stock are as follows:
AT&T COMMON STOCK AT&T WIRELESS LIBERTY MEDIA
GROUP GROUP GROUP
----- ----- -----
FOR THE THREE MONTHS ENDED JUNE 30, 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(Loss) from continuing operations $(12,749) $ (51) $ -- $-- $ -- $(2,125)
Dividend requirements of preferred stock -- (236) -- -- -- --
Premium on exchange of AT&T Wireless
tracking stock -- (80) -- -- -- --
-------- ------- ----- --- ----- -------
(Loss) from continuing operations
attributable to common shareowners (12,749) (367) -- -- -- (2,125)
(Loss) income from discontinued operations (88) 176 -- 42 -- --
Extraordinary gain 7 -- -- -- -- --
-------- ------- ----- --- ----- -------
Net (loss) income attributable to common
Shareowners $(12,830) $ (191) $ -- $42 $ -- $(2,125)
======== ======= ===== === ===== =======
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(Loss) from continuing operations $(12,909) $ (534) $ -- $-- $ -- $(2,822)
Dividend requirements of preferred stock -- (417) -- -- -- --
Premium on exchange of AT&T Wireless
Tracking stock -- (80) -- -- -- --
-------- ------- ----- --- ----- -------
(Loss) from continuing operations
attributable to common shareowners (12,909) (1,031) -- -- -- (2,822)
(Loss) income from discontinued
operations (88) 115 -- 35 -- --
Extraordinary gain 48 -- -- -- -- --
Cumulative effect of accounting changes (856) 359 -- -- -- 545
-------- ------- ----- --- ----- -------
Net (loss) income attributable to common
shareowners $(13,805) $ (557) $ -- $35 $ -- $(2,277)
======== ======= ===== === ===== =======
15
Basic loss per share for AT&T Common Stock Group was computed by
dividing AT&T Common Stock Group loss by the weighted-average number of
shares outstanding of 3,649 million and 3,694 million, for the three
months ended June 30, 2002 and 2001, respectively, and 3,598 million and
3,749 million for the six months ended June 30, 2002 and 2001,
respectively.
Since AT&T recorded a loss from continuing operations for the three
and six months ended June 30, 2002 and 2001, respectively, the diluted
loss per share is the same as basic loss per share, as any potentially
dilutive securities would be antidilutive to continuing operations. At
June 30, 2002, potentially dilutive securities outstanding included shares
issuable for stock options and convertible quarterly income preferred
securities.
Basic and diluted earnings per share from discontinued operations
for AT&T Wireless Group for the three and six months ended June 30, 2001,
were computed by dividing income attributable to AT&T Wireless Group by
the weighted-average number of shares outstanding of AT&T Wireless Group
of 513 million and 438 million, respectively. AT&T Wireless was split-off
from AT&T in July 2001.
Basic and diluted loss per share for LMG was computed by dividing
the loss attributable to LMG by the weighted-average number of shares
outstanding of LMG of 2,588 million and 2,581 million for the three and
six months ended June 30, 2001, respectively. LMG was split-off from AT&T
in August 2001.
j) EQUITY TRANSACTIONS
Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T
was required to redeem the outstanding TCI Pacific Communications, Inc.
Class A Senior Cumulative Exchangeable Preferred Stock for AT&T common
stock. Each share of TCI Pacific preferred stock was exchangeable at the
option of the holder for 8.365 shares of AT&T common stock. As of June 30,
2002, all outstanding (approximately 6.2 million) shares of TCI Pacific
preferred stock with a carrying value of $2.1 billion had either been
exchanged or redeemed for approximately 51.8 million shares of AT&T common
stock. No gain or loss was recorded on the exchange/redemption of the TCI
Pacific preferred stock.
In the second quarter of 2002, AT&T issued 13.9 million shares of
AT&T common stock to certain current and former senior managers in
settlement of their deferred compensation accounts. Pursuant to AT&T's
deferred compensation plan, senior managers may defer short- and long-term
incentive compensation awards. The issuance of these shares resulted in an
increase to total shareowners' equity of $186.4 million.
In June of 2002, AT&T completed a public equity offering of 230
million shares of AT&T common stock at a price of $11.25 per share for net
proceeds of $2.5 billion. AT&T anticipates, and under the Comcast merger
agreement is limited to, using the proceeds from the offering to satisfy a
portion of its obligation to AT&T Canada common shareholders.
On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion
for 812,512 shares of a new class of AT&T preferred stock with a par value
of $1 per share. On July
16
9, 2001, in conjunction with the split-off of AT&T Wireless Group, these
preferred shares were converted into AT&T Wireless common stock. In the
second quarter and first half of 2001, we recorded dividend requirements
on this preferred stock of $0.2 billion and $0.4 billion, respectively.
The preferred stock dividend represented interest in connection with the
DoCoMo preferred stock as well as accretion of the beneficial conversion
feature associated with this preferred stock. The beneficial conversion
feature was recorded upon the issuance of the preferred stock and
represented the excess of the fair value of the preferred shares issued
over the proceeds received.
k) DEBT OBLIGATIONS
During 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $2.7 billion of funding,
limited by monthly eligible receivables. Under the program, certain of
AT&T Business Services' and AT&T Consumer Services' accounts receivable
can be sold on a discounted, revolving basis, to a special purpose,
wholly-owned subsidiary of AT&T, which assigns interests in such
receivables to unrelated third-party financing entities. AT&T has renewed
both its AT&T Business Services and AT&T Consumer Services customer
accounts receivable securitization facilities. The terms of these
facilities have been extended to June (AT&T Business Services) and July
(AT&T Consumer Services) of 2003. Together the programs, as renewed,
provide up to $2.0 billion of available financing, limited by the eligible
receivables balance, which varies from month to month. The securitization
proceeds were recorded as a borrowing and included in "Debt maturing
within one year" in the Consolidated Balance Sheets. At June 30, 2002 and
December 31, 2001, such short-term notes totaled $0.2 billion and $2.3
billion, respectively.
During the first half of 2002, AT&T called $1.5 billion of TCI
Communications Financing I, II and IV, MediaOne Financing Trust A and B
and MediaOne Finance II preferred securities for early redemption. This
redemption resulted in a gain on early extinguishment of debt recorded as
an extraordinary gain of $7 million, net of taxes ($12 million pretax) and
$48 million, net of taxes ($78 million pretax) for the three and six-month
periods ending June 30, 2002, respectively. The gain represents the
difference between the carrying value of the debt and the cash paid to
extinguish the debt.
In June 2002, AT&T registered $7.0 billion of the private placement
notes sold in November 2001 and commenced a tender of the private notes
for registered notes. The note exchange was completed on August 2, 2002.
The terms of the registered notes are identical to the private notes.
As of June 30, 2002, AT&T has approximately $0.8 billion in private
debt outstanding that is partially collateralized with restricted cash of
approximately $0.4 billion. The restricted cash is recorded in "Other
Assets" in the Consolidated Balance Sheet.
l) COMMITMENTS AND CONTINGENCIES
In the normal course of business we are subject to proceedings,
lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters are
subject to many uncertainties, and outcomes are not predictable with
assurance. However, management makes its best estimate of the outcome of
these matters based on all available facts and records loss contingencies
as appropriate. Consequently, we are unable to ascertain the ultimate
aggregate amount of monetary liability or financial impact with respect to
these matters at June 30, 2002. These matters could affect the operating
results of any one quarter when resolved in future periods. However, we
believe that after final disposition, any monetary liability or financial
impact to us beyond that provided for at June 30, 2002 would not be
material to our annual consolidated financial statements.
Sprint PCS, a wireless carrier, sued AT&T for access charges for
AT&T long distance calls terminated on Sprint PCS' network and for
toll-free calls that Sprint PCS customers originated and which were
terminated on AT&T's network. AT&T refused to pay Sprint PCS based on
longstanding industry practice that wireless carrier-long distance carrier
interconnection is on a bill and keep basis and that wireless carriers
charged their customers for calls they received. On July 3, 2002, the FCC
ruled that wireless carriers such as Sprint PCS are not prohibited from
charging AT&T access charges, but that AT&T was not required to pay such
charges absent a contractual obligation to do so. The FCC
17
further held that the question whether the parties entered into a contract
concerning an access payment obligation is not a matter of federal
communications law but rather should to be determined by the court that
had referred the issue to the FCC. Because there was no express contract
between AT&T and Sprint PCS, the court will need to determine whether an
implied-in-fact contract can be inferred in light of the parties' conduct
and their tacit understanding. Petitions of Sprint PCS and AT&T Corp. for
Declaratory Ruling Regarding CMRS Access Charges, WT Docket No. 01-316,
Declaratory Ruling, FCC 02-203, rel. July 3, 2002. The FCC remanded the
matter to the federal district court, Sprint Spectrum, L.P. v. AT&T
Communications, Inc., Civil Action No. 00-0973-CV-W-5 (W.D. Mo.). AT&T has
petitioned for review of the FCC's ruling in the U.S. Court of Appeals for
the District of Columbia Circuit, AT&T Corp. v. FCC et al., No. 02-1240
(D.C. Cir. filed Aug. 1, 2002), and has requested a continuance of the
stay from the federal district court in Missouri pending appellate review.
An adverse decision in the present litigation may result in additional
wireless carriers seeking similar compensation from AT&T. AT&T believes
the case is without merit and intends to defend it vigorously, but cannot
predict the outcome of any such proceedings.
Sparks, et al. v. AT&T and Lucent Technologies Inc. et al., is a
class action lawsuit filed in 1996 in Illinois state court under the name
of Crain v. Lucent Technologies. The complaint seeks damages on behalf of
present and former customers based on a claim that the AT&T Consumer
Products business (which became part of Lucent in 1996) and Lucent had
defrauded and misled customers who leased telephones, resulting in
payments in excess of the cost to purchase the telephones. Similar
consumer class actions pending in various state courts have been stayed
pending the outcome of the Sparks case and, in July 2001, the Illinois
court certified a nationwide class of plaintiffs. Lucent filed pretrial
motions for, among other things, decertification of the class and summary
judgment in Lucent's favor. On July 29, 2002, the judge denied Lucent's
motions, and set trial to begin on August 5, 2002.
As a result of recent negotiations, a settlement proposal was
submitted to and accepted by the court on August 9, 2002. AT&T and Lucent
deny they have defrauded or misled their customers, but have decided to
settle this matter to avoid the uncertainty of litigation and the
diversion of resources and personnel that the continuation of pursuing
this matter would require. The separation and distribution agreement
between AT&T and Lucent governs how the cost of these settlements are
shared by each party. In accordance with the separation and distribution
agreement, AT&T recorded its proportionate share of the settlement and
estimated legal costs, which totaled $132 pretax ($88 after-tax).
Depending upon the number of claims submitted and accepted, the actual
cost of the settlement to AT&T may be less than stated amounts, but it is
not possible to estimate the amount at this time.
On March 13, 2002, AT&T Broadband informed CSG Systems, Inc. that
it was considering the initiation of an arbitration against CSG relating
to a Master Subscriber Management System Agreement that the two companies
entered into in 1997. Pursuant to the Master Agreement, CSG provides
billing support to AT&T Broadband. On May 10, 2002, AT&T Broadband filed a
demand for arbitration against CSG before the American Arbitration
Association. On May 31, 2002, CSG answered AT&T Broadband's arbitration
demand and asserted various counterclaims. On June 21, 2002, CSG filed a
lawsuit against Comcast Corporation in federal court located in Denver,
Colorado asserting claims related to the Master Agreement and the pending
arbitration. In the event that this process results in the termination of
the Master Agreement, AT&T Broadband may incur significant costs in
connection with its replacement of these customer care and billing
services and may experience temporary disruptions to its operations.
m) RELATED PARTY TRANSACTIONS
AT&T had various related party transactions with Concert until the
joint venture was officially unwound on April 1, 2002.
Included in "Revenue" in the Consolidated Statements of Operations
for the first half of 2002 was $0.3 billion, and for the three and six
months ended June 30, 2001 was $0.3 billion and $0.6 billion,
respectively, for services provided to Concert.
Included in "Access and other connection expense" in the
Consolidated Statements of Operations 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. Such charges totaled $0.5 billion for
the six months ended June 30, 2002 and $0.5 billion and $1.1 billion,
respectively for the three and six months ended June 30, 2001.
Included in "Accounts receivable" in the Consolidated Balance Sheet
at December 31, 2001 was $0.4 billion related to telecommunications
transactions with Concert. Included in "Accounts payable" in the
Consolidated Balance Sheet at December 31, 2001 was $0.2 billion related
to transactions with Concert.
Included in "Other receivables" in the Consolidated Balance Sheet at
December 31, 2001 was $0.8 billion related to administrative transactions
performed on behalf of Concert. Included in "Other current liabilities" in
the Consolidated Balance Sheet at December 31, 2001 was $0.9 billion
related to administrative transactions performed by Concert on our behalf.
During 2001, we had various related party transactions with LMG.
Included in "Costs of services and products" in the Consolidated Statement
of Operations were programming
18
expenses related to services from LMG while owned by AT&T of $91 and $172,
respectively, for the three and six-month periods ended June 30, 2001.
n) SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our
business: AT&T Business Services, AT&T Consumer Services and AT&T
Broadband.
Our existing segments reflect certain managerial changes that were
implemented during 2002. The changes primarily include the following:
revenue previously recorded by the AT&T Business Services segment as
"Internal Revenue" for services provided to certain other AT&T units and
then eliminated within the Corporate & Other group, is now recorded as a
contra-expense by AT&T Business Services; the results of certain units
previously included in the Corporate & Other group were transferred to the
AT&T Business Services segment and the financial impacts of SFAS No. 133
that were previously recorded in the Corporate & Other group were
transferred to the appropriate segments. In addition, AT&T Consumer
Services and total AT&T revenue was reclassified in accordance with EITF
issue 01-9, "Accounting for Consideration Given by a Vendor to a
Customer," which requires cash incentives given to customers previously
recorded as advertising and promotion expense now to be recorded as a
reduction of revenue when recognized in the income statement, unless an
identifiable benefit is received in exchange (see note c). All prior
periods have been restated to reflect these changes.
Reflecting the dynamics of our business, we continuously review our
management model and structure which may result in additional adjustments
to our operating segments in the future.
FOR THE THREE MONTHS FOR THE SIX MONTHS
REVENUE ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
AT&T Business Services external revenue $ 6,650 $ 6,853 $ 13,095 $ 13,790
AT&T Business Services internal revenue 92 158 175 317
-------- -------- -------- --------
Total AT&T Business Services revenue 6,742 7,011 13,270 14,107
AT&T Consumer Services external revenue 2,911 3,724 5,997 7,653
AT&T Broadband external revenue 2,524 2,560 4,960 5,021
AT&T Broadband internal revenue 2 5 5 9
-------- -------- -------- --------
Total AT&T Broadband revenue 2,526 2,565 4,965 5,030
-------- -------- -------- --------
Total reportable segments 12,179 13,300 24,232 26,790
Corporate and Other (a) (75) (35) (144) (52)
-------- -------- -------- --------
Total revenue $ 12,104 $ 13,265 $ 24,088 $ 26,738
======== ======== ======== ========
(a) Includes revenue related to Excite@Home of $134 and $278 for the
three and six months ended June 30, 2001.
