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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 September 30, 2002
OR
..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 1-1105
AT&T CORP.
A New York I.R.S. Employer
Corporation No. 13-4924710
900 Route 202/206 North, Bedminster, New Jersey 07921
Telephone - Area Code 800-257-7865
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ..X No ...
At October 31, 2002, the following shares of stock were outstanding:
AT&T common stock - 3,851,927,498 shares
PART I - FINANCIAL INFORMATION
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
Revenue $ 11,956 $ 13,035 $ 36,044 $ 39,773
Operating Expenses
Costs of services and products (excluding depreciation
of $1,368, $1,165, $4,142 and $3,533 included below) 3,333 3,476 9,962 10,458
Access and other connection 2,696 3,033 8,267 9,289
Selling, general and administrative 2,712 2,488 7,902 7,953
Depreciation and amortization 1,981 2,274 5,835 7,036
Net restructuring and other charges (26) 399 30 1,494
Goodwill and franchise impairment charges - - 16,479 -
Total operating expenses 10,696 11,670 48,475 36,230
Operating income (loss) 1,260 1,365 (12,431) 3,543
Other income (expense), net 56 320 (935) (771)
Interest (expense) (748) (786) (2,231) (2,426)
Income (loss) from continuing operations before income
taxes, minority interest and dividends on subsidiary
preferred stock, and net (losses) related to equity
investments 568 899 (15,597) 346
(Provision) benefit for income taxes (312) 70 4,053 288
Minority interest and dividends on subsidiary preferred
stock (38) 177 (126) 1,015
Net (losses) related to other equity investments (11) (3,352) (1,032) (4,389)
Equity earnings (losses) from Liberty Media Group - 111 - (2,711)
Income (loss) from continuing operations 207 (2,095) (12,702) (5,451)
(Loss) income from discontinued operations (net of income taxes of
$44 and $(158)) - - (88) 150
Gain on disposition of discontinued operations - 13,503 - -
Income (loss) before extraordinary gain and cumulative
effect of accounting changes 207 11,408 (12,790) 8,202
Extraordinary gain (net of income taxes of $(30)) - - 48 -
Cumulative effect of accounting changes (net of income
taxes of $530 and $(578)) - - (856) 904
Net income (loss) 207 11,408 (13,598) 9,106
Dividend requirements of preferred stock, net - (235) - (652)
Premium on exchange of AT&T Wireless tracking stock - - - (80)
Income (loss) attributable to common shareowners $ 207 $ 11,173 $(13,598) $ 8,374
AT&T Common Stock Group - per basic and diluted share:
Earnings (loss) from continuing operations $ 0.05 $ (0.69) $ (3.45) $ (0.94)
(Loss) earnings from discontinued operations - - (0.02) 0.03
Gain on disposition of discontinued operations - 3.82 - 3.67
Extraordinary gain - - 0.01 -
Cumulative effect of accounting changes - - (0.23) 0.10
Earnings (loss) $ 0.05 $ 3.13 $ (3.69) $ 2.86
Dividends declared $ 0.0375 $ 0.0375 $ 0.1125 $ 0.1125
AT&T Wireless Group - per basic and diluted share:
Earnings from discontinued operations $ - $ - $ - $ 0.08
Liberty Media Group - per basic and diluted share:
Earnings (loss) before cumulative effect of accounting change $ - $ 0.04 $ - $ (1.05)
Cumulative effect of accounting change - - - 0.21
Earnings (loss) $ - $ 0.04 $ - $ (0.84)
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
At At
September 30, December 31,
2002 2001
ASSETS
Cash and cash equivalents $ 6,926 $ 10,592
Accounts receivable, less allowances of $800 and $827 6,882 7,736
Other receivables 402 1,645
Investments 459 668
Deferred income taxes 2,048 1,230
Other current assets 995 657
TOTAL CURRENT ASSETS 17,712 22,528
Property, plant and equipment, net of accumulated depreciation of
$35,678 and $32,046 41,364 41,322
Goodwill, net of accumulated amortization of $1,307 in 2001 20,517 24,675
Franchise costs, net of accumulated amortization of $2,501 in 2001 29,084 42,819
Other purchased intangible assets, net of accumulated amortization
of $846 and $647 2,003 2,222
Investments and related advances 17,920 23,818
Prepaid pension costs 3,522 3,337
Other assets 5,916 4,561
TOTAL ASSETS $138,038 $165,282
LIABILITIES
Accounts payable $ 4,342 $ 4,744
Payroll and benefit-related liabilities 1,599 2,084
Debt maturing within one year 6,560 12,958
AT&T Canada obligation 3,525 -
Other current liabilities 4,652 5,641
TOTAL CURRENT LIABILITIES 20,678 25,427
Long-term debt 36,371 40,527
Long-term benefit-related liabilities 3,707 3,594
Deferred income taxes 24,452 28,160
Other long-term liabilities and deferred credits 3,868 7,614
TOTAL LIABILITIES 89,076 105,322
Minority Interest 1,371 3,560
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated Debt
Securities of AT&T 4,728 4,720
SHAREOWNERS' EQUITY
Common Stock:
AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares;
issued and outstanding 3,851,084,978 shares (net of 858,888,662
treasury shares) at September 30, 2002, and 3,542,405,744 shares
(net of 851,746,431 treasury shares) at December 31, 2001 3,851 3,542
Additional paid-in capital 56,229 51,964
Accumulated (deficit) (17,082) (3,484)
Accumulated other comprehensive (loss) (135) (342)
TOTAL SHAREOWNERS' EQUITY 42,863 51,680
TOTAL LIABILTIES AND SHAREOWNERS' EQUITY $138,038 $165,282
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Millions)
(Unaudited)
For the Nine Months Ended
September 30,
2002 2001
AT&T Common Shares
Balance at beginning of year $ 3,542 $ 3,760
Shares issued, net:
Under employee plans 24 10
For acquisitions - 44
Settlement of put option - 155
Exchange of AT&T Wireless tracking stock - (372)
For funding AT&T Canada obligation 230 -
Redemption of TCI Pacific preferred stock 52 -
Other(1) 3 (61)
Balance at end of period 3,851 3,536
AT&T Wireless Group Common Stock
Balance at beginning of year - 362
Shares issued:
Under employee plans - 2
Exchange of AT&T Wireless tracking stock - 438
Conversion of preferred stock - 406
AT&T Wireless Group split-off - (1,208)
Balance at end of period - -
Liberty Media Group Class A Common Stock
Balance at beginning of year - 2,364
Shares issued, net - 14
Liberty Media Group split-off - (2,378)
Balance at end of period - -
Liberty Media Group Class B Common Stock
Balance at beginning of year - 206
Shares issued, net - 6
Liberty Media Group split-off - (212)
Balance at end of period - -
Additional Paid-In Capital
Balance at beginning of year 51,964 90,496
Shares issued, net:
Under employee plans 276 208
For acquisitions - 827
For funding AT&T Canada obligation 2,301 -
Redemption of TCI Pacific preferred stock 2,045 -
Other(1) 31 (1,035)
Gain on issuance of common stock by affiliates - 20
Exchange of AT&T Wireless tracking stock - 14
Settlement of put option - 3,237
Conversion of preferred stock - 9,631
AT&T Wireless Group split-off - (20,955)
Liberty Media Group split-off - (30,738)
Beneficial conversion value of preferred stock - 295
Dividends declared - AT&T Common Stock Group (422) (133)
Other 34 (16)
Balance at end of period 56,229 51,851
(Accumulated Deficit)/Retained Earnings
Balance at beginning of year (3,484) 7,408
Net (loss) income (13,598) 9,106
Dividends declared - AT&T Common Stock Group - (275)
Dividends accrued - preferred stock - (652)
Premium on exchange of AT&T Wireless tracking stock - (80)
Treasury shares issued at less than cost - (7)
AT&T Wireless Group split-off - (17,593)
Balance at end of period (17,082) (2,093)
(CONTINUED)
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Nine Months
Ended September 30,
2002 2001
Accumulated Comprehensive (Loss)
Balance at beginning of year (342) (1,398)
Other comprehensive income 207 988
AT&T Wireless Group split-off - 72
Liberty Media Group split-off - (758)
Balance at end of period (135) (1,096)
Total Shareowners' Equity $ 42,863 $ 52,198
Summary of Total Comprehensive (Loss) Income:
Net (loss) income $(13,598) 9,106
Net foreign currency translation adjustment (net of income taxes of
$(38) and $135)(2) 61 (204)
Net revaluation of securities and derivative instruments:
Unrealized gains (losses) (net of income taxes of $443 and $(274))(2) (717) 363
Recognition of previously unrealized losses (gains) (net of income taxes
of $(535) and $(513))(3) 863 829
Comprehensive (Loss) Income $(13,391) $ 10,094
AT&T accounts for treasury stock as retired stock. We have 100 million authorized shares of preferred stock at $1 par value.
