FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2005 |
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or |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number 1-1105
AT&T Corp.
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A New York |
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I.R.S. Employer |
Corporation |
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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
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No o
At October 31, 2005, the following shares of stock were
outstanding: AT&T common stock 803,449,166
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
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Item 1. |
Financial Statements |
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the Three Months | |
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For the Nine Months | |
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Ended September 30, | |
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Ended September 30, | |
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2005 | |
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2004 | |
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2005 | |
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2004 | |
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(Dollars in millions, except per share amounts) | |
Revenue
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$ |
6,620 |
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$ |
7,638 |
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$ |
20,395 |
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$ |
23,264 |
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Operating Expenses
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Access and other connection
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2,317 |
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2,411 |
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7,111 |
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7,530 |
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Costs of services and products (excluding depreciation of $409,
$409, $1,232 and $2,280 included below)
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1,498 |
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1,783 |
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4,686 |
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5,406 |
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Selling, general and administrative
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1,228 |
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1,653 |
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3,830 |
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5,160 |
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Depreciation and amortization
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623 |
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647 |
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1,889 |
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3,128 |
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Asset impairment and net restructuring and other charges
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(1 |
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12,469 |
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35 |
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12,736 |
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Total operating expenses
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5,665 |
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18,963 |
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17,551 |
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33,960 |
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Operating Income (Loss)
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955 |
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(11,325 |
) |
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2,844 |
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(10,696 |
) |
Other income (expense), net
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10 |
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(34 |
) |
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(113 |
) |
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(172 |
) |
Interest (expense)
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(166 |
) |
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(192 |
) |
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(538 |
) |
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(611 |
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Income (Loss) Before Income Taxes, Minority Interest (Loss)
Income and Net Earnings Related to Equity Investments
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799 |
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(11,551 |
) |
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2,193 |
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(11,479 |
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(Provision) benefit for income taxes
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(279 |
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4,402 |
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(845 |
) |
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4,741 |
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Minority interest (loss) income
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(1 |
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(1 |
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1 |
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Net earnings related to equity investments
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1 |
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2 |
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9 |
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2 |
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Net Income (Loss)
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$ |
520 |
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$ |
(7,147 |
) |
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$ |
1,356 |
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$ |
(6,735 |
) |
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Weighted-Average Shares Used to Compute Earnings (Loss) per
Share:
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Basic
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803 |
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795 |
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801 |
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794 |
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Diluted
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812 |
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795 |
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809 |
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794 |
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Earnings (Loss) per Basic Share
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$ |
0.65 |
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$ |
(8.99 |
) |
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$ |
1.69 |
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$ |
(8.48 |
) |
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Earnings (Loss) per Diluted Share
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$ |
0.64 |
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$ |
(8.99 |
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$ |
1.68 |
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$ |
(8.48 |
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Dividends Declared per Common Share
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$ |
0.2375 |
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$ |
0.2375 |
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$ |
0.7125 |
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$ |
0.7125 |
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The notes are an integral part of the consolidated financial
statements.
1
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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At | |
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At | |
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September 30, | |
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December 31, | |
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2005 | |
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2004 | |
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(Dollars in millions) | |
Assets
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Cash and cash equivalents
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$ |
2,837 |
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$ |
3,698 |
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Accounts receivable, less allowances of $401 and $523
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2,994 |
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3,195 |
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Deferred income taxes
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1,016 |
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1,111 |
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Other current assets
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546 |
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1,383 |
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Total Current Assets
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7,393 |
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9,387 |
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Property, plant and equipment, net of accumulated depreciation
of $2,791 and $1,588
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10,845 |
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11,509 |
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Goodwill
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4,753 |
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4,888 |
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Other purchased intangible assets, net
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290 |
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375 |
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Prepaid pension costs
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4,149 |
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3,991 |
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Other assets
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2,278 |
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2,654 |
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Total Assets
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$ |
29,708 |
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$ |
32,804 |
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Liabilities
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Accounts payable and accrued expenses
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$ |
2,361 |
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$ |
2,716 |
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Compensation and benefit-related liabilities
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1,684 |
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2,193 |
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Debt maturing within one year
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522 |
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1,886 |
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Other current liabilities
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2,456 |
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2,293 |
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Total Current Liabilities
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7,023 |
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9,088 |
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Long-term debt
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7,160 |
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8,779 |
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Long-term compensation and benefit-related liabilities
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3,240 |
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3,322 |
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Deferred income taxes
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1,667 |
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1,356 |
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Other long-term liabilities and deferred credits
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2,743 |
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3,240 |
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Total Liabilities
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21,833 |
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25,785 |
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Shareowners Equity
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Common stock, $1 par value, authorized
2,500,000,000 shares; issued and outstanding
803,013,312 shares (net of 171,983,367 treasury shares) at
September 30, 2005 and 798,570,623 shares (net of
171,983,367 treasury shares) at December 31, 2004
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803 |
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799 |
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Additional paid-in capital
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26,787 |
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27,170 |
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Accumulated deficit
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(19,824 |
) |
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(21,180 |
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Accumulated other comprehensive income
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109 |
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230 |
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Total Shareowners Equity
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7,875 |
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7,019 |
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Total Liabilities and Shareowners Equity
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$ |
29,708 |
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$ |
32,804 |
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The notes are an integral part of the consolidated financial
statements.
2
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS
EQUITY
(Unaudited)
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For the Nine Months | |
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Ended September 30, | |
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2005 | |
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2004 | |
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(Dollars in millions) | |
AT&T Common Stock
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Balance at beginning of year
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$ |
799 |
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$ |
792 |
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Shares issued under employee plans
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4 |
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2 |
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Other
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2 |
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Balance at end of period
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803 |
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|
796 |
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Additional Paid-In Capital
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Balance at beginning of year
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27,170 |
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27,722 |
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Shares issued, net:
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Under employee plans
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89 |
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57 |
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Other
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22 |
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Dividends declared
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(571 |
) |
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(566 |
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Other
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99 |
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52 |
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Balance at end of period
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26,787 |
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27,287 |
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Accumulated Deficit
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Balance at beginning of year
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(21,180 |
) |
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|
(14,707 |
) |
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Net income (loss)
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1,356 |
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(6,735 |
) |
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Treasury shares issued at less than cost
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(4 |
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Balance at end of period
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(19,824 |
) |
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(21,446 |
) |
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Accumulated Other Comprehensive Income (Loss)
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Balance at beginning of year
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230 |
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|
149 |
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Other comprehensive loss
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(121 |
) |
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(351 |
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Balance at end of period
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109 |
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|
(202 |
) |
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Total Shareowners Equity
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$ |
7,875 |
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$ |
6,435 |
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Summary of Total Comprehensive Income (Loss):
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Net income (loss)
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$ |
1,356 |
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$ |
(6,735 |
) |
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Other comprehensive (loss) [net of income taxes of $75 and $192]
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(121 |
) |
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|
(351 |
) |
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Total Comprehensive Income (Loss)
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$ |
1,235 |
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$ |
(7,086 |
) |
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AT&T accounts for treasury stock as retired stock. The
amount attributable to treasury stock at September 30, 2005
and December 31, 2004, was $(17,011) million.
We have 100 million authorized shares of preferred stock at
$1 par value.
The notes are an integral part of the consolidated financial
statements.
3
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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For the Nine Months | |
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Ended September 30, | |
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2005 | |
|
2004 | |
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(Dollars in millions) | |
Operating Activities
|
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Net income (loss)
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$ |
1,356 |
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|
$ |
(6,735 |
) |
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
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Asset impairment and net restructuring and other charges
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21 |
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12,662 |
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Net (gains) on sales of assets
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(6 |
) |
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|
(16 |
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Loss on early extinguishment of debt
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|
206 |
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|
301 |
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Depreciation and amortization
|
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|
1,889 |
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|
3,128 |
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Provision for uncollectible receivables
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|
122 |
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|
371 |
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|
Deferred income taxes
|
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|
478 |
|
|
|
(4,469 |
) |
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Decrease in receivables
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|
90 |
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|
178 |
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|
Decrease in accounts payable and accrued expenses
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|
(387 |
) |
|
|
(488 |
) |
|
Net change in other operating assets and liabilities
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|
(1,012 |
) |
|
|
(839 |
) |
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Other adjustments, net
|
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|
(29 |
) |
|
|
(82 |
) |
|
|
|
|
|
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|
Net Cash Provided by Operating Activities
|
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|
2,728 |
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|
|
4,011 |
|
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|
|
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Investing Activities
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|
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Capital expenditures and other additions
|
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|
(1,072 |
) |
|
|
(1,459 |
) |
Proceeds from sale or disposal of property, plant and equipment
|
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|
150 |
|
|
|
58 |
|
Investment distributions and sales
|
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|
14 |
|
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|
37 |
|
Net dispositions of businesses
|
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|
82 |
|
|
|
8 |
|
Decrease in restricted cash
|
|
|
546 |
|
|
|
7 |
|
Other investing activities, net
|
|
|
27 |
|
|
|
9 |
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(253 |
) |
|
|
(1,340 |
) |
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Retirement of long-term debt, including redemption premiums
|
|
|
(2,723 |
) |
|
|
(3,711 |
) |
Decrease in short-term borrowings, net
|
|
|
(316 |
) |
|
|
(511 |
) |
Issuance of common shares
|
|
|
68 |
|
|
|
45 |
|
Dividends paid on common stock
|
|
|
(570 |
) |
|
|
(565 |
) |
Other financing activities, net
|
|
|
205 |
|
|
|
345 |
|
|
|
|
|
|
|
|
Net Cash Used in Financing Activities
|
|
|
(3,336 |
) |
|
|
(4,397 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(861 |
) |
|
|
(1,726 |
) |
Cash and cash equivalents at beginning of year
|
|
|
3,698 |
|
|
|
4,353 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$ |
2,837 |
|
|
$ |
2,627 |
|
|
|
|
|
|
|
|
The notes are an integral part of the consolidated financial
statements.
4
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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&Ts Forms 10-Q for the
quarters ended March 31, 2005 and June 30, 2005, and
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. On June 30, 2005, AT&T shareowners
voted to approve the proposed merger agreement with SBC. In
October 2005, the Department of Justice and the Federal
Communications Commission (FCC) approved the merger. The
acquisition, which remains subject to approval by other
regulatory authorities and customary closing conditions, is
expected to close by the end of 2005. 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. 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.
5
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 l, 2003, consistent with the provisions of
SFAS No. 123, net income (loss) and earnings (loss)
per share amounts would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions, except per share amounts) | |
Net income (loss)
|
|
$ |
520 |
|
|
$ |
(7,147 |
) |
|
$ |
1,356 |
|
|
$ |
(6,735 |
) |
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation expense included in reported
results, net of income taxes
|
|
|
30 |
|
|
|
22 |
|
|
|
81 |
|
|
|
57 |
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense determined under
the fair value method for all awards, net of income taxes
|
|
|
(44 |
) |
|
|
(49 |
) |
|
|
(134 |
) |
|
|
(145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
506 |
|
|
$ |
(7,174 |
) |
|
$ |
1,303 |
|
|
$ |
(6,823 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$ |
0.65 |
|
|
$ |
(8.99 |
) |
|
$ |
1.69 |
|
|
$ |
(8.48 |
) |
Pro forma basic earnings (loss) per share
|
|
$ |
0.63 |
|
|
$ |
(9.02 |
) |
|
$ |
1.63 |
|
|
$ |
(8.59 |
) |
Diluted earnings (loss) per share
|
|
$ |
0.64 |
|
|
$ |
(8.99 |
) |
|
$ |
1.68 |
|
|
$ |
(8.48 |
) |
Pro forma diluted earnings (loss) per share
|
|
$ |
0.62 |
|
|
$ |
(9.02 |
) |
|
$ |
1.61 |
|
|
$ |
(8.59 |
) |
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 No. 123 (revised 2004),
Share-Based Payment, beginning in the first quarter
of 2006 (see note 12).
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
|
|
|
(92 |
) |
|
|
|
|
|
|
(92 |
) |
Goodwill allocated to sale of payphone business
|
|
|
(43 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
$ |
4,683 |
|
|
$ |
70 |
|
|
$ |
4,753 |
|
|
|
|
|
|
|
|
|
|
|
6
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
|
|
$ |
521 |
|
|
$ |
282 |
|
|
$ |
239 |
|
Other
|
|
|
206 |
|
|
|
155 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
$ |
727 |
|
|
$ |
437 |
|
|
$ |
290 |
|
|
|
|
|
|
|
|
|
|
|
Amortization expense associated with purchased intangible assets
for the three and nine months ended September 30, 2005, was
$26 million and $79 million, respectively.
Amortization expense for the three and nine months ended
September 30, 2004, was $28 million and
$89 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 approximately $80 million for each of
the years ending December 31, 2007 and 2008, at which time
the purchased intangible assets will be fully amortized.
During the third quarter of 2004, we recorded a $15 million
impairment charge relating to other purchased intangible assets
(customer lists and relationships) (see note 6).
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 8).