RECONCILIATION OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO INCOME
BEFORE INCOME TAXES
FOR THE THREE MONTHS FOR THE SIX MONTHS
REVENUE ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
AT&T Business Services $ 691 $ 1,399 $ 1,143 $ 2,405
AT&T Consumer Services 802 1,217 1,634 2,535
AT&T Broadband (18,460) (819) (18,885) (2,361)
-------- -------- -------- --------
Total reportable segments (16,967) 1,797 (16,108) 2,579
Corporate and Other (a) (170) (2,057) (365) (2,380)
Deduct:
Pretax minority interest and dividends on
subsidiary preferred stock (56) 192 (138) 751
Pretax (losses) related to other equity
investments (1,172) (1,508) (1,653) (1,639)
Interest (expense) (716) (761) (1,483) (1,640)
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes, minority interest and dividends on
subsidiary preferred stock and net (losses)
related to equity investments $(16,625) $ 295 $(16,165) $ (553)
======== ======== ======== ========
(a) Includes $(85) and $(420) related to Excite@Home for the three and
six months ended June 30, 2001, respectively.
19
ASSETS
AT JUNE 30, AT DECEMBER 31,
2002 2001
---- ----
AT&T Business Services $ 39,150 $ 40,316
AT&T Consumer Services 1,877 2,141
AT&T Broadband 81,816 103,060
-------- --------
Total reportable segments 122,843 145,517
Corporate and Other:
Other segments 1,126 1,145
Prepaid pension costs 3,465 3,329
Deferred income taxes 1,769 960
Other corporate assets (a) 8,692 14,331
-------- --------
Total assets $137,895 $165,282
======== ========
(a) 2002 and 2001 amounts include cash of $5.3 billion and $10.4
billion, respectively.
o) GUARANTEE OF PREFERRED SECURITIES
Prior to AT&T's acquisition of TCI and MediaOne, TCI and MediaOne
issued mandatorily redeemable preferred securities through subsidiary
trusts that held subordinated debt securities of TCI and MediaOne.
In the first half of 2002, AT&T called mandatorily redeemable
preferred securities issued by TCI Communications Financing I, II and IV,
MediaOne Financing A and B, and MediaOne Finance II for early redemption.
As of June 30, 2002, AT&T provides a full and unconditional guarantee on
outstanding securities issued by MediaOne Finance III. At June 30, 2002,
$504 of MediaOne Finance III securities were outstanding.
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF JUNE 30, 2002
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR MEDIA-ONE ELIMINATION AND
AT&T SUBSIDIARY FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
PARENT MEDIAONE TCI III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- ---------- --- --------- ------------- --------------- ------------
ASSETS
Cash and cash equivalents... $5,323 $ 4 $ 279 $ 5,606
Receivables................. 20,148 46,078 (58,661) 7,565
Investments................. 414 414
Other current assets........ 1,070 1,548 110 527 585 (881) 2,959
TOTAL CURRENT ASSETS........ 26,541 1,548 114 527 47,356 (59,542) 16,544
Property, plant &
equipment, net..... 9,375 150 31,935 41,460
Franchise costs, net........ 19 29,064 29,083
Goodwill, net............... 70 2,526 17,930 20,526
Investments and related
advances........... 115,835 33,202 9,936 40,353 (180,650) 18,676
Other assets................ 6,483 151 9,369 (4,397) 11,606
TOTAL ASSETS................ $158,304 $37,276 10,370 $527 $176,007 $(244,589) $137,895
LIABILITIES
Debt maturing within one
year............... $34,712 $379 $ 1,458 $6,605 $ (37,265) $ 5,889
Other current liabilities... 6,939 380 558 11 17,825 (11,389) 14,324
TOTAL CURRENT LIABILITIES... 41,651 759 2,016 11 24,430 (48,654) 20,213
Long-term debt.............. 23,596 2,164 11,109 504 14,099 (14,201) 37,271
Deferred income taxes....... 1,429 22,482 23,911
Other long-term liabilities
and deferred credits...... 6,421 11 136 2,148 (1,093) 7,623
TOTAL LIABILITIES........... 73,097 2,934 13,261 515 63,159 (63,948) 89,018
Minority Interest........... 1,397 1,397
Company-Obligated
Convertible Quarterly
Income Preferred
Securities of Subsidiary
Trust Holding Solely
Subordinated Debt
Securities of AT&T....... 4,725 4,725
SHAREOWNERS' EQUITY
AT&T Common Stock........... 3,845 3,845
Preferred stock issued to
subsidiaries....... 10,559 (10,559) --
Other shareowners' equity... 66,078 34,342 (2,891) 12 111,451 (170,082) 38,910
TOTAL SHAREOWNERS' EQUITY... 80,482 34,342 (2,891) 12 111,451 (180,641) 42,755
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $158,304 $37,276 $10,370 $527 $176,007 $(244,589) $137,895
20
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF OPERATION
FOR THE THREE MONTHS ENDED JUNE 30, 2002
(DOLLARS IN MILLIONS)
ELIMINATION
GUARANTOR GUARANTOR MEDIA-ONE AND
AT&T SUBSIDIARY FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
PARENT MEDIAONE TCI III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- --------- --- --------- ------------- ------------- ------------
Revenue $4,059 $ -- $ 8,392 $(347) $12,104
Operating Expenses
Costs of services and
products............. 686 2,991 (338) 3,339
Access and other
connection........... 1,352 1,420 (9) 2,763
Selling, general and
administrative....... 694 (7) 162 1,795 2,644
Depreciation and
amortization......... 501 24 1,434 1,959
Net restructuring and
other charges........
Goodwill and franchise
cost impairment
charges 16,479 16,479
Total operating expenses 3,233 (7) 186 24,119 (347) 27,184
Operating income (loss). 826 7 (186) (15,727) -- (15,080)
Other income (expense),
net.................. 261 146 11 12 (147) (1,112) (829)
Interest (expense)...... (853) (90) (176) (12) (697) 1,112 (716)
Income (loss) from
continuing operations
before income taxes,
minority interest, and
dividends
on subsidiary preferred
stock, and net
(losses) earnings
related to other
equity investments... 234 63 (351) (16,571) (16,625)
(Provision) benefit for
income taxes......... (95) (24) 135 4,615 4,631
Minority interest and
dividends on
subsidiary preferred
stock................ (40) 9 (31)
Net (losses) earnings
related to other
equity investments... 224 (7,262) (5,633) (706) 12,653 (724)
Income (loss) from
continuing operations 323 (7,223) (5,849) (12,653) 12,653 (12,749)
(Loss) from
discontinued
operation (net of
income taxes)........ (88) (88)
(Loss) income before
extraordinary gain... 235 (7,223) (5,849) (12,653) 12,653 (12,837)
Extraordinary gain (net
of income taxes)..... 7 7
Net (loss) income....... 235 (7,223) (5,842) (12,653) 12,653 (12,830)
21
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF OPERATION
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR MEDIA-ONE ELIMINATION AND
AT&T SUBSIDIARY FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
PARENT MEDIAONE TCI III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
---------- ---------- --- --------- ------------- ---------------- ------------
Revenue $ 8,022 $ -- $ 16,923 $ (857) $24,088
Operating Expenses
Costs of services
and products..... 1,337 6,129 (837) 6,629
Access and other
connection......... 2,745 2,846 (20) 5,571
Selling, general and
administrative..... 1,261 (9) 357 3,581 5,190
Depreciation and
amortization....... 961 44 2,849 3,854
Net restructuring and
other charges...... 56 56
Goodwill and
franchise cost
impairment charges 16,479 16,479
Total operating
expenses........... 6,304 (9) 401 31,940 (857) 37,779
Operating income
(loss)............. 1,718 9 (401) (15,017) (13,691)
Other income
(expense), net..... 388 349 22 23 (50) (1,723) (991)
Interest (expense).... (1,654) (114) (336) (23) (1,079) 1,723 (1,483)
Income (loss) from
continuing operations
before income taxes,
minority interest, and
dividends
on subsidiary preferred
stock, and net
(losses) earnings
related to other
equity investments. 452 244 (715) (16,146) (16,165)
(Provision) benefit
for income taxes... (169) (93) 274 4,353 4,365
Minority interest and
dividends on
subsidiary
preferred stock.... (80) (8) (88)
Net (losses)
earnings related
to other equity
investments........ 428 (8,113) (5,993) (990) 13,647 (1,021)
Income (loss) from
continuing
operations......... 631 (7,962) (6,434) (12,791) 13,647 (12,909)
(Loss) from
discontinued
operation (net of
income taxes)...... (88) (88)
(Loss) income before
extraordinary gain
and cumulative
effect of
accounting changes. 543 (7,962) (6,434) (12,791) 13,647 (12,997)
Extraordinary gain
(net of income
taxes)............. 48 48
Cumulative effect of
accounting changes
(net of income
taxes)............. (856) (856)
Net income (loss)..... 543 (7,962) (6,386) (13,647) 13,647 (13,805)
22
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(DOLLARS IN MILLIONS)
ELIMINATION
GUARANTOR GUARANTOR MEDIA-ONE AND
AT&T SUBSIDIARY FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
PARENT MEDIAONE TCI III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- ---------- --- --------- ------------- ------------- ------------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES OF
CONTINUING
OPERATIONS.......... $ 646 $(767) $(291) $ 5,326 $4,914
INVESTING ACTIVITIES
Capital expenditures
and other
additions......... (1,104) (117) (2,191) (3,412)
Other (3,078) 206 (1,630) (5,013) 9,228 (287)
NET CASH (USED IN)
PROVIDED BY
INVESTING
ACTIVITIES OF
CONTINUING
OPERATIONS.......... (4,182) 206 (1,747) (7,204) 9,228 (3,699)
FINANCING ACTIVITIES
Proceeds from debt
from AT&T........... 1,407 4,800 (6,207)
Proceeds from
long-term debt 106 106
Retirement of
long-term debt...... (501) (28) (454) (1,485) (2,468)
Retirement of AT&T debt (830) (2,304) 3,134
(Decrease)increase in
short-term
borrowings, net..... (3,932) (2,097) (6,029)
(Decrease)increase in
short-term
borrowings from
AT&T, net 4,732 (4,732)
Issuance of AT&T
common shares 2,593 2,593
Other (4,448) 5,468 (1,423) (403)
NET CASH (USED IN)
PROVIDED BY
FINANCING
ACTIVITIES OF
CONTINUING
OPERATIONS.......... (1,556) 549 2,042 1,992 (9,228) (6,201)
Net (decrease)
increase in cash
and cash equivalents (5,092) (12) 4 114 (4,986)
Cash and cash
equivalents at
beginning of year... 10,415 12 -- 165 10,592
Cash and cash
equivalents at end
of period........... $ 5,323 $ -- $ 4 $ -- $ 279 $ -- $ 5,606
23
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2001
(DOLLARS IN MILLIONS)
GUARANTOR Guarantor GUARANTOR TCI TCI TCI MEDIAONE
AT&T Subsidiary SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
Revenue....................... $4,949 $ $ $ $ $ $
Operating Expenses
Costs of services and products 833 1
Access and other connection... 1,656
Selling, general and
administrative.............. 533 122 5
Depreciation and amortization. 456 19 17
Net restructuring and other
charges.....................
Total operating expenses...... 3,478 141 23
Operating income (loss)....... 1,471 (141) (23)
Other (expense) income........ (69) 44 443 11 11 5 1
Interest (expense)............ (1,210) (400) (77) (11) (11) (5)
Income (loss) from
continuing operations
before income taxes,
minority interest
and earnings (losses) from
equity investments ......... 192 (497) 343 1
(Provision) benefit for
income taxes................ (68) 185 (136)
Minority interest and
dividends on subsidiary
preferred stock............. (40) 1
Equity (losses) from Liberty
Media Group................. (2,125)
Net earnings (losses) from
other equity investments.... 531 177 (523)
Income (loss) from continuing
operations.................. 615 (2,259) (316) 1
Income from discontinued
operations (net of income
taxes)
Net income (loss) ............ 615 (2,259) (316) 1
Dividend requirements of
preferred stock............. (236)
Premium on Wireless tracking
stock exchange (80)
Net income (loss) available
to common shareowners....... $299 $ (2,259) $(316) $ $ $ $1
MEDIAONE MEDIAONE MEDIAONE ELIMINATION AND
FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
II II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- ------- ------- ------------- ------------- --------------
Revenue....................... $ $ $ $ 8,942 $ (626) $13,265
Operating Expenses
Costs of services and products 3,124 (548) 3,410
Access and other connection... 1,514 (65) 3,105
Selling, general and
administrative.............. 2,090 (1) 2,749
Depreciation and amortization. 1,858 2,350
Net restructuring and other
charges..................... 287 287
Total operating expenses...... 8,873 (614) 11,901
Operating income (loss)....... 69 (12) 1,364
Other (expense) income........ 1 5 12 (197) (575) (308)
Interest (expense)............ (5) (12) (141) 1,111 (761)
Income (loss) from
continuing operations
before income taxes,
minority interest
and earnings (losses) from
equity investments ......... 1 (269) 524 295
(Provision) benefit for
income taxes................ 455 436
Minority interest and
dividends on subsidiary
preferred stock............. 237 198
Equity (losses) from Liberty
Media Group................. (2,125)
Net earnings (losses) from
other equity investments.... (515) (650) (980)
Income (loss) from continuing
operations.................. 1 (92) (126) (2,176)
Income from discontinued
operations (net of income
taxes) 261 (43) 218
Net income (loss) ............ 1 169 (169) (1,958)
Dividend requirements of
preferred stock............. (236)
Premium on Wireless tracking
stock exchange (80)
Net income (loss) available
to common shareowners....... $1 $ $ $ 169 $(169) $(2,274)
24
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN MILLIONS)
GUARANTOR Guarantor GUARANTOR TCI TCI TCI MEDIAONE
AT&T Subsidiary SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
Revenue....................... $9,846 $ -- $ -- $ -- $ -- $ -- $ --
Operating Expenses
Costs of services and products 1,688 1
Access and other connection... 3,338
Selling, general and
administrative.............. 922 244 9
Depreciation and other
amortization................ 887 32 36
Net restructuring and other
charges.....................