(1) Other activity in 2001 represents AT&T stock received in exchange for entities owning certain cable systems.
(2) In the first nine months of 2001, total comprehensive (loss) income included LMG's foreign currency translation adjustments
totaling $(149), net of applicable income taxes and unrealized gains (losses) on available-for-sale securities totaling
$1,286, net of applicable income taxes.
(3) See note (4) for a summary of the "Recognition of previously unrealized losses (gains)."
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Nine Months Ended
September 30,
2002 2001
OPERATING ACTIVITIES
Net (loss) income $(13,598) $ 9,106
Deduct: (Loss) income from discontinued operations (88) 150
Gain on disposition of discontinued operations - 13,503
(Loss) from continuing operations (13,510) (4,547)
Adjustments to reconcile (loss) from continuing operations to net cash
provided by operating activities of continuing operations:
Cumulative effect of accounting changes - net of income taxes 856 (904)
Goodwill and franchise impairment charges 16,479 -
Depreciation and amortization 5,835 7,036
Net equity losses from Liberty Media Group - 2,711
Net losses related to other equity investments 1,671 7,149
Cost method investment impairment charges 1,411 203
Provision for uncollectible receivables 890 850
Net restructuring and other charges (18) 1,386
Deferred income taxes (4,159) (4,865)
Net revaluation of certain financial instruments (426) 779
Net gains on sales of businesses and investments (12) (689)
Minority interest (76) (1,222)
Extraordinary gain - net of income taxes (48) -
Put option mark-to-market charge - 838
Decrease (increase) in receivables 123 (49)
Decrease in accounts payable (307) (530)
Net change in other operating assets and liabilities (1,359) (873)
Other adjustments, net 338 (52)
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 7,688 7,221
INVESTING ACTIVITIES
Capital expenditures and other additions (5,295) (6,736)
Investment contributions and purchases (23) (371)
Investment distributions and sales 26 1,845
Proceeds from sale or disposal of property, plant and equipment 469 62
Net dispositions of businesses, net of cash disposed 17 4,827
Increase in restricted cash (418) -
Other investing activities, net (27) (142)
NET CASH (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS (5,251) (515)
FINANCING ACTIVITIES
Decrease in short-term borrowings, net (5,196) (9,580)
Repayment of borrowings from AT&T Wireless - (5,803)
Retirement of long-term debt (3,008) (1,618)
Dividends paid on common stock (411) (416)
Dividends paid on preferred securities (256) (190)
Proceeds from long-term debt issuances 129 195
Issuance of AT&T common shares 2,640 133
Net issuance of treasury shares - 23
Issuance of convertible preferred securities and warrants - 9,811
Issuance of AT&T Wireless Group common shares - 54
Other financing activities, net (1) (41)
NET CASH (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS (6,103) (7,432)
Net cash provided by discontinued operations - 4,860
Net (decrease) increase in cash and cash equivalents (3,666) 4,134
Cash and cash equivalents at beginning of year 10,592 64
Cash and cash equivalents at end of period $ 6,926 $ 4,198
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T
Corp.(AT&T) pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and, in the opinion of management, include
all adjustments necessary for a fair statement of the consolidated
results of operations, financial position and cash flows for each
period presented. The consolidated results for interim periods are not
necessarily indicative of results for the full year. These financial
results should be read in conjunction with AT&T's Form 10-K/A for the
year ended December 31, 2001, and AT&T's Form 10-Q for the quarters
ended March 31, 2002, and June 30, 2002. We have reclassified certain
prior period amounts to conform to our current presentation.
2) RESTRUCTURING OF AT&T
On October 25, 2000, AT&T announced a restructuring plan designed
to fully separate or issue separately tracked stocks intended to
reflect the financial performance and economic value of each of AT&T's
four major operating units.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as
a separate, independently traded company. On August 10, 2001, AT&T
completed the split-off of Liberty Media Corporation as an independent,
publicly traded company.
On July 10, 2002, AT&T and Comcast Corporation (Comcast)
shareowners approved the proposed merger between AT&T Broadband and
Comcast. The merger still remains subject to certain regulatory reviews
and approvals and certain other conditions and is expected to close by
the end of 2002. Under the terms of the agreement, AT&T will spin-off
AT&T Broadband and simultaneously AT&T Broadband and Comcast will merge
into subsidiaries of a new company to be called AT&T Comcast
Corporation (AT&T Comcast). AT&T shareowners will receive approximately
0.32 of a share of AT&T Comcast for each share of AT&T they own, based
on calculations using September 30, 2002 share prices. AT&T shareowners
will own an approximate 55% economic stake and have an approximate 61%
voting interest in the new company. The spin-off of AT&T Broadband
could result in the recognition of a gain or loss for the difference
between the fair value of the Comcast shares to be received by AT&T
shareholders in the merger and the net book value of AT&T Broadband.
On July 10, 2002, AT&T shareholders also approved a one-for-five
reverse stock split. The purpose of the reverse stock split is to seek
to adjust the trading price of AT&T common stock upward following
completion of the various transactions to effect AT&T's restructuring
plan. AT&T anticipates that the reverse stock split will be affected
immediately after the consummation of the AT&T Comcast transaction
described above.
3) SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 142, "GOODWILL
AND OTHER INTANGIBLE ASSETS"
Effective January 1, 2002, AT&T adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 requires that goodwill and
indefinite-lived intangible assets no longer be amortized, but instead
be tested for impairment at least annually. Intangible assets that have
finite useful lives will continue to be amortized over their useful
lives. In addition, the amortization period for intangible assets with
finite lives will no longer be limited to 40 years. We have determined
that our franchise costs are indefinite-lived assets, as defined in
SFAS No. 142, and therefore are not subject to amortization beginning
in 2002. In accordance with SFAS No. 142, goodwill was tested for
impairment by comparing the fair value of our reporting units to their
carrying values. As of January 1, 2002, the fair value of the reporting
units' goodwill exceeded their carrying value, and therefore no
impairment loss was recognized upon adoption. Franchise costs were
tested for impairment as of January 1, 2002, by comparing the fair
value to the carrying value (at the market level). An impairment loss
of $0.9 billion, net of taxes of $0.5 billion, or $0.23 per basic and
diluted share, was recorded relating to our AT&T Broadband segment in
the first quarter of 2002 and is included in "Cumulative effect of
accounting changes" in the Consolidated Statement of Operations. (See
note (7) for discussion of interim testing of goodwill and franchise
costs.)
The following tables present the impact of SFAS No. 142 on net
income (loss) and earnings (loss) per share had the standard been in
effect on January 1, 2001.
AT&T Common Stock AT&T Wireless Liberty Media
Group Group Group
----------- ---------- -------- ------- -------- ---------
For the Three Months Ended September 30, 2002 2001 2002 2001 2002 2001
Net income (loss):
Reported income (loss) from continuing
operations before extraordinary gain $ 207 $(2,206) $ - $ - $ - $ 111
Dividend requirements of preferred stock - (235) - - - -
Reported income (loss) from continuing
operations available to common
shareowners 207 (2,441) - - - 111
Add back amortization, net of tax:
Goodwill * - 191 - - - 50
Equity method excess basis - 14 - - - 24
Franchise costs - 181 - - - 1
Adjusted income (loss) from continuing
operations before extraordinary gain
available to common shareowners $ 207 $(2,055) $ - $ - $ - $ 186
Gain on disposition of discontinued
operations - 13,503 - - - -
Adjusted net income available to common
shareowners $ 207 $11,448 $ - $ - $ - $ 186
Basic and diluted earnings (loss) per
share:
Reported basic and diluted earnings
(loss) per share from continuing
operations before extraordinary gain $ 0.05 $(0.69) $ - $ - $ $ 0.04
Add back amortization, net of tax:
Goodwill * - 0.06 - - - 0.02
Equity method excess basis - - - - - 0.01
Franchise costs - 0.05 - - - -
Adjusted basic and diluted earnings
(loss) per share from continuing
operations before extraordinary gain $ 0.05 $(0.58) $ - $ - $ - $ 0.07
Gain on disposition - 3.82 - - - -
Adjusted basic and diluted earnings
per share $ 0.05 $ 3.24 $ - $ - $ - $ 0.07
* Goodwill amortization is net of the At Home Corp. (Excite@Home) minority interest impact on goodwill.