Recorded within other current liabilities were $574 million
and $281 million of income taxes payable as of
September 30, 2005 and December 31, 2004, respectively.
|
|
|
Supplementary Shareowners Equity Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Foreign | |
|
Net Revaluation | |
|
Net | |
|
Accumulated | |
|
|
Currency | |
|
of Certain | |
|
Minimum | |
|
Other | |
|
|
Translation | |
|
Financial | |
|
Pension | |
|
Comprehensive | |
|
|
Adjustment | |
|
Instruments | |
|
Liability | |
|
Income (Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005
|
|
$ |
319 |
|
|
$ |
19 |
|
|
$ |
(108 |
) |
|
$ |
230 |
|
Change
|
|
|
(116 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
$ |
203 |
|
|
$ |
14 |
|
|
$ |
(108 |
) |
|
$ |
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
|
Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in millons) | |
Other comprehensive (loss):
|
|
|
|
|
|
|
|
|
Net foreign currency translation adjustment [net of income taxes
of $72 and $11]
|
|
$ |
(116 |
) |
|
$ |
(17 |
) |
Net revaluation of certain financial instruments:
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) [net of income taxes of $3 and $(7)]
|
|
|
(6 |
) |
|
|
11 |
|
|
Recognition of previously unrealized losses (gains) [net of
income taxes of $0 and
$15](1)
|
|
|
1 |
|
|
|
(24 |
) |
Net minimum pension liability adjustment [net of income taxes of
$173]
|
|
|
|
|
|
|
(321 |
) |
|
|
|
|
|
|
|
Total other comprehensive (loss)
|
|
$ |
(121 |
) |
|
$ |
(351 |
) |
|
|
|
|
|
|
|
|
|
(1) |
See table below for a summary of recognition of previously
unrealized losses (gains). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Pretax | |
|
After Taxes | |
|
Pretax | |
|
After Taxes | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Recognition of previously unrealized losses (gains):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of various securities
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
(12 |
) |
|
$ |
(7 |
) |
|
Other financial instrument activity
|
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognition of previously unrealized losses (gains)
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
(39 |
) |
|
$ |
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. |
Earnings Per Common Share and Potential Common Share |
Basic earnings (losses) per common share (EPS) is computed
by dividing net income (loss) by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects
the potential dilution (considering the combined income and
share impact) that could occur if securities or other contracts
to issue common stock were exercised or converted into common
stock. The potential issuance of common stock is assumed to
occur at the beginning of the year (or at the time of issuance
if later), and the incremental shares are included using the
treasury stock method. The proceeds utilized in applying the
treasury stock method consist of the amount, if any, to be paid
upon exercise, the amount of compensation cost attributed to
future service not yet recognized, and any tax benefits credited
to paid-in-capital related to the exercise. These proceeds are
then assumed to be used to purchase common stock at the
average-market price during the period. The incremental shares
(difference between the shares assumed to be issued and the
shares assumed to be purchased), to the extent they would have
been dilutive, are included in the denominator of the diluted
EPS calculation. Potentially dilutive securities for all periods
presented were stock options, restricted stock units and
performance shares. No adjustments were made to income for the
computation of diluted EPS. Since AT&T recorded a loss for
the three and nine months ended September 30, 2004, diluted
loss per share is the same as basic loss per share, as any
potentially dilutive securities would be antidilutive.
|
|
6. |
Asset Impairment and Net Restructuring and Other Charges |
Asset impairment and net restructuring and other charges for the
three months ended September 30, 2005, were a net credit of
$1 million. During the third quarter of 2005, management
reevaluated preexisting restructuring reserves and determined
the actual or revised estimated obligations under these reserves
differed
8
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
from the estimates initially made. As a result, a net
$11 million of excess preexisting employee separation
restructuring liabilities were reversed. These activities were
partially offset by an additional $10 million net charge
recorded to preexisting facilities closing and other reserves.
These adjustments were recorded in the Corporate and Other group
and did not result from changes to the actual or planned
headcount separations or the number of vacated facilities.
Asset impairment and net restructuring and other charges of
$35 million for the nine months ended September 30,
2005, consisted of $55 million of net facility closing and
other reserves and a related $5 million asset impairment
charge. These activities were partially offset by the net
reversal of $25 million of excess preexisting employee
separation restructuring liabilities.
The net facilities closing and other reserves of
$55 million for the nine months ended September 30,
2005, primarily reflected a $45 million charge recorded in
the second quarter of 2005 associated with the continued
consolidation of our real estate portfolio and reflected the
present value of contractual lease obligations, net of estimated
sublease income, associated with vacant facilities primarily
resulting from workforce reductions. In addition, we recorded a
$10 million net charge in the third quarter of 2005 based
on a reevaluation of preexisting facilities closing and other
reserves as discussed above. Facilities closing and other
charges of $53 million were recorded in the Corporate and
Other group and $2 million in AT&T Business Services.
Additionally, the Corporate and Other group and AT&T
Business Services recorded $2 million and $3 million,
respectively, of leasehold improvement impairment charges
related to the second quarter 2005 facilities closing reserve.
The net reversal of $25 million of excess preexisting
employee separation restructuring liabilities for the nine
months ended September 30, 2005, was the result of
managements reevaluation of employee separation
restructuring reserves. Management determined the actual or
revised estimates of separation and related benefit payments
differed from the estimates initially made, resulting in a net
reversal of $25 million. AT&T Business Services
recorded $23 million of the reversal and the Corporate and
Other group recorded $12 million. AT&T Consumer
Services recorded an additional $10 million charge as a
result of this review. The adjustment to these reserves did not
result from changes to the actual or planned headcount
separations.
The following table displays the activity and balances of the
restructuring reserve account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Cost | |
|
|
| |
|
|
Employee | |
|
Facility | |
|
|
|
|
Separations | |
|
Closings | |
|
Other | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Balance at January 1, 2005
|
|
$ |
506 |
|
|
$ |
228 |
|
|
$ |
2 |
|
|
$ |
736 |
|
|
Net charges
|
|
|
(25 |
) |
|
|
57 |
|
|
|
(2 |
) |
|
|
30 |
|
|
Net deductions
|
|
|
(313 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
(368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
$ |
168 |
|
|
$ |
230 |
|
|
$ |
|
|
|
$ |
398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deductions primarily reflected total cash payments of
$368 million. These cash payments include cash termination
benefits of $310 million and $58 million of facility
closing reserve payments, which were funded primarily through
cash from operations.
Asset impairment and net restructuring and other charges of
$12,469 million for the three months ended
September 30, 2004, were comprised of $11,389 million
of asset impairment charges and $1,080 million of net
business restructuring and other obligations.
In July 2004, we announced a strategic change in our business
focus away from traditional consumer services and towards
business markets and emerging technologies. As a result of this
strategic change, we performed an evaluation of our long-lived
assets, including property, plant and equipment and internal-use
software (the asset group) as of July 1, 2004, as this
strategic change created a triggering event
9
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
necessitating such a review. In assessing impairments for
long-lived assets we follow the provisions of
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. We operate an integrated
telecommunications network; therefore, we performed our testing
of the asset group at the entity level, as this is the lowest
level for which identifiable cash flows are available.
In performing the test, we determined that the total of the
expected future undiscounted cash flows directly related to the
existing service potential of the asset group was less than the
carrying value of the asset group; therefore, an impairment
charge was required. The impairment charges of
$11,389 million represented the difference between the fair
values of the asset group and its carrying values and were
included within asset impairment and net restructuring and other
charges in the consolidated statements of operations. The
impairment charges resulted from sustained pricing pressure and
the evolution of services toward newer technologies in the
business market as well as changes in the regulatory
environment, which led to a shift away from traditional consumer
services.
AT&T Business Services recorded impairment charges of
$11,330 million resulting in reductions to property, plant
and equipment of $11,023 million, internal-use software of
$287 million, other purchased intangibles of
$15 million and other long-lived assets of $5 million.
AT&T Consumer Services recorded impairment charges of
$59 million resulting in reductions to property, plant and
equipment of $11 million and internal-use software of
$48 million. As a result of the asset impairments, a new
cost basis was established for those assets that were impaired.
The new cost basis resulted in a reduction of gross property,
plant and equipment and internal-use software and the write-off
of accumulated depreciation and accumulated amortization.
We calculated the fair value of our asset group using discounted
cash flows. The discounted cash flows calculation was made
utilizing various assumptions and estimates regarding future
revenue, expenses and cash flows projections through 2012. The
time horizon was determined based on the estimated remaining
useful life of the primary assets in the asset group; the
primary assets are those from which the most significant cash
flows are generated, principally consisting of the transport
central office equipment. Pursuant to SFAS No. 144,
the forecasts were developed without contemplation of
investments in new products. The 10% discount rate utilized was
determined using a weighted-average cost of capital (debt and
equity) and was more heavily weighted towards debt given that
the asset group, which primarily consisted of tangible assets,
can be financed with a larger proportion of debt. When
allocating the impairment to the asset categories, market values
were utilized, to the extent determinable, to ensure that no
asset category was impaired below its fair value.
The strategic change in business focus also created a
triggering event for a review of our goodwill. We
follow the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets, for determining impairments.
SFAS No. 142 indicates that if other types of assets
(in addition to goodwill) of a reporting unit are being tested
for impairment at the same time as goodwill, then those assets
are to be tested for impairment prior to performing the goodwill
impairment testing. Accordingly, the impairment charges noted
above reduced the carrying value of the reporting units when
performing the impairment test for goodwill.
The goodwill impairment test requires us to estimate the fair
value of our overall business enterprise down to the reporting
unit level. Our reporting units are AT&T Business Services
and AT&T Consumer Services. We estimated fair value using
both a discounted cash flows model, as well as an approach using
market comparables, both of which are weighted equally to
determine fair value. Under the discounted cash flows method, we
utilized estimated long-term revenue and cash flows forecasts,
as well as assumptions of terminal value, together with an
applicable discount rate, to determine fair value. Under the
market approach, fair value was determined by comparing our
reporting units to similar businesses (or guideline companies).
We then compared the carrying value of our reporting units to
their fair value. Since the fair value of our reporting units
exceeded their carrying amounts, no goodwill impairment charge
was recorded.
10
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The net business restructuring activities of $1,080 million
for the third quarter of 2004 consisted of $1,043 million
for employee separations (of which $339 million related to
benefit plan curtailment costs) and $37 million of facility
closing obligations.
This exit plan covered separation costs for approximately 11,200
employees (the majority of which were involuntary),
approximately 60% of whom were managers. This activity resulted
from the continued integration and automation of various
functions within network operations, and our strategic change in
focus away from traditional consumer services and towards
business markets and emerging technologies.
Facility closing reserves of $37 million for the three
months ended September 30, 2004, were primarily associated
with the continued consolidation of our real estate portfolio
and reflect the present value of contractual lease obligations,
net of estimated sublease income, associated with vacant
facilities resulting from workforce reductions and network
equipment space that will not be used.
Asset impairment and net restructuring and other charges of
$12,736 million for the nine months ended
September 30, 2004, were comprised of $11,511 million
of asset impairments and $1,225 million in net business
restructuring and other obligations.
The asset impairment charges of $11,511 million primarily
reflect the third quarter asset impairments of
$11,389 million as discussed above. In addition, we
recorded real estate impairment charges of $122 million
related to the decision made during the first quarter of 2004 to
divest five owned properties in an effort to further reduce
costs and consolidate our real estate portfolio. In accordance
with SFAS No. 144, an impairment charge was recorded,
within the Corporate and Other group, to reduce the book value
of the five properties to fair-market value based on third-party
assessments (including broker appraisals). The sales of these
properties have been completed.
The net restructuring obligations of $1,225 million for the
nine months ended September 30, 2004, were primarily
comprised of $1,147 million of net employee separations (of
which $339 million related to benefit plan curtailment
costs) and $78 million of facility closing obligations.
These exit plans covered separation costs for approximately
12,600 employees (the majority of which were involuntary),
nearly one-half of whom were managers. These activities resulted
from the continued integration and automation of various
functions within network operations, reorganizations throughout
our non-U.S. operations, and our strategic change in focus
away from traditional consumer services and towards business
markets and emerging technologies.
The facility closing reserves of $78 million for the nine
months ended September 30, 2004, were primarily associated
with the consolidation of our real estate portfolio and reflect
the present value of contractual lease obligations, net of
estimated sublease income, associated with vacant facilities
resulting from workforce reductions and network equipment space
that will not be used.
Approximately 90% of headcount reductions associated with all of
our 2004 exit plans were completed as of September 30,
2005. As of September 30, 2005, we had approximately 39,500
employees compared with approximately 47,600 employees at
December 31, 2004.
In May 2005, we repaid $125 million of short-term
borrowings outstanding under the AT&T Consumer Services
accounts receivable securitization facility and subsequently
terminated the facility.
In April 2005, we completed the early retirement of
$1.25 billion of our outstanding 7.30% Notes maturing
in November 2011, which carried an interest rate of 9.05% at the
time of retirement. The notes were
11
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
repurchased with cash and resulted in a loss of approximately
$0.2 billion recorded in other income (expense), net.
In the normal course of business, we use various financial
instruments, including derivative financial instruments, to
manage our market risk associated with changes in interest rates
and foreign exchange rates. We do not use financial instruments
for trading or speculative purposes. The following information
pertains to financial instruments with significant activity
since December 31, 2004.