Total operating expenses...... 6,835 276 46
Operating income (loss)....... 3,011 (276) (46)
Other income (expense)........ (573) 89 1,112 22 23 9 2
Interest (expense) ........... (2,529) (865) (155) (22) (23) (9) (1)
Income (loss) from
continuing operations
before income taxes,
minority interest,
earnings (losses)
from equity investments
and cumulative effect of
accounting change........... (91) (1,052) 911 1
Benefit (provision) for
income taxes................ 46 395 (360)
Minority interest and
dividends on subsidiary
preferred stock (80)
Equity (losses) from Liberty
Media Group................. (2,822)
Net earnings (losses) from
other equity investments.... 2,417 (1,472) (1,789)
Income (loss) from continuing
operations.................. 2,292 (4,951) (1,238) 1
Income from discontinued
operations (net of income
taxes)
Cumulative effect of
accounting change (net of
income taxes)............... 508 545 540
Net income (loss) ............ 2,800 (4,406) (698) 1
Dividend requirements of
preferred stock............. (417)
Premium on exchange of AT&T
Wireless tracking stock (80)
Net income (loss) available
to common shareowners....... $2,303 $(4,406) $ (698) $ -- $ -- $ -- $ 1
MEDIAONE MEDIAONE MEDIAONE ELIMINATION AND
FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
II II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
---------- -------- -------- ------------- --------------- ------------
Revenue....................... $ -- $ -- $ - $18,116 $(1,224) $26,738
Operating Expenses
Costs of services and products 6,371 (1,078) 6,982
Access and other connection... 3,039 (121) 6,256
Selling, general and
administrative.............. 4,292 (2) 5,465
Depreciation and other
amortization................ 3,807 4,762
Net restructuring and other
charges..................... 1,095 1,095
Total operating expenses...... 18,604 (1,201) 24,560
Operating income (loss)....... (488) (23) 2,178
Other income (expense)........ 2 10 23 (39) (1,771) (1,091)
Interest (expense) ........... (1) (10) (23) (305) 2,303 (1,640)
Income (loss) from
continuing operations
before income taxes,
minority interest,
earnings (losses)
from equity investments
and cumulative effect of
accounting change........... 1 (832) 509 (553)
Benefit (provision) for
income taxes................ 137 218
Minority interest and
dividends on subsidiary
preferred stock 918 838
Equity (losses) from Liberty
Media Group................. (2,822)
Net earnings (losses) from
other equity investments.... (571) 378 (1,037)
Income (loss) from continuing
operations.................. 1 (348) 887 (3,356)
Income from discontinued
operations (net of income
taxes) 178 (28) 150
Cumulative effect of
accounting change (net of
income taxes)............... (689) 904
Net income (loss) ............ 1 (859) 859 (2,302)
Dividend requirements of
preferred stock............. (417)
Premium on exchange of AT&T
Wireless tracking stock (80)
Net income (loss) available
to common shareowners....... $ 1 $ - $ - $ (859) $ 859 $(2,799)
25
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN MILLIONS)
GUARANTOR Guarantor GUARANTOR TCI TCI TCI MEDIAONE
AT&T Subsidiary SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES OF
CONTINUING OPERATIONS....... $ 2,996 $ (195) $ (79) $ -- $ -- $ -- $ 1
INVESTING ACTIVITIES
Capital expenditures and
other additions............. (806) (11)
Equity investment
distributions and sales 689 16,871 79
Net dispositions
(acquisitions) of
businesses, net of cash
disposed/acquired 14
Other......................... 3,172 24
NET CASH (USED IN) PROVIDED
BY INVESTING ACTIVITIES OF
CONTINUING OPERATIONS....... 3,069 16,884 79
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances...................
Retirement of long-term debt (836) (95)
Retirement of AT&T debt (5,176) (16,594)
Issuance of convertible
preferred securities
and warrants................ 9,811
(Decrease) increase in
short-term borrowings, net.. (6,019)
Other......................... 5,108 (1)
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES OF
CONTINUING OPERATIONS....... 2,888 (16,689) (1)
Net cash provided by (used
in) discontinued operations
Net (decrease) increase in
cash and cash equivalents... 8,953
Cash and cash equivalents at
beginning of year...........
Cash and cash equivalents at
end of period............... $ 8,953 $ -- $ -- $ -- $ -- $ -- $ --
ELIMINATION
MEDIAONE MEDIAONE MEDIAONE AND
FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
II II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- -------- -------- ------------- -------------- ------------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES OF
CONTINUING OPERATIONS....... $ 1 $ -- $ -- $ 1,880 $ 105 $ 4,709
INVESTING ACTIVITIES
Capital expenditures and
other additions............. (3,849) (4,666)
Equity investment
distributions and sales 553 (16,632) 1,560
Net dispositions
(acquisitions) of
businesses, net of cash
disposed/acquired 3,106 3,120
Other......................... 1,637 (5,284) (451)
NET CASH (USED IN) PROVIDED
BY INVESTING ACTIVITIES OF
CONTINUING OPERATIONS....... 1,447 (21,916) (437)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances................... 195 195
Retirement of long-term debt 117 (814)
Retirement of AT&T debt (79) 21,849
Issuance of convertible
preferred securities
and warrants................ 9,811
(Decrease) increase in
short-term borrowings, net.. 5,191 (7,638) (8,466)
Other......................... (1) (12,811) 7,439 (266)
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES OF
CONTINUING OPERATIONS....... (1) (7,387) 21,650 460
Net cash provided by (used
in) discontinued operations 4,760 161 4,921
Net (decrease) increase in
cash and cash equivalents... 700 9,653
Cash and cash equivalents at
beginning of year........... 64 64
Cash and cash equivalents at
end of period............... $ -- $ -- $ -- $ 764 $ -- $9,717
26
p) RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143,"Accounting for Asset Retirement Obligations." This
standard requires that obligations associated with the retirement of
tangible long-lived assets be recorded as liabilities when those
obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an
asset retirement obligation, an entity must capitalize the cost by
recognizing an increase in the carrying amount of the related long-lived
asset. Over time, this liability is accreted to its future value, and the
capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. SFAS No.
143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. For AT&T, this means that the standard will
be adopted on January 1, 2003. AT&T does not expect that the adoption of
this statement will have a material impact on AT&T's results of
operations, financial position or cash flows.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13 and
Technical Corrections." SFAS No. 145 eliminates the requirement (in SFAS
No. 4) that gains and losses from the extinguishments of debt be
aggregated and classified as extraordinary items, net of the related
income tax. An entity is not prohibited from classifying such gains and
losses as extraordinary items, as long as they meet the criteria of APB
Opinion No. 30. In addition, SFAS No. 145 requires sales-lease back
treatment for certain modifications of a capital lease that result in the
lease being classified as an operating lease. The rescission of SFAS No. 4
is effective for fiscal years beginning after May 15, 2002, which for AT&T
would be January 1, 2003. Earlier application is encouraged. Any gain or
loss on extinguishment of debt that was previously classified as an
extraordinary item would be reclassified to other income (expense), net.
The remainder of the statement is generally effective for transactions
occurring after May 15, 2002. AT&T does not expect that the adoption of
SFAS No. 145 will have a material impact on AT&T's results of operations,
financial position or cash flows.
On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Exit
or Disposal Activities." This statement addresses the recognition,
measurement and reporting of costs that are associated with exit and
disposal activities. This statement includes the restructuring activities
that are currently accounted for pursuant to the guidance set forth in
EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to exit an Activity (including Certain Costs
Incurred in a Restructuring)," costs related to terminating a contract
that is not a capital lease and one-time benefit arrangements received by
employees who are involuntarily terminated - nullifying the guidance under
EITF 94-3. Under SFAS No. 146 the cost associated with an exit or disposal
activity is recognized in the periods in which it is incurred rather than
at the date the company committed to the exit plan. This statement is
effective for exit or disposal activities initiated after December 31,
2002 with earlier application encouraged. Previously issued financial
statements will not be restated. The provisions of EITF 94-3 shall
continue to apply for exit plans initiated prior to the adoption of SFAS
No. 146. Accordingly, the initial adoption of SFAS No. 146 will not have
an effect on AT&T's results of operations, financial position or cash
flows. However, liabilities associated with future exit and disposal
activities will not be recognized until actually incurred.
q) SUBSEQUENT EVENTS
On July 1, 2002, AT&T completed the sale of its headquarters
facility and corporate conference center in Basking Ridge, New Jersey, to
Pharmacia for $0.2 billion. The transaction resulted in a pretax gain of
approximately $40.
AT&T owns a 49% economic interest in Alestra S. de R.L. de C.V., a
telecommunications company in Mexico. Alestra has announced that it may
not be able to make a $35 bond payment due in November 2002 and that it is
working jointly with Morgan Stanley in analyzing available options to
address the company's financial condition, including its liquidity
position. Standard and Poor's has downgraded Alestra's corporate credit
rating and said it would likely default on its debt obligations during
financial year 2002, probably by way of a bond restructuring. Moody's also
downgraded all ratings of Alestra stating that "based upon current long
distance network asset valuations, Moody's considers that unsecured debt
holders face poor recovery prospects in a distress scenario." AT&T cannot
predict what the impact of these developments will be.
On August 11, 2002, US Airways Group Inc. filed for Chapter 11
bankruptcy protection. AT&T leases airplanes under leveraged leases to US
Airways. Under a leveraged lease, the assets are secured with debt, which
is non-recourse to AT&T. In connection with the bankruptcy filing, US
Airways can reject or reaffirm its leases. AT&T does not know if US
Airways will reject or affirm its leases. If it does reject the leases and
the non-recourse debtholder forecloses on the assets, AT&T could incur an
after-tax loss of approximately $70 to $80 (based on June 30, 2002
balances).
On August 12, 2002, in connection with the proposed merger between
AT&T Broadband and Comcast, AT&T filed a preliminary prospectus
contemplating a potential offer to exchange an aggregate of $11.8 billion
of AT&T's existing debt securities. The exchange offer involves two types
of transactions. The first, which is expected to be subject to proration,
involves an exchange of certain series of AT&T notes for new notes that
would ultimately become obligations of AT&T Broadband Corp., a newly
formed company to which AT&T will spin-off its AT&T Broadband unit prior
to completing the merger. AT&T Comcast and certain of its subsidiaries
would guarantee these obligations upon completion of the merger. The
second, which is not expected to be subject to proration, involves an
exchange of other series of AT&T notes for new notes that would remain
obligations of AT&T.
Neither AT&T, AT&T Broadband, nor any other entity would receive any
proceeds from the issuance of the new notes in the exchange offer. The new
notes would represent a new offering with respect to those notes that
ultimately become obligations of AT&T Broadband and would reduce the
amount that AT&T Broadband would otherwise be required to pay to AT&T upon
completion of the merger with Comcast. The new notes would represent a
refinancing with respect to those notes that remain obligations of AT&T
after the merger.
The exchange offer would be subject to various conditions as
described in the prospectus. A decision to proceed with the exchange offer
will be based on market and business conditions over the next several
months, finalization of the exchange offer on terms that are mutually
acceptable to AT&T and Comcast, and other factors. Terms of the exchange
offer have not yet been determined and will be announced upon launch.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
AT&T Corp. (AT&T or the company) is among the world's communications
leaders, providing voice, data and video communications services to large
and small businesses, consumers and government agencies. We provide
domestic and international long distance, regional and local
communications services, cable (broadband) television and Internet
communication services.
RESTRUCTURING OF AT&T
On October 25, 2000, AT&T announced a restructuring plan designed to
fully separate or issue separately tracked stocks intended to reflect the
financial performance and economic value of each of AT&T's four major
operating units.
On July 10, 2002, AT&T and Comcast Corporation (Comcast) shareowners
approved the proposed merger between AT&T Broadband and Comcast. The
merger still remains subject to certain regulatory reviews and approvals
and certain other conditions and is expected to close by the end of 2002.
Under the terms of the agreement, AT&T will spin-off AT&T Broadband and
simultaneously AT&T Broadband and Comcast will merge into subsidiaries of
a new company to be called AT&T Comcast Corporation (AT&T Comcast). AT&T
shareowners will receive approximately 0.32 of a share of AT&T Comcast for
each share of AT&T they own, based on calculations using June 30, 2002
share prices. AT&T shareowners will own an approximate 55% economic stake
and have an approximate 61% voting interest in the new company. The
spin-off of AT&T Broadband could result in the recognition of a loss for
the difference between the fair value of the Comcast shares to be received
by AT&T shareholders in the merger and the net book value of AT&T
Broadband. At June 30, 2002, the book value of AT&T Broadband approximated
the fair value of the Comcast shares to be received based on the June
30,2002 Comcast stock trading price of $24.20 per share (see Note g). If
the Comcast stock price decreases below $24.20 per share, AT&T will need
to record a charge to adjust the AT&T Broadband book value to the fair
value of the Comcast shares.
On July 10, 2002, AT&T shareholders also approved the creation of a
separate tracking stock intended to reflect the financial performance and
economic value of its AT&T Consumer Services business. AT&T has not yet
determined the timing, if any, of the distribution. A decision on a
distribution will depend on market conditions and other factors. In
addition, AT&T shareowners approved a one-for-five reverse stock split.
The purpose of the reverse stock split is to seek to adjust upward the
trading price of AT&T common stock following completion of the various
transactions to effect AT&T's restructuring plan.
These restructuring activities are complicated and involve a
substantial number of steps and transactions, including obtaining various
approvals, such as Internal Revenue Service (IRS) rulings. AT&T
anticipates, however, that the transactions associated with AT&T's
restructuring plan will be tax-free to U.S. shareowners. Future financial
conditions, superior alternatives or other factors may arise or occur that
make it inadvisable to proceed with part or all of AT&T's restructuring
plans. Any or all of the elements of AT&T's restructuring plan may not
occur as we currently expect or in the time-frames that we currently
contemplate, or at all. Alternative forms of restructuring, including
sales of interests in these businesses, would reduce what is available for
distribution to AT&T shareowners in the restructuring.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. On August 10, 2001, AT&T completed
the split-off of Liberty Media Corporation as an independent, publicly
traded company.
TRACKING STOCKS
In 2001, AT&T had tracking stocks that reflected the financial
performance of Liberty Media Group (LMG) and AT&T Wireless Group. The
shares initially issued tracked approximately 100% and 16% of the
performance of LMG and AT&T Wireless Group, respectively.
28
In 2001, the earnings attributable to AT&T Wireless Group are
excluded from the earnings available to AT&T Common Stock Group and are
reflected as "Income from discontinued operations," net of applicable
taxes in the Consolidated Statement of Operations. Similarly, the earnings
and (losses) related to LMG are excluded from the earnings available to
AT&T Common Stock Group. The remaining results of operations of AT&T,
including the financial performance of AT&T Wireless Group not represented
by the tracking stock, are referred to as the AT&T Common Stock Group and
are represented by AT&T common stock.
We did not have a controlling financial interest in LMG for
financial accounting purposes; therefore, our ownership in LMG was
reflected as an investment accounted for under the equity method in AT&T's
consolidated financial statements. The amounts attributable to LMG are
reflected in the accompanying Consolidated Statement of Operations and
Cash Flows as "Equity (losses) from Liberty Media Group" prior to its
split-off from AT&T.
AT&T Wireless Group was an integrated business of AT&T, and LMG was
a combination of certain assets and businesses of AT&T; neither was a
stand-alone entity prior to its split-off from AT&T.