AT&T Common Stock AT&T Wireless Liberty Media
Group Group Group
------------ ----------- -------- ------- ------ ---------
For the Nine Months Ended September 30, 2002 2001 2002 2001 2002 2001
Net (loss) income: ------------ ----------- -------- ------- ------ ---------
Reported (loss) from continuing
operations before extraordinary gain
and cumulative effect of accounting
changes $ (12,702) $ (2,740) $ - $ - $ - $(2,711)
Dividend requirements of preferred stock - (652) - - -
Premium on exchange of AT&T Wireless
tracking stock - (80) - - - -
Reported (loss) from continuing operations
available to common shareowners (12,702) (3,472) - - - (2,711)
Add back amortization, net of tax:
Goodwill * - 596 - - - 350
Equity method excess basis - 111 - - - 346
Franchise costs - 572 - - - 4
Adjusted (loss) from continuing
operations before extraordinary gain
and cumulative effect of accounting
changes $ (12,702) $ (2,193) $ - $ - $ - $(2,011)
Reported (loss) income from discontinued
operations (88) 115 - 35 - -
Add back discontinued operations
amortization, net of tax - 152 - 36 - -
Extraordinary gain 48 - - - - -
Gain on disposition of discontinued
operations - 13,503 - - - -
Cumulative effect of accounting changes (856) 359 - - - 545
Adjusted net (loss) income available to
common shareowners $ (13,598) $ 11,936 $ - $ 71 $ - $(1,466)
Basic and diluted (loss) earnings per
share:
Reported basic and diluted (loss) per
share from continuing operations
before extraordinary gain and
cumulative effect of accounting
changes $ (3.45) $ (0.94) $ - $ - $ $ (1.05)
Add back amortization, net of tax:
Goodwill * - 0.16 - - - 0.14
Equity method excess basis - 0.03 - - - 0.13
Franchise costs - 0.16 - - - -
Adjusted basic and diluted (loss) per
share from continuing operations
before extraordinary gain and
cumulative effect of accounting
changes $ (3.45) $ (0.59) $ - $ - $ - $ (0.78)
Reported (loss) earnings from
discontinued operations (0.02) 0.03 - 0.08 - -
Add back discontinued operations
amortization, net of tax - 0.04 - 0.08 - -
Extraordinary gain 0.01 - - - - -
Gain on disposition of discontinued
operations - 3.67 - - - -
Cumulative effect of accounting changes (0.23) 0.10 - - - 0.21
Adjusted basic and diluted (loss)
earnings per share $ (3.69) $ 3.25 $ - $0.16 $ - $ (0.57)
* Goodwill amortization is net of the Excite@Home minority interest impact on goodwill.
At September 30, 2002, goodwill declined $4.2 billion from
December 31, 2001, primarily as a result of impairment charges recorded
related to AT&T Broadband in the second quarter of 2002 (see note 7).
Goodwill at September 30, 2002, by reportable segment is as follows:
Carrying Amount
AT&T Broadband $ 15,208
AT&T Business Services 5,239
AT&T Consumer Services 70
Total Goodwill $ 20,517
Identifiable intangible assets at September 30, 2002, are comprised of:
Gross Carrying Accumulated
Amount Amortization
Non-amortizable intangible assets:
Franchise costs $ 29,084 $ -
Amortizable other purchased intangible
assets:
Customer lists and relationships 2,743 787
Other 106 59
Total identifiable intangible assets $ 31,933 $ 846
The amortization expense associated with other purchased
intangible assets for the three and nine months ended September 30,
2002, was $74 and $210, respectively. Amortization expense for other
purchased intangible assets is estimated to be approximately $280 for
the year ended December 31, 2002, $270 for the year ended December 31,
2003, $250 for the year ended December 31, 2004, and $240 for each of
the years ended December 31, 2005 and 2006.
EITF Issue 01-9, "Accounting for Consideration Given by a Vendor to a
Customer"
The Emerging Issues Task Force (EITF) reached a consensus on Issue
01-9, "Accounting for Consideration Given by a Vendor to a Customer,"
that cash incentives given to customers should be characterized as a
reduction of revenue when recognized in the income statement, unless an
identifiable benefit is received in exchange. Prior to this consensus,
cash incentives to acquire customers were recorded as advertising and
promotion expense within selling, general and administrative expenses.
These cash incentives are now recorded as a reduction of revenue and
prior periods have been reclassified to conform with this presentation.
Total AT&T revenue and AT&T Consumer Services revenue for the quarters
ended March 31, 2002, December 31, 2001, September 30, 2001, June 30,
2001, and March 31, 2001, was reduced by $39, $45, $52, $61, and $78,
respectively. Net income was not affected by this reclassification.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets"
On January 1, 2002, AT&T adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all
long-lived assets, including discontinued operations, and consequently
amends Accounting Principles Board (APB) Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" to eliminate the
exception to consolidation for a subsidiary for which control is likely
to be temporary. The adoption had no impact on AT&T's results of
operations, financial position or cash flows.
For a detailed discussion of significant accounting polices, refer
to AT&T's Form 10-K/A for the year ended December 31, 2001.
4) SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS) IN OTHER
COMPREHENSIVE INCOME
AT&T has investment holdings classified as "available-for-sale"
under the scope of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." These securities are carried at fair value
with any unrealized gains or losses, net of income taxes, included
within "Accumulated other comprehensive (loss)" as a component of
shareowners' equity. Under SFAS No. 115, when the "available-for-sale"
securities are sold or when we believe a decline in the investment
value is other than temporary, the previously unrealized gains or
losses are recognized in earnings in "Other income (expense), net" in
the Consolidated Statement of Operations. If these securities are part
of a hedging relationship in accordance with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," to the extent that
there are offsetting amounts generated by the related derivatives,
these amounts are also recognized in earnings in "Other income
(expense), net." In addition, upon the adoption of SFAS No. 133 in
January 2001, we reclassified certain securities to "trading,"
resulting in the recognition in earnings of previously unrealized
losses. Following is a summary of the previously unrealized losses
(gains) that were recognized in the Consolidated Statements of
Operations for the nine months ended September 30, 2002 and 2001.
Recognition of Previously Unrealized Losses (Gains)
For the Nine Months Ended September 30, 2002 2001
---------------------- ----------------------
Pretax After-tax Pretax After-tax
AT&T Group:
Included in other income (expense), net:
Other-than-temporary investment impairments $ 1,398 $ 863 $ - $ -
Reclassification of securities to "trading"
in conjunction with the adoption of SFAS No. 133 - - 1,154 713
Sales of various securities - - 159 98
Liberty Media Group:
Included in equity earnings (losses) from Liberty Media Group:
Sales of various securities - - 173 105
Included in cumulative effect of accounting change - - (144) (87)
Total recognition of previously unrealized losses $ 1,398 $ 863 $ 1,342 $ 829
5) DISCONTINUED OPERATIONS
Discontinued operations for the nine months ended September
30, 2002, reflects an estimated loss on the litigation settlement
associated with the business of Lucent Technologies Inc., which was
spun-off from AT&T in 1996. Sparks, et al. v. AT&T and Lucent
Technologies Inc. et al., is a class action lawsuit filed in 1996 in
Illinois state court. On August 9, 2002, a settlement proposal was
submitted to and accepted by the court. In accordance with the
separation and distribution agreement between AT&T and Lucent, AT&T
recorded its proportionate share of the settlement and estimated legal
costs in the second quarter of 2002, which totaled $132 pretax ($88
after-tax, or $0.02 per share). (See note 13 for a complete discussion
of this matter.)
Pursuant to APB Opinion No. 30, the consolidated financial
statements of AT&T reflect the disposition of AT&T Wireless, which was
split-off from AT&T on July 9, 2001, as discontinued operations.
Accordingly, the revenue, costs and expenses, and cash flows of AT&T
Wireless through June 30, 2001, the effective split-off date for
accounting purposes, have been excluded from the respective captions in
the 2001 Consolidated Statements of Operations and Consolidated
Statements of Cash Flows and have been reported as "(Loss) income from
discontinued operations," net of applicable income taxes; and as "Net
cash provided by discontinued operations." Revenue from discontinued
operations was $6.6 billion for the nine months ended September 30,
2001. Interest expense of $0.2 billion for the nine months ended
September 30, 2001, was allocated to discontinued operations based on
the debt of AT&T that was attributable to AT&T Wireless.
In connection with the split-off of AT&T Wireless, AT&T wrote-up
the net assets of AT&T Wireless to fair value. This resulted in a
tax-free gain of $13.5 billion, which represents the difference between
the fair value of the Wireless tracking stock at the date of the
split-off and AT&T's book value in AT&T Wireless Services. This gain
was recorded in the third quarter of 2001 as "Gain on disposition of
discontinued operations."
6) CONCERT AND AT&T CANADA
On April 1, 2002, Concert, our joint venture with British
Telecommunications plc (BT), was officially unwound and the venture's
assets and customer accounts were distributed back to the parent
companies. Under the partnership termination agreement, each of the
partners generally reclaimed the customer contracts and assets that
were initially contributed to the joint venture, including
international transport facilities and gateway assets. In addition,
AT&T assumed certain other assets that BT originally contributed to the
joint venture.
