AT&T CORP - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended March 31, 2005

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission file number 1-1105

AT&T Corp.


A New York		I.R.S. Employer
Corporation		No. 13-4924710

One AT&T Way, Bedminster, New Jersey 07921

Telephone — Area Code 908-221-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

At April 29, 2005, the following shares of stock were outstanding: AT&T common stock — 800,989,478.

TABLE OF CONTENTS


PART I -- FINANCIAL INFORMATION
	Item 1. Financial Statements
	CONSOLIDATED STATEMENTS OF INCOME
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 4. Controls and Procedures
PART II -- OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-12: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART I — FINANCIAL INFORMATION


Item 1.	*Financial Statements*

AT&T CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	For the Three Months
	Ended March 31,

	2005			2004

	(Dollars in millions,
	except per share
	amounts)
Revenue	$	7,015		$	7,990
Operating Expenses
Access and other connection		2,404			2,638
Costs of services and products (excluding depreciation of $404 and $937 included below)		1,628			1,864
Selling, general and administrative		1,277			1,744
Depreciation and amortization		636			1,250
Asset impairment and net restructuring and other charges		—			213

Total operating expenses		5,945			7,709

Operating Income		1,070			281
Other income (expense), net		30			(174	)
Interest (expense)		(203	)		(228	)

Income (Loss) Before Income Taxes and Net (Losses) Related to Equity Investments		897			(121	)
(Provision) benefit for income taxes		(368	)		426
Net (losses) related to equity investments		—			(1	)

Net Income	$	529		$	304

Weighted-Average Shares Used to Compute Earnings Per Share:
Basic		800			793
Diluted		806			796

Earnings per Basic and Diluted Share	$	0.66		$	0.38

Dividends Declared per Common Share	$	0.2375		$	0.2375

The notes are an integral part of the consolidated financial statements.

AT&T CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	At			At
	March 31,			December 31,
	2005			2004

	(Dollars in millions)
Assets
Cash and cash equivalents	$	3,705		$	3,698
Accounts receivable, less allowances of $473 and $523		3,112			3,195
Deferred income taxes		1,094			1,111
Other current assets		802			1,383

Total Current Assets		8,713			9,387
Property, plant and equipment, net of accumulated depreciation of $1,936 and $1,588		11,203			11,509
Goodwill		4,838			4,888
Other purchased intangible assets, net of accumulated amortization of $389 and $428		348			375
Prepaid pension costs		4,048			3,991
Other assets		2,546			2,654

Total Assets	$	31,696		$	32,804

Liabilities
Accounts payable and accrued expenses	$	2,626		$	2,716
Compensation and benefit-related liabilities		1,724			2,193
Debt maturing within one year		1,982			1,886
Other current liabilities		2,603			2,293

Total Current Liabilities		8,935			9,088
Long-term debt		7,468			8,779
Long-term compensation and benefit-related liabilities		3,406			3,322
Deferred income taxes		1,358			1,356
Other long-term liabilities and deferred credits		3,113			3,240

Total Liabilities		24,280			25,785
Shareowners’ Equity
Common stock, $1 par value, authorized 2,500,000,000 shares; issued and outstanding 800,823,621 shares (net of 171,983,367 treasury shares) at March 31, 2005 and 798,570,623 shares (net of 171,983,367 treasury shares) at December 31, 2004		801			799
Additional paid-in capital		27,049			27,170
Accumulated deficit		(20,651	)		(21,180	)
Accumulated other comprehensive income		217			230

Total Shareowners’ Equity		7,416			7,019

Total Liabilities and Shareowners’ Equity	$	31,696		$	32,804

The notes are an integral part of the consolidated financial statements.

AT&T CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(Unaudited)


				For the Three Months
				Ended March 31,

				2005			2004

				(Dollars in millions)
AT&T Common Stock
		Balance at beginning of year		$	799		$	792
		Shares issued under employee plans			2			2

	Balance at end of period				801			794

Additional Paid-In Capital
		Balance at beginning of year			27,170			27,722
		Shares issued, net:
			Under employee plans		39			39
			Other		—			8
		Dividends declared			(190	)		(189	)
		Other			30			9

	Balance at end of period				27,049			27,589

Accumulated Deficit
		Balance at beginning of year			(21,180	)		(14,707	)
		Net income			529			304
		Treasury shares issued at less than cost			—			(4	)

	Balance at end of period				(20,651	)		(14,407	)

Accumulated Other Comprehensive Income
		Balance at beginning of year			230			149
		Other comprehensive (loss)			(13	)		(29	)

	Balance at end of period				217			120

Total Shareowners’ Equity				$	7,416		$	14,096

Summary of Total Comprehensive Income:
		Net income		$	529		$	304
		Other comprehensive (loss) [net of income taxes of $8 and $17]			(13	)		(29	)

Total Comprehensive Income				$	516		$	275

AT&T accounts for treasury stock as retired stock. The amount attributable to treasury stock at March 31, 2005 and December 31, 2004 was $(17,011) million.