FORWARD-LOOKING STATEMENTS
This document may contain forward-looking statements with respect to
AT&T's restructuring plan, financial condition, results of operations,
cash flows, dividends, financing plans, business strategies, operating
efficiencies or synergies, budgets, capital and other expenditures,
network build out and upgrade, competitive positions, availability of
capital, growth opportunities for existing products, benefits from new
technologies, availability and deployment of new technologies, plans and
objectives of management, and other matters.
These forward-looking statements, including, without limitation,
those relating to the future business prospects, revenue, working capital,
liquidity, capital needs, network build out, interest costs and income,
are necessarily estimates reflecting the best judgment of management and
involve a number of risks and uncertainties that could cause actual
results to differ materially from those suggested by the forward-looking
statements. These forward-looking statements should, therefore, be
considered in light of various important factors that could cause actual
results to differ materially from estimates or projections contained in
the forward-looking statements including, without limitation:
- - the risks associated with the implementation of AT&T's restructuring plan,
which is complicated and involves a substantial number of different
transactions each with separate conditions, any or all of which may not
occur as we currently intend, or which may not occur in the timeframe we
currently expect,
- - the risks associated with each of AT&T's main business units, operating as
independent entities as opposed to as part of an integrated
telecommunications provider following completion of AT&T's restructuring
plan, including the inability of these groups to rely on the financial and
operational resources of the combined company and these groups having to
provide services that were previously provided by a different part of the
combined company,
- - the impact of existing and new competitors in the markets in which these
groups compete, including competitors that may offer less expensive
products and services, desirable or innovative products, technological
substitutes, or have extensive resources or better financing,
- - the impact of oversupply of capacity resulting from excessive deployment
of network capacity,
- - 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,
- - the effects of vigorous competition in the markets in which the company
operates, which may decrease prices charged, increase churn and change
customer mix, profitability and average revenue per user,
29
- - the risks associated with possible disruptions to the telecommunications
industry related to the bankruptcy of major telecommunications providers,
- - the ability to enter into agreements to provide services, and the cost of
entering new markets necessary to provide services,
- - the ability to establish a significant market presence in new geographic
and service markets,
- - the availability and cost of capital and the consequences of increased
leverage,
- - the impact of any unusual items resulting from ongoing evaluations of the
business strategies of the company,
- - 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,
- - the risks associated with technological requirements, technology
substitution and changes and other technological developments,
- - the results of litigation filed or to be filed against the company,
- - the possibility of one or more of the markets in which the company
competes being impacted by changes in political, economic or other
factors, such as monetary policy, legal and regulatory changes or other
external factors over which these groups have no control, and
- - the risks related to AT&T's investments and joint ventures.
The words "estimate," "project," "intend," "expect," "believe,"
"plan" and similar expressions are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
document. Moreover, in the future, AT&T, through its senior management,
may make forward-looking statements about the matters described in this
document or other matters concerning AT&T.
The discussion and analysis that follows provides information
management believes is relevant to an assessment and understanding of
AT&T's consolidated results of operations for the three and six months
ended June 30, 2002 and 2001, respectively, and financial condition as of
June 30, 2002 and December 31, 2001.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
AT&T's financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses as well as the disclosure of contingent
assets and liabilities. Management continually evaluates its estimates and
judgments including those related to revenue recognition, allowances for
doubtful accounts, the carrying values and useful lives of property, plant
and equipment, internal use software and intangible assets, investments,
derivative contracts, pension and other postretirement benefits and income
taxes. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under
different assumptions or conditions. For a detailed discussion of
significant accounting polices that may involve a higher degree of
judgment or complexity, refer to AT&T's Form 10-K/A for the year ended
December 31, 2001.
CONSOLIDATED RESULTS OF OPERATIONS
The comparison of results for the second quarter and first half of
2002 with the corresponding periods in 2001 was impacted by events, such
as net cable dispositions which affect comparability. For example, in
2001, we disposed of several cable systems, which
30
were therefore not included in 2002 results, but were included in the
prior period results until the date of disposition.
Year-over-year comparison was also impacted by the deconsolidation
of At Home Corp. (Excite@Home). In 2001, Excite@Home was fully
consolidated for the period January 1, 2001, through September 28, 2001,
the date Excite@Home filed for Chapter 11 bankruptcy protection. As a
result of the bankruptcy and AT&T removing its members from the
Excite@Home board of directors, AT&T no longer consolidated Excite@Home as
of September 30, 2001.
The comparison of 2002 results with 2001 results is also affected by
the unwind of Concert, , our joint venture with British Telecommunications
plc (BT) on April 1, 2002. As a result of the unwindof Concert, the
venture's assets and customer accounts were distributed back to the parent
companies. AT&T combined these assets with its existing international
networking and other assets and began recording revenue from multinational
customers and foreign-billed revenue previously recorded by Concert. In
2001, charges from Concert were recorded as access and other connection
expenses. Effective April 2002, as AT&T took back the assets and customer
relationships from Concert, we began recording the expenses in each line
based on how the assets and customer are served and managed. As a result,
beginning in the second quarter of 2002, access and other connection
expenses are lower than 2001 as the costs associated with managing these
assets and customer relationships are recorded on other expense lines such
as cost of products and services, depreciation and selling, general and
administrative expenses. In addition, beginning in the second quarter of
2002, AT&T no longer records equity losses related to Concert.
REVENUE
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
AT&T Business Services $ 6,742 $ 7,011 $ 13,270 $ 14,107
AT&T Consumer Services 2,911 3,724 5,997 7,653
AT&T Broadband 2,526 2,565 4,965 5,030
Corporate and Other (75) (35) (144) (52)
-------- -------- -------- --------
Total revenue $ 12,104 $ 13,265 $ 24,088 $ 26,738
======== ======== ======== ========
Total revenue for the three months ended June 30, 2002, decreased
8.7%, or $1.2 billion, compared with the second quarter of 2001. The
decline was primarily driven by declines in long distance voice revenue of
approximately $1.3 billion and an approximate $0.4 billion impact of net
cable dispositions and the deconsolidation of Excite@Home. Partially
offsetting the decline was increased revenue of $0.4 billion primarily
from AT&T Broadband's advanced services (telephony, high-speed data and
digital video) and growth in data/ Internet Protocol (IP)/managed services
within AT&T Business Services. In addition, revenue increased as a result
of the reintegration of customers and assets from the unwind of Concert.
Total revenue for the first half of 2002 decreased 9.9%, or $2.7
billion, compared with the first half of 2001. The decline was primarily
driven by declines in long distance voice revenue of approximately $2.8
billion and an approximate $0.9 billion impact of net cable dispositions
and the deconsolidation of Excite@Home. Partially offsetting the decline
was increased revenue of $0.8 billion from AT&T Broadband's advanced
services (telephony, high-speed data and digital video) and growth in
data/ Internet Protocol (IP)/managed services within AT&T Business
Services. In addition, revenue increased as a result of the reintegration
of customers and assets from the unwind of Concert.
Revenue by segment is discussed in more detail in the segment
results section.
OPERATING EXPENSES
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
Costs of services and products $3,339 $3,410 $6,629 $6,982
Cost of services and products include the cost of operating and
maintaining our networks, costs to support our outsourcing contracts,
programming for cable services, the
31
provision for uncollectible receivables and other service-related costs,
including cost of equipment sold.
Cost of services and products decreased $0.1 billion, or 2.1%, in
the second quarter of 2002 and decreased $0.4 billion, or 5.1%, for the
six months ended June 30, 2002, compared with the comparable periods in
2001. Approximately $0.3 billion of the second quarter decrease and $0.6
billion of the year-to-date decrease was due to 2001 net cable
dispositions and the deconsolidation of Excite@Home. These decreases were
partially offset by increased costs of approximately $0.1 billion in the
second quarter and $0.2 billion in the year-to-date period resulting from
a higher provision for uncollectibles due to economic conditions and
increased costs at AT&T Broadband, primarily higher cable programming
costs due to higher rates. In addition, costs of services and products
increased as a result of the reintegration of customers and assets from
the unwind of Concert.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
Access and other connection $2,763 $3,105 $5,571 $6,256
Access and other connection expenses decreased $0.3 billion, or
11.0%, in the second quarter of 2002 and decreased $0.7 billion, or 11.0%
for the six months ended June 30, 2002, compared with the same periods in
2001. Included within access and other connection expenses are costs we
pay to connect calls on the facilities of other service providers, as well
as the Universal Service Fund contributions and multi-line per line
charges mandated by the FCC. The decrease in both periods was due to lower
Universal Service Fund contributions, international connection rates, per
line charges for multi-line business customers and per minute access
rates. In addition, access and other connection expenses decreased as a
result of the reintegration of customers and assets from the unwind of
Concert.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
Selling, general and administrative $2,644 $2,749 $5,190 $5,465
Selling, general and administrative (SG&A) expenses decreased $0.1
billion, or 3.8%, in the second quarter of 2002, compared with the second
quarter of 2001. The decrease was primarily attributable to lower costs of
approximately $0.2 billion associated with decreased volumes at AT&T
Consumer services due to a reduction in the number of customers and cost
control efforts at AT&T Business Services and AT&T Broadband. Partially
offsetting this decrease was increased advertising expense primarily new
local service offerings by AT&T Consumer, and increased AT&T Broadband
customer care expense, as well as costs associated with the reintegration
of customers and assets from the unwind of Concert.
Selling, general and administrative (SG&A) expenses decreased $0.3
billion, or 5.0%, in the first half of 2002, compared with the first half
of 2001. Approximately $0.1 billion of the decrease was due to expenses
associated with net cable dispositions in the first half of 2001 and the
deconsolidation of Excite@Home. Also contributing to the decrease were
lower costs of approximately $0.5 billion as a result of cost control
efforts at AT&T Business Services and AT&T Broadband and decreased volumes
at AT&T Consumer Services due to a reduction in the number of customers.
Partially offsetting this decrease was lower pension credits resulting
from decreased returns on plan assets and lower transaction costs
associated with AT&T's restructuring announced in October of 2000 of
approximately $0.2 billion, as well as increased AT&T Broadband customer
care expense and AT&T Consumer advertising expense of approximately $0.1
billion. In addition, SG&A expenses increased as a result of the
reintegration of customers and assets from the unwind of Concert.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
Depreciation and amortization $1,959 $2,350 $3,854 $4,762
32
Depreciation and amortization expenses declined $0.4 billion and
$0.9 billion, or 16.7% and 19.1%, in the second quarter and first half of
2002, respectively, compared with the corresponding periods in 2001. The
decline in both periods was primarily due to the adoption of Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" as of January 1, 2002, which eliminated amortization of
goodwill and franchise costs. In the second quarter and first half of
2001, we recorded $0.5 billion and $1.1 billion, respectively, of
amortization expense on goodwill and franchise costs. The deconsolidation
of Excite@Home and net cable dispositions also contributed to the decline.
The decline was partially offset by increased depreciation expense due to
a higher asset base resulting from continued infrastructure investment as
well as the reintegration of customers and assets from the unwind of
Concert. Total capital expenditures were $1.9 billion and $2.4 billion for
the three months ended June 30, 2002 and 2001, respectively and were $3.3
billion and $4.7 billion for the first half of 2002 and 2001,
respectively. We continue to focus the vast majority of our capital
spending on our growth businesses of broadband and data/IP/managed
services.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
Net restructuring and other charges $ -- $287 $56 $1,095
In the second quarter of 2002, AT&T recorded $23 million of
restructuring and other charges for facility closing costs in connection
with buildings that have been vacated as a result of previously announced
employee exit plans. These charges were entirely offset by the reversal of
$23 million of excess vintage facility closing restructuring reserves that
are no longer necessary. These reserves became unnecessary due to recent
changes in certain commercial real estate markets enabling AT&T to relieve
itself of certain contractual obligations for which the reserves were
originally established.
Net restructuring and other charges for the six months ended June
30, 2002, totaled $56 million which represents the restructuring and exit
costs associated with AT&T Broadband's efforts to reorganize and
streamline certain centralized and field functions.
The $56 million is comprised of headcount reductions of $42 million
associated with employee separation costs resulting from this exit plan,
$50 million in connection with facility closings and $4 million for other
charges. These charges were partially offset by the reversal of $40
million, $23 million related to excess vintage facility closing
restructuring reserves and $17 million related to the business
restructuring plan from the second quarter of 2001, primarily due to the
redeployment of certain employees to different functions within AT&T
Broadband. Approximately 900 employees will be involuntarily separated in
conjunction with this exit plan, approximately 75% of which are management
and 25% are non-management. Approximately 75% of the employees affected by
this exit plan have left their positions as of June 30, 2002, with the
remaining reductions occurring throughout the remainder of 2002. More than
$32 million of termination benefits were paid to employees during the
first half of 2002 related to this exit plan.
This restructuring and exit plan is expected to yield cash savings
of approximately $4 million (net of severance benefit payouts) in 2002. In
subsequent years, the net cash savings will continue to increase, due to
the timing of actual separations and associated payments, until the
completion of the exit plan at which time we expect to yield approximately
$65 million of cash savings per year. Additionally, there will be no
benefit to operating income (net of the restructuring charges recorded) in
2002. In subsequent years, the operating income benefit will continue to
increase, due to the timing of actual separations, until the completion of
the exit plan at which time we expect a benefit to operating income of
approximately $74 million per year.
During the second quarter of 2001, AT&T recorded $287 million of net
restructuring and other charges, which included $56 million of asset
impairment charges related to Excite@Home including the write-off of
property, plant and equipment, and $231 million for restructuring and
exits costs which consisted of $88 million of severance costs, $136
million related to facility closings and $7 million primarily related to
termination of contractual obligations.
The severance costs, for approximately 4,500 employees, primarily
resulted from synergies created by the MediaOne merger. Approximately 27%
of the affected employees are management employees and 73% are
non-management employees. This business restructuring plan was
substantially completed by March 31, 2002.
33
Net restructuring and other charges for the six months ended June
30, 2001, totaled $1,095 million. The charge included $795 million of
asset impairment charges related to Excite@Home, $300 million for
restructuring and exits costs, which consisted of $147 million for
severance costs, $142 million for facilities closing and $11 million
primarily related to termination of contractual obligations. The severance
costs, for approximately 6,900 employees, primarily resulted from
synergies created by the MediaOne merger. Approximately 21% of the
affected employees were management employees and 79% were non-management
employees. These business restructuring plans were substantially completed
by March 31, 2002.
The asset impairment charges included $656 million recorded by
Excite@Home associated with the write-down of goodwill and other
intangible assets, warrants granted in connection with distributing the
@Home service and fixed assets. These charges were due to continued
deterioration in the business climate of, and reduced levels of venture
capital funding activity for, Internet advertising and other
Internet-related companies, continued significant declines in the market
values of Excite@Home's competitors in the Internet advertising industry,
and changes in their operating and cash flow forecasts for the remainder
of 2001. These charges were also impacted by Excite@Home's decision to
sell or shut down narrowband operations. In addition, AT&T recorded a
related goodwill impairment charge of $139 million associated with its
acquisition goodwill of Excite@Home. Since we consolidated, but only owned
approximately 23% of Excite@Home, a portion of the charges recorded by
Excite@Home was not included as a reduction to AT&T's net income, but
rather was eliminated in our Consolidated Statement of Operations as a
component of "Minority interest and dividends on subsidiary preferred
stock."