At September 30, 2002, AT&T had an approximate 31% equity
ownership in AT&T Canada. On June 25, 2002, under the terms of the 1999
merger agreement, AT&T triggered the purchase of the remaining equity
of AT&T Canada for the Back-end Price, which is the greater of the
floor price and the fair market value. The floor price accreted at 4%
each quarter, commencing on June 30, 2000. In the first and second
quarters of 2002, and the third and fourth quarters of 2001, AT&T
recorded charges reflecting the difference between the underlying value
of the AT&T Canada shares and the price AT&T has committed to pay for
them, including the 4% accretion of the floor price. In the nine months
ended September 30, 2002, and September 30, 2001, AT&T recorded
after-tax charges of $0.3 billion ($0.5 billion pretax) and $1.5
billion ($2.4 billion pretax), respectively, within "Net (losses)
related to other equity investments" in the Consolidated Statement of
Operations. At December 31, 2001, the liability of $3.0 billion was
included in "Other long-term liabilities and deferred credits" in the
Consolidated Balance Sheet. At September 30, 2002, the liability of
$3.5 billion was reflected as "AT&T Canada obligation."
On October 8, 2002, Tricap Investments Corporation, a wholly owned
subsidiary of Brascan Financial Corporation, purchased an approximate
63% equity interest in AT&T Canada and CIBC Capital Partners acquired
an approximate 6% equity interest in AT&T Canada. AT&T paid the
purchase price for the AT&T Canada shares on behalf of Tricap and CIBC
Capital Partners. AT&T funded the purchase price of the AT&T Canada
shares partly with the net proceeds of approximately $2.5 billion
received from the sale of 230 million shares of AT&T common stock on
June 11, 2002. The remaining portion of the obligation was financed
through short-term sources. Tricap and CIBC Partners made a nominal
payment to AT&T upon completion of the transaction. AT&T continues to
hold a 31% ownership interest in AT&T Canada.
7) IMPAIRMENT CHARGES
Goodwill and Franchise Impairment Charges
SFAS No. 142 requires that goodwill and intangible assets not
subject to amortization be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the
asset might be impaired. The impairment test shall consist of a
comparison of the fair value of the intangible asset/goodwill with its
carrying amount. AT&T has determined that its annual testing date for
these assets will be in the fourth quarter of each year.
In the second quarter of 2002, we noted significant changes in the
general business climate as evidenced by the severe downward movement
in the U.S. stock market (including the decline in values of publicly
traded cable industry stocks). At June 30, 2002, five of our cable
competitors as a group experienced an average decline in total market
capitalization of over 20% since January 1, 2002. We have also
witnessed corporate bankruptcies. We believe these factors coupled with
the pending merger of AT&T Broadband and Comcast (which was approved by
both companies' shareholders on July 10, 2002) created a "trigger
event" for our AT&T Broadband segment, which necessitated the testing
of goodwill and franchise costs for impairment as of the end of the
second quarter.
We assessed our impairment on the same principles employed during
the initial adoption of SFAS No. 142. Such testing resulted in the
recognition of a $12.3 billion franchise cost impairment charge and a
$4.2 billion goodwill impairment charge (aggregating to $11.8 billion
after-tax) recorded in "Goodwill and franchise impairment charges" in
the Consolidated Statement of Operations.
Investment Impairment Charges
In accordance with SFAS No. 115 and APB Opinion No. 18 "The Equity
Method of Accounting for Investments in Common Stock," we evaluated our
portfolio of investments for potential impairments. SFAS No. 115 and
APB Opinion No. 18 both require the recognition in earnings of declines
in value of cost and equity method securities which are "other than
temporary."
Given the significant decline in stock prices, the length of time
these investments had been below market and industry specific issues,
we believed that certain investments would not recover our cost basis
in the foreseeable future. Accordingly, we believed the declines in
value were "other than temporary" and, as a result, AT&T recorded total
investment impairment charges of $2.4 billion pretax ($1.5 billion
after-tax) in the first nine months of 2002. The following is a
breakout of the investment impairment charges recorded by type of
investment.
Cost Method Investments
In the first nine months of 2002, we recorded investment
impairment charges on cost method investments of $1.4 billion pretax
($0.9 billion after-tax), within "Other income (expense), net" in the
Consolidated Statement of Operations. These charges related to
securities that were classified as "available-for-sale" and were
marked-to-market through "Other comprehensive income" as a component of
shareowners' equity. The majority of these charges were recorded in the
second quarter and primarily consisted of impairments on our
investments in Cablevision Systems Corporation ($0.6 billion pretax,
$0.4 billion after-tax), Comcast ($0.3 billion pretax, $0.2 billion
after-tax) and Microsoft Corporation ($0.2 billion pretax, $0.1 billion
after-tax).
Our investment in Cablevision stock is monetized by debt which is
indexed to the value of Cablevision shares. The debt contains an
embedded derivative which is designated as a cash-flow hedge under the
provisions of SFAS No. 133 and is marked-to-market through "Other
comprehensive income." At the time we recognized the
other-than-temporary decline in the value of the Cablevision stock as
an expense, as permitted by SFAS No. 133, we also recognized, in
earnings, the unrealized gain on the embedded derivative that was
previously recorded in "Other comprehensive income," resulting in the
$0.6 billion pretax impairment discussed above.
Equity Method Investments
In the nine months ended September 30, 2002, we recorded
investment impairment charges on equity method investments of $1.0
billion pretax ($0.6 billion after-tax) within "Net (losses) related to
other equity investments" in the Consolidated Statement of Operations.
These charges consisted of impairments of our cable partnerships,
primarily Texas Cable Partners, LP ($0.4 billion pretax, $0.2 billion
after-tax), Insight Midwest LP ($0.2 billion pretax, $0.1 billion
after-tax), Kansas City Cable Partners ($0.2 billion pretax, $0.1
billion after-tax), Parnassos Communications, LP ($0.1 billion pretax
and after-tax) and Century-TCI California Communications, LP ($0.1
billion pretax and after-tax). Parnassos Communications, LP and
Century-TCI California Communications, LP represent the only
partnership investments we have with Adelphia Communications
Corporation. Adelphia Communications Corporation and subsidiaries
(including Parnassos Communications, LP and Century-TCI California
Communications, LP) filed for Chapter 11 bankruptcy on June 25, 2002.
8) RESTRUCTURE OF TIME WARNER ENTERTAINMENT COMPANY L.P.
AT&T currently holds a 27.64% interest in Time Warner
Entertainment L.P. (TWE) through its AT&T Broadband segment. In
February 2001, AT&T requested that TWE begin the process of converting
the limited partnership into a corporation with registered equity
securities. On August 21, 2002, AT&T and Comcast entered into an
agreement with AOL Time Warner for the restructuring of TWE. The
restructuring agreement is intended to provide for a more orderly and
timely disposition of AT&T's entire stake in TWE than would be
available under the registration rights provisions of the TWE
partnership agreement. Under the restructuring agreement, AT&T will
receive $2.1 billion in cash, $1.5 billion in common stock of AOL Time
Warner Inc. (valued at the time of the closing and subject to certain
limitations) and an effective 21% passive equity interest in a new
cable company, to be named Time Warner Cable, which will consist of all
of AOL Time Warner's cable properties, including those already in TWE.
Upon consummation of the merger of AT&T Broadband with Comcast, AT&T
Comcast will assume all of AT&T's interest in TWE and in the
restructuring agreement, and AT&T Broadband will have registration
rights enabling it to dispose of its shares in Time Warner Cable and in
AOL Time Warner. The TWE restructuring is expected to close in the
first half of 2003.
In connection with the transactions, AT&T Broadband and Comcast
have also reached a three-year non-exclusive agreement with AOL Time
Warner under which AOL High-Speed Broadband service would be made
available on certain of AT&T's, or AT&T Comcast's, cable systems, which
pass approximately 10 million homes.
The TWE restructuring is subject to receipt of certain regulatory
approvals and other closing conditions, certain of which are outside
the control of AT&T and Comcast. There can be no assurance that the
transaction contemplated by the TWE restructuring agreement will be
consummated. If the restructuring agreement is terminated, the parties
will return to the registration rights process under the TWE
partnership agreement.
If the merger of Comcast and AT&T Broadband is terminated, the TWE
restructuring agreement will remain in place between AT&T and AOL Time
Warner, although certain changes would be made to the Internet service
provider carriage agreement.