Letters of credit are guarantees we purchase, which ensure our
performance or payment to third parties in accordance with
specified terms and conditions. Management has determined that
our letters of credit do not create additional risk to us. The
notional amounts outstanding at September 30, 2005 and
December 31, 2004, were $0.3 billion and
$1.2 billion, respectively. The decrease in the notional
amount of the letters of credit was primarily related to the
maturity of debt in February 2005. In addition, restricted cash
of $546 million, recorded within other current assets as of
December 31, 2004, which collateralized these letters of
credit, was released upon maturity of this debt.
|
|
|
Interest Rate Swap Agreements |
We enter into interest rate swap agreements to manage the
fixed/floating mix of our debt portfolio in order to reduce
aggregate risk of interest rate movements. These agreements
involve the exchange of floating-rate for fixed-rate payments or
the exchange of fixed-rate for floating-rate payments without
the exchange of the underlying notional amount. Floating-rate
payments and receipts are primarily tied to the London
Inter-Bank Offered Rate (LIBOR). During the first quarter of
2005, all of our floating-rate to fixed-rate swaps (notional
amount of $108 million), designated as cash flow hedges,
matured.
In addition, we have combined interest-rate foreign-currency
swap agreements for foreign-currency-denominated debt, which
hedge our risk to both interest rate and currency movements. As
of September 30, 2005, the notional amount and fair value
of these contracts was $0.6 billion and $0.3 billion,
respectively, compared with $1.4 billion and
$0.7 billion, respectively, at December 31, 2004. The
decreases in the notional amount and fair value of these
agreements were primarily related to the February 2005 maturity
of $0.7 billion notional amount of contracts relating to
debt that also matured in February 2005.
We enter into foreign currency contracts to manage our exposure
to changes in currency exchange rates related to
foreign-currency-denominated transactions. As of
September 30, 2005, the notional amount outstanding on
these contracts was $0.7 billion compared with
$0.6 billion as of December 31, 2004. The increase in
the notional amount was primarily attributable to changes in the
forward contracts portfolio, the majority of which were not
designated for accounting purposes, as well as an increase in
our net investment hedges.
|
|
|
Equity Option and Equity Swap Contracts |
We entered into equity options and equity swap contracts, which
were undesignated, to manage our exposure to changes in equity
prices associated with various equity awards tied to previously
affiliated companies. During the first quarter of 2005, all of
the previously outstanding equity awards and the related equity
option and equity swap contracts expired (notional amount of
$29 million).
12
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
|
|
9. |
Pension, Postretirement and Other Employee Benefit Plans |
We sponsor noncontributory defined benefit pension plans
covering the majority of our U.S. employees. Our
postretirement benefit plans for current and certain future
retirees include health-care benefits, life insurance coverage
and telephone concessions.
The following table shows the components of net periodic benefit
(credit) cost for our U.S. plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension | |
|
Postretirement | |
|
Pension | |
|
Postretirement | |
|
|
Benefits | |
|
Benefits | |
|
Benefits | |
|
Benefits | |
|
|
| |
|
| |
|
| |
|
| |
|
|
For the Three Months Ended | |
|
For the Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Service cost benefits earned during the period
|
|
$ |
45 |
|
|
$ |
55 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
133 |
|
|
$ |
165 |
|
|
$ |
13 |
|
|
$ |
18 |
|
Interest cost on benefit obligations
|
|
|
229 |
|
|
|
231 |
|
|
|
77 |
|
|
|
89 |
|
|
|
686 |
|
|
|
691 |
|
|
|
236 |
|
|
|
268 |
|
Amortization of unrecognized prior service cost
|
|
|
21 |
|
|
|
32 |
|
|
|
9 |
|
|
|
13 |
|
|
|
66 |
|
|
|
97 |
|
|
|
28 |
|
|
|
39 |
|
Credit for expected return on plan assets
|
|
|
(335 |
) |
|
|
(359 |
) |
|
|
(40 |
) |
|
|
(45 |
) |
|
|
(1,004 |
) |
|
|
(1,078 |
) |
|
|
(121 |
) |
|
|
(133 |
) |
Amortization of losses
|
|
|
19 |
|
|
|
1 |
|
|
|
20 |
|
|
|
25 |
|
|
|
59 |
|
|
|
3 |
|
|
|
65 |
|
|
|
75 |
|
Net curtailment loss*
|
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
119 |
|
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (credit) cost
|
|
$ |
(21 |
) |
|
$ |
180 |
|
|
$ |
71 |
|
|
$ |
207 |
|
|
$ |
(60 |
) |
|
$ |
98 |
|
|
$ |
221 |
|
|
$ |
386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Included in asset impairment and net restructuring and other
charges (see note 6). |
In 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 was signed into law. The Act
introduced a prescription drug benefit under Medicare (Medicare
Part D), as well as a federal subsidy to sponsors of
retiree health-care benefits. In 2004, we determined that the
prescription drug benefit provided to a specific portion of our
postretirement benefit plan participants is actuarially
equivalent to Medicare Part D.
In the second quarter of 2005, we determined that the
prescription drug benefit provided to the remaining plan
participants is also actuarially equivalent to the Medicare
Part D benefits and therefore, we expect to be entitled to
the federal subsidy. The impact of such expected federal subsidy
will not have a significant effect on our accumulated
postretirement benefit obligation or net periodic postretirement
benefit cost.
We expect to contribute approximately $550 million to the
postretirement benefit plans in 2005. As of September 30,
2005, approximately $400 million of such contributions have
been made.
Certain non-U.S. operations have varying types of pension
programs providing benefits for substantially all of their
employees.
13
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The following table shows the components of net periodic benefit
cost for non-U.S. plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Service cost benefits earned during the period
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
18 |
|
|
$ |
17 |
|
Interest cost on benefit obligations
|
|
|
9 |
|
|
|
6 |
|
|
|
30 |
|
|
|
25 |
|
Credit for expected return on plan assets
|
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(26 |
) |
|
|
(20 |
) |
Amortization of losses
|
|
|
2 |
|
|
|
2 |
|
|
|
8 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
9 |
|
|
$ |
8 |
|
|
$ |
30 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. |
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 disputes with other carriers,
environmental and other matters. Such matters are subject to
many uncertainties, and outcomes are not predictable with
assurance. Consequently, we are unable to ascertain the ultimate
aggregate amount of monetary liability or financial impact with
respect to these matters at September 30, 2005. However, if
these matters are adversely settled, such amounts could be
material to our consolidated financial statements.
During the second quarter of 2005, we reached a settlement for
$29 million, subject to final approval by the Court, of the
class action claims brought by participants in our Long Term
Savings Plan for Management Employees (the Plan). The lawsuit
alleged we breached our fiduciary duties to the Plan and Plan
participants by making materially false and misleading
statements and omitting to state material facts concerning our
future business prospects. Final approval was received in
September 2005. The settlement of this lawsuit did not have a
material impact on our results of operations.
In 2004, following an FCC ruling against a petition we filed in
which we asked the FCC to decide the issue of whether certain
phone-to-phone Internet protocol (IP) telephony
services are exempt from paying access charges, SBC filed a
lawsuit in federal district court in Missouri asserting claims
that we avoided interstate and intrastate access charges. During
the first quarter of 2005, AT&T and SBC settled a variety of
claims and disputes between the parties, including this
litigation. The settlement of all matters resulted in AT&T
paying SBC approximately $60 million, which did not have a
material impact on our results of operations. Other carriers,
including BellSouth Telecommunications, Inc. (BellSouth) have
filed similar lawsuits in various jurisdictions. These claims
did not specify damages.
During the second quarter of 2005, we settled and paid lawsuits
brought by the trustee for the bondholders liquidating
trust, as well as a preference claim brought by creditors of At
Home Corporation (At Home). Under the terms of the settlement
agreement, the bondholders were paid $340 million, in
addition to AT&T and Comcast Corporation (Comcast)
relinquishing claims held in reserve by the At Home estate.
Under the terms of a separation agreement with our former
broadband subsidiary, which was spun off to Comcast in 2002, the
settlement was shared equally between the two parties. The
settlement of this litigation did not have a material impact on
our results of operations.
Class action lawsuits filed in California on behalf of At Home
shareholders, which alleged AT&T breached fiduciary
obligations, have been dismissed and are on appeal.
In February 2005, the FCC ruled against AT&T and our
petition for a declaratory ruling that our enhanced prepaid card
services is an interstate information service. Following this
decision, Qwest Communications International, Inc. (Qwest) filed
a lawsuit against us asserting claims for breach of federal and
state tariffs, unjust enrichment, fraudulent misrepresentation
and breach of contract. Qwest seeks unspecified
14
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
damages. Other carriers, including BellSouth, have filed similar
lawsuits in various jurisdictions, all seeking unspecified
damages.
Our results are segmented according to the customers we service:
AT&T Business Services and AT&T Consumer Services.
AT&T Business Services provides a variety of communication
services to various-sized businesses and government agencies
including long distance, international, toll-free and local
voice, including wholesale transport services, as well as data
services and Internet protocol and enhanced (IP&E) services,
which includes the management of network servers and
applications. AT&T Business Services also provides
outsourcing solutions and other professional services.
AT&T Consumer Services provides a variety of communication
services to residential customers. These services include
traditional long distance voice services, such as domestic and
international dial services (long distance or local toll calls
where the number 1 is dialed before the call) and
calling card services. Transaction services, such as prepaid
card and operator-assisted calls, are also offered.
Collectively, these services represent stand-alone long distance
services and are not offered in conjunction with any other
service. AT&T Consumer Services also provides dial-up
Internet services, and all distance services, which generally
bundle long distance, local and local toll.
The balance of our operations is included in a Corporate
and Other group. This group primarily reflects corporate
staff functions and the elimination of transactions between
segments.
Total assets for each segment include all assets, except
intercompany receivables. Nearly all prepaid pension assets,
taxes and corporate-owned or leased real estate are held at the
corporate level and, therefore, are included in the Corporate
and Other group. Capital additions for each segment include
capital expenditures for property, plant and equipment,
additions to internal-use software (included in other assets)
and additions to nonconsolidated investments. We evaluate
performance based on several factors, of which the primary
financial measure is operating income.
AT&T Business Services sells services to AT&T Consumer
Services at cost-based prices. These sales are recorded by
AT&T Business Services as contra-expense.
15
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
AT&T Business Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long distance voice services
|
|
$ |
2,063 |
|
|
$ |
2,364 |
|
|
$ |
6,311 |
|
|
$ |
7,363 |
|
|
|
Local voice services
|
|
|
313 |
|
|
|
390 |
|
|
|
1,048 |
|
|
|
1,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total voice services
|
|
|
2,376 |
|
|
|
2,754 |
|
|
|
7,359 |
|
|
|
8,546 |
|
|
|
Data services
|
|
|
1,505 |
|
|
|
1,693 |
|
|
|
4,608 |
|
|
|
5,098 |
|
|
|
IP&E services
|
|
|
630 |
|
|
|
587 |
|
|
|
1,838 |
|
|
|
1,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total data and IP&E services
|
|
|
2,135 |
|
|
|
2,280 |
|
|
|
6,446 |
|
|
|
6,803 |
|
|
Outsourcing, professional services and other
|
|
|
598 |
|
|
|
611 |
|
|
|
1,778 |
|
|
|
1,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AT&T Business Services
|
|
|
5,109 |
|
|
|
5,645 |
|
|
|
15,583 |
|
|
|
17,128 |
|
AT&T Consumer Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stand-alone long distance voice and other services
|
|
|
924 |
|
|
|
1,256 |
|
|
|
2,923 |
|
|
|
4,045 |
|
|
Bundled services
|
|
|
575 |
|
|
|
724 |
|
|
|
1,854 |
|
|
|
2,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AT&T Consumer Services
|
|
|
1,499 |
|
|
|
1,980 |
|
|
|
4,777 |
|
|
|
6,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments
|
|
|
6,608 |
|
|
|
7,625 |
|
|
|
20,360 |
|
|
|
23,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
12 |
|
|
|
13 |
|
|
|
35 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
6,620 |
|
|
$ |
7,638 |
|
|
$ |
20,395 |
|
|
$ |
23,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Operating Income (Loss) to Income (Loss)
before Income Taxes, Minority Interest (Loss) Income and Net
Earnings Related to Equity Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
AT&T Business Services
|
|
$ |
513 |
|
|
$ |
(11,095 |
) |
|
$ |
1,629 |
|
|
$ |
(10,860 |
) |
AT&T Consumer Services
|
|
|
541 |
|
|
|
281 |
|
|
|
1,605 |
|
|
|
892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments
|
|
|
1,054 |
|
|
|
(10,814 |
) |
|
|
3,234 |
|
|
|
(9,968 |
) |
Corporate and Other
|
|
|
(99 |
) |
|
|
(511 |
) |
|
|
(390 |
) |
|
|
(728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
955 |
|
|
|
(11,325 |
) |
|
|
2,844 |
|
|
|
(10,696 |
) |
Other income (expense), net
|
|
|
10 |
|
|
|
(34 |
) |
|
|
(113 |
) |
|
|
(172 |
) |
Interest (expense)
|
|
|
(166 |
) |
|
|
(192 |
) |
|
|
(538 |
) |
|
|
(611 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, minority interest (loss)
income and net earnings related to equity investments
|
|
$ |
799 |
|
|
$ |
(11,551 |
) |
|
$ |
2,193 |
|
|
$ |
(11,479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
16
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
At | |
|
At | |
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in millions) | |
AT&T Business Services
|
|
$ |
19,541 |
|
|
$ |
20,621 |
|
AT&T Consumer Services
|
|
|
595 |
|
|
|
743 |
|
|
|
|
|
|
|
|
|
Total reportable segments
|
|
|
20,136 |
|
|
|
21,364 |
|
Corporate and Other
|
|
|
9,572 |
|
|
|
11,440 |
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
29,708 |
|
|
$ |
32,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
AT&T Business Services
|
|
$ |
344 |
|
|
$ |
391 |
|
|
$ |
1,063 |
|
|
$ |
1,324 |
|
AT&T Consumer Services
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments
|
|
|
344 |
|
|
|
400 |
|
|
|
1,063 |
|
|
|
1,361 |
|
Corporate and Other
|
|
|
6 |
|
|
|
6 |
|
|
|
15 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital additions
|
|
$ |
350 |
|
|
$ |
406 |
|
|
$ |
1,078 |
|
|
$ |
1,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Revenue(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States(2)
|
|
$ |
6,235 |
|
|
$ |
7,227 |
|
|
$ |
19,168 |
|
|
$ |
22,078 |
|
International
|
|
|
385 |
|
|
|
411 |
|
|
|
1,227 |
|
|
|
1,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
6,620 |
|
|
$ |
7,638 |
|
|
$ |
20,395 |
|
|
$ |
23,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At | |
|
At | |
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in millions) | |
Long-Lived
Assets(3)
|
|
|
|
|
|
|
|
|
United
States(2)
|
|
$ |
14,227 |
|
|
$ |
14,968 |
|
International
|
|
|
1,661 |
|
|
|
1,804 |
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$ |
15,888 |
|
|
$ |
16,772 |
|
|
|
|
|
|
|
|
|
|
(1) |
Revenue is reported in the geographic area in which it
originates. |
|
(2) |
Includes amounts attributable to operations in Puerto Rico and
the Virgin Islands. |
|
(3) |
Long-lived assets include property, plant and equipment, net;
goodwill and other purchased intangibles, net. |
17
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Reflecting the dynamics of our business, we continually review
our management model and structure, which may result in
adjustments to our operating segments in the future.