Of the approximately 10,300 employees impacted by the exit plan
announced in the fourth quarter of 2001, nearly 64% have left their
positions as of June 30, 2002, with the remaining reductions to occur
throughout the remainder of 2002. Nearly $171 million of termination
benefits were paid to employees during the first half of 2002.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
Goodwill and franchise
impairment charges $16,479 $ -- $16,479 $ --
In the second quarter of 2002, we noted significant changes in the
general business climate as evidenced by the severe downward movement in
the U.S. stock market (including the decline in values of publicly traded
cable industry stocks). At June 30, 2002, five of our cable competitors as
a group experienced an average decline in total market capitalization of
over 20% since January 1, 2002. We have also witnessed corporate
bankruptcies. We believe these factors coupled with the pending merger of
AT&T Broadband and Comcast (which was approved by both companies'
shareholders on July 10, 2000) created a "trigger event" for our AT&T
Broadband segment, which necessitated the testing of goodwill and
franchise costs for impairment as of the end of the second quarter.
We assessed our impairment using the same principles employed during
the initial adoption of SFAS No. 142. Such testing resulted in the
recognition of a $12.3 billion franchise cost impairment charge and a $4.2
billion goodwill impairment charge (aggregating to $11.8 billion
after-tax).
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
Operating (loss) income $(15,080) $1,364 $(13,691) $2,178
Operating (loss) income decreased $16.4 billion and $15.9 billion in
the second quarter of 2002 and the first half of 2002, respectively,
compared with the same periods in 2001. The decrease was primarily
attributable to the recognition of a $12.3 billion franchise cost
impairment charge and a $4.2 billion goodwill impairment charge recorded
for our AT&T Broadband segment.
34
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
Other (expense), net $ (829) $ (308) $ (991) $(1,091)
Other (expense), net for the second quarter of 2002 was $0.8
billion, compared with $0.3 billion in the second quarter of 2001, an
increase in expense of $0.5 billion, which primarily resulted from higher
cost method investment impairment charges of approximately $1.1 billion,
primarily related to our investments in Cablevision Systems Corporation
(Cablevision), Comcast and Microsoft. Also contributing to the increase in
expense were lower net gains on the sales of businesses and investments of
approximately $0.3 billion in the second quarter of 2002 versus the prior
year quarter. Net gains in the second quarter of 2001 included a gain on
the sale of our stake in Japan Telecom of approximately $0.5 billion, a
gain on the sale of Baltimore cable-systems to Comcast of approximately
$0.1 billion and a loss on the redemption of AT&T stock held by Comcast in
exchange for cable-systems of approximately $0.3 billion. These expense
increases were partially offset by a $0.8 billion loss recorded in the
second quarter of 2001 on the Excite@Home put obligation settlement with
Cox Communications, Inc. (Cox) and Comcast, combined with increased income
in the second quarter of 2002 of $0.2 billion related to the revaluation
of certain financial instruments.
Other (expense), net for the first half of 2002 was $1.0 billion,
compared with $1.1 billion in same period in 2001, a decrease in expense
of $0.1 billion. The decreased expense primarily resulted from the
adoption of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in the first quarter of 2001. In conjunction with the
adoption, we reclassified certain investment securities, which support
debt that is indexed to those securities, from "available-for-sale" to
"trading," resulting in a pretax charge of $1.2 billion. Also contributing
to the decrease was a $0.8 billion loss on the Excite@Home put obligation
settlement with Cox and Comcast recorded in the first half of 2001. The
expense decreases were partially offset by higher cost investment
impairment charges in the first half of 2002 of $1.2 billion, primarily
related to our investments in Cablevision, Comcast, Microsoft, Vodafone
plc and Time Warner Telecom. Also offsetting the decreased expense was
lower net gains on sale of businesses and investments of $0.6 billion.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
Interest (expense) $ (716) $ (761) $(1,483) $(1,640)
Interest expense decreased 6.1%, or $45 million, in the second
quarter of 2002 compared with the second quarter of 2001, and decreased
9.6%, or $0.2 billion, in the first half of 2002 compared with the first
half of 2001. The decrease in both periods was primarily due to a lower
average debt balance in 2002 compared with 2001, reflecting the company's
debt reduction efforts. The decrease in the second quarter of 2002
compared with the second quarter of 2001 was partially offset by a higher
average interest rate primarily driven by our $10 billion global bond
offering in November 2001.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
---- ---- ---- ----
Benefit for income taxes $4,631 $ 436 $4,365 $ 218
The benefit for income taxes increased $4.2 billion in the second
quarter of 2002 compared with the second quarter of 2001. The increase was
primarily due to a loss before income taxes in the second quarter of 2002
compared with income before income taxes in the second quarter of 2001,
partially offset by the impact of the effective tax rates. The effective
tax benefit rate for the second quarter of 2002 was 27.9%, compared with a
negative 147.6% for the prior year quarter. The second quarter 2002
effective tax benefit rate was negatively impacted by non tax-deductible
expenses, primarily the AT&T Broadband goodwill impairment charge. The
second quarter 2001 negative effective tax rate was positively impacted by
the net tax benefits resulting from the Excite@Home put obligation
settlement with Cox and Comcast and the redemption of AT&T stock held by
Comcast in exchange for an entity owning certain cable systems. These
impacts were partially offset by the consolidation of the operational
losses of Excite@Home, for which the company was unable to record tax
benefits, and non tax-deductible goodwill amortization.
The benefit for income taxes increased $4.1 billion in the first
half of 2002 compared with the first half of 2001. The increase was
primarily due to a higher loss before
35
income taxes in the first half of 2002 compared with the first half of
2001, partially offset by a lower effective tax benefit rate. The
effective tax benefit rate for the first half of 2002 was 27.0%, compared
with 39.4% for the prior year period. The first half 2002 effective tax
benefit rate was negatively impacted by non tax-deductible expenses,
primarily the AT&T Broadband goodwill impairment charge. The first half
2001 effective tax benefit rate was positively impacted by the net tax
benefits resulting from the Excite@Home put obligation settlement with Cox
and Comcast and the redemption of AT&T stock held by Comcast in exchange
for an entity owning certain cable systems. These impacts were partly
offset by the consolidation of the operational losses of Excite@Home,
including an asset impairment charge, for which the company was unable to
record tax benefits, and non tax-deductible goodwill amortization.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
----- ----- ----- -----
Minority interest and dividends on
subsidiary preferred stock $ (31) $ 198 $ (88) $ 838
Minority interest and dividends on subsidiary preferred stock was
$31 million of expense in the second quarter of 2002 and $0.2 billion of
income in the second quarter of 2001 and $0.1billion of expense for the
six months ended June 30, 2002 and $0.8 billion of income for the six
months ended June 30, 2000. These variances were due to income recorded in
the three and six months ended June 30, 2001 primarily relating to losses
generated by Excite@Home, including asset impairment charges, that were
attributable to the approximately 77% of Excite@Home not owned by AT&T. In
2002, Excite@Home was not consolidated; therefore we no longer recorded
minority interest income (expense) related to Excite@Home. The income tax
benefit recorded on minority interest and dividends on subsidiary
preferred stock was $25 million and $6 million for the second quarter of
2002 and 2001, respectively, and $50 million and $87 million for the first
half of 2002 and 2001, respectively.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
----- ----- ----- -----
Net (losses) related to other
equity investments $(724) $(980) $(1,021) $(1,037)
Net losses related to other equity investments, which are recorded
net of income taxes, were $0.7 billion in the second quarter of 2002
compared with $1.0 billion in the second quarter of 2001, a decrease in
net losses of approximately $0.3 billion. The decrease was primarily
driven by a $1.1 billion pretax impairment of our investment in Net2Phone
recorded in the second quarter of 2001 as well as a decrease in equity
losses of approximately $0.2 billion (pretax) from Concert due to the
unwinding of this joint venture on April 1, 2002. Partially offsetting the
decrease in losses were $1.0 billion of pretax cable partnership
impairment charges recorded in the second quarter of 2002. In addition, we
recorded $0.2 billion (pretax) of accretion of the floor price of AT&T's
obligation to purchase the shares of AT&T Canada not owned by AT&T in the
second quarter of 2002.
The income tax benefit recorded on net losses related to other
equity investments was $448 million in the second quarter of 2002 and $528
million in the second quarter of 2001, a decrease of $80 million. The
amortization of excess basis associated with nonconsolidated investments,
recorded as a reduction of income, totaled $76 million in the second
quarter of 2001. Effective January 1, 2002, in accordance with the
provisions of SFAS No. 142, we no longer amortize excess basis related to
nonconsolidated investments.
Net losses related to other equity investments, which are recorded
net of income taxes, were $1.0 billion for both the first half of 2002 and
2001. The 2002 net losses related primarily to $1.0 billion of pretax
cable partnership impairment charges recorded as well as approximately
$0.5 billion (pretax) recorded in the first half of 2002 related to the
estimated loss on AT&T's commitment to purchase the shares of AT&T Canada
not owned by AT&T. This charge reflects the accretion of the floor price
of AT&T's obligation to purchase AT&T Canada shares as well as the
deterioration in the underlying value of AT&T Canada since December 31,
2001. The 2001 net losses consisted primarily of a $1.1 billion pretax
impairment of our investment in Net2Phone. We recorded equity losses from
Concert
36
in 2002 and 2001. These losses decreased approximately $0.3 billion on a
pretax basis due to the unwind of this joint venture on April 1, 2002.
The income tax benefit recorded on net losses related to other
equity investments was $632 million in the first half of 2002 and $602
million in the first half of 2001, an increase of $30 million. The
amortization of excess basis associated with nonconsolidated investments,
recorded as a reduction of income, totaled $156 million in the first half
of 2001. Effective January 1, 2002, in accordance with the provisions of
SFAS No. 142, we no longer amortize excess basis related to
nonconsolidated investments.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
----- ----- ----- -----
Equity (losses) from Liberty
Media Group $ -- $(2,125) $ -- $(2,822)
As a result of the split-off of LMG on August 10, 2001, we no longer
record the results of LMG.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
----- ----- ----- -----
(Loss) income from discontinued
operations $ (88) $ 218 $ (88) $ 150
Discontinued operations for the three and six months ended June 30,
2002 reflects an estimated loss on the settlement associated with the
business of Lucent Technologies Inc., which was spun-off from AT&T in
1996. Sparks, et al. v. AT&T and Lucent Technologies Inc. et al., is a
class action lawsuit filed in 1996 in Illinois state court. The complaint
seeks damages on behalf of present and former customers based on a claim
that the AT&T Consumer Products business (which became part of Lucent in
1996) and Lucent had defrauded and misled customers who leased telephones,
resulting in payments in excess of the cost to purchase the telephones. As
a result of recent negotiations, a settlement proposal was submitted to
the and accepted by court on August 9, 2002. In accordance with the
separation and distribution agreement between AT&T and Lucent, AT&T
recorded its proportionate share of the settlement and estimated legal
costs, which totaled $132 million pretax ($88 million after-tax).
Income from discontinued operations in 2001 represents the results
of AT&T Wireless Group, which was split-off from AT&T on July 9, 2001.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
----- ----- ----- -----
Extraordinary gain - net
of income Taxes $ 7 $ -- $ 48 $ --
In the second quarter of 2002, AT&T called $0.2 billion of trust
originated preferred securities for early redemption, resulting in a gain
on early extinguishment of debt of $7 million, net of $5 million of income
taxes. The year-to-date gain of $48 million, net of $30 million of income
taxes relates to $1.5 billion of trust originated preferred securities
called for early redemption in the first half of 2002. The gains represent
the difference between the carrying value of the debt and the cash paid to
extinguish the debt.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
----- ----- ----- -----
Cumulative effect of accounting
changes - net of income taxes $ -- $ -- $(856) $ 904
Cumulative effect of accounting changes, net of applicable income
taxes, was a loss of $0.9 billion in the first six months of 2002 compared
with a gain of $0.9 billion in the first half of 2001. Effective January
1, 2002, we adopted SFAS No. 142 and in accordance with SFAS No. 142,
franchise costs were tested for impairment as of January 1, 2002, by
comparing the fair value to the carrying value (at the market level). As a
result of this test, an impairment loss of $0.9 billion, net of income
taxes of $0.5 billion was recorded in 2002.
37
The cumulative effect of accounting change related to the adoption
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," net of applicable income taxes, in the first six months of
2001 was comprised of $0.4 billion for AT&T Group (other than LMG) and
$0.5 billion for LMG. The $0.4 billion recorded by AT&T, excluding LMG,
was attributable primarily to fair value adjustments of equity derivative
instruments related to indexed debt instruments and warrants held in
public and private companies. The $0.5 billion recorded by LMG represents
the impact of separately recording the embedded call option obligations
associated with LMG's senior exchangeable debentures.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
----- ----- ----- -----
Dividend requirements of
preferred stock, net $ -- $(236) $ -- $(417)
Dividend requirements of preferred stock were $0.2 billion in the
second quarter of 2001 and $0.4 billion for the first half of 2001. The
preferred stock dividend represented interest in connection with
convertible preferred stock issued to NTT DoCoMo in January of 2001 as
well as accretion of the beneficial conversion feature. On July 9, 2001,
in conjunction with the split-off of AT&T Wireless Group, these preferred
shares were converted into AT&T Wireless common stock and accordingly were
no longer outstanding.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
----- ----- ----- -----
Premium on wireless tracking
stock exchange $ -- $ (80) $ -- $ (80)
The premium on the wireless tracking stock exchange was $80 million
for the three and six months ended June 30, 2001. The premium represents
the excess of fair value of the Wireless tracking stock issued over the
fair value of the AT&T common stock exchanged and was calculated based on
the closing share prices of AT&T common stock and AT&T Wireless tracking
stock on May 25, 2001, the date the exchange [closed].
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
----- ----- ----- -----
AT&T Common Stock Group - per
basic and diluted share:
(Loss) - continuing operations $(3.49) $(0.10) $(3.59) $(0.28)
Total (loss) $(3.52) $(0.05) $(3.84) $(0.15)
In the second quarter of 2002, AT&T Common Stock Group had a loss
from continuing operations, per diluted share of $3.49, compared with a
loss per diluted share of $0.10 in the second quarter of 2001. In the
first half of 2002, AT&T Common Stock Group had a loss from continuing
operations of $3.59 per diluted shares compared with a loss of $0.28 per
diluted share in 2001. The increased loss in both periods was primarily
driven by goodwill and franchise impairment charges recorded in the second
quarter of 2002, combined with an unfavorable year over year variance in
other (expense), net. Such unfavorable impacts were offset somewhat by
dividend requirements of preferred stock and the premium on exchange of
AT&T Wireless stock recorded in 2001. In addition, the second quarter
decrease was offset by lower net losses related to other equity
investments and the first half decrease was offset by lower net
restructuring and other charges.