We have 100 million authorized shares of preferred stock at $1 par value.

The notes are an integral part of the consolidated financial statements.

AT&T CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		For the Three Months
		Ended March 31,

		2005			2004

		(Dollars in millions)
Operating Activities
Net income		$	529		$	304
Adjustments to reconcile net income to net cash provided by operating activities:
	Asset impairment and net restructuring and other charges		—			201
	Net losses (gains) on sales of businesses and investments		7			(11	)
	Loss on early extinguishment of debt		—			274
	Depreciation and amortization		636			1,250
	Provision for uncollectible receivables		48			146
	Deferred income taxes		21			(295	)
	(Increase) decrease in receivables		(126	)		18
	(Decrease) increase in accounts payable and accrued expenses		(140	)		7
	Net change in other operating assets and liabilities		(146	)		(443	)
	Other adjustments, net		(24	)		(102	)

Net Cash Provided by Operating Activities			805			1,349

Investing Activities
Capital expenditures and other additions			(326	)		(546	)
Proceeds from sale or disposal of property, plant and equipment			5			9
Investment distributions and sales			7			14
Net dispositions of businesses, net of cash disposed			—			8
Decrease (increase) in restricted cash			546			(2	)
Other investing activities, net			8			10

Net Cash Provided by (Used in) Investing Activities			240			(507	)

Financing Activities
Retirement of long-term debt, including redemption premiums			(1,032	)		(2,781	)
(Decrease) increase in short-term borrowings, net			(98	)		35
Issuance of common shares			32			22
Dividends paid on common stock			(190	)		(188	)
Other financing activities, net			250			295

Net Cash Used in Financing Activities			(1,038	)		(2,617	)

Net increase (decrease) in cash and cash equivalents			7			(1,775	)
Cash and cash equivalents at beginning of year			3,698			4,353

Cash and Cash Equivalents at End of Period		$	3,705		$	2,578

The notes are an integral part of the consolidated financial statements.

AT&T CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1.	Basis of Presentation

The consolidated financial statements have been prepared by AT&T Corp. (AT&T) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments of a normal and recurring nature 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, 2004.


2.	Merger Agreement With SBC Communications Inc.

On January 31, 2005, AT&T and SBC Communications Inc. (SBC) announced an agreement for SBC to acquire AT&T. Under the terms of the agreement, each AT&T share will be exchanged for 0.77942 of a share of SBC common stock. In addition, at the time of closing, we will pay our shareowners a special dividend of $1.30 per share. At the time of the announcement, this consideration was valued at $19.71 per share, or approximately $16.0 billion. The stock consideration in the transaction is expected to be tax-free to our shareowners. The acquisition, which is subject to approval by our shareowners and regulatory authorities, and other customary closing conditions, is expected to close in late 2005 or early 2006. However, it is possible that factors outside of our control could require us to complete the merger at a later time or not to complete it at all. While the merger agreement prohibits us from soliciting competing acquisition proposals, we may accept a superior proposal prior to the effective date of the merger, subject to compliance with the terms of the merger agreement and payment of a $560 million termination fee and all documented out-of-pocket fees incurred by SBC, up to $40 million. The terms of certain of our agreements including contracts, employee benefit arrangements and debt instruments have provisions, which could result in changes to the terms or settlement amounts of these agreements upon a change in control of AT&T.


3.	Summary of Significant Accounting Policies

We have a Long Term Incentive Program under which stock options, performance shares, restricted stock and other awards in common stock are granted, as well as an Employee Stock Purchase Plan (ESPP). Employee purchases of company stock under the ESPP were suspended in 2003. Effective January 1, 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” and we began to record stock-based compensation expense for all employee awards (including stock options) granted or modified after January 1, 2003. For awards issued prior to January 1, 2003, we apply Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for our plans. Under APB Opinion No. 25, no compensation expense has been recognized for stock options, other than for certain occasions when we have modified the terms of the stock option vesting schedule.

AT&T CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

If we had elected to recognize compensation costs based on the fair value at the date of grant of all awards granted prior to January 1, 2003, consistent with the provisions of SFAS No. 123, net income and earnings per share amounts would have been as follows:


		For the Three Months
		Ended March 31,

		2005			2004

		(Dollars in millions,
		except per share
		amounts)
Net income		$	529		$	304
Add:
	Stock-based employee compensation expense included in reported results, net of income taxes		24			18
Deduct:
	Total stock-based employee compensation expense determined under the fair value method for all awards, net of income taxes		(46	)		(51	)

Pro forma net income		$	507		$	271

Basic and diluted earnings per share		$	0.66		$	0.38
Pro forma basic and diluted earnings per share		$	0.63		$	0.34

Pro forma stock-based compensation expense reflected above may not be indicative of future compensation expense that may be recorded. Future compensation expense may differ due to various factors, such as the number of awards granted and the market value of such awards at the time of grant, as well as the planned adoption of SFAS 123 (revised 2004), “Share-Based Payment,” beginning in the first quarter of 2006 (see note 11).

For a detailed discussion of significant accounting policies, please refer to our Form 10-K/ A for the year ended December 31, 2004.


4.	Supplementary Financial Information


	*Supplementary Balance Sheet Information*


	AT&T			AT&T
	Business			Consumer
	Services			Services		Total

	(Dollars in millions)
Goodwill:
Balance at January 1, 2004	$	4,731		$	70	$	4,801
Translation adjustment		90			—		90
Other		(3	)		—		(3	)

Balance at December 31, 2004	$	4,818		$	70	$	4,888
Translation adjustment		(7	)		—		(7	)
Reclassification to assets held-for-sale (included in other current assets)		(43	)		—		(43	)

Balance at March 31, 2005	$	4,768		$	70	$	4,838

AT&T CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


	Gross
	Carrying		Accumulated
	Amount		Amortization		Net

	(Dollars in millions)
Other purchased intangible assets:
Customer lists and relationships	$	528	$	229	$	299
Other		275		199		76

Balance at December 31, 2004	$	803	$	428	$	375
Customer lists and relationships	$	528	$	248	$	280
Other		209		141		68

Balance at March 31, 2005	$	737	$	389	$	348

Amortization expense associated with purchased intangible assets for the first quarter of 2005 and 2004, was $27 million and $33 million, respectively. Amortization expense for purchased intangible assets is estimated to be approximately $110 million for each of the years ending December 31, 2005 and 2006, and $80 million for each of the years ending December 31, 2007 and 2008, at which time the purchased intangible assets will be fully amortized.


	Restricted Cash:

Recorded within other current assets as of December 31, 2004, was restricted cash of $546 million relating to debt that matured in February 2005 (see note 7).


	Income Taxes Payable:

Recorded within other current liabilities were $539 million and $281 million of income taxes payable as of March 31, 2005 and December 31, 2004, respectively.


	Assets Held-for-Sale:

In the first quarter of 2005, we entered into an agreement to sell our payphone business, which is part of the AT&T Business Services segment. As a result of this agreement, we reclassified the assets and liabilities related to this business as held-for-sale at fair market value, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The assets and liabilities that were reclassified consisted of $43 million of goodwill, $28 million of net accounts receivable, $12 million of property, plant and equipment, $7 million of prepaid expenses and $2 million of current liabilities. The goodwill was determined based on the relative fair value of the payphone business to that of AT&T Business Services. We recorded a $9 million charge within other income (expense), net to write down the assets to fair market value. It is currently expected that this sale will close by the end of the second quarter of 2005. Also reclassified to assets held-for-sale was $81 million related to an administrative building, which we actively marketed in the first quarter of 2005 and entered into an agreement to sell in April 2005. It is anticipated that we will record a gain on the sale of the building of approximately $40 million. Since we will be leasing a portion of the building back from the buyer, approximately $6 million of the gain is expected to be recognized at the time of sale (within the Corporate and Other group), which is currently anticipated to occur in the second quarter of 2005. The remaining gain will be deferred and amortized over the lease period (up to 5 years). The reclassification of the assets and liabilities discussed above to held-for-sale (included in other current assets and other current liabilities, respectively) represented non-cash activity for the first quarter of 2005.

AT&T CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


	*Supplementary Shareowners’ Equity Information*

Net Foreign

Net Revaluation

Net

Accumulated

Currency

of Certain

Minimum

Other

Translation

Financial

Pension

Comprehensive

Adjustment

Instruments

Liability

Income

(Dollars in millions)

Accumulated other comprehensive income (loss):

Balance at January 1, 2005

319

(108

)

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