|
|
12. |
New Accounting Pronouncements |
In June 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position FSP
FAS No. 143-1, Accounting for Electronic
Equipment Waste Obligations, to address the accounting for
obligations associated with the Directive on Waste Electrical
and Electronic Equipment (the Directive) issued by the European
Union (EU). The Directive was enacted on February 13, 2003,
and directs EU-member countries to adopt legislation to regulate
the collection, treatment, recovery, and environmentally sound
disposal of electrical and electronic waste equipment. The
Directive concludes that commercial users are obligated to
retire, in an environmentally sound manner, specific assets that
qualify as historical waste. FSP FAS No. 143-1 is
effective for reporting periods ending after June 8, 2005,
which is June 30, 2005 for us, or the date of adoption of
the Directive by the applicable EU-member countries, if later.
We have evaluated the impact to our operations in EU countries
that have adopted legislation and have deemed these costs to be
immaterial. We will continue to evaluate the impact as other
EU-member countries enact legislation. However, if the remaining
EU-member countries enact similar legislation, we do not expect
a material impact to our results of operations.
In March 2005, the FASB issued FASB Interpretation
(FIN) 47, Accounting for Conditional Asset Retirement
Obligations, an interpretation of SFAS No. 143,
Accounting for Asset Retirement Obligations.
FIN 47 clarifies that the term conditional asset
retirement obligation, as used in SFAS No. 143,
refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset
retirement activity is unconditional even though uncertainty
exists about the timing and/or method of settlement. FIN 47
requires an entity to recognize a liability for the fair value
of the conditional asset retirement obligation if the fair value
of the liability can be reasonably estimated. FIN 47 is
effective for fiscal years ending after December 15, 2005,
which is December 31, 2005 for us; however, earlier
application is permitted. We are currently evaluating the impact
of FIN 47 on our results of operations, financial position
and cash flows.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment, which requires
a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on
the grant-date fair value of the award. Additional guidance to
assist in the initial interpretation of this revised statement
was subsequently issued by the SEC in Staff Accounting
Bulletin No. 107. SFAS No. 123 (revised
2004) eliminates the alternative of using APB Opinion
No. 25 intrinsic-value method of accounting that was
provided for in SFAS No. 123 as originally issued.
Effective January 1, 2003, we adopted the fair-value
recognition provisions of original SFAS No. 123 on a
prospective basis and we began to record stock-based
compensation expense for all employee awards (including stock
options) granted or modified after January 1, 2003, using
the nominal-vesting approach. Had we used the non-substantive
vesting method, which will be required upon adoption, our
results of operations would not have been materially different
from those reported for the nine months ended September 30,
2005 and 2004. Adoption of the revised standard will require
that we begin to recognize expense for unvested awards issued
prior to January 1, 2003. Additionally, this standard
requires that estimated forfeitures be considered in determining
compensation expense. For equity awards other than stock
options, we have not previously included estimated forfeitures
in determining compensation expense. Accordingly, the difference
between the expense we have recognized to date and the
compensation expense as calculated considering estimated
forfeitures will be reflected as a cumulative effect of
accounting change upon adoption. Further, SFAS No. 123
(revised 2004) requires that excess tax benefits be recognized
as an addition to paid-in capital and amends
SFAS No. 95, Statement of Cash Flows, to
require that the excess tax benefits be reported as a financing
cash inflow rather than as a reduction of taxes paid.
SFAS No. 123 (revised 2004) is effective for
18
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
annual periods beginning after June 15, 2005, which is
January 1, 2006 for us. We intend to elect a modified
prospective adoption beginning in the first quarter of 2006 and
do not anticipate that the adoption of SFAS No. 123
(revised 2004) will have a material impact on our results of
operations.
In December 2004, the FASB issued FASB Staff Position FSP
FAS 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004, which provides guidance on the
accounting and disclosure requirements for the repatriation
provision of the Act. The Act creates a one-time tax incentive
for U.S. corporations to repatriate accumulated income
earned abroad by providing a tax deduction of 85% of dividends
received for certain foreign earnings that are repatriated. In
an effort to assist taxpayers with the interpretation of the
repatriation provision of the Act, in May 2005, the United
States Department of Treasury issued detailed guidance on
certain technical aspects that required clarification. Based
upon this guidance, in the third quarter of 2005, we completed
our evaluation of the impact of the repatriation provision and
recorded an income tax benefit of $6 million related to
deferred taxes previously provided on foreign earnings.
On October 5, 2005, we entered into a $0.5 billion
364-day Revolving Credit Facility Agreement (the
Agreement) with a group of financial institutions,
including J.P. Morgan Securities Inc., Citigroup Global
Markets Inc. and Banc of America Securities LLC. The Agreement
replaces the $1.0 billion 364-day Revolving Credit Facility
Agreement dated October 6, 2004.
19
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
AT&T CORP. AND SUBSIDIARIES
Forward-Looking Statements
This document contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995 with respect to financial condition, results of operations,
cash flows, dividends, financing plans, business strategies,
operating efficiencies, capital and other expenditures,
competitive positions, availability of capital, growth
opportunities for new and existing products, benefits from new
technologies, availability and deployment of new technologies,
plans and objectives of management, mergers and acquisitions,
and other matters.
Statements in this document that are not historical facts are
hereby identified as forward-looking statements for
the purpose of the safe harbor provided by Section 27A of
the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The words estimate,
project, intend, expect,
believe, plan, and similar expressions
are intended to identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this document.
Any Form 10-K, Annual Report to Shareholders,
Form 10-Q or Form 8-K of AT&T Corp. may include
forward-looking statements. In addition, other written or oral
statements which constitute forward-looking statements have been
made and may in the future be made by or on behalf of AT&T,
including with respect to the matters referred to above. These
forward-looking statements are necessarily estimates, reflecting
the best judgment of senior management that rely on a number of
assumptions concerning future events, many of which are outside
of our control, and involve a number of risks and uncertainties
that could cause actual results to differ materially from those
suggested by the forward-looking statements. These
forward-looking statements should, therefore, be considered in
light of various important factors, including those set forth in
this document. Important factors that could cause actual results
to differ materially from estimates or projections contained in
the forward-looking statements include, without limitation:
|
|
|
|
|
the impact of existing, new and restructured competitors in the
markets in which we compete, including competitors that may
offer less expensive products and services, desirable or
innovative products, technological substitutes, or have
extensive resources or better financing, |
|
|
|
the impact of oversupply of capacity resulting from excessive
deployment of network capacity, |
|
|
|
the ongoing global and domestic trend toward consolidation in
the telecommunications industry, which may have the effect of
making the competitors larger and better financed and afford
these competitors with extensive resources and greater
geographic reach, allowing them to compete more effectively, |
|
|
|
the effects of vigorous competition in the markets in which we
operate, which may decrease prices charged and change customer
mix and profitability, |
|
|
|
the ability to establish a significant market presence in new
geographic and service markets, |
|
|
|
the availability and cost of capital, |
|
|
|
the impact of any unusual items resulting from ongoing
evaluations of our business strategies, |
|
|
|
the requirements imposed on us or latitude allowed to
competitors by the Federal Communications Commission
(FCC) or state regulatory commissions under the
Telecommunications Act or other applicable laws and regulations, |
|
|
|
the invalidity of portions of the FCCs Triennial Review
Order, |
|
|
|
the risks associated with technological requirements; wireless,
Internet, Voice over Internet Protocol (VoIP) or other
technology substitution and changes; and other technological
developments, |
20
|
|
|
|
|
the risks associated with the repurchase by us of debt or equity
securities, which may adversely affect our liquidity or
creditworthiness, |
|
|
|
the uncertainties created by the proposed acquisition of our
company by SBC Communications, Inc., |
|
|
|
the impact of the significant recent reductions in the number of
our employees, |
|
|
|
the results of litigation filed or to be filed against
us, and |
|
|
|
the possibility of one or more of the markets in which we
compete being impacted by changes in political, economic or
other factors, such as monetary policy, legal and regulatory
changes, war or other external factors over which we have no
control. |
The discussion and analysis that follows provides information
management believes is relevant to an assessment and
understanding of AT&Ts consolidated results of
operations for the three and nine months ended
September 30, 2005 and 2004, and financial condition as of
September 30, 2005 and December 31, 2004.
21
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
Overview
AT&T Corp. (AT&T) is among the worlds
communications leaders, providing voice and data communications
services to large and small businesses, consumers and government
agencies. We provide domestic and international long distance,
regional and local communications services, data and Internet
services.
Critical Accounting Estimates and Judgments
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses as well as the
disclosure of contingent assets and liabilities. Management
bases its estimates and judgments on historical experience and
other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates
under different assumptions or conditions.
For a discussion of the critical accounting estimates we
identified that we believe require significant judgment in the
preparation of our consolidated financial statements, please
refer to AT&Ts Form 10-K/ A for the year ended
December 31, 2004.
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
AT&T Business Services
|
|
$ |
5,109 |
|
|
$ |
5,645 |
|
|
$ |
15,583 |
|
|
$ |
17,128 |
|
AT&T Consumer Services
|
|
|
1,499 |
|
|
|
1,980 |
|
|
|
4,777 |
|
|
|
6,098 |
|
Corporate and Other
|
|
|
12 |
|
|
|
13 |
|
|
|
35 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
6,620 |
|
|
$ |
7,638 |
|
|
$ |
20,395 |
|
|
$ |
23,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue decreased $1.0 billion, or
13.3%, in the third quarter of 2005 and decreased
$2.9 billion, or 12.3%, for the nine months ended
September 30, 2005, compared with the same periods of 2004.
These decreases were primarily driven by continued declines in
stand-alone long distance voice revenue of $0.6 billion in
the third quarter of 2005 and $2.2 billion for the nine
months ended September 30, 2005, compared with the same
periods of 2004. These declines were reflective of increased
competition, which has led to lower prices in the business
markets, and loss of market share in AT&T Consumer Services
and small- and medium-sized business markets. In addition,
stand-alone long distance voice revenue was negatively impacted
by substitution. Total long distance voice volumes (including
long distance volumes sold as part of a bundled product)
increased approximately 3% in the third quarter of 2005 compared
with the third quarter of 2004 primarily due to an increase in
lower-priced wholesale volumes, partially offset by a decrease
in higher-priced consumer and business retail volumes. Total
long distance volumes decreased approximately 3% for the nine
months ended September 30, 2005, compared with the
respective period in 2004, primarily due to declines in consumer
and business retail volumes, partially offset by an increase in
business wholesale volumes. Also contributing to the overall
revenue decline was lower data services revenue of
$0.2 billion in the third quarter of 2005 and
$0.5 billion for the nine months ended September 30,
2005, compared with the respective periods of 2004, primarily
driven by competitive pricing pressure and lower volumes,
including the impact of technology migration.
Revenue by segment is discussed in greater detail in the Segment
Results section.