In the second quarter of 2002, the total loss per diluted share of
AT&T Common Stock Group of $3.52 reflects the loss from continuing
operations as discussed above of $3.49, and a loss from discontinued
operations of $0.03. In the second quarter of 2001, the total loss per
diluted share of AT&T Common Stock Group of $0.05 included a loss from
continuing operations as discussed above of $0.10 and income from
discontinued operations of $0.05.
The total loss per diluted share of AT&T Common Stock Group in the
first half of 2002 of $3.84 included the loss from continuing operations
of $3.59, a loss related to the cumulative effect of accounting change of
$0.23 and a loss from discontinued operations of $0.03, partially offset
by an extraordinary gain of $0.01. In the first half of 2001, the total
loss per diluted share of AT&T Common Stock Group of $0.15 included a loss
from
38
continuing operations of $0.28, income from discontinued operations of
$0.03 and income related to the cumulative effect of accounting change of
$0.10.
In the second quarter of 2001, Liberty Media Group (LMG) reported a
loss of $0.82 per diluted share. For the first half of 2001, LMG reported
a loss of $0.88 per diluted share, which included income of $0.21 per
diluted share related to the cumulative effect of accounting change.
AT&T Wireless group reported income of $0.08 per diluted share for
both the three and six-month periods ended June 30, 2001.
SEGMENT RESULTS
In support of the services we provide, we segment our results by
the operating units that support our primary lines of business: AT&T
Business Services, AT&T Consumer Services and AT&T Broadband. The balance
of AT&T's operations, excluding LMG, is included in a corporate and other
category. LMG was split-off from AT&T in August 2001.
EBIT is the primary measure used by AT&T's chief operating decision
makers to measure AT&T's operating results and to measure segment
profitability and performance. AT&T calculates EBIT as operating income
(loss) plus other income (expense), minority interest and dividends on
subsidiary preferred stock and net pretax earnings (losses) related to
other equity investments. In addition to EBIT, we also use EBITDA,
excluding other income, to measure AT&T Broadband's segment profitability
and performance. EBITDA, excluding other income, for AT&T Broadband is
defined as EBIT, excluding other income (expense), net pretax earnings
(losses) related to other equity investments, the 2002 goodwill and
franchise cost impairment charges, and minority interest and dividends on
subsidiary preferred stock, plus depreciation and amortization. Interest
expense and income taxes are not factored into the segment profitability
measure used by the chief operating decision makers; therefore, trends
for these items are discussed on a consolidated basis. Management
believes EBIT and EBITDA, excluding other income, for AT&T Broadband are
meaningful to investors because they provide analyses of operating
results using the same measures used by AT&T's chief operating decision
makers. In addition, we believe that EBIT allows investors a means to
evaluate the financial results of each segment in relation to total AT&T.
EBIT for AT&T was a deficit of $17,137 million and a deficit of $260
million for the three months ended June 30, 2002 and 2001, respectively.
EBIT was a deficit of $16,473 million and earnings of $199 million for
the six months ended June 30, 2002 and 2001, respectively. Our
calculations of EBIT and EBITDA, excluding other income, for AT&T
Broadband may or may not be consistent with the calculation of these
measures by other public companies. EBIT and EBITDA, excluding other
income, should not be viewed by investors as an alternative to generally
accepted accounting principles (GAAP) measures of income as a measure of
performance or to cash flows from operating, investing and financing
activities as a measure of liquidity. In addition, EBITDA, excluding
other income, does not take into account changes in certain assets and
liabilities as well as interest, income taxes and other income (expense)
that can affect cash flow.
The discussion of segment results includes revenue, EBIT, capital
additions and total assets. In addition, for AT&T Broadband, we include
EBITDA, excluding other income. Total assets for each segment generally
include all assets, except intercompany receivables. Prepaid pension
assets and corporate-owned or leased real estate are generally held at the
corporate level, and therefore are included in the corporate and other
group. The income from discontinued operations is not reflected in the
corporate and other group. Capital additions for each segment include
capital expenditures for property, plant and equipment, internal-use
software, additions to nonconsolidated investments and increases in
franchise costs.
Our existing segments reflect certain managerial changes that were
implemented during 2002. The changes primarily include the following:
revenue previously recorded by the AT&T Business Services segment as
"Internal Revenue" for services provided to certain other AT&T units and
then eliminated within the Corporate & Other group, is now recorded as a
contra-expense by AT&T Business Services; the results of certain units
previously included in the Corporate & Other group were transferred to the
AT&T Business Services segment; the financial impacts of SFAS No. 133 that
were previously recorded in the Corporate & Other group were transferred
to the appropriate segments. In addition, AT&T Consumer Services and total
AT&T revenue was restated in accordance with EITF issue 01-9, "Accounting
for Consideration Given by a Vendor to a Customer," which requires cash
incentives given to customers previously recorded as advertising and
promotion expense now to be recorded as a reduction of revenue when
recognized in the income statement, unless an identifiable benefit is
received in exchange. All prior periods have been restated to reflect
these changes.
39
Reflecting the dynamics of our business, we continuously review our
management model and structure, and make adjustments to our operating
segments accordingly.
AT&T BUSINESS SERVICES
AT&T Business Services offers a variety of global communications
services to small and medium-sized businesses, large domestic and
multinational businesses and government agencies. AT&T Business' services
include long distance, international, toll-free and local voice; data and
IP networking; managed networking services and outsourcing solutions; and
wholesale transport services (sales of services to service resellers).
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
DOLLARS IN MILLIONS 2002 2001 2002 2001
---- ---- ---- ----
External revenue
Service revenue $6,558 $6,788 $12,905 $13,654
Equipment and product
sales revenue 92 65 190 136
------ ------ ------- -------
Total external revenue 6,650 6,853 13,095 13,790
Internal revenue 92 158 175 317
------ ------ ------- -------
Total revenue $6,742 $7,011 $13,270 $14,107
====== ====== ======= =======
EBIT $ 691 $1,399 $ 1,143 $ 2,405
OTHER ITEMS
Capital additions $ 930 $1,414 $ 1,506 $ 2,696
AT JUNE 30, 2002 AT DECEMBER 31, 2001
Total assets $39,150 $40,316
REVENUE
AT&T Business Services total revenue decreased $0.3 billion, or
3.8%, in the second quarter of 2002, and declined $0.8 billion, or 5.9%,
for the six months ended June 30, 2002, compared with the same periods in
2001. The decreases were primarily due to a decline in long distance voice
revenue of approximately $0.4 billion and $1.2 billion in the second
quarter of 2002 and the first six months of 2002, respectively. The
decreases were partially offset by growth in data/IP/managed services,
including equipment and product sales, and local voice services of
approximately $0.2 billion and $0.4 billion for the second quarter of 2002
and the first six months of 2002, respectively.
Long distance voice services revenue decreased approximately 12% in
the second quarter of 2002 and approximately 16% for six months ended June
30, 2002. The decrease was primarily driven by a lower average price per
minute reflecting the competitive forces within the industry as well as a
wholesale-retail product mix shift. Long distance voice minute volumes
were relatively flat for the second quarter of 2002 and the six months
ended June 30, 2002.
Data/IP/managed services, excluding equipment and product sales,
increased approximately 7% for the second quarter of 2002 and
approximately 6% for the six months ended June 30, 2002, compared with the
same periods in 2001. When we include equipment and product sales, these
services increased approximately 7% in both periods. Growth was driven by
packet services (IP, frame relay and ATM) partially offset by a decline in
domestic private line service.
Local voice services revenue grew nearly 6% in the second quarter of
2002 and nearly 11% for the six months ended June 30, 2002, compared with
the same periods in 2001. This growth reflects our continued focus on
increasing the utilization of our existing footprint. AT&T added more than
200,000 access lines in the second quarter of 2002 and had approximately
3.3 million access lines in service at June 30, 2002. Access lines enable
AT&T to provide local service to customers by allowing direct connection
from customer equipment to the AT&T network.
AT&T Business Services internal revenue decreased $66 million and
$142 million in the second quarter and first half of 2002 compared with
the same periods in the prior year. The impact of internal revenue is
included in the revenue by product discussions above. These decreases were
primarily due to the split-off of AT&T Wireless on July 9, 2001, as these
sales are now reported as external revenue.
40
EBIT
EBIT declined $0.7 billion, or 50.6%, in the second quarter of 2002
compared with the second quarter of 2001. This decline reflects a
reduction in other expense of $0.5 billion in the second quarter of 2002
compared with other income in the second quarter of 2001 due to a gain
recorded on the sale of Japan Telecom in April 2001. In addition, the
decline reflects lower operating income of $0.3 billion resulting from the
impact of lower prices within the long distance business, which includes
competitive pricing pressures as well as a shift from higher margin long
distance services to lower margin products.
EBIT declined $1.3 billion, or 52.5%, for the six months ended June
30, 2002, compared with the same period in 2001. This decrease was driven
by a $0.6 billion decrease in operating income reflecting the impact of
lower prices within the long distance business, which includes competitive
pricing pressures as well as a shift from higher margin long distance
services to lower margin products. In addition, the decline includes a
reduction in other expense of $0.5 billion for the six months ended June
30, 2002, compared with other income for the six months ended June 30,
2001, resulting primarily from a gain recorded on the sale of Japan
Telecom in April 2001.
OTHER ITEMS
Capital additions decreased $0.5 billion, or 34.2%, in the second
quarter of 2002 and declined $1.2 billion, or 44.1%, in the first half of
2002 compared with the same periods in 2001. These declines reflect
significantly lower capital expenditures on our core network.
Total assets decreased $1.2 billion, or 2.9%, at June 30, 2002,
compared with December 31, 2001. The decrease reflects lower receivables
primarily driven by the settlement of receivables from Concert in
connection with the Concert unwind and lower long distance revenue.
AT&T CONSUMER SERVICES
AT&T Consumer Services provides a variety of communications services
to residential customers including domestic and international long
distance; transaction-based long distance, such as operator-assisted
service and prepaid phone cards; local and local toll (intrastate calls
outside the immediate local area); and dial-up Internet.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
DOLLARS IN MILLIONS 2002 2001 2002 2001
---- ---- ---- ----
Revenue $2,911 $3,724 $5,997 $7,653
EBIT $ 802 $1,217 $1,634 $2,535
OTHER ITEMS
Capital additions $ 33 $ 31 $ 61 $ 53
AT JUNE 30, 2002 AT DECEMBER 31, 2001
Total assets $1,877 $2,141
REVENUE
AT&T Consumer Services revenue decreased $0.8 billion, or 21.8%, in
the second quarter of 2002, and declined $1.7 billion, or 21.6%, for the
six months ended June 30, 2002, compared with the same periods in 2001.
The revenue decline in both periods reflects the impact of long distance
volume reductions, primarily in traditional long distance voice services;
such as domestic and international dial services (long distance calls
where the number "1" is dialed before the call), and domestic calling card
services. The traditional long distance voice services were negatively
impacted by wireless and internet substitution, and the impact of ongoing
competition, which has led to a loss of market share. In addition, the
continued migration of customers to lower-priced products and optional
calling plans has also negatively impacted revenue. Calling volumes
declined at a low-teens percentage rate in the second quarter of 2002, and
a mid-teens percentage rate for the period ended June 30, 2002, as a
result of competition and substitution, partially offset by prepaid card
usage.
41
EBIT
EBIT declined $0.4 billion, or 34.1%, in the second quarter of 2002
compared with the second quarter of 2001. EBIT declined $0.9 billion, or
35.6%, for the six months ended June 30, 2002, compared with the same
period in 2001. The decline in both periods was primarily due to the
revenue declines in the long distance business.
EBIT margin declined to 27.5% in the second quarter of 2002 from
32.7% in the second quarter of 2001. EBIT margin declined to 27.2% for
the six months ended June 30, 2002, from 33.1% for the period ended
June 30, 2001. Customers who substitute long distance calling with
wireless and internet services and/or migrate to lower priced calling
plans and lower margin products and remain AT&T Consumer Services
customers generate less revenue, however the billing, customer care and
fixed costs remain, resulting in lower EBIT margins.
OTHER ITEMS
Capital additions were about the same in the second quarter of 2002
and the six months ended June 30, 2002 compared with the same periods in
2001.
Total assets declined $0.3 billion to $1.9 billion at June 30, 2002,
compared with $2.1 billion at December 31, 2001. The decline was primarily
due to lower accounts receivable, reflecting lower revenue.
AT&T BROADBAND
AT&T Broadband offers a variety of services through our cable
broadband network, including traditional analog video and advanced
services such as high-speed data (HSD) service, broadband telephony
service and digital video service.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
DOLLARS IN MILLIONS 2002 2001 2002 2001
---- ---- ---- ----
External revenue $ 2,524 $ 2,560 $ 4,960 $ 5,021
Internal revenue 2 5 5 9
-------- -------- -------- --------
Total revenue $ 2,526 $ 2,565 $ 4,965 $ 5,030
======== ======== ======== ========
EBIT $(18,460) $ (819) $(18,885) $ (2,361)
EBITDA, excluding other income $ 541 $ 500 $ 1,006 $ 894
OTHER ITEMS
Capital additions $ 959 $ 949 $ 1,707 $ 1,859
AT JUNE 30, 2002 AT DECEMBER 31, 2001
Total assets $81,816 $103,060
REVENUE
Broadband revenue declined $39 million, or 1.5%, for the three
months ended June 30, 2002, compared with the corresponding prior year
period. Approximately $0.3 billion of the decline was due to 2001 net
cable dispositions. The decline was largely offset by $0.2 billion of
growth from advanced services (broadband telephony, HSD and digital video)
as well as an increase in other basic video services. The increase in
other basic video services was primarily due to a basic rate increase on
January 1, 2002, increased pay per view and advertising revenue, partially
offset by a loss of basic subscribers.
Broadband revenue declined $65 million, or 1.3%, for the six months
ended June 30, 2002, compared with the first half of 2001. Approximately
$0.6 billion of the decline was due to 2001 net cable dispositions. The
decline was partially offset by $0.4 billion of growth from advanced
services (broadband telephony, HSD and digital video) as well as a $0.1
billion increase in other basic video services, primarily due to a rate
increase in basic cable, increased pay per view and advertising revenue,
partially offset by a loss of basic subscribers.
42
AT&T Broadband continues to experience a decline in the number of
basic subscribers reflecting the impacts of increased competition and
current economic conditions. A continued loss of basic subscribers could
have a significant impact on projected revenue and EBITDA, excluding other
income, growth. Revenue and EBITDA, excluding other income, growth is also
largely dependent on AT&T Broadband's ability to offer advanced services
and the completion of AT&T Broadband's plant upgrade is an important
factor in offering such services. Failure to complete AT&T Broadband's
plant upgrade as anticipated could have a significant impact on projected
revenue and EBITDA, excluding other income, growth.