9) NET RESTRUCTURING AND OTHER CHARGES
In the third quarter of 2002, AT&T recorded a net reversal of $26
of net restructuring and other charges. In light of current
unprecedented industry conditions, including the bankruptcy of several
significant competitors, AT&T's management reevaluated the business
restructuring plan established in the fourth quarter of 2001 and
determined that the plan needed to be modified primarily for certain
areas of AT&T Business Services, including network services. As a
result, approximately $137 of net restructuring and other charges were
reversed which primarily consisted of $110 for employee separation
costs. In addition, the reversals included $12 of sales obligation
liabilities associated with the government-mandated disposition of AT&T
Communications (U.K.) Ltd. that were never incurred. However, in order
to continue to properly manage our cost structure, AT&T's management
developed a new exit plan in other areas of AT&T Business Services,
including network services, totaling $111. This plan primarily consists
of $91 for employee separation costs related to approximately 1,400
employees (slightly more than half of which are management) and $16 for
facility closings related to buildings becoming vacant as a result of
previously announced restructuring plans.
Net restructuring and other charges for the nine months ended
September 30, 2002, totaled $30 which primarily represents costs
associated with AT&T Broadband's efforts to reorganize and streamline
certain centralized and field functions, partially offset by the
reversal of reserves primarily for AT&T Business Services' initiatives.
The $30 is comprised of new exit plans totaling $207 primarily
consisting of $133 associated with employee separation costs and $66 in
connection with facility closings. These charges were largely offset by
total reversals of $177 which were primarily comprised of $127 of
employee separation costs and $26 related to excess vintage facility
closing restructuring reserves. In addition, the reversals included $12
from the third quarter relating to sales obligations associated with
AT&T Communications (U.K.) Ltd. The reversals were due primarily to
management's reevaluation of the restructuring plan established in the
fourth quarter of 2001 for certain areas of AT&T Business Services, as
discussed above, as well as the redeployment of certain employees to
different functions within the company.
Approximately 2,300 employees will be separated in conjunction
with the exit plans implemented in 2002 (about 17% of which will be
leaving voluntarily), with more than 60% of the total employees
impacted being management employees. Approximately 34% of the employees
affected by these exit plans have left their positions as of September
30, 2002, with the remaining reductions expected to be completed by the
end of the first quarter of 2003. Termination benefits of $38 were paid
to employees through the third quarter of 2002 relative to these exit
plans.
The following table displays the activity and balances of the
restructuring reserve account from January 1, 2002, to September 30,
2002:
Type of Cost
Employee Facility
Separations Closings Other Total
Balance at January 1, 2002 $ 508 $ 316 $ 19 $ 843
Additions 133 66 4 203
Deductions (423) (84) (18) (525)
Balance at September 30, 2002 $ 218 $ 298 $ 5 $ 521
Deductions reflect total cash payments of $375, of which $306
represents cash termination benefits funded primarily through cash from
operations. Deductions also reflect reversals of $160. In addition,
deductions include non-cash activity of $10 primarily due to the
issuance of common stock to satisfy restricted stock obligations that
vested upon separation, primarily to executives. Offsetting these
deductions is a $20 transfer into the restructuring reserve related to
the third quarter 2002 reversal for separation payments that was
originally anticipated to be funded through AT&T's pension assets.
During the third quarter of 2001, $399 of net restructuring and
other charges were recorded by Excite@Home, primarily asset impairment
charges due to continued weakness in the on-line media market and the
bankruptcy filing of Excite@Home. These charges included the write-off
of goodwill and other intangible assets, warrants granted in connection
with distributing the @Home service and fixed assets.
Net restructuring and other charges for the nine months ended
September 30, 2001, totaled $1,494. The charges included $1,171 of
asset impairment charges related to Excite@Home and $323 for
restructuring and exits costs, which consisted of $151 for severance
costs, $156 for facility closings and $16 primarily related to
termination of contractual obligations.
The severance costs, for approximately 7,700 employees, primarily
resulted from synergies created by the MediaOne merger as well as
continued cost reduction efforts by Excite@Home. These business
restructuring plans were substantially completed by March 31, 2002.
10) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
Net income (loss) attributable to the different classes of AT&T
common stock are as follows:
AT&T Common Stock AT&T Wireless Liberty Media
Group Group Group
For the Three Months Ended September 30, 2002 2001 2002 2001 2002 2001
Income (loss) from continuing operations $ 207 $ (2,206) $ - $ - $ - $ 111
Dividend requirements of preferred stock - (235) - - - -
Income (loss) from continuing operations
attributable to common shareowners 207 (2,441) - - - 111
Gain on disposition of discontinued
operations - 13,503 - - - -
Net income (loss) attributable to common
shareowners $ 207 $ 11,062 $ - $ - $ - $ 111
For the Nine Months Ended September 30, 2002 2001 2002 2001 2002 2001
(Loss) from continuing operations $(12,702) $ (2,740) $ - $ - $ - $(2,711)
Dividend requirements of preferred stock - (652) - - - -
Premium on exchange of AT&T Wireless
tracking stock - (80) - - - -
(Loss) from continuing operations
attributable to common shareowners (12,702) (3,472) - - - (2,711)
(Loss) income from discontinued
operations (88) 115 - 35 - -
Gain on disposition of discontinued
operations 13,503
Extraordinary gain 48 - - - - -
Cumulative effect of accounting changes (856) 359 - - - 545
Net (loss) income attributable to common
shareowners $(13,598) $10,505 $ - $ 35 $ - $(2,166)
Basic earnings (loss) per share for AT&T Common Stock Group was
computed by dividing AT&T Common Stock Group earnings (loss) by the
weighted-average number of shares outstanding of 3,848 million and
3,534 million, for the three months ended September 30, 2002 and 2001,
respectively, and 3,681 million and 3,677 million for the nine months
ended September 30, 2002 and 2001, respectively.
Diluted earnings per share for AT&T Common Stock Group was
computed by dividing AT&T Common Stock Group earnings by the
weighted-average number of shares and dilutive potential shares
outstanding of 3,850 million for the three months ended September 30,
2002. At September 30, 2002, the 2 million share difference between
basic and diluted shares is attributable to the shares potentially
issuable for stock options. Since AT&T recorded a loss from continuing
operations for the three months ended September 30, 2001, and the nine
months ended September 30, 2002 and 2001, the diluted loss per share is
the same as basic loss per share, as any potentially dilutive
securities would be antidilutive to continuing operations.
Basic and diluted earnings per share from discontinued operations
for AT&T Wireless Group for the year-to-date period through its
split-off date were computed by dividing income attributable to AT&T
Wireless Group by the weighted-average number of shares outstanding of
AT&T Wireless Group of 438 million. AT&T Wireless was split-off from
AT&T in July 2001.
Basic and diluted loss per share for LMG was computed by dividing
the loss attributable to LMG by the weighted-average number of shares
outstanding of LMG of 2,588 million for the third quarter of 2001, and
2,582 million for the year-to-date period in 2001 though its split-off
date. LMG was split-off from AT&T in August 2001.
11) EQUITY TRANSACTIONS
Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T
was required to redeem the outstanding TCI Pacific Communications, Inc.
Class A Senior Cumulative Exchangeable Preferred Stock for AT&T common
stock. Each share of TCI Pacific preferred stock was exchangeable at
the option of the holder for 8.365 shares of AT&T common stock. All
outstanding shares (approximately 6.2 million) of TCI Pacific preferred
stock with a carrying value of $2.1 billion at December 31, 2001
(included in Minority Interest in the Consolidated Balance Sheet),
were either exchanged or redeemed for approximately 51.8 million shares
of AT&T common stock. No gain or loss was recorded on the
exchange/redemption of the TCI Pacific preferred stock.
In the nine months ended September 30, 2002, AT&T issued 14.7
million shares of AT&T common stock to certain current and former
senior managers in settlement of their deferred compensation accounts.
Pursuant to AT&T's deferred compensation plan, senior managers may
defer short- and long-term incentive compensation awards. The issuance
of these shares resulted in an increase to total shareowners' equity of
$0.2 billion.
In September 2002, AT&T offered to exchange certain outstanding
employee AT&T stock options for restricted stock units or cash at a
discount to the Black-Scholes option value. Each restricted stock unit
represents a right to receive a share of AT&T's common stock upon
vesting. On October 29, 2002, the offer closed, resulting in
approximately 75 million options cancelled and the issuance of
approximately 13 million restricted stock units and cash payments of
approximately $4.
In June of 2002, AT&T completed a public equity offering of 230
million shares of AT&T common stock at a price of $11.25 per share for
net proceeds of $2.5 billion. AT&T utilized the proceeds from the
offering to satisfy a portion of its obligation to AT&T Canada common
shareholders (see Note 6).
On January 22, 2001, NTT DoCoMo invested approximately $9.8
billion for 812,512 shares of a new class of AT&T preferred stock with
a par value of $1 per share. On July 9, 2001, in conjunction with the
split-off of AT&T Wireless Group, these preferred shares were converted
into AT&T Wireless common stock. In the three and nine months ended
September 30, 2001, we recorded dividend requirements on this preferred
stock of $0.2 billion and $0.7 billion, respectively. The preferred
stock dividend represented interest in connection with the DoCoMo
preferred stock as well as accretion of the beneficial conversion
feature associated with this preferred stock. The beneficial conversion
feature was recorded upon the issuance of the preferred stock and
represented the excess of the fair value of the preferred shares issued
over the proceeds received.
12) DEBT OBLIGATIONS
During 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $2.7 billion of funding,
limited by monthly eligible receivables. Under the program, certain
AT&T Business Services' and AT&T Consumer Services' accounts receivable
can be sold on a discounted, revolving basis, to a special purpose,
wholly-owned subsidiary of AT&T, which assigns interests in such
receivables to unrelated third-party financing entities. AT&T has
renewed both its AT&T Business Services and AT&T Consumer Services
customer accounts receivable securitization facilities. The terms of
these facilities have been extended to June (AT&T Business Services)
and July (AT&T Consumer Services) of 2003. Together the programs, as
renewed, provide up to $2.0 billion of available financing, limited by
the eligible receivables balance, which varies from month to month. The
securitization proceeds were recorded as a borrowing and included in
"Debt maturing within one year" in the Consolidated Balance Sheets. At
September 30, 2002 and December 31, 2001, such short-term notes totaled
$1.5 billion and $2.3 billion, respectively.
In the first nine months of 2002, AT&T called $1.5 billion of TCI
Communications Financing I, II and IV, MediaOne Financing Trust A and B
and MediaOne Finance II preferred securities for early redemption. This
redemption resulted in a gain on early extinguishment of debt recorded
as an extraordinary gain of $48 net of taxes ($78 pretax). The gain
represents the difference between the carrying value of the debt and
the cash paid to extinguish the debt.
In June 2002, AT&T registered $7.0 billion of the private
placement notes sold in November 2001 and commenced a tender of the
private notes for registered notes. The note exchange was completed on
August 2, 2002. The terms of the registered notes are identical to the
private notes.
As of September 30, 2002, AT&T had approximately $0.8 billion in
private debt outstanding that was partially collateralized with
restricted cash of approximately $0.4 billion. The restricted cash is
recorded in "Other assets" in the Consolidated Balance Sheet.
On August 12, 2002, in connection with the proposed merger
between AT&T Broadband and Comcast, AT&T filed a preliminary prospectus
contemplating a potential offer to exchange an aggregate of $11.8
billion of AT&T's existing debt securities. The exchange offer involves
two types of transactions. The first involves an exchange of certain
series of AT&T notes for new notes that would ultimately become
obligations of AT&T Broadband Corp., a newly formed company to which
AT&T will spin-off its AT&T Broadband unit prior to completing the
merger. AT&T Comcast and certain of its subsidiaries would guarantee
these obligations upon completion of the merger. The second involves an
exchange of other series of AT&T notes for new notes that would remain
obligations of AT&T. The new notes will have revised maturity dates
and/or interest rates.
Neither AT&T, AT&T Broadband, nor any other entity would receive
any proceeds from the issuance of the new notes in the exchange offer.
The new notes would represent a new offering with respect to those
notes that ultimately become obligations of AT&T Broadband and would
reduce the amount that AT&T Broadband would otherwise be required to
pay to AT&T upon completion of the merger with Comcast. The new notes
would represent a refinancing with respect to those notes that remain
obligations of AT&T after the merger.
On October 4, 2002, AT&T and Comcast commenced the exchange offer.
On November 8, 2002, the exchange offer was closed with $3.5 billion of
AT&T debt exchanged for AT&T Broadband debt and $4.7 billion of debt
exchanged for new AT&T debt.
At December 31, 2001, AT&T had exchangeable notes outstanding,
which were indexed to 9.8 million shares of Rainbow Media Group common
stock. On August 20, 2002, Cablevision Systems Corporation exchanged
each share of Rainbow Media Group common stock for 1.19093 shares of
Cablevision NY Group (Cablevision) common stock. As a result of the
exchange, AT&T's exchangeable notes outstanding at September 30, 2002,
are now indexed to 11.7 million shares of Cablevision common stock,
with a put price of $18.89 per share and a call price of $23.05 per
share. All other provisions of the exchangeable notes remain the same.
13) COMMITMENTS AND CONTINGENCIES
In the normal course of business we are subject to proceedings,
lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters
are subject to many uncertainties, and outcomes are not predictable
with assurance. However, management makes its best estimate of the
outcome of these matters based on all available facts and records loss
contingencies as appropriate. Consequently, we are unable to ascertain
the ultimate aggregate amount of monetary liability or financial impact
with respect to these matters at September 30, 2002. These matters
could affect the operating results of any one quarter when resolved in
future periods. However, we believe that after final disposition, any
monetary liability or financial impact to us beyond that provided for
at September 30, 2002, would not be material to our annual consolidated
financial statements.
Sprint PCS, a wireless carrier, sued AT&T for access charges for
AT&T long distance calls terminated on Sprint PCS' network and for
toll-free calls that Sprint PCS customers originated and which were
terminated on AT&T's network. AT&T refused to pay Sprint PCS based on
longstanding industry practice that wireless carrier-long distance
carrier interconnection is on a bill and keep basis and that wireless
carriers charged their customers for calls they received. On July 3,
2002, the FCC ruled that wireless carriers such as Sprint PCS are not
prohibited from charging AT&T access charges, but that AT&T was not
required to pay such charges absent a contractual obligation to do so.
The FCC further held that the question whether the parties entered into
a contract concerning an access payment obligation is not a matter of
federal communications law but rather should be determined by the court
that had referred the issue to the FCC. Because there was no express
contract between AT&T and Sprint PCS, the court will need to determine
whether an implied-in-fact contract can be inferred in light of the
parties' conduct and their tacit understanding. Petitions of Sprint PCS
and AT&T Corp. for Declaratory Ruling Regarding CMRS Access Charges, WT
Docket No. 01-316, Declaratory Ruling, FCC 02-203, rel. July 3, 2002.
The FCC remanded the matter to the federal district court, Sprint
Spectrum, L.P. v. AT&T Communications, Inc., Civil Action No.
00-0973-CV-W-5 (W.D. Mo.). AT&T has petitioned for review of the FCC's
ruling in the U.S. Court of Appeals for the District of Columbia
Circuit, AT&T Corp. v. FCC et al., No. 02-1240 (D.C. Cir. filed Aug. 1,
2002), and has requested a continuance of the stay from the federal
district court in Missouri pending appellate review. An adverse
decision in the present litigation may result in additional wireless
carriers seeking similar compensation from AT&T. AT&T believes the case
is without merit and intends to defend it vigorously, but cannot
predict the outcome of any such proceedings.
Sparks, et al. v. AT&T and Lucent Technologies Inc. et al., is a
class action lawsuit filed in 1996 in Illinois state court under the
name of Crain v. Lucent Technologies. The complaint sought damages on
behalf of present and former customers based on a claim that the AT&T
Consumer Products business (which became part of Lucent in 1996) and
Lucent had defrauded and misled customers who leased telephones,
resulting in payments in excess of the cost to purchase the telephones.
AT&T and Lucent have denied any wrongdoing, but settled this matter to
avoid the uncertainty and expense of protracted litigation. The court
has given final approval to the settlement. Pursuant to the separation
and distribution agreement between Lucent and AT&T, AT&T recorded its
proportionate share of the settlement and estimated legal costs in the
second quarter of 2002, which totaled $132 pretax ($88 after-tax).
Depending upon the number of claims submitted and accepted, the actual
cost of the settlement to AT&T may be less than stated amounts, but it
is not possible to estimate the amount at this time. While similar
consumer class actions are pending in various state courts, the
Illinois state court has held that the class it certified covers claims
in the other state court class actions.
In light of recent publicly reported developments, AT&T is
examining the impact to it if various telecommunications companies and
vendors are unable to satisfy their agreement with AT&T, including the
separation agreements between AT&T and Lucent Technologies, Inc. While
AT&T has not completed its review and can not quantify the impact, if
any, it is possible that under certain circumstances any such inability
by telecommunications companies and vendors, including the inability of
Lucent to meet its obligations under such agreements, could have
negative financial and operational impacts on AT&T, which may be
material.
On March 13, 2002, AT&T Broadband informed CSG Systems, Inc. that
it was considering the initiation of an arbitration against CSG
relating to a Master Subscriber Management System Agreement that the
two companies entered into in 1997. Pursuant to the Master Agreement,
CSG provides billing support to AT&T Broadband. On May 10, 2002, AT&T
Broadband filed a demand for arbitration against CSG before the
American Arbitration Association. On May 31, 2002, CSG answered AT&T
Broadband's arbitration demand and asserted various counterclaims. On
June 21, 2002, CSG filed a lawsuit against Comcast Corporation in
federal court located in Denver, Colorado asserting claims related to
the Master Agreement and the pending arbitration, which complaint was
withdrawn without prejudice on November 1, 2002. In the event that this
process results in the termination of the Master Agreement, AT&T
Broadband may incur significant costs in connection with its
replacement of these customer care and billing services and may
experience temporary disruptions to its operations.
14) RELATED PARTY TRANSACTIONS
AT&T had various related party transactions with Concert until the
joint venture was officially unwound on April 1, 2002.
Included in "Revenue" in the Consolidated Statements of Operations
for the nine months ended September 30, 2002, was $0.3 billion, and for
the three and nine months ended September 30, 2001, was $0.3 billion
and $0.8 billion, respectively, for services provided to Concert.
Included in "Access and other connection expense" in the
Consolidated Statements of Operations were charges from Concert
representing costs incurred on our behalf to connect calls made to
foreign countries (international settlements) and costs paid by AT&T to
Concert for distributing Concert products. Such charges totaled $0.5
billion for the nine months ended September 30, 2002, and $0.4 billion
and $1.5 billion, respectively for the three and nine months ended
September 30, 2001.
Included in "Accounts receivable" in the Consolidated Balance
Sheet at December 31, 2001, was $0.4 billion related to
telecommunications transactions with Concert. Included in "Accounts
payable" in the Consolidated Balance Sheet at December 31, 2001, was
$0.2 billion related to transactions with Concert.
Included in "Other receivables" in the Consolidated Balance
Sheet at December 31, 2001, was $0.8 billion related to administrative
transactions performed on behalf of Concert. Included in "Other current
liabilities" in the Consolidated Balance Sheet at December 31, 2001,
was $0.9 billion related to administrative transactions performed by
Concert on our behalf.
During 2001, we had various related party transactions with LMG.
Included in "Costs of services and products" in the Consolidated
Statement of Operations were programming expenses related to services
from LMG while owned by AT&T of $27 and $199 for the quarter and
year-to-date periods ended July 31, 2001, the deemed effective LMG
split-off date for accounting purposes.
15) SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our
business: AT&T Business Services, AT&T Consumer Services and AT&T
Broadband.
Our existing segments reflect certain managerial changes that were
implemented during 2002. The changes primarily include the following:
revenue previously recorded by the AT&T Business Services segment as
"Internal Revenue" for services provided to certain other AT&T units
and then eliminated within the Corporate & Other group, is now recorded
as a contra-expense by AT&T Business Services; the results of certain
units previously included in the Corporate & Other group were
transferred to the AT&T Business Services segment and the financial
impacts of SFAS No. 133 that were previously recorded in the Corporate
& Other group were transferred to the appropriate segments. In
addition, AT&T Consumer Services and total AT&T revenue was
reclassified in accordance with EITF issue 01-9, "Accounting for
Consideration Given by a Vendor to a Customer," which requires cash
incentives given to customers previously recorded as advertising and
promotion expense now to be recorded as a reduction of revenue when
recognized in the income statement, unless an identifiable benefit is
received in exchange (see note 3). All prior periods have been restated
to reflect these changes.
Reflecting the dynamics of our business, we continuously review
our management model and structure, which may result in additional
adjustments to our operating segments in the future.
For the Three Months For the Nine Months
Revenue Ended September 30, Ended September 30,
2002 2001 2002 2001
AT&T Business Services external revenue $ 6,602 $ 6,746 $ 19,697 $ 20,536
AT&T Business Services internal revenue 98 61 273 378
Total AT&T Business Services revenue 6,700 6,807 19,970 20,914
AT&T Consumer Services external revenue 2,794 3,770 8,791 11,423
AT&T Broadband external revenue 2,546 2,390 7,506 7,411
AT&T Broadband internal revenue 1 3 6 12
Total AT&T Broadband revenue 2,547 2,393 7,512 7,423
Total reportable segments 12,041 12,970 36,273 39,760
Corporate and Other (a) (85) 65 (229) 13
Total revenue $ 11,956 $ 13,035 $ 36,044 $ 39,773
(a) Includes revenue related to Excite@Home of $140 and $418 for the three and nine months ended September 30, 2001.
RECONCILIATION OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO INCOME BEFORE INCOME TAXES
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
AT&T Business Services EBIT $ 826 $(4,390) $ 1,969 $(1,985)
AT&T Consumer Services EBIT 618 1,282 2,252 3,817
AT&T Broadband EBIT 45 (789) (18,840) (3,150)
Total reportable segments' EBIT 1,489 (3,897) (14,619) (1,318)
Corporate and Other EBIT (a) (253) 243 (618) (2,137)
Deduct:
Pretax minority interest and dividends on
subsidiary preferred stock (62) 171 (200) 922
Pretax (losses) related to other equity
investments (18) (5,510) (1,671) (7,149)
Interest (expense) (748) (786) (2,231) (2,426)
Income (loss) from continuing operations before
income taxes, minority interest and dividends on
subsidiary preferred stock, and net (losses)
related to equity investments $ 568 $ 899 $(15,597) $ 346
(a) Includes $(294) and $(714) related to Excite@Home for the three and nine months ended September 30, 2001,
respectively.
ASSETS
At September 30, At December 31,
2002 2001
AT&T Business Services $ 38,621 $ 40,316
AT&T Consumer Services 1,762 2,141
AT&T Broadband 81,933 103,060
Total reportable segments 122,316 145,517
Corporate and Other:
Other segments 857 1,145
Prepaid pension costs 3,522 3,329
Deferred income taxes 1,784 960
Other corporate assets (a) 9,559 14,331
Total assets $ 138,038 $165,282
(a) 2002 and 2001 amounts include cash of $6.7 billion and $10.4
billion, respectively.
16) GUARANTEE OF PREFERRED SECURITIES
Prior to AT&T's acquisition of TCI and MediaOne, TCI and
MediaOne issued mandatorily redeemable preferred securities through
subsidiary trusts that held subordinated debt securities of TCI and
MediaOne.
In the first nine months of 2002, AT&T called mandatorily
redeemable preferred securities issued by TCI Communications Financing
I, II and IV, MediaOne Financing A and B, and MediaOne Finance II for
early redemption. As of September 30, 2002, AT&T provided a full and
unconditional guarantee on outstanding securities issued by MediaOne
Finance III. At September 30, 2002, $504 of MediaOne Finance III
securities were outstanding.
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2002
Guarantor Guarantor Media-One Elimination and
AT&T Subsidiary Finance Non-Guarantor Consolidation Consolidated
Parent MediaOne TCI III Subsidiaries Adjustments AT&T Corp.
ASSETS
Cash and cash equivalents... $ 6,644 $ - $ 2 $ - $ 280 $ - $ 6,926
Receivables................. 20,469 48,870 (62,055) 7,284
Investments................. 459 459
Deferred income taxes....... 1,939 413 (304) 2,048
Other current assets........ 359 2,288 96 516 (1,375) (889) 995
TOTAL CURRENT ASSETS........ 29,411 2,288 98 516 48,647 (63,248) 17,712
Property, plant & equipment,
net ................... 8,992 160 32,212 41,364
Franchise costs, net........ 14 29,070 29,084
Goodwill, net............... 70 2,554 17,893 20,517
Investments and related
advances................. 120,143 32,584 12,046 39,602 (186,455) 17,920
Other assets................ 6,537 182 12,923 (8,201) 11,441
TOTAL ASSETS................ $165,153 $37,426 12,500 $ 516 $180,347 $(257,904) $138,038
LIABILITIES
Debt maturing within one
year..................... $ 35,851 $ 350 $ 1,819 $ - $ 7,094 $ (38,554) $ 6,560
Other current liabilities... 10,798 590 471 13,328 (11,069) 14,118
TOTAL CURRENT LIABILITIES... 46,649 940 2,290 20,422 (49,623) 20,678
Long-term debt.............. 23,328 2,191 12,682 504 14,404 (16,738) 36,371
Deferred income taxes....... 1,191 23,261 24,452
Other long-term liabilities
and deferred credits..... 6,389 10 128 2,258 (1,210) 7,575
TOTAL LIABILITIES........... 77,557 3,141 15,100 504 60,345 (67,571) 89,076
Minority Interest........... 1,371 1,371
Company-Obligated
Convertible Quarterly
Income Preferred
Securities of Subsidiary
Trust Holding Solely
Subordinated Debt
Securities of AT&T....... 4,728 4,728
SHAREOWNERS' EQUITY
AT&T Common Stock........... 3,851 (11,459) 11,459 3,851
Preferred stock issued to
subsidiaries............. 10,559 (10,559) -
Other shareowners' equity... 68,458 34,285 (2,600) 12 130,090 (191,233) 39,012
TOTAL SHAREOWNERS' EQUITY... 82,868 34,285 (2,600) 12 118,631 (190,333) 42,863
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY...... $165,153 $37,426 $12,500 $ 516 $180,347 $(257,904) $138,038
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF OPERATION
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
Guarantor Guarantor Media-One Elimination and
AT&T Subsidiary Finance Non-Guarantor Consolidation Consolidated
Parent MediaOne TCI III Subsidiaries Adjustments AT&T Corp.
Revenue $4,043 $ - $ - $ - $8,245 $ (332) $11,956
Operating Expenses
Costs of services
and products..... 729 2,925 (321) 3,333
Access and other
connection......... 1,423 1,280 (7) 2,696
Selling, general and
administrative..... 697 2 186 1,831 (4) 2,712
Depreciation and
amortization....... 518 20 1,443 1,981
Net restructuring and
other charges...... 4 (30) (26)
Total operating
expenses........... 3,371 2 206 7,449 (332) 10,696
Operating income
(loss)............. 672 (2) (206) 796 1,260
Other income
(expense), net..... 301 47 11 12 696 (1,011) 56
Interest (expense).... (912) (45) (196) (11) (595) 1,011 (748)
Income (loss) from
continuing
operations before
income taxes,
minority interest,
and dividends on
subsidiary
preferred stock,
and net (losses)
related to other
equity investments. 61 (391) 1 897 568
(Provision) benefit
for income taxes... (27) 149 (434) (312)
Minority interest and
dividends on
subsidiary
preferred stock.... (40) 2 (38)
Net (losses)
earnings related
to other equity
investments........ (200) (49) 703 (11) (454) (11)
Income (loss) from
continuing
operations......... (206) (49) 461 1 454 (454) 207
(Loss) income before
extraordinary gain
and cumulative
effect of
accounting changes. (206) (49) 461 1 454 (454) 207
Net income (loss)..... $ (206) $(49) $ 461 $ 1 $ 454 $(454) $ 207
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF OPERATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Guarantor Guarantor Media-One Elimination and
AT&T Subsidiary Finance Non-Guarantor Consolidation Consolidated
Parent MediaOne TCI III Subsidiaries Adjustments AT&T Corp.
Revenue $ 12,065 $ - $ - $ - $ 25,168 $(1,189) $ 36,044
Operating Expenses
Costs of services and
products............. 2,066 9,054 (1,158) 9,962
Access and other
connection........... 4,168 4,126 (27) 8,267
Selling, general and
administrative....... 1,958 (7) 543 5,412 (4) 7,902
Depreciation and
amortization......... 1,479 64 4,292 5,835
Net restructuring and
other charges........ 4 26 30
Goodwill and franchise
cost impairment
charges 16,479 16,479
Total operating expenses 9,675 (7) 607 39,389 (1,189) 48,475
Operating income (loss). 2,390 7 (607) (14,221) (12,431)
Other income (expense),
net.................. 689 396 33 35 646 (2,734) (935)
Interest (expense)...... (2,566) (159) (532) (34) (1,674) 2,734 (2,231)
Income (loss) from
continuing
operations before
income taxes,
minority interest,
and dividends on
subsidiary preferred
stock, and net
(losses) related to
other equity
investments.......... 513 244 (1,106) 1 (15,249) (15,597)
(Provision) benefit for
income taxes......... (196) (93) 423 3,919 4,053
Minority interest and
dividends on
subsidiary preferred
stock................ (120) (6) (126)
Net earnings (losses)
related to other
equity investments... 228 (8,162) (5,290) (1,001) 13,193 (1,032)
Income (loss) from
continuing operations 425 (8,011) (5,973) 1 (12,337) 13,193 (12,702)
(Loss) from
discontinued
operation (net of
income taxes)........ (88) (88)
(Loss) income before
extraordinary gain... 337 (8,011) (5,973) 1 (12,337) 13,193 (12,790)
Extraordinary gain (net
of income taxes)..... 48 48
Cumulative effect of
accounting changes
(net of income taxes) (856) (856)
Net (loss) income....... $ 337 $(8,011) $(5,925) $ 1 $(13,193) $13,193 $(13,598)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Elimination
Guarantor Guarantor Media-One and
AT&T Subsidiary Finance Non-Guarantor Consolidation Consolidated
Parent MediaOne TCI III Subsidiaries Adjustments AT&T Corp.
NET CASH (USED IN)
PROVIDED BY
OPERATING
ACTIVITIES OF
CONTINUING
OPERATIONS.......... $ (925) $ (576) $ (526) $ 9,715 $ 7,688
INVESTING ACTIVITIES
Capital expenditures
and other
additions......... (1,497) (166) (3,632) (5,295)
Other (5,973) 726 (3,207) (6,972) 15,470 44
NET CASH (USED IN)
PROVIDED BY
INVESTING
ACTIVITIES OF
CONTINUING
OPERATIONS.......... (7,470) 726 (3,373) (10,604) 15,470 (5,251)
FINANCING ACTIVITIES
Proceeds from debt
from AT&T........... 1,933 1,413 6,406 (9,752)
Proceeds from
long-term debt 129 129
Retirement of
long-term debt...... (2,900) (28) (454) 374 (3,008)
Retirement of AT&T debt (1,547) (2,051) 3,598
(Decrease) increase in
short-term
borrowings, net..... (4,442) (754) (5,196)
Increase (decrease) in
short-term
borrowings from
AT&T, net 6,837 (6,837)
Issuance of AT&T
common shares 2,640 2,640
Other 556 1,255 (2,479) (668)
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES OF
CONTINUING
OPERATIONS.......... 4,624 (162) 3,901 1,004 (15,470) (6,103)
Net (decrease)
increase in cash
and cash equivalents (3,771) (12) 2 115 (3,666)
Cash and cash
equivalents at
beginning of year... 10,415 12 165 10,592
Cash and cash
equivalents at end
of period........... $ 6,644 $ 2 $ 280 $ 6,926
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2001
Guaran- Guaran- Guaran- TCI TCI TCI Media Media Media Media Non- Elimi- Consoli-
tor tor tor Finan- Finan- Finan- -One -One -One -One Guar- nation dated
AT&T Sub- Sub- cing cing cing Finan-Finan-Finan-Finan- antor and AT&T
Parent sidiary sidiary I II IV cing ce ce ce Sub- Con- Corp.
TCI MediaOne A B II III sid- soli-
iaries dation
Adjust-
ments
ASSETS
Cash and cash
equivalents...... $ 10,415 $ - $ 12 $ - $ - $ - $ - $ - $ - $ - $ 165 $ - $ 10,592
Receivables........ 11,682 44,516 (46,817) 9,381
Investments........ 668 668
Deferred income
taxes............ 729 501 1,230
Other current
assets........... 302 71 689 527 513 204 31 29 220 11 (45) (1,895) 657
TOTAL CURRENT
ASSETS........... 23,128 71 701 527 513 204 31 29 220 11 45,805 (48,712) 22,528
Property, plant &
equipment, net... 8,580 135 32,607 41,322
Franchise costs,
net.............. 20 42,799 42,819
Goodwill, net...... 70 2,526 22,079 24,675
Investments and
related advances. 130,219 12,747 41,413 63,996 (224,557) 23,818
Other assets....... 5,445 91 21 16 16 516 8,835 (4,820) 10,120
TOTAL ASSETS....... $167,442 $13,064 $44,640 $527 $513 $204 $52 $45 $236 $527 $216,121 $(278,089) $165,282
LIABILITIES
Debt maturing
within one year.. $34,195 $616 $753 $527 $513 $204 $30 $28 $214 $ 8,985 $ (33,107) $ 12,958
Other current
liabilities...... 8,763 597 59 1 1 6 11 11,419 (8,388) 12,469
TOTAL CURRENT
LIABILITIES...... 42,958 1,213 812 527 513 204 31 29 220 11 20,404 (41,495) 25,427
Long-term debt..... 23,810 9,866 676 504 14,640 (8,969) 40,527
Deferred income
taxes............ 1,147 934 26,079 28,160
Other long-term
liabilities and
deferred credits. 6,850 45 23 7,378 (3,088) 11,208
TOTAL LIABILITIES.. 74,765 11,124 2,445 527 513 204 31 29 220 515 68,501 (53,552) 105,322
Minority Interest.. 3,560 3,560
Company-Obligated
Convertible
Quarterly Income
Preferred
Securities of
Subsidiary Trust
Holding Solely
Subordinated
Debt Securities
of AT&T.......... 4,720