22
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Access and other connection
|
|
$ |
2,317 |
|
|
$ |
2,411 |
|
|
$ |
7,111 |
|
|
$ |
7,530 |
|
Costs of services and products
|
|
|
1,498 |
|
|
|
1,783 |
|
|
|
4,686 |
|
|
|
5,406 |
|
Selling, general and administrative
|
|
|
1,228 |
|
|
|
1,653 |
|
|
|
3,830 |
|
|
|
5,160 |
|
Depreciation and amortization
|
|
|
623 |
|
|
|
647 |
|
|
|
1,889 |
|
|
|
3,128 |
|
Asset impairment and net restructuring and other charges
|
|
|
(1 |
) |
|
|
12,469 |
|
|
|
35 |
|
|
|
12,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$ |
5,665 |
|
|
$ |
18,963 |
|
|
$ |
17,551 |
|
|
$ |
33,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
955 |
|
|
$ |
(11,325 |
) |
|
$ |
2,844 |
|
|
$ |
(10,696 |
) |
Operating margin
|
|
|
14.4 |
% |
|
|
(148.3 |
)% |
|
|
13.9 |
% |
|
|
(46.0 |
)% |
Included within access and other connection expenses
are costs we pay to connect calls using the facilities
of other service providers, as well as the Universal Service
Fund contributions and per-line charges mandated by the Federal
Communications Commission (FCC). We pay domestic access charges
to local exchange carriers to complete long distance calls
carried across the AT&T network and originated or terminated
on a local exchange carriers network. We also pay local
connectivity charges for leasing components of local exchange
carrier networks in order to provide local service to our
customers. International connection charges paid to telephone
companies to connect international calls are also included
within access and other connection expenses. Universal Service
Fund contributions are charged to all telecommunications
carriers by the FCC based on a percentage of state-to-state and
international services revenue to provide affordable services to
eligible customers. In addition, the FCC assesses charges on a
per-line basis. Since most of the Universal Service Fund
contributions and per-line charges are passed through to the
customer, a change in these rates generally results in a
corresponding change in revenue.
Access and other connection expenses decreased
$0.1 billion, or 3.9%, in the third quarter of 2005 and
$0.4 billion, or 5.6%, for the nine months ended
September 30, 2005, compared with the same periods of 2004.
The declines were due to lower average rates, as well as changes
in product and country mix relating to domestic access and
international connection charges, totaling $0.1 billion for
the third quarter of 2005 and $0.4 billion for the
year-to-date period. The decreased rates reflect a greater
proportion of calls that have non-access incurring terminations
(such as when a call terminates over our own network or over a
leased line), as well as the impact of rate negotiations,
settlements and more efficient network usage. In addition, these
declines were attributable to lower volumes primarily relating
to local service of $0.1 billion for the third quarter of
2005 and lower volumes relating to local and domestic long
distance services of $0.3 billion for the nine months ended
September 30, 2005. These declines were partially offset by
an increase in Universal Service Fund expense of
$0.1 billion for the third quarter of 2005 and
$0.2 billion for the nine months ended September 30,
2005, primarily due to higher revenue subject to assessment.
Costs of services and products include the costs
of operating and maintaining our networks, the provision for
uncollectible receivables and other service-related costs,
including cost of equipment sold.
Costs of services and products decreased $0.3 billion, or
16.0%, in the third quarter of 2005 and $0.7 billion, or
13.3%, for the nine months ended September 30, 2005,
compared with the same periods of 2004. These declines were
primarily driven by the overall impact of cost cutting
initiatives, primarily
23
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
headcount reductions, as well as lower revenue. Also
contributing to the declines was a lower provision for
uncollectible receivables, resulting from improved collections
and lower revenue.
Selling, general and administrative expenses
decreased $0.4 billion, or 25.7%, in the third
quarter of 2005, and $1.3 billion, or 25.8%, for the nine
months ended September 30, 2005, compared with the same
periods of 2004. These declines were primarily attributable to
cost control efforts throughout AT&T, as well as lower costs
resulting from decreased customer levels, totaling
$0.3 billion and $0.8 billion for the three and nine
months ended September 30, 2005, respectively. Cost control
efforts included headcount reductions, as well as continued
process improvements. In addition, the declines reflect lower
marketing and customer acquisition spending of $0.2 billion
in the third quarter of 2005 and $0.7 billion for the nine
months ended September 30, 2005, primarily as a result of
our strategic decision in the third quarter of 2004 to shift our
focus away from traditional consumer services. Also impacting
the third quarter of 2005 decline compared with the same period
in 2004 was a $50 million legal accrual recorded in the
third quarter of 2004 associated with the settlement of an
AT&T shareholder class action lawsuit. The decline for the
nine months ended September 30, 2005, was partially offset
by increased costs relating to the pending merger with SBC of
$0.1 billion.
Depreciation and amortization expenses decreased
$24 million, or 3.7%, in the third quarter of 2005, and
$1.2 billion, or 39.6%, for the nine months ended
September 30, 2005, compared with the same periods of 2004.
The decline in the third quarter of 2005 compared with the third
quarter of 2004 was primarily due to a lower depreciable asset
base. The year-to-date decrease was primarily attributable to
asset impairment charges of $11.4 billion recorded in the
third quarter of 2004, which decreased depreciation and
amortization expense by approximately $1.1 billion in the
nine months ended September 30, 2005, compared with the
same period of 2004. Capital expenditures were $0.3 billion
and $0.4 billion for the three months ended
September 30, 2005 and 2004, respectively, and were
$1.1 billion and $1.4 billion for the nine months
ended September 30, 2005 and 2004, respectively. We
continue to focus the majority of our capital spending on our
advanced services offerings of Internet protocol and enhanced
(IP&E) services and data services, both of which include
managed services.
Asset impairment and net restructuring and other charges
for the three months ended September 30, 2005, were
a net credit of $1 million. During the third quarter of
2005, management reevaluated preexisting restructuring reserves
and determined the actual or revised estimated obligations under
these reserves differed from the estimates initially made. As a
result, a net $11 million of excess preexisting employee
separation restructuring liabilities were reversed. These
activities were partially offset by an additional
$10 million net charge recorded to preexisting facilities
closing and other reserves. These adjustments were recorded in
the Corporate and Other group and did not result from changes to
the actual or planned headcount separations or the number of
vacated facilities.
Asset impairment and net restructuring and other charges of
$35 million for the nine months ended September 30,
2005, consisted primarily of net charge of $55 million for
facility closing and other reserves and a related
$5 million asset impairment charge. These activities were
partially offset by the net reversal of $25 million of
excess preexisting employee separation restructuring liabilities.
The net facilities closing and other reserves of
$55 million for the nine months ended September 30,
2005, primarily reflected a $45 million charge recorded in
the second quarter of 2005 associated with the continued
consolidation of our real estate portfolio and reflected the
present value of contractual lease obligations, net of estimated
sublease income associated with vacant facilities primarily
resulting from workforce reductions. In addition, we recorded a
$10 million net charge in the third quarter of 2005 based
on a reevaluation of preexisting facilities closing and other
reserves as discussed above. Net facilities closing and other
charges of $53 million were recorded in the Corporate and
Other group and $2 million in AT&T Business Services.
Additionally, the Corporate and Other group and AT&T
Business Services recorded $2 million and $3 million,
24
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
respectively, of leasehold improvement impairment charges
related to the second quarter 2005 facilities closing reserve.
The net reversal of $25 million of excess preexisting
employee separation restructuring liabilities for the nine
months ended September 30, 2005, was the result of
managements reevaluation of preexisting employee
separation restructuring reserves. Management determined the
actual or revised estimates of separation and related benefit
payments differed from the estimates initially made, resulting
in a net reversal of $25 million. AT&T Business
Services recorded $23 million of the reversal and the
Corporate and Other group recorded $12 million. AT&T
Consumer Services recorded an additional $10 million charge
as a result of this review. The adjustment to these reserves did
not result from changes to the actual or planned headcount
separations.
Asset impairment and net restructuring and other charges of
$12,469 million for the three months ended
September 30, 2004, were comprised of $11,389 million
of asset impairment charges and $1,080 million of net
business restructuring and other charges. Charges in the amount
of $11,859 million were recorded in AT&T Business
Services, $188 million in AT&T Consumer Services and
$422 million in the Corporate and Other group.
In July 2004, we announced a strategic change in our business
focus away from traditional consumer services and towards
business markets and emerging technologies. As a result of this
strategic change, we performed an evaluation of our long-lived
assets, including property, plant and equipment and internal-use
software (the asset group) as of July 1, 2004, as this
strategic change created a triggering event
necessitating such a review. In assessing impairments of
long-lived assets we follow the provisions of Statement of
Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. We operate an integrated telecommunications
network; therefore, we performed our testing of the asset group
at the entity level, as this is the lowest level for which
identifiable cash flows are available.
In performing the test, we determined that the total of the
expected future undiscounted cash flows directly related to the
existing service potential of the asset group was less than the
carrying value of the asset group; therefore, an impairment
charge was required. The impairment charges of
$11,389 million represented the difference between the fair
value of the asset group and its carrying value and were
included within asset impairment and net restructuring and other
charges in the consolidated statements of operations. The
impairment charges resulted from sustained pricing pressure and
the evolution of services toward newer technologies in the
business market as well as changes in the regulatory
environment, which led to a shift away from traditional consumer
services.
AT&T Business Services recorded impairment charges of
$11,330 million resulting in reductions to property, plant
and equipment of $11,023 million, internal-use software of
$287 million, other purchased intangibles of
$15 million and other long-lived assets of $5 million.
AT&T Consumer Services recorded impairment charges of
$59 million resulting in reductions to property, plant and
equipment of $11 million and internal-use software of
$48 million.
We calculated the fair value of our asset group using discounted
cash flows. The discounted cash flows calculation was made
utilizing various assumptions and estimates regarding future
revenue, expenses and cash flows projections through 2012. The
time horizon was determined based on the estimated remaining
useful life of the primary assets in the asset group; the
primary assets are those from which the most significant cash
flows are generated, principally consisting of the transport
central office equipment. Pursuant to SFAS No. 144,
the forecasts were developed without contemplation of
investments in new products. The 10% discount rate utilized was
determined using a weighted-average cost of capital (debt and
equity) and was more heavily weighted towards debt given that
the asset group, which primarily consists of tangible assets,
can be financed with a larger proportion of debt. When
allocating the impairment to the asset categories, market
25
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
values were utilized, to the extent determinable, to ensure that
no asset category was impaired below its fair value.
The use of different assumptions within our discounted cash
flows model when determining fair value, including the selection
of the discount rate, could result in different valuations for
our long-lived assets. For every percentage point difference in
the discount rate selected, the amount of the impairment would
have increased or decreased by approximately $0.4 billion.
The strategic change in business focus also created a
triggering event for a review of our goodwill. We
follow the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets for determining impairments.
SFAS No. 142 indicates that if other types of assets
(in addition to goodwill) of a reporting unit are being tested
for impairment at the same time as goodwill, then those assets
are to be tested for impairment prior to performing the goodwill
impairment testing. Accordingly, the impairment charges noted
above reduced the carrying value of the reporting units when
performing the impairment test for goodwill.
The goodwill impairment test requires us to estimate the fair
value of our overall business enterprise down to the reporting
unit level. Our reporting units are AT&T Business Services
and AT&T Consumer Services. We estimated fair value using
both a discounted cash flows model, as well as an approach using
market comparables, both of which are weighted equally to
determine fair value. Under the discounted cash flows method, we
utilized estimated long-term revenue and cash flows forecasts,
as well as assumptions of terminal value, together with an
applicable discount rate, to determine fair value. Under the
market approach, fair value was determined by comparing our
reporting units to similar businesses (or guideline companies).
We then compared the carrying value of our reporting units to
their fair value. Since the fair value of our reporting units
exceeded their carrying amounts, no goodwill impairment charge
was recorded.
The net business restructuring activities of $1,080 million
for the third quarter of 2004 consisted of $1,043 million
for employee separations (of which $339 million related to
benefit plan curtailment costs) and $37 million of facility
closing obligations.
This exit plan covered separation costs for approximately 11,200
employees (the majority of which were involuntary),
approximately 60% of whom were managers. This activity resulted
from the continued integration and automation of various
functions within network operations, and our strategic change in
focus away from traditional consumer services and towards
business markets and emerging technologies.
Facility closing reserves of $37 million were primarily
associated with the continued consolidation of our real estate
portfolio and reflect the present value of contractual lease
obligations, net of estimated sublease income, associated with
vacant facilities resulting from workforce reductions and
network equipment space that will not be used.
Asset impairment and net restructuring and other charges of
$12,736 million for the nine months ended
September 30, 2004, were comprised of $11,511 million
of asset impairments and $1,225 million in net business
restructuring and other obligations. In this period, charges in
the amount of $12,002 million were recorded in AT&T
Business Services, $189 million in AT&T Consumer
Services and $545 million in the Corporate and Other group.
The asset impairment charges of $11,511 million primarily
reflect the third quarter asset impairments of
$11,389 million as discussed above. In addition, we
recorded real estate impairment charges of $122 million
related to the decision made during the first quarter of 2004 to
divest five owned properties in an effort to further reduce
costs and consolidate our real estate portfolio. In accordance
with SFAS No. 144, an impairment charge was recorded,
within the Corporate and Other group, to reduce the book value
of the five properties to fair-market value based on third-party
assessments (including broker appraisals). The sales of these
properties have been completed.
26
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
The net restructuring obligations of $1,225 million for the
nine months ended September 30, 2004, were primarily
comprised of $1,147 million of net employee separations (of
which $339 million related to benefit plan curtailment
costs) and $78 million of facility closing obligations.
These exit plans covered separation costs for approximately
12,600 employees (the majority of which were involuntary),
nearly one-half of whom were managers. These activities resulted
from the continued integration and automation of various
functions within network operations, reorganizations throughout
our non-U.S. operations, and our strategic change in focus
away from traditional consumer services and towards business
markets and emerging technologies. Nearly one-half of the
employees impacted by these exit plans are managers.