At June 30, 2002, Broadband serviced 13.3 million basic cable
customers, passing 25.1 million homes, compared with 14.4 million basic
cable customers, passing 25.7 million homes at June 30, 2001. At June 30,
2002, we provided digital video service to 3.9 million customers, HSD
service to 1.8 million customers and broadband telephony service to 1.2
million customers. This compares with 3.1 million digital-video customers,
1.3 million HSD customers, and 0.8 million broadband telephony customers
at June 30, 2001.
EBIT/EBITDA, EXCLUDING OTHER INCOME
The EBIT deficit for the second quarter of 2002 was $18.5 billion,
an increase of $17.6 billion compared with the second quarter of 2001. The
increased deficit was largely due to the recognition of a $12.3 billion
franchise cost impairment charge and a $4.2 billion goodwill impairment
charge. In addition, the deficit increased due to higher cost and equity
method investment impairment charges of $2.1 billion recorded in 2002.
These impacts were partially offset by lower depreciation and amortization
expenses of $0.3 billion, primarily as a result of the adoption of SFAS
No. 142, and income of $0.3 billion related to the revaluation of certain
financial instruments in 2002.
The EBIT deficit for the six months ended June 30, 2002 was $18.9
billion, an increase of $16.5 billion compared with the six months ended
June 30, 2001. The increased deficit was largely due to the goodwill and
franchise impairment charges noted above, as well as higher cost and
equity method investment impairment charges of $2.2 billion recorded in
2002. These impacts were partially offset by a $1.2 billion charge taken
in the first quarter of 2001 due to the adoption of SFAS No. 133, lower
depreciation and amortization expenses of $0.5 billion, primarily as a
result of the adoption of SFAS No. 142, and income of $0.3 billion related
to the revaluation of certain financial instruments in 2002.
EBITDA, excluding other income, was $0.5 billion and $1.0 billion
for the three and six months ended June 30, 2002, respectively,
improvements of $41 million, or 8.5%, and $0.1 billion, or 12.6%,
respectively from the comparable prior year periods. These improvements
were primarily due to improved EBITDA, excluding other income, of $0.2
billion and $0.4 billion for advanced services (primarily broadband
telephony and HSD) driven by revenue growth and operating cost management
for the three and six month periods ended June 30, 2002 respectively. This
improvement was mostly offset by higher Comcast merger related costs of
$0.1 billion in both the three and six month periods ended June 30, 2002
and the impact of net cable dispositions in 2001 of $0.1 billion and $0.2
billion in the three and six month periods, respectively.
OTHER ITEMS
Capital additions were essentially flat for the three months ended
June 30, 2002, compared with the same period in 2001. Capital additions
decreased $0.2 billion, or 8.2%, to $1.7 billion for the six months ended
June 30, 2002, from $1.9 billion for the comparable prior year period.
This decrease was primarily driven by a decline in capital expenditures,
primarily the result of net cable dispositions in 2001, combined with
decreased infusions into non-consolidated investments. The capital
spending for the three and six months ended June 30, 2002, was primarily
related to the growth and support of advanced services and plant upgrade
expenditures.
Total assets at June 30, 2002, were $81.8 billion compared with
$103.1 billion at December 31, 2001. The decrease in total assets was
primarily due to a $13.7 billion decrease in franchise costs and a $4.2
billion decrease in goodwill, primarily reflecting the asset impairment
charges including the impact of adopting SFAS No. 142.
AT&T Broadband and Bresnan Broadband Holdings, LLC ("Bresnan") continue
efforts toward closing the transactions contemplated by the Asset Purchase
Agreement dated as of April 5, 2002, pursuant to which AT&T Broadband will
sell to Bresnan cable systems in the States of Colorado, Wyoming, Montana
and Utah. Closing is subject to satisfaction of
43
specified conditions, including a requirement that the systems have no
fewer than 305,000 subscribers, that certain consents of franchising
authorities and other third parties have been obtained, and that there has
not occurred (a) a material adverse change in the business, operations,
financial condition, results of operations or prospects of the systems or
the business, (b) a material market disruption, or (c) a material change
in the financial, banking, capital or syndication markets. AT&T Broadband
currently anticipates that the transaction will close prior to the end of
2002.
CORPORATE AND OTHER
This group reflects the results of corporate staff functions, the
elimination of transactions between segments, as well as the results of
Excite@Home in 2001.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
DOLLARS IN MILLIONS 2002 2001 2002 2001
---- ---- ---- ----
External revenue $ 19 $ 128 $ 36 $ 274
Internal revenue (94) (163) (180) (326)
------- ------- ------- -------
Total revenue $ (75) $ (35) $ (144) $ (52)
======= ======= ======= =======
EBIT $ (170) $(2,057) $ (365) $(2,380)
OTHER ITEMS
Capital additions $ 14 $ 73 $ 24 $ 260
AT JUNE 30, 2002 AT DECEMBER 31, 2001
Total assets $15,052 $19,765
REVENUE
Revenue for corporate and other decreased $40 million in the second
quarter of 2002 compared with the second quarter of 2001 and $92 million
in the first half of 2002 compared with the same prior year period. The
deconsolidation of Excite@Home contributed $0.1 billion and $0.3 billion
of the decrease for the quarter and year-to-date periods, respectively.
Partially offsetting the declines in revenue were lower internal revenue
eliminations of $0.1 billion and $0.2 billion for the quarter and
year-to-date periods as a result of the split-off of AT&T Wireless on July
9, 2001, partially offset by increased internal sales from AT&T Business
Services to AT&T Broadband.
EBIT
The EBIT deficit declined $1.9 billion in the second quarter of 2002
and $2.0 billion in the first half of 2002 compared with the corresponding
periods in 2001. The decline in both periods was largely due to lower
losses related to equity investments of approximately $1.2 billion
primarily related to the impairment of our investment in Net2Phone in the
second quarter of 2001. The declining deficits were also the result of a
$0.8 billion loss on the second quarter 2001 Excite@Home put obligation
settlement with Cox and Comcast. Also contributing to the lower deficits
was the impact of the deconsolidation of Excite@Home of $0.1 billion for
the second quarter and $0.4 billion for the year-to-date period as well as
lower transaction costs associated with AT&T's restructuring announced in
October of 2000 of $0.1 billion for both periods. The EBIT deficit
declines were partially offset by higher expense of $0.1 billion for the
quarter related to on-going valuation activity of certain financial
instruments and $0.3 billion for the year-to-date period related to the
on-going valuation activity of certain financial instruments as well as
greater cost investment impairments. A lower pension credit of $0.1
billion for both periods, primarily driven by a lower pension trust asset
base resulting from lower investment returns also partially offset the
EBIT declines.
OTHER ITEMS
Capital additions decreased $0.1 billion, or 80.2% in the second
quarter of 2002 and $0.2 billion, or 90.8%, in the first half of 2002,
compared with the corresponding 2001 periods. The decrease in both periods
was primarily attributable to the impact of the deconsolidation of
Excite@Home of $0.1 billion. In addition, the first half of 2002 was
impacted by decreased purchases of non-consolidated investments of $0.1
billion
44
Total assets decreased $4.7 billion at June 30, 2002 to $15.1
billion. The decrease was primarily driven by a lower cash balance held at
June 30, 2002.
LIQUIDITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001
---- ----
(DOLLARS IN MILLIONS)
CASH FLOWS:
Provided by operating activities of continuing operations $ 4,914 $ 4,709
Used in investing activities of continuing operations (3,699) (437)
Used in financing activities of continuing operations (6,201) 460
Provided by discontinued operations -- 4,921
Net cash provided by operating activities of continuing operations
of $4.9 billion for the six months ended June 30, 2002, was primarily due
to $6.3 billion of income from continuing operations, excluding non-cash
income items, partially offset by net changes in other operating assets
and liabilities of $1.1 billion and a decrease in accounts payable of $0.4
billion. Net cash provided by operating activities of continuing
operations of $4.7 billion for the six months ended June 30, 2001, was
primarily due to income from continuing operations, excluding non-cash
income items and the adjustment for net gains on sales of businesses of
$6.9 billion, partially offset by a net changes in other operating assets
and liabilities of $1.6 billion and a decrease in accounts payable of $0.8
billion.
AT&T's investing activities of continuing operations resulted in a
net use of cash of $3.7 billion for the six months ended June 30, 2002,
compared with $0.4 billion for the comparable period in 2001. In the first
six months of 2002, AT&T spent $3.4 billion on capital expenditures. For
the six months ended June 30, 2001, AT&T spent approximately $4.7 billion
on capital expenditures and $0.4 billion on non-consolidated investments,
primarily infusions into existing cable investments, and received
approximately $3.1 billion primarily from the net disposition of cable
systems and approximately $1.6 billion from the sales of various
investments.
For the six months ended June 30, 2002, net cash used in financing
activities of continuing operations was $6.2 billion, compared with $0.5
billion of net cash provided by financing activities of continuing
operations for the six months ended June 30, 2001. In the first six months
of 2002, AT&T made net payments of $8.4 billion to reduce debt and
received $2.6 billion from the issuance of AT&T common stock. In the first
six months of 2001, AT&T made net payments of $9.1 billion to reduce debt
and received $9.8 billion from the issuance of convertible preferred stock
to NTT DoCoMo.
At June 30, 2002, we had current assets of $16.5 billion and current
liabilities of $20.2 billion. The current assets were primarily comprised
of trade and other receivables of $7.6 billion and cash of $5.6 billion.
The current liabilities were primarily comprised of debt maturing within
one year of $5.9 billion, other current liabilities of $4.8 billion,
accounts payable of $4.3 billion and AT&T's obligation for AT&T Canada of
$3.7 billion. We expect to fund our operations primarily with cash from
operations, cash on hand, commercial paper and our securitization program.
If economic conditions worsen or do not improve and/or competition and
product substitution accelerate beyond current expectations, our cash flow
from operations would decrease, negatively impacting our liquidity.
In November 2001, we completed a $10.0 billion private bond offering
which includes provisions that would allow bondholders to require AT&T to
repurchase the notes if certain conditions are not met in conjunction with
the spin-off or other separation of AT&T Broadband from AT&T at the time
of notification to bondholders of the intention to separate AT&T
Broadband. On May 15, 2002, the bondholders were notified that AT&T
satisfied these conditions and this provision is no longer applicable. In
June 2002, AT&T registered $7.0 billion of these private placement notes
and commenced a tender on the private notes for registered notes. The note
exchange was completed on August 2, 2002.
On July 1, 2002, AT&T announced it received initial commitments from
Citibank, Credit Suisse First Boston, Goldman Sachs and JP Morgan for a
significant portion of a new bank facility of up to $4.0 billion. The
banks have also agreed to act as lead arrangers to syndicate the balance
of the 364-day credit facility. The proposed new bank facility will
replace AT&T's existing undrawn $8.0 billion facility, which matures in
December 2002. The existing facility currently provides that AT&T could
not consummate the spin-off of AT&T Broadband given Moody's recent
downgrade as discussed below. As a result, at or prior to the spin-off of
AT&T Broadband, AT&T expects to cancel the existing facility and replace
it with the new facility of up to
45
$4.0 billion, of which a significant portion is currently committed. The
new facility is expected to be in place prior to the spin-off of AT&T
Broadband and remain in effect following the spin-off. The new facility is
also expected to be adequate to back up any AT&T commercial paper or other
short-term debt maturing over the course of the next year. The current
credit facility agreement contains a financial covenant that requires AT&T
to maintain a net debt-to-EBITDA ratio (as defined in the credit
agreement) not exceeding 3.00 to 1.00 for four consecutive quarters ending
on the last day of each fiscal quarter. At June 30, 2002, we were in
compliance with this covenant. If AT&T were to become noncompliant, it
could result in the cancellation of the credit facility with any amounts
outstanding under the credit facility becoming payable immediately.
The holders of certain private debt with an outstanding balance of
$0.8 billion at June 30, 2002, have an annual right to cause AT&T to repay
the debt upon payment of an exercise fee. In exchange for the elimination
of this put right for 2002, AT&T posted a cash-collateralized letter of
credit totaling $0.4 billion. The creditor could accelerate repayment of
the debt if unfavorable local law changes were to occur in its country of
operation.
AT&T has renewed both its AT&T Business Services and AT&T Consumer
Services customer accounts receivable securitization facilities. Together
the programs provide up to $2.0 billion of available financing, limited by
the eligible receivables balance, which varies from month to month.
Proceeds from the securitization are recorded as a borrowing and included
in short-term debt. At June 30, 2002, approximately $0.2 billion was
outstanding. The terms of these facilities have been extended to June
(Business) and July (Consumer) of 2003.
In June 2002, AT&T sold 230 million shares of AT&T common stock
receiving net proceeds of $2.5 billion. We anticipate, and under the
Comcast merger agreement are limited to, using these funds, which are
reflected in the cash balance at June 30, 2002, to satisfy a portion
AT&T's obligation to AT&T Canada shareholders. The remaining portion of
the obligation will be financed through short-term sources.
On May 29, 2002, Moody's Investors Service (Moody's) lowered its
rating of long-term debt issued or guaranteed by AT&T to Baa2 from A3.
Moody's also confirmed AT&T's short-term rating as Prime-2. Moody's
ratings outlook for AT&T remains negative but AT&T is not currently on
review for any additional downgrade by Moody's. On June 3, 2002, Fitch
Ratings also downgraded AT&T's long-term debt rating to BBB+ from A-, with
the rating remaining on Rating Watch Negative pending completion of the
AT&T Comcast transaction. AT&T's long-term debt ratings remain BBB+ and
Credit Watch with negative implications by Standard & Poor's Ratings Group
(Standard & Poor's). A recent press release from Standard & Poor's
confirmed that following the AT&T Comcast transaction Standard & Poor's
expects AT&T to have a stable outlook. Additional debt rating downgrades
could require AT&T to pay higher rates on certain existing debt and repay
certain operating leases. If our ratings were downgraded below investment
grade, there are provisions in our securitization programs which could
require the outstanding balances to be paid by the collection of the
receivables. In addition, there are provisions in several of our debt
instruments that require us to pay the present value of up to $0.7 billion
of future interest payments if our credit ratings are downgraded below
investment grade. We do not believe downgrades below investment grade are
likely to occur.
On February 27, 2002, AT&T signed an agreement with AT&T Latin
America (ALA) that restructured approximately $725 million of ALA's
short-term and long-term debt, preferred stock and interest dividends held
by AT&T. At June 30, 2002, the $725 million financing remained
outstanding. ALA's senior secured vendor financing of $298 million became
effective on March 27, 2002. The AT&T-provided debt and preferred
facilities are subordinated to the ALA senior secured vendor financing.
The agreement between AT&T and ALA, which also took effect on March 27,
2002, extends the maturity and redemption dates of all ALA debt and
preferred stock payable to AT&T to October 2008. ALA may be required to
make earlier prepayments of debt or redemptions of preferred stock out of
the net proceeds of certain future equity and debt offerings. In addition,
while the vendor financing is outstanding, the agreement defers interest
payments on all AT&T debt and dividend payments on AT&T preferred stock
until October 2008.
If the proposed spin-off of AT&T Broadband occurs as currently
structured, the debt of TCI and MediaOne will be included in the net
assets spun-off and will be included in AT&T Comcast. The amount of this
third-party debt at June 30, 2002, was $15.5 billion. The amount of
intercompany debt of AT&T Broadband payable to AT&T that is outstanding at
the time of the spin-off will be paid immediately prior to the
46
spin-off. At June 30, 2002 such intercompany debt amounted to
approximately $6.5 billion. In addition, AT&T's quarterly convertible
income preferred securities, which had a book value of $4.7 billion at
June 30, 2002, will be included in the net assets spun-off and will be
transferred to AT&T Comcast. These securities will be settled by being
converted into shares of AT&T Broadband, which will then be converted into
shares of AT&T Comcast. If the transfer to AT&T Comcast does not occur
within a specified period as prescribed in the merger agreement, AT&T
Broadband will pay AT&T an amount equal to the fair value of the
securities, determined pursuant to an appraisal process.
If AT&T's debt ratings are further downgraded or any of the risks or
covenants noted above are triggered, AT&T may not be able to obtain
sufficient financing in the timeframe required, and/or such replacement
financing may be more costly or have additional covenants than we had in
connection with our debt at June 30, 2002. In addition, the market
environment for financing in general, and within the telecommunications
sector in particular, has been adversely affected by economic conditions
and bankruptcies of other telecommunication providers. If the financial
markets become more cautious regarding the industry/ratings category we
operate in, our ability to obtain financing would be further reduced. This
could negatively impact our ability to pursue acquisitions, make capital
expenditures to expand our network and cable plant or to pay dividends.
CONTRACTUAL CASH OBLIGATIONS
At June 30, 2002, AT&T had a 31% equity ownership in AT&T Canada.
Under the terms of the 1999 merger agreement, AT&T has the right to
trigger, at any time, the purchase by AT&T or another entity the remaining
equity of AT&T Canada for the Back-end Price which is the greater of the
floor price and the fair market value. On June 25, 2002, AT&T provided
notice triggering the requirement to purchase in cash the outstanding
shares of AT&T Canada from the public. AT&T has arranged for Tricap
Investments Corporation, a wholly owned subsidiary of Brascan Financial
Corporation, to purchase approximately 63% equity interest in AT&T Canada
and CIBC Capital Partners to acquire an approximate 6% equity interest in
AT&T Canada. The purchase of AT&T Canada shares is expected to occur in
the fourth quarter of this year, subject to the terms and conditions of
the 1999 merger agreement, including obtaining the required regulatory
approval. The liability at June 30, 2002, of $3.7 billion, is included in
current liabilities on the balance sheet. The liability reflects foreign
currency translation adjustments due to fluctuations in the Canadian
dollar of $0.2 billion pretax. AT&T has a hedge related to this obligation
and at June 30, 2002, had a realized and unrealized gains of $0.2 billion
pretax relating to this hedge. AT&T will fund the purchase price of the
AT&T Canada shares partly with the net proceeds of approximately $2.5
billion raised in the sale of 230 million shares of AT&T common stock on
June 11, 2002. The remaining portion of the obligation will be financed
through short-term sources. Tricap and CIBC Partners will make a nominal
payment to AT&T upon completion of the transaction. After the transaction
closes, AT&T will continue to hold a 31% ownership interest.
AT&T has contractual obligations to utilize network facilities from
local exchange carriers with terms greater than one year. These contracts
are based on volumes and have penalty fees if certain volume levels are
not met. We assessed our minimum exposure based on penalties to exit the
contracts. At December 31, 2001, penalties to exit these contracts in any
given year totaled approximately $1.5 billion. At June 30, 2002, this
amount has increased to approximately $1.7 billion, primarily as a result
of the company entering into additional contracts.
FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
2002 2001
---- ----
DOLLARS IN MILLIONS
Total assets $ 137,895 $ 165,282
Total liabilities 89,018 105,322
Total shareowners' equity 42,755 51,680
Total assets decreased $27.4 billion, or 16.6%, to $137.9 billion at
June 30, 2002 from $165.3 billion at December 31, 2001. This decrease was
largely driven by a $13.7 billion decrease in franchise costs and a $4.1
billion decrease in goodwill, primarily reflecting the asset impairment
charges recorded related to our AT&T Broadband segment including the
impact of adopting SFAS No. 142. Also contributing to the decrease was
$5.4
47
billion of lower investments and related advances resulting from
unfavorable mark-to-market adjustments on monetized investments and other
than temporary impairments on certain investments, as well as a $5.0
billion reduction in cash, primarily reflecting the net repayment of debt,
partially offset by the proceeds of our June 2002 common stock offering.
Total liabilities decreased $16.3 billion, or 15.5%, to $89.0
billion at June 30, 2002 from $105.3 billion at December 31, 2001. This
decrease was primarily a result of $10.3 billion in lower debt, primarily
reflecting the pay down of short-term debt, as well as favorable
mark-to-market adjustments on certain derivatives embedded in debt that
are indexed to various investments, partially offset by unfavorable
mark-to-market adjustments on foreign debt resulting from fluctuations in
exchange rates. This decrease also includes $4.2 billion of lower deferred
income taxes, primarily resulting from the reversal of deferred taxes
associated with the impairment of franchise costs and certain investments.
Although not impacting total liabilities, our obligation related to AT&T
Canada was reclassified from other long-term liabilities and deferred
credits to a short-term liability "AT&T Canada obligation" in the
Consolidated Balance Sheet at June 30, 2002 due to the announcement of our
intention to satisfy the obligation relating to the outstanding common
shares of AT&T Canada in the fourth quarter of 2002.
Minority interest decreased $2.2 billion, or 60.8%, to $1.4 billion
at June 30, 2002, from $3.6 billion at December 31, 2001. This decrease
was primarily due to the exchange and redemption of all TCI Pacific
preferred shares for AT&T common shares.
Total shareowners' equity decreased $8.9 billion, or 17.3%, to $42.8
billion at June 30, 2002 from $51.7 billion at December 31, 2001. This
decrease was primarily due to an increase in the accumulated deficit
resulting from net losses of $13.8 billion, offset by an increase in
additional paid-in capital and AT&T common stock resulting from our June
2002 $2.5 billion common stock offering and $2.1 billion resulting from
the exchange and redemption of all TCI Pacific preferred shares for AT&T
common shares.
In March and June 2002, when AT&T declared its quarterly dividends
to the AT&T Common Stock Group shareowners, the company was in an
accumulated deficit position. As a result, the company reduced additional
paid-in capital by $0.3 billion, the entire amount of the dividends
declared.
The ratio of total debt to total capital for AT&T (total debt
divided by total debt and equity) was 47.6% at June 30, 2002, compared
with 47.7% at December 31, 2001. For purposes of this calculation, equity
includes the convertible trust preferred securities and subsidiary
redeemable preferred stock. In addition, included in total debt was
approximately $6.1 billion and $8.6 billion of notes at June 30, 2002 and
December 31, 2001, respectively, which are exchangeable into or
collateralized by securities we own. Excluding this debt, the debt ratio
at June 30, 2002, was 43.8%, compared with 43.4% at December 31, 2001.
RISK MANAGEMENT
We are exposed to market risk from changes in interest and foreign
exchange rates. In addition, we are exposed to market risk from
fluctuations in the prices of securities, some of which are monetized
through the issuance of debt. On a limited basis, we use certain
derivative financial instruments, including interest rate swaps, options,
forwards, equity hedges and other derivative contracts to manage these
risks. We do not use financial instruments for trading or speculative
purposes. All financial instruments are used in accordance with
board-approved policies.
We have entered into combined interest rate forward contracts to
hedge foreign-currency-denominated debt. Assuming a 10% downward shift in
interest rates, the fair value of the contracts and the underlying hedged
debt at June 30, 2002, would have changed by $2 million.
We have certain notes which are indexed to the market price of
equity securities we own. Certain of these notes contain embedded
derivatives, while other debt was issued in conjunction with net
purchased options. Changes in the market prices of these securities
result in changes in the fair value of the derivatives. Assuming a
downward 10% change in the market price of these securities, the fair
value of the combined collars and underlying debt would decrease by $394
million at June 30, 2002. The change in fair value referenced above does
not represent the actual change in fair value we would incur under normal
market conditions because all variables other than the equity prices were
held constant in the calculations.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143,"Accounting for Asset Retirement Obligations." This
standard requires that obligations associated with the retirement of
tangible long-lived assets be recorded as liabilities when those
obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an
asset retirement obligation, an entity must capitalize the cost by
recognizing an increase in the carrying amount of the related long-lived
asset. Over time, this liability is accreted to its future value, and the
capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation
for its recorded
48
amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective
for financial statements issued for fiscal years beginning after June 15,
2002. For AT&T, this means that the standard will be adopted on January 1,
2003. AT&T does not expect that the adoption of this statement will have a
material impact on AT&T's results of operations, financial position or
cash flows.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13 and
Technical Corrections." SFAS No. 145 eliminates the requirement (in SFAS
No. 4) that gains and losses from the extinguishments of debt be
aggregated and classified as extraordinary items, net of the related
income tax. An entity is not prohibited from classifying such gains and
losses as extraordinary items, as long as they meet the criteria of APB
No. 30. In addition, SFAS No. 145 requires sales-lease back treatment for
certain modifications of a capital lease that result in the lease being
classified as an operating lease. The rescission of SFAS No. 4 is
effective for fiscal years beginning after May 15, 2002, which for AT&T
would be January 1, 2003. Earlier application is encouraged. Any gain or
loss on extinguishment of debt that was previously classified as an
extraordinary item would be reclassified to other income (expense). The
remainder of the statement is generally effective for transactions
occurring after May 15, 2002. AT&T does not expect that the adoption of
SFAS No. 145 will have a material impact on AT&T's results of operations,
financial position or cash flows.
On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Exit
or Disposal Activities". This statement addresses the recognition,
measurement and reporting of costs that are associated with exit and
disposal activities. This statement includes the restructuring activities
that are currently accounted for pursuant to the guidance set forth in
EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to exit an Activity (including Certain Costs
Incurred in a Restructuring)", costs related to terminating a contract
that is not a capital lease and one-time benefit arrangements received by
employees who are involuntarily terminated- nullifying the guidance under
EITF 94-3. Under SFAS No. 146 the cost associated with an exit or disposal
activity is recognized in the periods in which it is incurred rather than
at the date the company committed to the exit plan. This statement is
effective for exit or disposal activities initiated after December 31,
2002 with earlier application encouraged. Previously issued financial
statements will not be restated. The provisions of EITF 94-3 shall
continue to apply for exit plans initiated prior to the adoption of SFAS
No. 146. Accordingly, the initial adoption of SFAS No. 146 will not have
an effect on AT&T's results of operations, financial position or cash
flows. Liabilities associated with future exit and disposal activities
will not be recognized until actually incurred .
SUBSEQUENT EVENTS
On July 1, 2002, AT&T completed the sale of its headquarters
facility and corporate conference center in Basking Ridge, New Jersey, to
Pharmacia for $0.2 million. The transaction resulted in a pretax gain of
approximately $40 million.
AT&T owns a 49% economic interest in Alestra S. de R.L. de C.V., a
telecommunications company in Mexico. Alestra has announced that it may
not be able to make a $35 million bond payment due in November 2002 and
that it is working with Morgan Stanley in analyzing available options to
address the company's financial condition, including its liquidity
position. Standard and Poor's has downgraded Alestra's corporate credit
rating and said it would likely default on its debt obligations during
financial year 2002, probably by way of a bond restructuring. Moody's also
downgraded all ratings of Alestra stating that "based upon current long
distance network asset valuations, Moody's considers that unsecured debt
holders face poor recovery prospects in a distress scenario." AT&T cannot
predict what the impact of these developments will be.
On August 11, 2002, US Airways Group Inc. filed for Chapter 11
bankruptcy protection. AT&T leases airplanes under leveraged leases to US
Airways. Under a leveraged lease, the assets are secured with debt, which
is non-recourse to AT&T. In connection with the bankruptcy filing, US
Airways can reject or reaffirm its leases. AT&T does not know if US
Airways will reject or affirm its leases. If it does reject the leases and
the non-recourse debtholder forecloses on the assets, AT&T could incur an
after-tax loss of approximately $70 to $80 million (based on June 30, 2002
balances).
On August 12, 2002, in connection with the proposed merger between
AT&T Broadband and Comcast, AT&T filed a preliminary prospectus
contemplating a potential offer to exchange an aggregate of $11.8 billion
of AT&T's existing debt securities. The exchange offer involves two types
of transactions. The first, which is expected to be subject to proration,
involves an exchange of certain series of AT&T notes for new notes that
would ultimately become obligations of AT&T Broadband Corp., a newly
formed company to which AT&T will spin-off its AT&T Broadband unit prior
to completing the merger. AT&T Comcast and certain of its subsidiaries
would guarantee these obligations upon completion of the merger. The
second, which is not expected to be subject to proration, involves an
exchange of other series of AT&T notes for new notes that would remain
obligations of AT&T.
Neither AT&T, AT&T Broadband, nor any other entity would receive any
proceeds from the issuance of the new notes in the exchange offer. The new
notes would represent a new offering with respect to those notes that
ultimately become obligations of AT&T Broadband and would reduce the
amount that AT&T Broadband would otherwise be required to pay to AT&T upon
completion of the merger with Comcast. The new notes would represent a
refinancing with respect to those notes that remain obligations of AT&T
after the merger.
The exchange offer would be subject to various conditions as
described in the prospectus. A decision to proceed with the exchange offer
will be based on market and business conditions over the next several
months, finalization of the exchange offer on terms that are mutually
acceptable to AT&T and Comcast, and other factors. Terms of the exchange
offer have not yet been determined and will be announced upon launch.
49
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
10 Form of Employment Agreement Addendum between AT&T Corp. and Charles
H. Noski
12 Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Forms 8-K
Form 8-K dated April 13, 2002 was filed pursuant to Item 5 and Item 7 on
April 16, 2002. Form 8-K dated April 24, 2002 was filed pursuant to Item 5
and Item 7 on April 25, 2002. Form 8-K dated May 9, 2002 was filed
pursuant to Item 5 and Item 7 on May 13, 2002. Form 8-K dated May 28, 2002
was filed pursuant to Item 5 and Item 7 on May 29, 2002. Form 8-K dated
June 5, 2002 was filed pursuant to Item 5 on June 5, 2002. Form 8-K dated
June 5, 2002 was filed pursuant to Item 5 and Item 7 on June 11, 2002.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1034, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T Corp.
/s/ N.S. Cyprus
----------------------------------------
By: N.S. Cyprus
Vice President and Controller
(Principal Accounting Officer)
Date: August 13, 2002
51
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges
10 Form of Employment Agreement Addendum between AT&T Corp. and Charles
H. Noski
52