The facility closing reserves of $78 million were primarily
associated with the consolidation of our real estate portfolio
and reflect the present value of contractual lease obligations,
net of estimated sublease income, associated with vacant
facilities resulting from workforce reductions and network
equipment space that will not be used.
Operating income (loss) improved to income of
$1.0 billion in the third quarter of 2005 compared with a
loss of $11.3 billion in the third quarter of 2004. For the
nine months ended September 30, 2005, operating income was
$2.8 billion compared with a loss of $10.7 billion for
the same period of 2004. For the three and nine months ended
September 30, 2004, the operating loss included
$12.5 billion and $12.7 billion, respectively, of
asset impairment and net restructuring and other charges. Also,
as a result of the third quarter 2004 asset impairment charges,
operating income for the nine months ended September 30,
2005, included $1.1 billion of benefits due to lower
depreciation on the impaired assets. Operating margins
improved 162.7 percentage points in the third
quarter of 2005 and 59.9 percentage points in the nine
months ended September 30, 2005, compared with the same
periods of 2004. Asset impairment and net restructuring and
other charges negatively impacted the margins for the three and
nine months ended September 30, 2004, by
163.3 percentage points and 54.8 percentage points,
respectively. The benefits due to lower depreciation positively
impacted the margin for the nine months ended September 30,
2005, by 5.3 percentage points. Excluding these items,
operating margins were essentially flat in the third quarter of
2005 and the nine months ended September 30, 2005, compared
with the same periods of 2004, as operating margin improvements
at AT&T Consumer Services were essentially offset by lower
operating margins at AT&T Business Services. AT&T
Consumer Services operating margin improvements resulted
primarily from greater rates of decline in selling, general and
administrative expenses in relation to revenue. AT&T
Business Services lower operating margins were primarily
reflective of the declining higher-margin long distance retail
voice and data businesses coupled with a shift to lower-margin
products, such as advanced and wholesale services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Other income (expense), net
|
|
$ |
10 |
|
|
$ |
(34 |
) |
|
$ |
(113 |
) |
|
$ |
(172 |
) |
Other income (expense), net, in the third quarter
of 2005 was income of $10 million compared with expense of
$34 million in the third quarter of 2004. The favorable
variance was primarily due to settlements of insurance claims
and legal matters in 2005, losses in 2004 associated with the
early repurchase of long-term debt, and increased
investment-related income. These improvements were partially
offset by an impairment of our investment in leveraged leases of
certain aircraft as a result of the bankruptcy filings of Delta
Air Lines, Inc. and Northwest Airlines Corp. Other income
(expense), net, for the nine months ended September 30,
2005, compared with the same period of 2004, improved
$59 million reflecting lower losses on early repurchases of
long-term debt and increased investment-related income.
Partially offsetting these favorable variances were higher
impairment charges of our investment in leveraged leases of
certain aircraft, and a settlement in 2004 associated with a
business disposition.
27
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
We continue to hold $0.4 billion of investments in
leveraged leases, including leases of commercial aircraft.
Should the financial difficulties in the U.S. airline
industry lead to further bankruptcies or lease restructurings,
we could record additional losses associated with our aircraft
lease portfolio. In addition, in the event of bankruptcy or
renegotiation of lease terms, if any portion of the non-recourse
debt is canceled, such amounts would result in taxable income to
AT&T and, accordingly, a cash tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Interest (expense)
|
|
$ |
(166 |
) |
|
$ |
(192 |
) |
|
$ |
(538 |
) |
|
$ |
(611 |
) |
Interest (expense) decreased 13.7%, or
$26 million, in the third quarter of 2005 compared with the
third quarter of 2004, and decreased 12.0%, or $73 million,
for the nine months ended September 30, 2005, compared with
the nine months ended September 30, 2004. These declines
were reflective of a lower debt balance due to early debt
redemptions and scheduled debt maturities in 2004 and 2005,
partially offset by the impact of interest rate step-ups on
certain bonds as a result of long-term debt ratings downgrades
in 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
(Provision) benefit for income taxes
|
|
$ |
(279 |
) |
|
$ |
4,402 |
|
|
$ |
(845 |
) |
|
$ |
4,741 |
|
Effective tax rate
|
|
|
35.0 |
% |
|
|
38.1 |
% |
|
|
38.5 |
% |
|
|
41.3 |
% |
The effective tax rate is the
(provision) benefit for income taxes as a percentage of
income (loss) before income taxes. The effective tax rate for
the third quarter of 2005 was positively impacted by tax
benefits associated with the settlement of prior-year state
income tax liabilities and tax benefits recognized in connection
with the Foreign Earnings Repatriation Provision of the American
Jobs Creation Act of 2004. The effective income tax benefit rate
for the nine months ended September 30, 2004, was
positively impacted by approximately 3.2 percentage points
due to the reversal of a portion of the valuation allowance we
recorded in 2002 attributable to the book and tax basis
difference related to our investment in AT&T Latin America.
During February 2004, the subsidiaries of AT&T Latin America
were sold to Telefonos de Mexico S.A. de C.V., or Telmex, and
the AT&T Latin America plan of liquidation became effective.
As a result, we no longer needed a portion of the valuation
allowance and recorded an income tax benefit of
$0.4 billion in the first quarter of 2004.
Segment Results
Our results are segmented according to the customers we service:
AT&T Business Services and AT&T Consumer Services. The
balance of our operations is included in a Corporate and Other
group. This group primarily reflects corporate staff functions
and the elimination of transactions between segments. The
discussion of segment results includes revenue, operating
income, capital additions and total assets.
Operating income is the primary measure used by our chief
operating decision makers to measure our operating results and
to measure segment profitability and performance. See
note 11 to our consolidated financial statements for a
reconciliation of segment results to consolidated results.
Total assets for each segment include all assets, except
intercompany receivables. Nearly all prepaid pension assets,
taxes and corporate-owned or leased real estate are held at the
corporate level, and therefore are included in the Corporate and
Other group. A substantial majority of our property, plant and
equipment (including network assets) is included in the AT&T
Business Services segment. Capital additions for each
28
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
segment include capital expenditures for property, plant and
equipment, additions to internal-use software and additions to
nonconsolidated investments.
We continually review our management model and structure, which
may result in additional adjustments to our operating segments
in the future.
AT&T Business Services provides a variety of global
communications services to large domestic and multinational
businesses, government agencies and small- and medium-sized
businesses. These services include long distance, international,
toll-free and local voice, including wholesale transport
services (sales of services to service resellers, such as other
long distance companies, local service providers, wireless
carriers and cable companies), as well as data services and
IP&E services. AT&T Business Services also provides
outsourcing solutions and other professional services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Revenue(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long distance voice services
|
|
$ |
2,063 |
|
|
$ |
2,364 |
|
|
$ |
6,311 |
|
|
$ |
7,363 |
|
|
Local voice services
|
|
|
313 |
|
|
|
390 |
|
|
|
1,048 |
|
|
|
1,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total voice services
|
|
|
2,376 |
|
|
|
2,754 |
|
|
|
7,359 |
|
|
|
8,546 |
|
|
Data services
|
|
|
1,505 |
|
|
|
1,693 |
|
|
|
4,608 |
|
|
|
5,098 |
|
|
IP&E services
|
|
|
630 |
|
|
|
587 |
|
|
|
1,838 |
|
|
|
1,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total data and IP&E services
|
|
|
2,135 |
|
|
|
2,280 |
|
|
|
6,446 |
|
|
|
6,803 |
|
Outsourcing, professional services and other
|
|
|
598 |
|
|
|
611 |
|
|
|
1,778 |
|
|
|
1,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
5,109 |
|
|
$ |
5,645 |
|
|
$ |
15,583 |
|
|
$ |
17,128 |
|
Operating income (loss)
|
|
$ |
513 |
|
|
$ |
(11,095 |
) |
|
$ |
1,629 |
|
|
$ |
(10,860 |
) |
Capital additions
|
|
$ |
344 |
|
|
$ |
391 |
|
|
$ |
1,063 |
|
|
$ |
1,324 |
|
|
|
|
|
|
|
|
|
|
|
|
At | |
|
At | |
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in millions) | |
Total assets
|
|
$ |
19,541 |
|
|
$ |
20,621 |
|
|
|
(1) |
Revenue includes equipment and product sales of
$118 million and $103 million for the three months
ended September 30, 2005 and 2004, respectively, and
$310 million and $241 million for the nine months
ended September 30, 2005 and 2004, respectively. |
AT&T Business Services revenue decreased $0.5 billion,
or 9.5%, in the third quarter of 2005 and $1.5 billion, or
9.0%, in the nine months ended September 30, 2005, compared
with the same prior-year periods. These declines reflect
continued pricing pressure in traditional long distance voice
and data services as well as volume weakness in data services.
Long distance voice revenue in the third quarter of 2005
declined $0.3 billion, or 12.7%, and declined
$1.1 billion, or 14.3%, for the nine months ended
September 30, 2005, compared with the same prior-year
periods. These declines were driven by a decrease in the average
price per minute in both the retail and
29
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
wholesale businesses combined with a decline in retail volumes,
primarily due to the impacts of competition and substitution.
Partially offsetting these declines was an increase in
lower-priced wholesale minutes. Total long distance volumes
increased about 10% in the third quarter of 2005 and increased
approximately 3% in the nine months ended September 30,
2005, compared with the same prior-year periods. The significant
increase in volumes in the third quarter of 2005 reflects
increased wholesale business with several wireless carriers.
Local voice services revenue declined $0.1 billion, or
19.7%, in the third quarter of 2005, and $0.1 billion, or
11.4%, for the nine months ended September 30, 2005,
compared with the same prior-year periods. The decrease in both
periods reflects declines in our bundled product offers, and
lower payphone-related revenue as a result of the sale of our
payphone business. In addition, for the nine months ended
September 30, 2005, compared to the same period in 2004,
the declines reflect lower reciprocal compensation revenue
(revenue generated when local exchange carriers use our local
network to terminate calls).
Data services revenue for the third quarter of 2005 declined
$0.2 billion, or 11.1%, and $0.5 billion, or 9.6%, for
the nine months ended September 30, 2005, compared with the
same prior-year periods. The declines were primarily driven by
competition, which has led to declining prices. In addition, the
declines were attributable to weak demand including the effect
of technology migration. For the third quarter of 2005 compared
with the same period of 2004, this decline also reflects higher
customer disconnects of prepaid network capacity in 2004, which
negatively impacted the growth rate by approximately
1.5 percentage points.
IP&E services revenue increased $43 million, or 7.3%,
in the third quarter of 2005, and $0.1 billion, or 7.8%,
for the nine months ended September 30, 2005, compared with
the same prior-year periods. The increases were primarily
attributable to growth in our customer base associated with
advanced products such as E-VPN (Enhanced Virtual Private
Network) and IP-enabled frame relay services, partially offset
by declines in legacy products of Managed Internet Access and
Virtual Private Networks.
Outsourcing, professional services and other revenue declined
2.3% in the third quarter of 2005, and 0.1% for the nine months
ended September 30, 2005, compared with the same periods of
2004. These declines were primarily driven by the impact of
contract terminations and renegotiations. Partially offsetting
the year-to-date decline was strength in government and retail
professional services and equipment and product sales.
Operating income was $0.5 billion in the third quarter of
2005, an increase of $11.6 billion, or 104.6%, compared
with a loss of $11.1 billion in the third quarter of 2004.
Operating income for the nine months ended September 30,
2005, of $1.6 billion increased $12.5 billion compared
with an operating loss of $10.9 billion for the nine months
ended September 30, 2004. Operating income for the three
and nine months ended September 30, 2005, reflects lower
asset impairment and net restructuring and other charges of
$11.9 billion and $12.0 billion, respectively. As a
result of the 2004 asset impairment charges, the nine months
ended September 30, 2005, included a net benefit of
$1.0 billion due to lower depreciation on the impaired
assets. Exclusive of these items, the decline in operating
income in the third quarter and nine months ended
September 30, 2005, reflects decreased long distance voice
and data services revenue partially offset by a reduction in
operating expenses due to cost controls.
Operating margin was 10.0% and (196.5)% for the third quarter of
2005 and 2004, respectively. For the nine months ended
September 30, 2005 and 2004, operating margin was 10.5% and
(63.4)%, respectively. The asset impairment and net
restructuring and other charges negatively impacted the third
quarter and nine months ended September 30, 2004 operating
margin by 210.0 and 70.1 percentage points, respectively.
The net depreciation benefit positively impacted the nine months
ended September 30, 2005 operating margin by
6.5 percentage points and had no impact on the third
quarter results, when compared to 2004. Excluding the impacts of
these items, the decreased margins were primarily reflective of
the declining higher-margin long
30
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
distance retail voice and data businesses coupled with a shift
to lower-margin products, such as advanced and wholesale
services.
Capital additions were $0.3 billion in the third quarter of
2005 and were $1.1 billion for the nine months ended
September 30, 2005. We continue to concentrate the majority
of capital spending on our advanced services offerings of
IP&E services and data services, both of which include
managed services.
Total assets declined $1.1 billion, or 5.2%, at
September 30, 2005, from December 31, 2004, primarily
driven by lower net property, plant and equipment and
internal-use software as a result of depreciation and
amortization expenses, partially offset by capital additions,
and lower accounts receivable.
AT&T Consumer Services provides a variety of communication
services to residential customers. These services include
traditional long distance voice services such as domestic and
international dial services (long distance or local toll calls
where the number 1 is dialed before the call) and
calling card services. Transaction services, such as prepaid
card and operator-assisted calls, are also offered.
Collectively, these represent stand-alone long distance services
and are not offered in conjunction with any other service. In
addition, AT&T Consumer Services provides dial-up Internet
services and all distance services, which generally bundle long
distance, local and local toll.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stand-alone long distance voice and other services
|
|
$ |
924 |
|
|
$ |
1,256 |
|
|
$ |
2,923 |
|
|
$ |
4,045 |
|
|
Bundled services
|
|
|
575 |
|
|
|
724 |
|
|
|
1,854 |
|
|
|
2,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
1,499 |
|
|
$ |
1,980 |
|
|
$ |
4,777 |
|
|
$ |
6,098 |
|
Operating income
|
|
$ |
541 |
|
|
$ |
281 |
|
|
$ |
1,605 |
|
|
$ |
892 |
|
Capital additions
|
|
$ |
|
|
|
$ |
9 |
|
|
$ |
|
|
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
|
At | |
|
At | |
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in millions) | |
Total assets
|
|
$ |
595 |
|
|
$ |
743 |
|
AT&T Consumer Services revenue declined $0.5 billion,
or 24.3%, in the third quarter of 2005 and $1.3 billion, or
21.7%, for the nine months ended September 30, 2005,
compared with the same prior-year periods. These declines were
primarily due to stand-alone long distance voice services, which
decreased $0.3 billion to $0.9 billion in the third
quarter of 2005, and decreased $1.1 billion to
$2.7 billion for the nine months ended September 30,
2005, largely due to the impact of ongoing competition, which
has led to a loss of market share, as well as substitution.
Partially offsetting the declines in stand-alone long distance
voice services were targeted price increases during the latter
part of 2004 and throughout 2005. Also contributing to the
overall revenue declines was lower bundled services revenue due
to our third quarter 2004 strategic decision to shift our focus
away from traditional consumer services.
31
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
Total long distance calling volumes (including long distance
volumes sold as part of a bundle) declined approximately 32% for
the third quarter of 2005, and approximately 30% in the nine
months ended September 30, 2005, compared with the same
prior-year periods, primarily as a result of competition and
wireless and Internet substitution.
Operating income increased $0.3 billion, or 92.7%, in the
third quarter of 2005 and $0.7 billion, or 80.0%, for the
nine months ended September 30, 2005, compared with the
same prior-year periods. Operating margin increased to 36.1% in
the third quarter of 2005 from 14.2% in the third quarter of
2004, and to 33.6% for the nine months ended September 30,
2005, from 14.6% for the nine months ended September 30,
2004. Operating income for the third quarter and the nine months
ended September 30, 2004, included asset impairment and net
restructuring and other charges of $0.2 billion. As a
result of the 2004 asset impairment charges, operating income
for the nine months ended September 30, 2005, included
$66 million of benefits due to lower depreciation on assets
impaired by AT&T Consumer Services, as well as lower
network-related charges from AT&T Business Services. The
asset impairment and net restructuring and other charges
negatively impacted operating margin for the third quarter and
nine months ended September 30, 2004, by 9.5 and
3.1 percentage points, respectively. The net depreciation
benefit positively impacted the operating margin for the nine
months ended September 30, 2005, by 1.4 percentage
points and had no impact on the third quarter 2005 results, when
compared to 2004. Excluding these items, the increases in
operating margin were primarily due to greater rates of decline
in selling, general and administrative expenses and costs of
services and products in relation to revenue. The declines in
selling, general and administrative expenses reflected
reductions in sales and marketing expenses, primarily due to our
strategic decision in the third quarter of 2004 to shift our
focus away from traditional consumer services. Costs of services
and products declined primarily due to reduced bad debt expenses
as a result of improved collections and lower revenue. Also
contributing to the increase in operating margin were targeted
price increases during the latter part of 2004 and throughout
2005. These increases in operating margin were partially offset
by a lower rate of decline in access and other connection
expenses relative to revenue.
Capital additions declined $9 million during the third
quarter of 2005 and $37 million for the nine months ended
September 30, 2005, compared with the same prior-year
periods, primarily due to our change in strategic focus.
Total assets declined $0.1 billion at September 30,
2005, from December 31, 2004. The decline was primarily due
to lower accounts receivable, reflecting lower revenue and
improved cash collections.
Corporate and Other
This group primarily reflects the results of corporate staff
functions, brand licensing fee revenue and the elimination of
transactions between segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Revenue
|
|
$ |
12 |
|
|
$ |
13 |
|
|
$ |
35 |
|
|
$ |
38 |
|
Operating (loss)
|
|
$ |
(99 |
) |
|
$ |
(511 |
) |
|
$ |
(390 |
) |
|
$ |
(728 |
) |
Capital additions
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
15 |
|
|
$ |
10 |
|
32
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
|
|
|
|
|
|
|
|
|
|
|
At | |
|
At | |
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in millions) | |
Total assets
|
|
$ |
9,572 |
|
|
$ |
11,440 |
|
Operating (loss) decreased $412 million to
$(99) million for the third quarter of 2005 and decreased
$338 million to $(390) million for the nine months
ended September 30, 2005, compared with the same periods of
2004. The decreases in operating (loss) in the third quarter of
2005 and the nine months ended September 30, 2005, compared
with the respective periods of 2004 were primarily due to lower
asset impairment and net restructuring and other charges.
Partially offsetting the decreased loss for the nine months
ended September 30, 2005, compared with the same period of
2004, were costs recorded in 2005 relating to the pending merger
with SBC as well as increased pension expenses primarily as a
result of higher loss amortization and a lower expected return
resulting from a 25 basis point decrease in both the
discount rate and the expected rate of return in 2005.
Total assets decreased $1.9 billion to $9.6 billion at
September 30, 2005, from December 31, 2004. This
decrease was primarily driven by the maturity of debt and
related combined interest rate foreign currency swap agreements
in February 2005, as well as the April 2005 early redemption of
debt.
Financial Condition
|
|
|
|
|
|
|
|
|
|
|
At | |
|
At | |
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in millions) | |
Total assets
|
|
$ |
29,708 |
|
|
$ |
32,804 |
|
Total liabilities
|
|
$ |
21,833 |
|
|
$ |
25,785 |
|
Total shareowners equity
|
|
$ |
7,875 |
|
|
$ |
7,019 |
|
Total assets declined $3.1 billion, or 9.4%,
to $29.7 billion at September 30, 2005, compared with
December 31, 2004. Total assets declined primarily as a
result of cash payments made related to scheduled maturities of
debt, as well as the April 2005 debt repurchase and common stock
dividend payments. Cash from operations partially offset these
declines (see Liquidity discussion for further
details). Total assets also declined due to depreciation and
amortization expense recorded during the period, lowering
property, plant and equipment and other assets. While not
impacting total assets, the release of restricted cash and the
settlement of a hedge related to debt that matured in February
2005, resulted in a decrease in other current assets with a
corresponding increase to cash.
Total liabilities decreased $4.0 billion, or
15.3%, to $21.8 billion at September 30, 2005,
compared with December 31, 2004. The decrease in total
liabilities was primarily due to a lower debt balance of
$3.0 billion, attributable to scheduled repayments of debt,
as well as an April 2005 debt repurchase. Additionally,
short-term and long-term compensation and benefit-related
liabilities declined by $0.6 billion, primarily due to the
payment of year-end bonus and salary accruals, employee
separation payments and contributions to the postretirement
benefit trust, partially offset by higher pension and
postretirement benefit accruals.
Total shareowners equity increased
$0.9 billion, or 12.2%, to $7.9 billion at
September 30, 2005, compared with December 31, 2004.
This increase was primarily due to net income for the period,
partially offset by dividends declared.
33
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
|
Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in millions) | |
Cash Flows:
|
|
|
|
|
|
|
|
|
|
Provided by operating activities
|
|
$ |
2,728 |
|
|
$ |
4,011 |
|
|
Used in investing activities
|
|
|
(253 |
) |
|
|
(1,340 |
) |
|
Used in financing activities
|
|
|
(3,336 |
) |
|
|
(4,397 |
) |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$ |
(861 |
) |
|
$ |
(1,726 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities of
$2.7 billion for the nine months ended September 30,
2005, declined $1.3 billion from $4.0 billion in the
comparable prior-year period, largely driven by the declining
stand-alone long distance voice and data businesses. In
addition, the year-over-year decrease reflects payments in 2005
for settlements of the At Home Corporation and AT&T
shareholder litigation of $220 million net of amounts
collected from Comcast Corporation (see note 10 for a
further discussion of these matters), as well as higher employee
separation payments in 2005. Favorably impacting cash flows in
2005 compared with 2004 was our continued focus on controlling
costs.
Our investing activities resulted in net cash used
of $0.3 billion for the nine months ended
September 30, 2005, compared with $1.3 billion for the
nine months ended September 30, 2004. The decline in net
cash used primarily reflects the release of restricted cash
related to debt that matured in February 2005, as well as a
reduction in capital expenditures. Also contributing to the
decline were higher proceeds from sales of property, plant and
equipment and businesses.
During the nine months ended September 30, 2005, net cash
used in financing activities was $3.3 billion
compared with $4.4 billion for the nine months ended
September 30, 2004. During 2005, we made net payments of
$3.0 billion to reduce debt (including redemption premiums
and foreign currency mark-to-market payments) as a result of
scheduled maturities and an April 2005 debt repurchase, and paid
dividends of $0.6 billion. In addition, reflected as an
other financing activity in 2005 was the receipt of
approximately $0.3 billion for the settlement of a combined
interest rate foreign currency swap agreement in conjunction
with the scheduled repayment of debt. During 2004, we made net
payments of $4.2 billion to reduce debt (including
redemption premiums and foreign currency mark-to-market
payments), primarily reflecting the early termination of debt,
and paid dividends of $0.6 billion. Reflected as an other
financing item in 2004 was the receipt of approximately
$0.4 billion for the settlement of a combined interest rate
foreign currency swap agreement in conjunction with the early
repayment of Euro notes during 2004.
|
|
|
Working Capital and Other Sources of Liquidity |
At September 30, 2005, our working capital ratio (current
assets divided by current liabilities) was 1.05.
We have a variety of sources of liquidity available to us as
discussed below. However, the SBC merger agreement provides that
we cannot incur additional indebtedness over $100 million
in the aggregate or issue equity (other than for employee and
shareowner plans) or convertible securities without the prior
consent of SBC. The merger agreement also requires us to pay a
special dividend in excess of $1.0 billion in connection
with the closing of the transaction. We expect to have
sufficient liquidity from cash on hand and cash from operations
to fund all liquidity needs, including the special dividend,
through the expected closing of the merger without any
additional borrowings or financings. If competition and product
substitution accelerate beyond current expectations and/or
economic conditions worsen or do not improve, our cash flows from
34
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
operations would decrease, negatively impacting our liquidity.
Similarly, if we were to experience unexpected requirements to
expend cash, our liquidity could be negatively impacted.
However, we believe our access to the capital markets is
adequate to provide the flexibility we desire in funding our
operations, subject to SBCs consent.
In the event we need additional financing and SBC agreed to such
financing, we could utilize the AT&T Business Services
364-day accounts receivable securitization facility, which has
been extended through July 2006. The amended AT&T Business
Services facility provides for up to $0.8 billion of
available financing, limited by the eligible receivables
balance, which varies from month to month. Proceeds from the
securitization facility are recorded as borrowings and are
included in short-term debt. Approximately $0.1 billion was
outstanding under the facility at September 30, 2005. On
May 6, 2005, we repaid $0.1 billion of borrowings
outstanding under the AT&T Consumer Services facility and
subsequently terminated this facility. In addition, we have
$2.4 billion remaining under a universal shelf registration.
Further financing is available through the $0.5 billion
syndicated 364-day credit facility that was entered into on
October 5, 2005. The entire facility can be utilized for
letters of credit, which reduces the amount available for
borrowings. No borrowings or letters of credit are currently
outstanding under this facility. This facility replaced our
existing $1.0 billion 364-day credit facility dated
October 6, 2004.
On April 1, 2005, we entered into a $0.3 billion
credit facility maturing on March 20, 2006. This credit
facility collateralizes our letters of credit issued in the
normal course of business, which were previously issued against
the $0.5 billion sub-limit in the facility that matured in
October 2005. At September 30, 2005, approximately
$0.3 billion of letters of credit were collateralized under
this facility.
We cannot provide any assurances that any or all of these
sources of funding will be available at the time they are needed
or in the amounts required. Additionally, as our short-term
credit ratings from Standard and Poors (S&P) and
Moodys Investors Services, Inc. (Moodys) have been
withdrawn at our request, there is no assurance that we will
have any significant access to the commercial paper market.
Furthermore, the combination of the requirement to reserve cash
to pay the special dividend and the SBC-merger restrictions on
incurring indebtedness could limit our ability to utilize
sources of liquidity, which in turn, could negatively impact
AT&T.
The $1.0 billion credit facility that was in place at
September 30, 2005, and the securitization facility contain
financial covenants that require us to meet a debt-to-EBITDA
(defined as operating income plus depreciation and amortization
expenses excluding any asset impairment or net restructuring and
other charges) ratio not exceeding 2.25 to 1 (calculated
pursuant to the credit facility) and an EBITDA-to-net interest
expense ratio of at least 3.50 to 1 (calculated pursuant to the
credit facility) for four consecutive quarters ending on the
last day of each fiscal quarter. At September 30, 2005, we
were in compliance with these covenants. The $0.5 billion
credit facility contains similar covenants.
|
|
|
Credit Ratings and Related Debt Implications |
As of September 30, 2005, our credit ratings were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term | |
|
Long-Term | |
|
|
Credit Rating Agency |
|
Rating | |
|
Rating | |
|
Outlook |
|
|
| |
|
| |
|
|
Standard & Poors
|
|
|
Withdrawn |
|
|
|
BB+ |
|
|
Watch Positive |
Fitch
|
|
|
B |
|
|
|
BB+ |
|
|
Watch Positive |
Moodys
|
|
|
Withdrawn |
|
|
|
Ba1 |
|
|
Review for Possible Upgrade |
As a result of the SBC merger announcement, on January 31,
2005 and February 1, 2005, Fitch and S&P, respectively,
put our long-term debt ratings on watch positive and
removed the outlook negative and, on
35
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
January 31, 2005, Moodys placed our long-term debt
rating on review for possible upgrade and removed
the outlook negative debt rating. In addition, based
on our request, S&P and Moodys have withdrawn our
short-term credit ratings.
Our access to capital markets, as well as the cost of our
borrowings, are affected by our debt ratings. If our debt
ratings were downgraded, we would be required to pay higher
rates on certain existing debt and could be required to post
cash collateral for certain interest-rate swaps in which we were
in a net payable position. Additionally, our access to the
capital markets may be further restricted and/or such
replacement financing may be more costly or have additional
covenants than we had in connection with our debt at
September 30, 2005.
AT&T is generally the obligor for debt issuances. However,
there are some instances in which AT&T is not the obligor,
for example, the securitization facility and certain capital
leases. The total debt of these entities, which are fully
consolidated, was approximately $0.2 billion at
September 30, 2005, and is included within short-term and
long-term debt.
Our cash needs for 2005 will primarily relate to capital
expenditures, repayment of debt, the payment of dividends and
income tax related payments. During April 2005, we repurchased
$1.25 billion of our outstanding debt, which resulted in a
loss of $0.2 billion. We expect our capital expenditures in
2005 to be approximately $1.5 billion. We expect income tax
payments to be significantly higher in 2005 compared with 2004.
We anticipate contributing approximately $550 million to
the U.S. postretirement benefit plans in 2005,
approximately $400 million of which was contributed as of
September 30, 2005. We expect to contribute approximately
$30 million to our U.S. nonqualified pension plan in
2005. No contribution is expected for our U.S. qualified
pension plans in 2005.
|
|
|
Contractual Cash Obligations |
We have contractual obligations to purchase certain goods or
services from various other parties. During the nine months
ended September 30, 2005, we entered into new contracts and
modified the commitment amounts of certain existing contracts,
including commitments to utilize network facilities from local
exchange carriers, which were previously assessed based on
termination fees (see discussion below). The net effect of these
changes was an increase to our unconditional purchase
obligations of approximately $1.3 billion in 2005,
$874 million in aggregate for 2006 and 2007, and
$52 million in aggregate for 2008 and 2009. A portion of
the 2005 obligation was satisfied in the nine months ended
September 30, 2005. Also during the nine months ended
September 30, 2005, we entered into contracts under which
we have calculated the minimum obligation for such agreements
based on termination fees that can be paid to exit the
contracts. In addition, we modified existing contracts that
contained termination fees. The net effect of these changes is
an increase to termination fees of approximately
$47 million in 2005, $148 million in aggregate for
2006 and 2007, $46 million in aggregate for 2008 and 2009
and $10 million in 2010 and beyond. Termination fees for
any individual contract would not be paid in every year, rather
only in the year of termination.
We have contractual obligations to utilize network facilities
from local exchange carriers with terms greater than one year.
Since the contracts have no minimum volume requirements, and are
based on an interrelationship of volumes and discount rates, we
assessed our minimum commitment based on the penalties to exit
the contracts, assuming we exit the contracts as of
December 31 of each year. During the nine months ended
September 30, 2005, we entered into new contracts with
local exchange carriers, which had minimum purchase requirements
and therefore are discussed above and no longer assessed based
on termination fees. In
36
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
addition, the termination fees with other local exchange
carriers changed based on increases or decreases to the level of
services purchased. The net effect of these changes resulted in
a decrease to termination fees of approximately
$0.4 billion in 2005, and an increase of approximately
$0.7 billion in aggregate for 2006 and 2007, and
approximately $0.2 billion in aggregate for 2008 and 2009.
Termination fees for any individual contract would not be paid
in every year, rather only in the year of termination.
Risk Management
We are exposed to market risk from changes in interest and
foreign currency exchange rates. In addition, we are exposed to
market risk from fluctuations in the prices of securities. On a
limited basis, we use certain derivative financial instruments,
including interest rate swaps, foreign currency exchange
contracts, combined interest rate foreign currency contracts,
forwards and other derivative contracts, to manage these risks.
We do not use financial instruments for trading or speculative
purposes. All financial instruments are used in accordance with
Board-approved policies.
Recently Issued Accounting Pronouncements
In June 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position FSP
FAS No. 143-1, Accounting for Electronic
Equipment Waste Obligations, to address the accounting for
obligations associated with the Directive on Waste Electrical
and Electronic Equipment (the Directive) issued by the European
Union (EU). The Directive was enacted on February 13, 2003,
and directs EU-member countries to adopt legislation to regulate
the collection, treatment, recovery, and environmentally sound
disposal of electrical and electronic waste equipment. The
Directive concludes that commercial users are obligated to
retire, in an environmentally sound manner, specific assets that
qualify as historical waste. FSP FAS No. 143-1 is
effective for reporting periods ending after June 8, 2005,
which is June 30, 2005 for us, or the date of adoption of
the Directive by the applicable EU-member countries, if later.
We have evaluated the impact to our operations in EU countries
that have adopted legislation and have deemed these costs to be
immaterial. We will continue to evaluate the impact as other
EU-member countries enact legislation. However, if the remaining
EU-member countries enact similar legislation, we do not expect
a material impact to our results of operations.
In March 2005, the FASB issued FASB Interpretation
(FIN) 47, Accounting for Conditional Asset Retirement
Obligations, an interpretation of SFAS No. 143,
Accounting for Asset Retirement Obligations.
FIN 47 clarifies that the term conditional asset
retirement obligation, as used in SFAS No. 143,
refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset
retirement activity is unconditional even though uncertainty
exists about the timing and/or method of settlement. FIN 47
requires an entity to recognize a liability for the fair value
of the conditional asset retirement obligation if the fair value
of the liability can be reasonably estimated. FIN 47 is
effective for fiscal years ending after December 15, 2005,
which is December 31, 2005 for us; however, earlier
application is permitted. We are currently evaluating the impact
of FIN 47 on our results of operations, financial position
and cash flows.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment, which requires
a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on
the grant-date fair value of the award. Additional guidance to
assist in the initial interpretation of this revised statement
was subsequently issued by the SEC in Staff Accounting
Bulletin No. 107. SFAS No. 123 (revised
2004) eliminates the alternative of using Accounting Principles
Board (APB) Opinion No. 25 intrinsic-value method of
accounting that was provided for in SFAS No. 123 as
originally issued. Effective January 1, 2003, we adopted
the fair-value recognition provisions of original
37
AT&T CORP. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS (Continued)
SFAS No. 123 on a prospective basis and we began to
record stock-based compensation expense for all employee awards
(including stock options) granted or modified after
January 1, 2003, using the nominal vesting approach. Had we
used the non-substantive vesting method, which will be required
upon adoption, our results of operations would not have been
materially different from those reported for the nine months
ended September 30, 2005 and 2004. Adoption of the revised
standard will require that we begin to recognize expense for
unvested awards issued prior to January 1, 2003.
Additionally, this standard requires that estimated forfeitures
be considered in determining compensation expense. For equity
awards other than stock options, we have not previously included
estimated forfeitures in determining compensation expense.
Accordingly, the difference between the expense we have
recognized to date and the compensation expense as calculated
considering estimated forfeitures will be reflected as a
cumulative effect of accounting change upon adoption. Further,
SFAS No. 123 (revised 2004) requires that excess tax
benefits be recognized as an addition to paid-in capital and
amends SFAS No. 95, Statement of Cash
Flows, to require that the excess tax benefits be reported
as a financing cash inflow rather than as a reduction of taxes
paid. SFAS No. 123 (revised 2004) is effective for
annual periods beginning after June 15, 2005, which is
January 1, 2006 for us. We intend to elect a modified
prospective adoption beginning in the first quarter of 2006 and
do not anticipate that the adoption of SFAS No. 123
(revised 2004) will have a material impact on our results of
operations.
In December 2004, the FASB issued FASB Staff Position FSP
FAS 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004, which provides guidance on the
accounting and disclosure requirements for the repatriation
provision of the Act. The Act creates a one-time tax incentive
for U.S. corporations to repatriate accumulated income
earned abroad by providing a tax deduction of 85% of dividends
received for certain foreign earnings that are repatriated. In
an effort to assist taxpayers with the interpretation of the
repatriation provision of the Act, in May 2005, the United
States Department of Treasury issued detailed guidance on
certain technical aspects that required clarification. Based
upon this guidance, in the third quarter of 2005 we completed
our evaluation of the impact of the repatriation provision and
recorded an income tax benefit of $6 million related to
deferred taxes previously provided on foreign earnings.
38
|
|
Item 3. |
Quantitative and Qualitative Disclosures About Market
Risk |
The information required by this Item is contained in the
section entitled Risk Management in Item 2.
|
|
Item 4. |
Controls and Procedures |
As of the end of the period covered by this report, we completed
an evaluation, under the supervision and with the participation
of our management including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15 or 15d-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and
procedures were effective as of September 30, 2005. There
have not been any changes in our internal controls over
financial reporting identified in connection with the evaluation
required by Exchange Act Rules 13a-15 or l5d-15 or
otherwise that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
39
PART II OTHER INFORMATION
|
|
Item 1. |
Legal Proceedings |
Refer to Part 1, Footnote 10, Commitments and
Contingencies for discussion of certain legal proceedings.
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
The following table contains information about our purchases of
our equity securities during the third quarter of 2005.
Issuer Purchases of Equity Securities
|
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|
|
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|
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|
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|
|
|
|
|
|
|
|
|
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|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number |
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|
|
|
|
|
|
|
|
|
Total Number |
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|
(or Approximate |
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Dollar Value) of |
|
|
|
|
|
|
|
|
|
|
(or Units) |
|
|
Shares or Units |
|
|
|
|
Total Number |
|
|
Average Price |
|
|
Purchased as |
|
|
that May Yet |
|
|
|
|
of Shares |
|
|
Paid per |
|
|
Part of Publicly |
|
|
Be Purchased |
|
|
|
|
(or Units) |
|
|
Share |
|
|
Announced Plans |
|
|
Under the Plans |
|
Period |
|
|
Purchased(1)(2) |
|
|
(or Unit) |
|
|
or Programs |
|
|
or Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2005 to July 31, 2005
|
|
|
|
4,130 |
|
|
|
$ |
20.6039 |
|
|
|
|
0 |
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2005 to August 31, 2005
|
|
|
|
9,386 |
|
|
|
$ |
19.9889 |
|
|
|
|
0 |
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1, 2005 to September 30, 2005
|
|
|
|
15,970 |
|
|
|
$ |
19.6058 |
|
|
|
|
0 |
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
29,486 |
|
|
|
$ |
19.8676 |
|
|
|
|
0 |
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents restricted stock units and performance shares
redeemed to pay taxes related to the vesting of restricted stock
units and performance shares awarded under employee benefit
plans. |
|
(2) |
Does not include shares purchased in the open market by the
trustee of our Shareowner Dividend Reinvestment and Stock
Purchase Plan as follows: 14,505 shares in July at an
average price paid per share of $19.1397; 305,251 shares in
August at an average price paid per share of $19.8295; and
36,244 shares in September at an average price paid per
share of $19.6365. |
40
|
|
Item 6. |
Exhibits and Reports on Form 8-K |
(a) Exhibits:
|
|
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
|
|
12 |
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
31 |
.1 |
|
Certification by CEO pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31 |
.2 |
|
Certification by CFO pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32 |
.1 |
|
Certification by CEO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
|
32 |
.2 |
|
Certification by CFO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
(b) Reports on Form 8-K
During the third quarter of 2005, the following reports on
Form 8-K were filed and/or furnished: Form 8-K dated
July 20, 2005 was furnished pursuant to Item 2.02
(Results of Operations and Financial Condition) and 9.01
(Financial Statements and Exhibits), on July 21, 2005;
Form 8-K dated September 16, 2005 was filed pursuant
to Item 8.01 (Other Events); and Form 8-K dated
September 21, 2005 was filed pursuant to Item 1.01
(Entry into a Material Definitive Agreement).
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
|
AT&T Corp.
|
|
|
/s/ C.R. Reidy
|
|
|
|
By: Christopher R. Reidy |
|
Vice President and Controller |
Date: November 3, 2005
42
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
|
|
12 |
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
31 |
.1 |
|
Certification by CEO pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31 |
.2 |
|
Certification by CFO pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32 |
.1 |
|
Certification by CEO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
|
32 |
.2 |
|
Certification by CFO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |