-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ArS6flzxN6JPaCfhdV9Q7IR4gaZrCVsMY4MVKzC+6Ac1Nq2dcquoeS4LpKb2gAui VVY+pstdkAo+Ue8koOzKQA== 0000950123-02-003272.txt : 20020415 0000950123-02-003272.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-003272 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01105 FILM NUMBER: 02597071 BUSINESS ADDRESS: STREET 1: 295 NORTH MAPLE AVENUE CITY: BASKING RIDGE STATE: NJ ZIP: 07920 BUSINESS PHONE: 9082214000 MAIL ADDRESS: STREET 1: 295 NORTH MAPLE AVENUE CITY: BASKING RIDGE STATE: NJ ZIP: 07920 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 10-K 1 e56632e10-k.txt AT&T CORP. AS FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-1105 AT&T CORP. A NEW YORK I.R.S. EMPLOYER CORPORATION NO. 13-4924710
295 NORTH MAPLE AVENUE, BASKING RIDGE, NEW JERSEY 07920 TELEPHONE NUMBER 908-221-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: SEE ATTACHED SCHEDULE A. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At February 28, 2002, the aggregate market value of voting common stock held by non-affiliates was approximately $54 billion. At February 28, 2002, 3,545,275,809 shares of AT&T common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE NONE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SCHEDULE A SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Shares New York, Boston, Chicago, (Par Value $1 Per Share) Philadelphia and Pacific Stock Exchanges Three Year 6 1/2% Notes due September 15, 2002 New York Stock Exchange Five Year 5 5/8% Notes due March 15, 2004 New York Stock Exchange Ten Year 6 3/4% Notes, due April 1, 2004 New York Stock Exchange Ten Year 7% Notes, due May 15, 2005 New York Stock Exchange Twelve Year 7 1/2% Notes, due June 1, 2006 New York Stock Exchange Twelve Year 7 3/4% Notes, due March 1, 2007 New York Stock Exchange Ten Year 6% Notes due March 15, 2009 New York Stock Exchange Thirty Year 8 1/8% Debentures, due January 15, 2022 New York Stock Exchange Thirty Year 8.35% Debentures, due January 15, 2025 New York Stock Exchange Thirty-Two Year 8 1/8% Debentures, due July 15, New York Stock Exchange 2024 Thirty Year 6 1/2% Notes due March 15, 2029 New York Stock Exchange Forty Year 8 5/8% Debentures, due December 1, 2031 New York Stock Exchange
PART I ITEM 1. BUSINESS GENERAL AT&T Corp. was incorporated in 1885 under the laws of the State of New York and has its principal executive offices at 295 North Maple Avenue, Basking Ridge, New Jersey (telephone number 908-221-2000). AT&T is among the world's communications leaders, providing voice, data and video communications services to large and small businesses, consumers and government entities. AT&T and its subsidiaries furnish domestic and international long distance, regional, and local communications services, cable (broadband) television and Internet communications services. AT&T also provides directory and calling card services to support its communications business. AT&T's primary lines of business are AT&T Business Services; AT&T Consumer Services; and AT&T Broadband Services. RESTRUCTURING On October 25, 2000, AT&T announced a restructuring plan to be implemented by various independent actions designed to fully separate or issue separately tracked stocks intended to reflect the financial performance and economic value of each of AT&T's four major operating units: Broadband Services, Business Services, Consumer Services and Wireless Services. On December 19, 2001, AT&T and Comcast Corporation announced an agreement to combine AT&T Broadband with Comcast. Under the terms of the agreement, AT&T will spin off AT&T Broadband and simultaneously merge it with Comcast, forming a new company to be called AT&T Comcast Corporation. AT&T shareholders will receive a number of shares of AT&T Comcast common stock based on an exchange ratio calculated pursuant to a formula specified in the merger agreement. If determined as of the date of the merger agreement, the exchange ratio would have been approximately 0.34 shares of AT&T Comcast common stock for each share of AT&T Corp. common stock held, assuming the AT&T shares held by Comcast are included in the number of shares of AT&T common stock outstanding. Assuming Comcast retains its AT&T shares and converts them into exchangeable preferred stock of AT&T as contemplated by the merger agreement, the exchange ratio would be approximately 0.35 as of the date of the execution of the merger agreement. AT&T shareowners will own a 56% economic stake and have a 66% voting interest in the new company, calculated as of the date of the merger agreement. The merger remains subject to regulatory review, shareholder approval by both companies and certain other conditions and is expected to close by the end of 2002. AT&T also reaffirmed its commitment to seek shareholder approval to create a tracking stock designed to reflect the economic value and financial performance of its AT&T Consumer business. On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176 shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T common stock validly tendered. A total of 372.2 million shares of AT&T common stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group tracking stock. On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a separate, independently traded company. All AT&T Wireless tracking stock was converted into AT&T Wireless common stock on a one-for-one basis and 1,136 million shares of AT&T Wireless common stock, held by AT&T, were distributed to AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding. AT&T common shareowners received whole shares of AT&T Wireless and cash payments for fractional shares. The Internal Revenue Service (IRS) ruled that the transaction qualified as tax-free for AT&T and its shareowners for U.S. federal income tax purposes, with the exception of cash received for fractional shares. AT&T retained approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of which was used in a debt-for-equity exchange in July 2001 and the remaining shares were monetized in the fourth quarter of 2001. 1 On August 10, 2001, AT&T completed the split-off of Liberty Media Corporation as an independent, publicly-traded company. AT&T redeemed each outstanding share of Class A and Class B Liberty Media Group (LMG) tracking stock for one share of Liberty Media Corporation's Series A and Series B common stock, respectively. In the redemption, shares of Liberty Media Corporation were issued to former holders of Liberty Media Group tracking stock in exchange for their shares of Liberty Media Group tracking stock. The IRS ruled that the split-off of Liberty Media Corporation qualified as a tax-free transaction for AT&T, Liberty Media and their shareowners. DESCRIPTION OF AT&T BUSINESS SERVICES OVERVIEW AT&T Business Services is one of the nation's largest business services communications providers, offering a variety of global communications services to over 4 million customers, including large domestic and multinational businesses, small and medium-sized businesses and government agencies. AT&T Business Services operates one of the largest telecommunications networks in the United States and, through AT&T's Global Network Services and other investments and affiliates, provides an array of services and customized solutions in 60 countries and 850 cities worldwide. AT&T Business Services provides a broad range of communications services and customized solutions, including: - long distance, international and toll-free voice services; - local services, including private line, local data and special access services; - data and Internet Protocol (IP) services for a variety of network standards, including frame relay and asynchronous transfer mode (ATM); - managed networking services and outsourcing solutions; and - wholesale transport services. STRATEGY AT&T Business Services intends to leverage its existing leadership position in communications connectivity and substantial customer base to become a leading provider of value-added managed communications services and outsourcing solutions. The following strategic objectives are critical to this transformation: Offer comprehensive enterprise networking solutions to large business customers. AT&T Business Services provides integrated communications services to enterprise customers, bundling an array of communications and data services to create customized end-to-end solutions. AT&T Business Services offers large domestic and U.S.-based multinational corporations solutions comprised of local voice and data, long-distance voice and data, IP, virtual private networks, hosting and managed network services. AT&T Business Services believes it has a well-established reputation for reliability, restoration and overall customer satisfaction, and that this provides it with critical competitive advantages in offering enterprise networking solutions. Increase sales of new services. AT&T Business Services focuses on increasing sales of high-growth communications services, including local voice and data, IP connectivity and managed services. AT&T Business Services is focused on increasing sales on its extensive existing local, long distance and IP networks. With substantial infrastructure already in place, AT&T Business Services believes that future capital expenditures will be focused primarily on meeting specific customer demands for incremental capabilities and capacity. AT&T Business Services believes that increased sales of high-growth services will help increase asset utilization and expand operating margins for these new services. Lower operating costs and increase efficiencies. AT&T Business Services believes it is imperative to maintain a cost leadership position. AT&T Business Services continuously evaluates its operations on an ongoing basis to streamline core processes and reduce costs, focusing on key operational areas including access, network operations, provisioning, billing, customer care and sales. In particular, AT&T focuses on 2 providing its customers direct access to its network to enhance service quality and to reduce AT&T's access charge cost. AT&T Business Services routinely evaluates its performance relative to competitors through benchmarking studies. AT&T Business Services also reviews best-of-class companies across all industries to identify new process improvements and additional cost reduction opportunities. Improve asset utilization. AT&T Business Services plans to continue to improve network asset utilization. AT&T Business Services has invested substantial capital to create an end-to-end network that supports next-generation communication services, such as IP-enabled virtual private networks. AT&T Business Services plans to selectively invest as market demand and asset utilization levels warrant in order to achieve competitive returns on capital. Develop and offer new, innovative customer solutions. AT&T Business Services believes its market and technological leadership positions enable it to develop and offer new advanced communications services and managed service solutions. AT&T Business Services evaluates and launches new products and services on an ongoing basis to accelerate bundling of transport and connectivity services with other communications products, such as managed network services and outsourcing solutions. AT&T Business Services' goal is to develop and integrate new advanced applications in a manner that ensures effortless customer migration; for example, to transition from voice private networks to IP-enabled virtual private networks that support voice as an application. AT&T Business Services believes its leadership in voice services coupled with the technological leadership of AT&T Labs in developing IP and enterprise networking solutions will help attract new enterprise network customers and generate incremental revenue among AT&T's existing enterprise customers while increasing network utilization and improving margins. INDUSTRY OVERVIEW The communications services industry continues to evolve, both domestically and internationally, providing significant opportunities and risks to the participants in these markets. Factors that have been driving this change include: - entry of new competitors and investment of substantial capital in existing and new services, resulting in significant price competition; - technological advances resulting in a proliferation of new services and products and rapid increases in network capacity; - the Telecommunications Act; and - deregulation of communications services markets in selected countries around the world. One factor affecting the communications services industry is the rapid development of data services. The development of frame relay, ATM and IP networks as modes of transmitting information electronically has dramatically transformed the array and breadth of services offered by telecommunications carriers. Use of the Internet, including intranets and extranets, has grown rapidly in recent years. This growth has been driven by a number of factors, including the large and growing installed base of personal computers, improvements in network architectures, increasing numbers of network-enabled applications, emergence of compelling content and commerce-enabling technologies, and easier, faster and cheaper Internet access. Consequently, the Internet has become an important new global communications and commerce medium. The Internet represents an opportunity for enterprises to interact in new and different ways with both existing and prospective customers, employees, suppliers and partners. Enterprises are responding to this opportunity by substantially increasing their investment in Internet connectivity and services to enhance internal voice and data networks. In the United States, the Telecommunications Act has had a significant impact on AT&T Business Services' business by establishing a statutory framework for opening the local service markets to competition and by allowing regional phone companies to provide in-region long distance services. In addition, prices for long distance minutes and other basic communications services have declined as a result of increased competitive pressures, governmental deregulation, introduction of more efficient networks and advanced 3 technologies, and product substitution. Competition in these basic communications services segments has more recently been based more on price and less on other differentiating factors that appeal to the larger business market customers, including range of services offered, bundling of products, customer service, and communications quality, reliability and availability. SERVICES AND PRODUCTS VOICE SERVICES Long Distance Voice Services. AT&T Business Services' long distance voice communication offerings include the traditional "one plus" dialing of domestic and international long distance for customers that select AT&T Business Services as their primary long distance carrier. AT&T Business Services offers toll-free (for example, 800, 888 or 877) inbound services, where the receiving party pays for the call. These services are used in a wide variety of applications, including sales, reservation centers or customer service centers. AT&T Business Services also offers a variety of value-added features to enhance customers' toll-free services, including call routing by origination point and time-of-day routing. In addition, AT&T Business Services provides virtual private network applications, including dedicated outbound facilities. AT&T Business Services also offers audio and video teleconferencing services, as well as web-based video conferencing. These services offer customers the ability to establish automated teleconference lines, as well as teleconferences moderated by an AT&T representative. Customers can also establish a dedicated audio conference number that can be used at any time without the necessity of a reservation. AT&T Business Services also offers a variety of calling cards that allow the user to place calls from virtually anywhere in the world. Additional features include prepaid phone cards, conference calling, international origination, information service access (such as weather or stock quotes), speed dialing and voice messaging. Business Local Services. AT&T Business Local provides a wide range of local voice and data telecommunications services in major metropolitan markets throughout the United States. Services include basic local exchange service, Centrex, exchange access, private line, high speed data and video services. AT&T Business Local typically offers local service as part of a package of services that can include any combination of other AT&T Business Services offerings. Integrated Voice/Data/IP Offers. AT&T Business Services provides a variety of integrated service offers targeted at business customers. For small businesses, AT&T's All in One service offering provides both local and long distance services through a single bill, providing discounts based on volume and term commitments. The AT&T Business Network service offers a wide range of voice and data services through a single service package. Among the features of the integrated services offering is the ability to enable customers to electronically order new services, perform maintenance and manage administrative functions. AT&T also has a number of integrated voice and data services, such as Integrated Network Connections, that provide customers the ability to integrate access for their voice and data services and thereby qualify for lower prices. DATA AND INTERNET SERVICES Private Line Services. AT&T Business Services' data services include private line and special access services that use high-capacity digital circuits to carry voice, data and video or multimedia transmission from point-to-point in multiple configurations. These services provide high-volume customers with a direct connection to an AT&T Business Services switch instead of switched access shared by many users. These services permit customers to create internal computer networks and to access external computer networks and the Internet, thereby reducing originating access costs. Packet Services. Packet services consist of data networks utilizing packet switching and transmission technologies. Packet services include frame relay, ATM and IP connectivity services. Packet services enable 4 customers to transmit large volumes of data economically and securely. Packet services are utilized for local area network interconnection, remote site, point of sale and branch office communications solutions. While frame relay and ATM Services are widely deployed as private data networks, AT&T Business Services offers customers the ability to connect these networks to the Internet through services such as IP-enabled frame relay. High speed packet services, including IP-enabled frame relay service, are utilized extensively by enterprise customers for an expanding range of applications. AT&T Business Internet Services. AT&T Business Services provides IP connectivity and managed IP services, messaging, and electronic commerce services to businesses. AT&T offers managed Internet services, which give customers dedicated, high-speed access to the Internet for business applications at a variety of speeds and types of access, as well as business dial service, a dial-up version of Internet access designed to meet the needs of small- and medium-sized businesses. AT&T's web services consist of a family of hosting and transactional services and platforms serving the web needs of thousands of businesses; these offers include AT&T Small Business Hosting Services. MANAGED SERVICES AND OUTSOURCING SOLUTIONS AT&T Business Services provides clients with an array of managed networking services, professional services and outsourcing solutions intended to satisfy clients' complete networking technology needs-ranging from managing individual network components such as routers and frame relay networks to managing entire complex global networks. AT&T Business Services is engaged in: designing, developing and delivering integrated and interoperable global services, allowing enterprises to optimize networking-based mission-critical and electronic commerce applications. AT&T Business Services also works selectively with qualified partners to offer enhanced services to customers. Enterprise Networking Services. With a global scale and reach in 60 countries and 850 different cities, AT&T Business Services' enterprise networking services strive to provide comprehensive support from network design, implementation and installation to ongoing network operations and lifecycle management of solutions for networks of varying scales, including Local Area Networks, Wide Area Networks, and Virtual Private Networks. These managed enterprise networking services enable customers to accommodate specific business applications such as e-mail, voice over IP, order entry systems, employee directories, human resource transaction and other database applications; to create secure remote access intranet and extranet solutions with controlled access to employees, business partners and customers; and to use Intelligent Content Distribution Services to accelerate delivery of content to any Internet user. Web Services. AT&T Business Services' continuum of managed web hosting services supports clients' hosted infrastructure needs from the network layer all the way up through managing the performance of their business applications. With 18 Internet Data Centers located on three continents and with a capacity of more than 1.8 million square feet of web hosting space, AT&T's hosting services provide a fully flexible, managed environment of network, server and security infrastructure as well as built-in data storage. AT&T's full suite of managed hosting services includes application performance management, database management, hardware and operating system management, intelligent content distribution services, high availability data and computing services, storage services, managed security and firewall services. AT&T's web hosting services also include a range of business tools, including client portal services that provide managed hosting customers with personalized, secure access to detailed reporting information about their infrastructure and applications. High Availability and Security Services. AT&T Business Services' high availability and security services deliver enterprise-class, high-end integrated solutions to ensure the continuous operations of clients' critical business processes and availability of critical data by leveraging the core competencies of AT&T's end-to-end professional services; world-class global networks; global management and monitoring; Internet Data Centers and conditioned facilities. In addition, AT&T's high availability and security services include business continuity and disaster recovery services that provide core network disaster recovery, information technology, work center, and risk management/business continuity analysis, planning and operational capabilities. Outsourcing Solutions. AT&T Business Services provides customers with outsourcing solutions designed to manage customers' highly complex voice and data networks. These services range from consulting to 5 outsourcing and management of highly complex global data networks. AT&T Business Services designs, engineers and implements seamless solutions for clients that are designed to maximize the competitive advantage of networking-based electronic commerce applications. Transport. AT&T Business Services considers itself one of the leaders in providing wholesale networking services to other carriers, providing both network capacity and switched services. AT&T Business Services offers a combination of high-volume transmission capacity, conventional dedicated line services and dedicated switched services on a regional and national basis to ISPs and facility-based and switchless resellers. AT&T Business Services' wholesale customers are primarily large tier-one ISPs, competitive local exchange carriers, regional phone companies, interexchange carriers, cable companies and systems integrators. AT&T Business Services focuses on ensuring optimal network utilization through the sale of off-peak capacity. Further, wholesale switched services are priced to reflect the cost of access incurred. In limited circumstances, AT&T Business Services also has sold network capacity through indefeasible rights-of-use agreements under which capacity is furnished for contract terms as long as 25 years. SALES AND MARKETING AT&T Business Services markets its suite of voice and data communications services through its global sales and marketing organization. The sales and marketing organization is primarily organized by customer type and targets retail, wholesale and government organizations throughout the United States and the rest of the world. AT&T Business Services' direct sales and marketing force consists of approximately 6,800 sales representatives. In addition, the sales and marketing group works in connection with several outside telemarketing firms to target small businesses in a cost efficient manner. For small businesses with more sophisticated service needs, AT&T Business Services uses a direct sales force of approximately over 450 representatives trained to market the full suite of products and services and customized services solutions. In addition, the AT&T Solution Center provides a centralized resource designed to respond rapidly to complex customer requirements. For many large and multinational clients, a senior AT&T officer is responsible for maintaining a continuous relationship with the senior management of the customer, helping to ensure a continuous and effective marketing effort. CUSTOMER CARE AND SUPPORT AT&T Business Services places a high priority on ensuring all customers receive the highest level of customer care, including contracting, ordering, provisioning, maintenance and collections. AT&T's customer care organization places particular emphasis on the ordering, provisioning and maintenance processes. Customer care and support group monitors these functions and responds to inbound customer inquiries in a manner intended to ensure customer orders for new services, service changes and maintenance requests are completed on-time and accurately. Customer care and support has approximately 10,000 customer care associates world-wide at 27 customer care centers, of which 24 are company-owned and three are operated by outside customer care firms. AT&T Business Services determines the appropriate customer care program based on the size and sophistication of the customer and its communications needs. For larger and multinational customers and government agencies, AT&T Business Services provides customer care services and support through dedicated account teams designed to provide support on a rapid and personalized basis. AT&T Business Services believes that the web has greatly enhanced AT&T Business Services' customer care programs. Through a dedicated customer care website, www.iadvantgage@att.com, customers may submit questions or initiate service requests, including ordering new services or submitting maintenance requests. Customer care delivered via the web is often quicker and more convenient for customers and reduces errors. RATES AND BILLING AT&T Business Services provides the majority of its services through long-term contracts. General descriptions of AT&T Business Services' services, applicable rates, warranties, limitations on liability, user 6 requirements and other material service provisioning information are outlined in service guides that are provided directly to prospective clients or are available on AT&T's website. Clients enter into contracts, based on the service guides, detailing customer-specific terms and information, including volume discounts, service bundling, extended warranties and other customized terms. Through combined offerings, AT&T Business Services also provides customers with such features as single billing, unified services for multi-location companies and customized calling plans. Most intrastate services are provided in accordance with applicable tariffs filed with the states. Most domestic and international switched voice services originating in the United States are billed in 1 or 6 second increments after a fixed initial period. Switched voice services originating in international markets are also billed in increments, subject to local market conditions and interconnect agreements. Switched long distance and local services are billed in arrears, with monthly billing statements itemizing date, time, duration and charges. Data services are billed generally in advance, based on a fixed circuit charge, with rates that vary according to speed of transmission and service type. NETWORK AT&T Business Services' U.S. network comprises 46,500 route miles of long-haul backbone fiber-optic cable, plus another 17,000 route miles of local metro fiber, capable of carrying OC-192 (10 billion bits, or 10 gigabits per second) traffic. In addition, AT&T Business Services has recently completed installation of over 10,000 new route miles of the latest generation fiber-optic cable capable of carrying OC-768 (40 gigabits per second) when that standard is ready for deployment. This new fiber capacity presently connects 22 of the largest U.S. cities, and provides AT&T substantial capacity for future growth of network traffic with minimal incremental capital expenditure requirements. AT&T Business Services was the first in the industry with a coast-to-coast OC-192 backbone, connecting Boston, New York, Chicago, St. Louis, San Francisco and Los Angeles. In addition to this state-of-the-art 10 gigabits per second backbone, AT&T Business Services also has over 400 Synchronous Optical Network points-of-presence in the continental U.S., offering high-speed data connectivity to the majority of U.S. business centers. Currently, 78 of these points-of-presence are tariffed with OC-48 service. AT&T Business Services' network, which also supports AT&T Consumer Services' services, carries over 300 million voice calls every business day and more than 2,175 trillion bytes (terabytes) of data each day. On the voice network, AT&T Business Services employs its patented Real Time Network Routing to automatically complete domestic voice calls through more than 100 possible routes. The reliability of certain portions of the network is maximized by using Synchronous Optical Network rings that can restore service on a severed fiber optic cable within 50 to 60 milliseconds by sending traffic in the other direction on the ring. On other routes, AT&T uses its patented FASTAR technology to route traffic around a cable cut by automatically transferring traffic to alternative spare capacity. AT&T Business Services stands behind its reliability claims with service level agreements. For example, on its IP backbone, AT&T Business Services guarantees business customers no more than 60 milliseconds of latency, or delay in the transmission of a packet of information, and 0.7% packet loss per month. AT&T Business Services has been a leader in deploying Dense Wavelength Division Multiplexing, or DWDM, technology that divides an optical fiber into multiple channels, each carrying up to 10 gigabits per second of information today. When DWDM was introduced in 1996, the technology could put only eight wavelengths on a fiber strand. Today, AT&T Business Services is deploying 64-and 80-wavelength DWDM systems, as well as systems capable of carrying 160 wavelengths. When installed with OC-192 capabilities, a 160-wavelength DWDM system will enable 1.6 terabits (trillion bits per second) on a single fiber strand. Since digital switching was introduced in the late 1970s, the heart of the AT&T voice network has been the 4ESS, a circuit switch specifically designed for long distance use, and currently AT&T Business Services has 143 of these switches in the network. AT&T Business Services has recently installed nearly 60 standard tandem switches that allow AT&T to accommodate the transition from circuit-switched to packet networks. While AT&T Business Services will continue to have both circuit and packet switching technologies for some time, significant future capital expenditures are not planned for circuit switching. 7 In addition to its long distance network, AT&T Business Services has an extensive local network serving business customers in 80 U.S. cities. AT&T Business Services has expanded its local network so that it now includes 118 local switches and reaches more than 6,300 buildings. This network provides voice service to business users, as well as data connections up to OC-48 capacity. In order to maximize asset utilization, AT&T's local network also handles consumer traffic, providing most of the dial-in numbers for AT&T WorldNet Service, as well as switching cable telephony calls for customers of AT&T Broadband. AT&T Business Services also operates one of the largest IP networks in the United States. As a Tier 1 provider, AT&T has direct peering relationships with other Tier 1 providers, providing service to carriers that go through public peering sites. AT&T offers multiple access choices to the IP network, including dial-up, dedicated private line, cable modem and DSL, as well as IP-enabled access through ATM and frame relay networks. AT&T Business Services is deploying Internet Data Centers across the U.S., offering web hosting services. Currently, AT&T Business Services has 18 Internet Data Centers, with an aggregate 1.8 million square feet of space, all directly connected to AT&T Business Services' high-speed IP backbone. Over the next few years, AT&T Business Services plans to evolve its network to an all-optical facility. The first element of the optical network is AT&T Business Services' existing fiber-optic backbone. The next step is the Intelligent Optical Switch, which was introduced by the end of 2001. The Intelligent Optical Switch switches wavelengths of light, and can communicate and establish a connection with other switches automatically when a customer requests a new service. The third element is the Multi-Service Platform, located in either the AT&T local network or on the customer premise, that aggregates low-speed and high-speed services and sends the information to the Intelligent Optical Switch for routing. INTERNATIONAL AT&T Business Services has entered into a number of agreements and alliances with international communications companies, and has made strategic investments in several countries in order to provide customers end-to-end network management capabilities and highly customized solutions. Concert. On January 5, 2000 AT&T and BT created a global venture to serve the communications needs of multinational companies and the international calling needs of businesses around the world. On October 16, 2001 AT&T and BT announced that they had reached binding agreements to unwind Concert. Under the Concert dissolution agreement with BT, AT&T will reclaim customer contracts and assets that were initially contributed to the venture, including international transport facilities and gateway assets. In addition, AT&T Business Services will obtain ownership of certain frame relay assets located in the Asia Pacific region that BT initially contributed to the venture. AT&T Business Services expects to combine these assets with its existing international networking and other assets. AT&T Business Services will honor all contracts and service level agreements that it will assume from Concert. AT&T Business Services and BT have agreed to enter into transitional commercial agreements enabling them to provide existing Concert services for a period of three years. Under these agreements, AT&T Business Services and BT will pay each other market-based prices. AT&T Canada. On June 1, 1999, AT&T Canada Corp. merged with MetroNet Communications Corp., Canada's largest competitive local exchange carrier. Under the terms of the merger agreement, AT&T Business Services received 31% of the equity interest and 23% of the voting interest in AT&T Canada in exchange for AT&T Canada Corp. and ACC TelEnterprises Ltd. AT&T Canada is Canada's leading facilities-based end-to-end competitive carrier, covering 25 cities. AT&T Canada is focused on serving large enterprise and international customers. AT&T Canada currently connects over 3,300 buildings, with over 510,000 local access lines in service. AT&T Canada owns over 11,500 route miles of fiber, and has six fiber interconnection points to AT&T's U.S. network at the U.S.-Canada border. As part of the merger, AT&T agreed to purchase all of the remaining shares of AT&T Canada upon the removal of Canadian foreign ownership restrictions at the greater of the then appraised fair market value or the accreted minimum price, which initially was C$37.50 per share accreting after June 30, 2000 at a rate of 4% per quarter. 8 AT&T also has the right at any time to trigger the purchase of such shares. AT&T may acquire the AT&T Canada shares or designate another party to acquire such shares prior to a change in the ownership restrictions by developing a structure that addresses these ownership restrictions. If the foreign ownership restrictions have not been removed and AT&T has not triggered the purchase by June 30, 2003, those shares, along with AT&T's AT&T Canada shares, would be sold through an auction process and AT&T will make whole the other shareowners for the amount they would have been entitled to if AT&T Business Services had purchased all of the remaining shares of AT&T Canada. At its sole option, AT&T can fulfill its obligation either with cash or AT&T common stock. On August 16, 1999, AT&T completed its sale to BT of 30% of AT&T's stake in AT&T Canada. In addition, BT had agreed to purchase 30% of the shares of AT&T Canada that AT&T will be acquiring from the other shareholders, subject to BT's right to cap its purchase at C$1.65 billion. As part of the formation agreement of Concert and as a result of dissolution of Concert, AT&T will acquire BT's investment in AT&T Canada and will assume BT's obligation to purchase additional AT&T Canada shares. AT&T Latin America Corp. On August 28, 2000, AT&T Business Services established AT&T Latin America in connection with the merger of Netstream, a competitive local exchange carrier in Brazil, and FirstCom Corporation. AT&T Latin America provides voice, data and Internet access services in five countries, Argentina, Brazil, Chile, Colombia and Peru. AT&T Business Services owns a 62.5% economic interest (94% voting interest) in AT&T Latin America. Alestra. S. de R.L. de C.V. AT&T Business Services also owns a 49% economic interest in Alestra S. de R.L. de C.V., a competitive telecommunications company in Mexico. Alestra offers voice, data and Internet services throughout Mexico to residential, small business and enterprise customers. Alestra's state-of-the-art network comprises approximately 3,500 route miles, with four interconnection points to AT&T's network at the U.S.-Mexico border. AT&T LABS AT&T Labs conducts research and development for AT&T. AT&T Labs' scientists and engineers conduct research in a variety of areas, including IP and future broadband technologies; advanced network design and architecture; network operations systems; data mining technologies and advanced speech technologies. AT&T Labs works with the other business units within AT&T to create new services and invent tools and systems to manage secure and reliable networks for AT&T and its customers. With a heritage that extends from fundamental advances such as the development of the transistor, AT&T Labs has made numerous recent advances in the areas of IP communications infrastructure, data mining and wireless networks. PATENTS AND TRADEMARKS AT&T actively pursues patents and trademarks to protect its intellectual property within the United States and abroad. AT&T has developed a focused law practice to prepare and prosecute its patent and trademark applications. On average, AT&T receives over 300 U.S. patents per year and maintains a portfolio of over 2,500 trademark and service mark registrations. DESCRIPTION OF AT&T CONSUMER SERVICES OVERVIEW AT&T Consumer Services is the leading provider of domestic and international long distance and transaction based services to residential consumers in the United States with approximately 60 million customer relationships. AT&T Consumer Services provides interstate and intrastate long distance communications services throughout the continental United States, and provides, or joins in providing with other carriers, communications services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international communications services to and from virtually all nations and territories around the world. 9 AT&T Consumer Services provides a broad range of communications services to consumers individually and in combination with other services, including: - inbound and outbound domestic and international long distance; - transaction-based long distance services, such as operator-assisted calling services and prepaid phone cards; - local calling offers; and - dial-up Internet service through AT&T WorldNet Service. In addition, AT&T Consumer Services offers combined long distance and local services in selected locations and is developing a multi-service platform, the AT&T Worldnet High Speed Service, based upon DSL technology for combined voice, data and other broadband services. STRATEGY AT&T Consumer Services' goal is to maintain a leadership position in the long distance market and develop complementary products and services to maximize cash flow. Key strategic elements include: Attract and retain high value customers. AT&T Consumer Services focuses on acquiring and maintaining high value long distance customers with targeted offers and solicitations. AT&T Consumer Services believes that high value customers use AT&T's services more frequently and are more likely to use multiple service offerings such as local toll, calling card, international plans, AT&T WorldNet Service, local services and the AT&T Worldnet High Speed Service. Through the greater utilization of services, high value customers generate greater margins and hasten recuperation of marketing, sales and provisioning expenses. Increase operating efficiencies and reduce operating costs. AT&T Consumer Services seeks to maximize the utilization of its assets and reduce operating costs. In the three year period ended December 31, 2001, aggregate selling, general and administrative expenses have decreased by over $1 billion and overall costs and expenses have decreased by nearly $6 billion. AT&T Consumer Services expects it will continue to reduce operating costs associated with AT&T's infrastructure through implementation of various business initiatives and co-sourcing, outsourcing or other types of arrangements with third parties. Broaden its service lines. AT&T Consumer Services believes it can generate additional revenue by bundling AT&T long distance with other communications services including local services, AT&T WorldNet Services and high-speed data services. By bundling value-added services, AT&T Consumer Services believes it will substantially enhance its customers' reliance on its services, improve customer satisfaction and retention levels and increase sales of more profitable services. In addition, AT&T Consumer Services continues to evaluate new growth businesses that would provide additional services complementary to its current suite of product offerings. AT&T Consumer Services believes additional high value product offerings better enable it to attract new customers, migrate existing customers to more profitable product offerings and better satisfy the overall needs of its customers. New product and service offerings are evaluated and implemented in a manner designed to be consistent with AT&T Consumer Services' overall goal of maximizing cash flow. Leverage the AT&T brand to attract new customers. AT&T Consumer Services believes that the AT&T brand is very influential in consumers' purchasing decisions and positively impacts consumer awareness of, and confidence in, AT&T Consumer Services' products and services, as well as providing for an enhanced ability to cross-sell consumer services with other AT&T services. In addition, AT&T Consumer Services believes that its efforts to bundle products and services will help to further strengthen the AT&T brand by providing consumers with exposure to a broader range of AT&T Consumer Services' services and an improved overall consumer experience. Enhance customer satisfaction and loyalty. AT&T Consumer Services believes that achieving a high level of customer satisfaction is critical to successfully acquiring new customers and increasing retention of its existing customer base. AT&T Consumer Services has historically strived to maintain a high level of customer 10 satisfaction through a portfolio of loyalty programs such as its spot loyalty bonus program, its Continental Airlines rewards program and its UPromise college education savings plan. AT&T Consumer Services will continue to focus on improving the customer care experience through various service enhancement initiatives including the introduction of convenience features such as e-payment of bills as well as increasing its portfolio of loyalty plans. INDUSTRY OVERVIEW The communications services industry continues to change competitively and technologically both domestically and internationally, providing significant complexity and risks to the participants in these markets, particularly those not associated with an incumbent local exchange carrier. In the United States, the Telecommunications Act has had a significant impact on AT&T Consumer Services' business by establishing a statutory framework for opening the local service markets to competition and by allowing regional phone companies to provide in-region long distance services bundled with their existing local franchise. In addition, prices for long distance minutes and other basic communications services have declined as a result of competitive pressures, excess capacity as a result of substantial network build-out, the introduction of more efficient networks and advanced technologies, product substitution, and deregulation. In particular, consumer long distance voice usage is declining as a result of substitution of wireless services, Internet access and e-mail/instant messaging services. Competition in the provision of basic communications services to consumers is based more on price and less on other differentiating factors that appeal to the larger business market customers, such as the range of services offered, bundling of products, customer service, and communication quality, reliability and availability. The consumer long distance market is characterized by rapid deregulation and intense competition among long distance providers, and, more recently, incumbent local exchange carriers. Under the Telecommunications Act, a regional phone company may offer long distance services in a state within its region if the FCC finds, first, that the regional phone company's service territory within the state has been sufficiently opened to local competition, and second, that allowing the regional phone company to provide these services is in the public interest. As of April 1, 2002, regional phone companies have received approval to offer long distance in ten states and AT&T expects that regional phone companies will be successful in obtaining approval to offer long distance in the majority of the remaining states by the end of 2002. The incumbent local exchange carriers presently have numerous advantages as a result of their historic monopoly control over local exchanges. While these dynamics are creating downward pressure on stand-alone long distance, new opportunities are being created in the consumer industry, including local, data and bundled offers. The local voice market is currently dominated by the incumbent local exchange carriers. The Telecommunications Act has established a statutory framework for opening the local service markets to competition. AT&T Consumer Services has already entered the local voice business in selected markets and expects to expand its presence in this area. The data services market in the consumer segment is comprised primarily of Internet access, utilizing either dial-up or high speed access technologies, such as DSL and cable modems. Currently, AT&T Consumer Services offers products in the narrowband data segment and is conducting trials for products in the broadband data segment. Management believes both narrowband and broadband data services represent substantial revenue growth opportunities for AT&T Consumer Services. SERVICES AND PRODUCTS LONG DISTANCE AT&T Consumer Services provides interstate and intrastate long distance telecommunications services throughout the continental United States and provides, or joins in providing with other carriers, telecommunications services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international telecommunications services to and from virtually all nations and territories around the world. Consumers can use AT&T Consumer Services' domestic and international long distance services through traditional "one plus" dialing of the desired call destination, through dial-up access or through use of AT&T calling cards. 11 In the continental United States, AT&T Consumer Services provides long distance telecommunications services over AT&T Business Services' backbone network. CALLING CARD AT&T Consumer Services provides a vehicle for placing all "away from home" calls. The AT&T calling card can be used to place domestic and international calls in the U.S. and Canada by accessing 1-800CALLATT, 10-10-288 or 0+ the number dialed. Features include purchase limits, geographic restrictions, native language preference, voice messaging and sequence dialing. Customers can place calls over the AT&T network by using any of the following options: AT&T calling cards, local exchange carrier cards and commercial credit cards. TRANSACTION-BASED SERVICES AT&T Consumer Services offers a variety of transaction-based services that are designed to provide customers with an alternative to access long distance services as well as to provide assistance in completing long distance communications. Operator Services. Operator-assisted calling services include traditional collect calls, third party billing, person to person and long distance pay phone service. Directory Assistance. Directory Assistance is provided to customers both domestically and internationally, with an option to complete the call for a nominal extra charge. AT&T Direct Services. AT&T Consumer Services provides customers with the ability to reach the AT&T network from outside the U.S. By dialing the access code associated with the country of origin, customers can receive all the benefits of AT&T Consumer Services' calling card and operator-assisted calling services. AT&T True Messages. AT&T True Messages is a voice store and forward service. Using this service, callers can record a message in their own voice and have it delivered to a telephone number that they called or they can access AT&T True Messages directly and send a message. Accessible Communication Service. AT&T Consumer Services provides Telecommunications Relay Service for the deaf and hearing-impaired and speech impaired customers to help them communicate with anyone in the world on the phone. 1-800CALLATT (Collect). 1-800CALLATT for collect calls continues to be AT&T Consumer Services' lead discounted collect calling offer in the operator services portfolio. 1-800CALLATT is a domestic, automated, flat-rate collect calling service. The service is targeted at price conscious consumers and advertised nationally through multiple media channels. Optional collect messaging capabilities exist as well. AT&T PrePaid Card. AT&T PrePaid cards provide local, long distance and international calls charged to an AT&T PrePaid card account maintained on AT&T's PrePaid platform. The AT&T PrePaid card service is available 24 hours a day, 7 days a week. Currently, AT&T PrePaid cards are available in over 60,000 retail locations of various types including grocery, drug, convenience, mass merchandise, wholesale clubs, electronics/office and military/government. More than half of AT&T Consumer's prepaid card sales in 2001 were to a single retail account under an agreement with a one-year term. 10-10-345. 10-10-345 is a non-AT&T-branded dial-around service that allows customers an alternative way to make a long distance call. The service is targeted at price-sensitive dial-around and other common carriers' users completing domestic and/or international calls from home. When customers dial 10-10-345, they pay a competitive per-minute rate, 24 hours a day, 7 days a week with a minimal surcharge per call. Charges made for calls using 10-10-345 are billed through the local exchange carrier. 12 AT&T DSL SERVICE AT&T Consumer Services is currently developing and market testing an offer that bundles AT&T long distance with local services, using incumbent local exchange carrier network combinations, AT&T Worldnet Services and high-speed Internet access services, which AT&T Consumer Services delivers using DSL technology. The DSL Service would broaden AT&T Consumer Services' franchise from long distance to a portfolio of voice, Internet, high speed data, e-mail and messaging. In addition, AT&T Consumer Services would offer competitively priced local and long distance packages to customers with features such as voice mail and call waiting. The DSL Service would be provided over traditional telephone "twisted pair" copper lines leased from local exchange carriers. Using electronics attached to a typical telephone line both at the customer premises (through a modem) and at a point in the AT&T network, the DSL Service provides customers with a continuous connection to the Internet, featuring AT&T Worldnet Service. The typical residential offering would feature connection speeds up to 12 times faster than 56k modem technology. COMBINED LOCAL AND LONG DISTANCE AT&T Consumer Services offers customers combined local, via unbundled network elements platform, and long distance service in New York, Texas, Michigan and Georgia. AT&T Consumer Services handles all aspects of the phone service for the customer, including ordering, customer service, billing and inside wiring. AT&T Consumer Services also offers many of the same local calling features as the incumbent local exchange carriers, such as call waiting and caller ID. AT&T WORLDNET SERVICE AT&T offers dial-up Internet access to consumers through its AT&T WorldNet Service, a leading provider of Internet access service in the United States. AT&T WorldNet Service currently has dial-up subscribers that use IP communication services within the AT&T WorldNet Service offer, such as e-mail, calendar and alerting. AT&T Consumer Services' objective is to increase usage by the long distance customer base of AT&T Consumer Services' IP-based services and then migrate those customers to more advanced IP-based services, such as voice mail. MARKETING, SALES AND CUSTOMER CARE AT&T Consumer Services develops customer awareness through its marketing and promotion efforts. AT&T Consumer Services markets its products and services to a broad spectrum of customers seeking to communicate locally or globally. AT&T Consumer Services markets under the AT&T brand, with the exception of its 10-10-345 service and certain prepaid card offerings, and strives to provide superior customer care. AT&T Consumer Services extensively utilizes direct marketing channels, including the Internet, direct mail, mass media, probe and transfer, and outbound telemarketing to communicate with its existing customer base as well as to market to prospective customers regarding the breadth of services available to them. AT&T Consumer Services' marketing efforts focus on offering its services to its customers based on their needs. These efforts involve the selling of stand-alone services, such as long distance, local and AT&T WorldNet Service, as well as bundled service offerings including long distance/AT&T WorldNet Service, long distance/ local, and long distance/calling card. AT&T Consumer Services relies on an integrated sales and service team to solicit and handle customer contact opportunities. The customer care centers consist of a network of internal and external vendors. The breadth of support provided by the centers ranges from universal sales and service to specialized services based on functional area or customer needs. AT&T Consumer Services generally pays its vendors based on a contracted hourly rate and some on a pay-for-performance scale methodology. AT&T Consumer Services has 22 service centers, of which ten are operated by AT&T and 12 are outsourced to outside vendors. These service centers handle 9 million calls per month in 12 different languages. 13 AT&T Consumer Services also has begun to implement various initiatives aimed at improving the overall quality of its sales channels as well as lowering its costs of adding new subscribers. Recent initiatives targeted at reducing costs and enhancing channel efficiencies have included the expansion of AT&T Consumer Services' on-line capacity and capabilities, including billing, sales and service, and the increased use of interactive voice response technology. AT&T Consumer Services is pursuing an e-enabling strategy designed to create a more convenient, interactive relationship with the consumer, while streamlining its existing processes and reducing the costs of providing services. AT&T Consumer Services' electronic consumer strategy embodies the entire business process from advertising and marketing through sales, ordering, billing, fulfillment, customer service, and after-sales support. AT&T Consumer Services is supplying a range of product information, bill management utilities and customer care capabilities designed to attract and retain its most valuable customers. AT&T Consumer Services' on-line billing infrastructure enables customers to view, sort, adjust, investigate and resolve questions regarding their billing statements. To further the relationship with specific customer segments, AT&T Consumer Services provides access to information in five languages other than English. These transactions are designed to increase consumer satisfaction by providing a new level of control and, in many cases, reduce time-consuming contacts with AT&T Consumer Services' care and sales channels. In January 2002, AT&T entered into a five-year agreement with Accenture Ltd., for Accenture to provide management, new technology and training for AT&T Consumer Services. Under the terms of the agreement, Accenture will be responsible for providing new technology development and ongoing management direction to improve AT&T Consumer Services' customer care operations, with goals of reducing costs, raising productivity, and improving sales and customer service. AT&T Consumer Services will continue to develop and implement its overall business and marketing strategies and new product offerings. CUSTOMER OFFERS AT&T Consumer Services offers long distance customers a family of calling plans. These calling plans are simple and are consistently offered on the web and over the telephone. Further, these plans offer customers a broad choice of price points designed to meet their needs. Currently, there are two leading long distance offers. The first is the AT&T One Rate 7c Plan. For a monthly plan fee of $3.95, customers pay 7c per minute for direct dialed state-to-state long distance calls from home, at all times. The second is AT&T Unlimited, which offers AT&T residential long distance subscribers unlimited intraLATA and interLATA long distance calls from home to all other AT&T residential long distance customers served by Consumer Services in the United States for $19.95 per month. All other domestic direct-dialed calls under this plan are priced at 7 cents per minute. AT&T Consumer Services also offers various reward and partnership programs for higher spending long distance customers. For example, customers enrolled in AT&T rewards receive redemption options every six months based on their long distance spending. AT&T Consumer Services relationships with companies such as Continental Airlines, Inc., Starwood Hotels & Resorts Worldwide Inc. and Cablevision, among others, provide customers with options ranging from airline miles to hotel nights to premium cable channel upgrades. Recently, market research has indicated consumer interest in college investment funds. Through an agreement announced in January 2001 with UPromise Inc., a customer can receive a contribution equal to 4% of the cost of residential long distance calls made into a UPromise savings account to be used for college education. Consumers can also invite family and friends to participate in collectively building the UPromise savings account. AT&T Worldnet Service seeks to build brand recognition and customer loyalty and to make it easy for consumers to remain with AT&T WorldNet Service. In addition to direct marketing through brand name mass advertising, direct mail and magazine insert promotions and bundling offers, AT&T Worldnet Service maintains a large indirect channel marketing effort. Through this indirect channel, AT&T Worldnet Service software is bundled in new computers produced by major manufacturers and is included in millions of copies of software titles published by independent software vendors. AT&T Worldnet Service also has a co-branded ISP offer that enables businesses to offer customers their own branded, full-featured Internet access in 14 affiliation with AT&T. AT&T Worldnet Service currently offers AT&T Worldnet Service Plus for $16.95 per month, which includes 150 hours of monthly usage (with additional hours billed at $.99/hour), video e-mail, and live technical support. RATES AND BILLING AT&T Consumer Services generally continues to charge long distance customers for jurisdictionally intrastate services based on applicable tariffs filed with various individual states. However, effective as of August 1, 2001, the rates for state-to-state and international calls are now generally set by contract rather than by FCC tariffs as a result of an FCC de-tariffing order. Customers select different services and various rate plans, which determine the monthly or per minute price that customers pay on their long distance calls. Per minute rates typically vary based on a variety of factors, particularly the volume of usage and the day and time that calls are made. AT&T Consumer Services long distance charges may include fees per minute for transporting a call, per call or per minute surcharges, monthly recurring charges, minimums and price structures that offer a fixed number of minutes each month for a specific price and price structure that offer unlimited calling to certain numbers for a monthly fee. The fees per minute for transporting a call may vary by time of day or length of call and by whether the call is domestic or international. Within the United States, in-state rates may vary from interstate rates. These rate structures apply to customer dialed calls, calling card calls, directory assistance calls, operator-assisted calls and certain miscellaneous services. Customers also may be assessed a percentage of revenue, or a fixed monthly fee, to satisfy AT&T Consumer Services' obligations to recover U.S. federal- and state-mandated assessments and access surcharges. Customers for combined long distance and local services are charged a flat rate per month for local service and usage fees and/or monthly charges for long distance. AT&T Worldnet Service offers a variety of pricing plan options. Generally, customers are charged a flat rate for a certain number of hours with charges for each additional hour of usage. AT&T Worldnet Service also offers a plan without a usage restriction. The AT&T Worldnet High Speed Service will offer integrated high speed data combined with comprehensive voice services for one flat rate each month, generally billed electronically to a credit card or through electronic funds transfers. AT&T Consumer Services generally provides billing via traditional paper copy or on-line billing. The traditional paper bills provide call details for calls that are separately charged and are sent directly by AT&T or indirectly through local exchange carriers. An additional fee is charged for customers receiving their bills through local exchange carriers. In the case of on-line billing, the charges are billed to a credit card or directly debited from a checking account; call details for toll charges are available via the AT&T website. 15 DESCRIPTION OF AT&T BROADBAND OVERVIEW AT&T Broadband is one of the nation's largest broadband communications businesses based on customers served as of December 31, 2001, providing cable television, high-speed cable Internet services and telephone services. AT&T Broadband's business consists primarily of the combined assets and business of TCI, acquired by AT&T on March 9, 1999, and MediaOne, acquired by AT&T on June 15, 2000. As of December 31, 2001, AT&T Broadband owned and operated cable systems in 13 of the 20 largest Designated Marketing Areas, which represented 82% of AT&T Broadband's total subscribers. AT&T Broadband's wholly owned and consolidated broadband networks passed approximately 24.6 million homes and served approximately 13.56 million video customers as of December 31, 2001. AT&T Broadband continues to upgrade its systems, 74% of which were upgraded to a capacity equal to or greater than 550 MHz and 79% of which were two-way capable as of December 31, 2001. AT&T Broadband's broadband networks enable it to deliver a suite of advanced entertainment, information and communications services, including its digital cable, high-speed cable Internet and broadband telephone services. As of December 31, 2001, AT&T Broadband provided a variety of advanced services, including: - digital cable, with over 3.47 million digital cable subscribers or 25.6% of AT&T Broadband's basic subscribers, - high-speed cable Internet service, with approximately 1.51 million high-speed cable Internet service subscribers or 10.1% of marketable homes, and - broadband telephone service, with approximately 1.01 million local telephone subscribers or 14.8% of marketable homes. In addition to fees from residential customers for the services AT&T Broadband offers, AT&T Broadband also derives revenues from the sale of advertising time on satellite-delivered program services, such as ESPN, MTV and CNN, and on local cable channels, as well as the payment of license and/or launch fees by certain program services. As of December 31, 2001: - AT&T Broadband had 13.56 million basic subscribers, 94% of whom were concentrated in AT&T Broadband's 20 largest markets, - 40% of AT&T Broadband's subscribers were located in its three largest markets: Boston, San Francisco and Chicago, and - 10.67 million, or 78.7% of AT&T Broadband's subscribers, were in markets where AT&T Broadband had more than 500,000 customers. In addition to AT&T Broadband's wholly owned and consolidated cable systems, AT&T Broadband also owns a number of investments in companies, joint ventures and partnerships, the most significant of which are: - Time Warner Entertainment Company, L.P., which owns and operates the business of Warner Bros., Inc. and HBO and cable systems serving approximately 11 million subscribers, and manages cable systems owned by AOL Time Warner serving approximately 1.8 million subscribers; - Insight Midwest, which owns and operates cable systems that serve approximately 1.2 million subscribers in Indiana, Kentucky, Illinois, Georgia and Ohio; and - Texas Cable Partners, which owns and operates cable systems that serve approximately 1.1 million subscribers in Texas. 16 INDUSTRY OVERVIEW AT&T Broadband operates in the broadband communications industry, offering cable television services (both analog and digital), high-speed cable Internet services and telephone service, in each case primarily to residential and small business customers. AT&T Broadband also is pursuing additional services, including video on demand and interactive television that take advantage of its broadband network. Cable television is a service that delivers multiple channels of video and audio programming to subscribers that pay a monthly fee for the services they receive. Cable television systems receive video, audio and data signals transmitted by nearby television broadcast stations, terrestrial microwave relay services and communications satellites. These signals then are amplified and distributed by coaxial cable and optical fiber to the premises of customers that pay a fee for the service. In many cases, cable television systems also originate and distribute local programming. Cable television systems typically are constructed and operated pursuant to nonexclusive franchises awarded by local franchising authorities for specified periods of time. Cable television revenues principally are derived from monthly fees paid by subscribers, sales of pay-per-view movies and events, sale of advertising time on advertiser supported programming, payment of license and/or launch fees by certain program services and installation charges. High-speed cable Internet services deliver typical Internet service provider, or ISP, services, such as e-mail, instant messaging, personal webspace management and personalized home pages, and content. In some cases, AT&T Broadband provides distinct localized content in addition to national content. Subscribers pay a monthly fee for the services they receive, including access to public areas on the Internet. Other revenue streams may be derived from sales of premium content and services, advertising spots, premium placement of media/service providers within the service, and installation service. Cable telephone service is a technology that allows cable operators to offer telephone service over the same hybrid fiber/coaxial network that supplies television service. Cable telephone service systems have three basic components -- a headend unit, which is a master telephone switching system; a customer premise unit, which is a set-top box, modem or other piece of equipment that is owned by AT&T Broadband and used by a customer in the customer's home; and a management interface, which is a computer server that resides at the headend and controls the telephone switching systems. Cable operators connect to the public switched telephone network through an interface on the headend unit that conforms to one of several standards. At the customer premise unit, voice transmission is separated from the coaxial cable that goes from the neighborhood splitter to the customer's home and routed to a twisted copper pair connected to the customer's existing inside telephone wiring. AT&T Broadband is in the process of developing, testing or offering on a limited basis a variety of new or expanded services, including video on demand, interactive television, targeted advertising, multiple service tiers of high-speed cable Internet service, home networking, multiple ISP offerings and a set of communications services that are designed to work seamlessly over all television, computer and telephone platforms. TECHNICAL OVERVIEW As of December 31, 2001, AT&T Broadband's systems were comprised of approximately 250,000 miles of network passing approximately 24.6 million homes, resulting in a density of slightly less than 100 homes per mile. As of that date, AT&T Broadband's systems were made up of an aggregate of 41 headends in its top 20 markets. As of December 31, 2001, approximately 59% of AT&T Broadband's network was equal to or greater than 750 MHz, approximately 17% of its network was greater than or equal to 550 MHz and less than 750 MHz, and approximately 24% of its network was less than 550 MHz. AT&T Broadband's network design calls for a digital two-way active network with a fiber optic trunk system carrying signals via fiber optic cable to nodes, or main points of contact that typically hang from telephone utility poles within its customers' neighborhoods. The signals are transferred to a coaxial network at the node for delivery to its customers. AT&T Broadband has designed the fiber system to be capable of subdividing the nodes if traffic on the network requires additional capacity. AT&T Broadband's design allows 17 its systems to have the capability to run multiple separate channel lineups from a single headend and to insert targeted advertisements into specific neighborhoods based on node location. The following chart outlines the status of the capacities of AT&T Broadband's cable systems, historically and as of December 31, 2001:
PERCENT OF NETWORK MILES -------------------------------------- GREATER THAN OR EQUAL TO 550 MHZ 750 OR PERCENT OF LESS THAN AND LESS THAN GREATER NETWORK TWO- 550 MHZ 750 MHZ MHZ WAY CABLE --------- ---------------- ------- ------------ As of December 31, 1999.............. 28% 22% 50% 55% As of December 31, 2000.............. 21% 16% 63% 75% As of December 31, 2001.............. 24% 17% 59% 77%
SERVICES Cable Television Service. AT&T Broadband offers its customers a wide array of traditional cable television services and programming offerings. AT&T Broadband offers a basic level of service which typically includes from 15 to 25 channels of television programming. As of December 31, 2001, approximately 89% of AT&T Broadband's customers elected to pay an additional amount to receive additional channels under its expanded basic service, which AT&T Broadband calls its Standard Cable package. Premium channels, which AT&T Broadband offers individually or in packages of several channels, are optional add-ons to its basic service. AT&T Broadband's cable television services include the following: - Basic Service. All of AT&T Broadband's customers receive its basic level of service, which generally consists of local broadcast television and local community programming, including public, educational or governmental, or PEG, programming, and may include a limited number of satellite-delivered channels. - Standard Cable. AT&T Broadband's Standard Cable package includes basic service, plus expanded basic. This level of service includes a group of satellite-delivered and non-broadcast channels such as ESPN, CNN, Discovery Channel and Lifetime. - Premium Channels. These channels provide unedited, commercial-free movies, sports and other special event entertainment programming. AT&T Broadband offers subscriptions to numerous premium channels, including HBO, Cinemax, Starz!, Showtime and The Movie Channel, individually or in packages. - Pay-Per-View. These channels allow customers with addressable set-top boxes to pay to view a single showing of a recently released movie or a one-time special sporting event or music concert on an unedited, commercial-free basis. Through AT&T Digital Cable, AT&T Broadband also offers additional special interest networks, premium channels, pay-per-view, digital music and an interactive on-screen guide, as described under "-- Advanced Services." AT&T Broadband's basic subscribers, including its digital cable customers, are served as follows:
DECEMBER 31, -------------------------- 1998 1999 2000 2001 ---- ---- ---- ----- (IN MILLIONS) Managed through AT&T Broadband's operating divisions...... 11.4 11.3 15.9 13.5 Other non-managed subsidiaries of AT&T Broadband.......... 0.5 0.1 0.1 0.1 ---- ---- ---- ----- Total..................................................... 11.9 11.4 16.0 13.6 ==== ==== ==== =====
18 In addition to the above, the FCC currently attributes AT&T Broadband with the subscribers of various other entities as a consequence of AT&T Broadband's investments in those entities. The following table sets forth selected statistical data regarding AT&T Broadband's cable television operations:
DECEMBER 31, ----------------------------------------------------- 1998 1999 2000 2001 ----------- ----------- ----------- ----------- Homes passed by cable(1)(3)...... 19,889,000 19,668,000 28,303,000 24,614,000 Basic service subscribers(3)..... 11,948,000 11,408,000 16,041,000 13,560,000 Basic service subscribers as a percentage of homes passed..... 60% 58% 57% 55% Average monthly revenue per basic service subscriber(2)(3)....... $ 32.24 $ 42.97 $ 47.63 $ 47.69
- --------------- (1) Homes passed is based on homes actually marketed and does not include multiple dwelling units passed by the cable plant that are not connected to it. (2) Based on video service revenues for the last month of the period, including installation charges and certain other nonrecurring revenues, such as pay-per-view, advertising and home shopping revenues. (3) Year-end statistics regarding AT&T Broadband's subscribers and homes passed by cable are materially affected by AT&T Broadband's acquisition and divestiture program discussed under "-- Acquisitions and Divestitures." Notable variations arose during 1998, when AT&T Broadband contributed cable systems serving approximately 2,700,000 customers to other persons, and during 2000, when AT&T Broadband acquired approximately 5,000,000 customers from MediaOne. Advanced Services. As network upgrades are activated, AT&T Broadband offers new and advanced services, including interactive digital cable and high-speed cable Internet service. In addition, AT&T Broadband offers all-distance telephone services in selected markets. Digital Cable. AT&T Broadband offers digital cable service, which includes additional channels on its existing service tiers, the creation of new service tiers and the introduction of multiple packages of premium services. AT&T Broadband's digital cable service also includes an electronic program guide, on demand pay-per-view and up to 30 channels of digital music. In addition, AT&T Broadband offers more premium and special interest networks. AT&T Broadband's interactive digital cable service also allows it to offer TV-formatted information to its customers that has local content and is targeted to a specific system or community. For example, through this service AT&T Broadband offers local weather, sports, news and dining information. Below is a summary of operating statistics for digital cable services:
DECEMBER 31, --------------------------------- 1999 2000 2001 --------- --------- --------- Digital cable customers............................. 1,800,000 2,815,000 3,475,000 Digital penetration as a percentage of basic service subscribers....................................... 15.8% 17.5% 25.6%
AT&T Broadband offers its customers four digital packages -- Bronze, Silver, Gold and Platinum. These packages allow viewers to select the level of services they receive to fit their individual interests. High-Speed Cable Internet. AT&T Broadband offers high-speed cable Internet service for personal computers over its networks in all of its upgraded systems. 19 Below is a summary of AT&T Broadband's high-speed cable Internet service operating statistics:
DECEMBER 31, ----------------------------------- 1999 2000 2001 --------- ---------- ---------- Data marketable homes passed...................... 4,974,000 14,523,000 14,937,000 Customers......................................... 207,000 1,060,000 1,512,000 Penetration....................................... 4.2% 7.3% 10.1%
AT&T Broadband's high-speed cable Internet service enables data to be transmitted substantially faster than through conventional telephone modem technologies, and the cable connection does not interfere with normal telephone activity or usage. AT&T Broadband's high-speed cable Internet service offers unlimited access to public areas on the Internet. Until recently, AT&T Broadband and At Home Corporation were parties to a master distribution agreement pursuant to which At Home provided AT&T Broadband with broadband network services and content aggregation necessary for the delivery of high-speed cable Internet services to AT&T Broadband's customers. On September 28, 2001, At Home and its U.S. subsidiaries filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California. On November 30, 2001, the bankruptcy court granted a motion made by At Home for authority to reject the master distribution agreement and other similar agreements with other customers of At Home, thereby giving At Home the authority to terminate service to AT&T Broadband and other customers at any time. As a result, on December 1, 2001, At Home terminated service to AT&T Broadband and, in response, AT&T Broadband converted the majority of its customers to a new AT&T-managed network during the first week of December. AT&T Broadband currently provides "AT&T Broadband Internet" branded high-speed cable Internet service to its customers pursuant to an agreement with AT&T to provide certain network and backbone support services to AT&T Broadband. In March 2002, AT&T Broadband entered into an agreement with EarthLink pursuant to which EarthLink will initially launch its high speed Internet service in greater Boston and in the Seattle market. Broadband Telephone Service. AT&T Broadband currently offers broadband telephone services to customers in 15 markets using AT&T Broadband's systems' direct, two-way connections to homes. AT&T Broadband utilizes its broadband network to provide local telephone services and resell AT&T long distance services. AT&T Broadband also provides broadband telephone services for the systems operated by Insight Midwest which are located in Kentucky, Indiana and Ohio. Below is a summary of AT&T Broadband's operating statistics for broadband telephone services:
DECEMBER 31, ------------------------------- 1999 2000 2001 ------- --------- --------- Telephone-ready homes passed......................... 721,000 6,103,000 6,833,000 Customers............................................ 8,000 547,000 1,011,000 Penetration.......................................... 1.1% 9.0% 14.8%
AT&T Broadband's broadband telephone service initiatives progressed substantially in 2000 and 2001. During 2000, AT&T Broadband increased the number of markets in which it offers telephone service from ten to 16, and increased its customer base from 8,000 to 547,000. As of December 31, 2001, AT&T Broadband offered broadband telephone services in: Atlanta, Boston, the San Francisco Bay Area, Chicago, Dallas, Denver, Hartford, Jacksonville, Twin Cities, Pittsburgh, Richmond, Seattle, Salt Lake City, Southern California and Portland, Oregon. AT&T Broadband offers a variety of options and calling plans with various price points. These options and calling plans range from basic one line service to multiple lines with full feature functionality. Advertising. AT&T Broadband sells advertising time on satellite-delivered program services such as CNN, Discovery, ESPN and Lifetime, and on local channels. In addition to the sale of advertising time to local and regional advertisers, AT&T Broadband participates in the national spot advertising marketplace 20 through its sales representation arrangement with and investment in National Cable Communications, LLC, a partnership that represents cable systems in the sale of time to national spot advertisers. STRATEGY AT&T Broadband's strategy is to utilize the technological capabilities of its broadband cable systems to be a full-service provider of entertainment, information and communications services in the markets it serves. To implement this strategy, AT&T Broadband continues to upgrade its cable systems to allow it to deliver more information and entertainment services and to provide for two-way communications capability. Continuing the upgrade of its cable systems is expected to enhance AT&T Broadband's ability to increase penetration of advanced services, including digital cable, high-speed cable Internet service and all-distance telephone service. Providing quality customer service also is a key element of AT&T Broadband's strategy. Throughout its operations, AT&T Broadband focuses on achieving reliable customer service with financial results comparable to the overall cable industry. ACQUISITIONS AND DIVESTITURES AT&T Broadband has sought to improve the geographic footprint of its cable systems by selectively exchanging its cable systems for systems of other cable operators or acquiring systems in close proximity to its systems. In this regard, AT&T Broadband completed a significant number of transactions in 2000 and 2001 that substantially changed the size and profile of its cable system network. The principal transactions are described below: - In January 2000, a subsidiary of AT&T Broadband sold its entire 50% interest in Lenfest to a subsidiary of Comcast. In consideration for its 50% interest, AT&T Broadband received 47,289,843 shares of Comcast Special Class A common stock. - In February 2000, AT&T Broadband redeemed a portion of its interest in Bresnan Communications LLC for $285 million in cash. AT&T Broadband then contributed its remaining interest in Bresnan to CC VIII, LLC, in exchange for a preferred ownership interest. - In March 2000, AT&T Broadband redeemed approximately 50.3 million shares of AT&T common stock held by Cox in exchange for stock of a subsidiary of AT&T Broadband owning cable television systems serving approximately 312,000 customers, AT&T Broadband's interest of $1,088 million in certain investments, $878 million of franchise costs and $503 million of other net assets. - In April 2000, AT&T Broadband contributed 103,000 subscribers into a joint venture with Midcontinent Media, Inc. in exchange for a 50% interest in Midcontinent Communications, a general partnership. - In June 2000, MediaOne merged into a subsidiary of AT&T, whereby AT&T Broadband acquired approximately 5 million basic cable subscribers, 0.2 million digital video subscribers, 0.3 million high-speed cable Internet service subscribers and 0.1 million broadband telephone service subscribers. - Effective December 31, 2000, AT&T Broadband transferred systems serving approximately 770,000 subscribers primarily located in Washington D.C., Florida, Georgia, Michigan, New Jersey and Pennsylvania to Comcast in exchange for systems serving approximately 700,000 subscribers primarily located in Sacramento, California, Longmont, Colorado, Florida, Georgia and Chicago, Illinois. - In January 2001, AT&T Broadband transferred 98,400 subscribers to Insight Communications Company, Inc. In a subsequent transaction, AT&T Broadband contributed 247,500 additional subscribers in the Illinois markets to Insight Midwest, a partnership owned 50% by AT&T Broadband and 50% by Insight Communications, and Insight Communications also contributed additional subscribers to the partnership. The expanded joint venture continues to be managed by Insight Communications. 21 - In January 2001, AT&T Broadband acquired 358,000 subscribers in the Boston metropolitan area from Cablevision and transferred 130,000 New York subscribers, 44 million shares of AT&T common stock valued at approximately $871 million and approximately $204 million in cash to Cablevision. - On January 5, 2001, AT&T Broadband completed an exchange whereby AT&T Broadband contributed approximately 82,000 subscribers in the Corpus Christi, Texas area to Texas Cable Partners, L.P., a partnership in which AT&T Broadband holds a 50% partnership interest' and AT&T Broadband received from Texas Cable Partners, L.P. approximately 97,000 subscribers in areas surrounding the Dallas, Texas metropolitan area. - On March 1, 2001, AT&T Broadband completed an exchange with CableOne, Inc. whereby AT&T Broadband received approximately 105,000 subscribers in the Santa Rosa/Modesta, California area from CableOne, Inc.; and AT&T Broadband transferred approximately 149,000 subscribers in Idaho, Oregon, and Washington to CableOne, Inc. - On April 30, 2001, a subsidiary of AT&T sold to Comcast certain cable systems attributed to AT&T Broadband serving approximately 590,000 subscribers in Delaware, New Mexico, Maryland, New Jersey, Pennsylvania and Tennessee in exchange for 63.9 million shares of AT&T common stock valued at $1,423 million. - On June 29, 2001, a subsidiary of AT&T sold to MediaCom Communications Corporation cable systems attributed to AT&T Broadband serving approximately 94,000 customers in Missouri for approximately $295 million in net cash. - Effective June 30, 2001, a subsidiary of AT&T transferred to Charter cable systems attributed to AT&T Broadband serving approximately 563,000 customers in Alabama, California, Illinois, Missouri and Nevada. AT&T Broadband, through its attributed entities, received $1,497 million in net cash, $222 million in cash restricted for future acquisitions of cable systems, and a cable system in Florida serving 9,000 customers. - Effective June 30, 2001, AT&T, together with certain subsidiaries attributed to AT&T Broadband transferred its 99.75% interest in an entity owning the Baltimore, Maryland cable television system, serving approximately 115,000 customers, to Comcast for approximately $510 million. - On July 18, 2001, a subsidiary of AT&T sold to MediaCom cable systems attributed to AT&T Broadband serving approximately 710,000 customers in Georgia, Iowa and Illinois for approximately $1,724 million in net cash. - On December 17, 2001, a subsidiary of AT&T and Adelphia closed a transaction in which certain cable systems attributable to AT&T Broadband serving approximately 128,000 customers in central Pennsylvania and Ohio were sold to Adelphia for approximately $245 million in cash and Adelphia Class A Common stock valued at approximately $73 million. SALES, MARKETING AND BILLING AT&T Broadband's marketing programs and campaigns offer a variety of services packaged and tailored to its markets. AT&T Broadband markets its services through promotional campaigns and local media and newspaper advertising, through telemarketing, direct mail advertising, online selling and in person selling. In addition, AT&T Broadband reserves a portion of its inventory of locally inserted cable television advertising to market its services. AT&T Broadband is party to an agreement under which it purchases certain billing services from CSG Systems, Inc. ("CSG"). Unless terminated by either party pursuant to terms of the agreement, the agreement expires on December 31, 2012. On March 13, 2002, AT&T Broadband informed CSG that AT&T Broadband is considering the initiation of an arbitration against CSG relating to a Master Subscriber Management System Agreement that the two companies entered into in 1997. Pursuant to the Master Agreement, CSG provides billing support to AT&T Broadband. AT&T Broadband's decision whether to seek arbitration is subject to the parties exhausting the negotiation process specified in the Master Agreement. That dispute 22 resolution portion of the agreement calls for senior officers from each company to meet promptly, and for a period of not less than 30 days, in an effort to resolve the dispute. In the event that this process results in the termination of the Master Agreement, AT&T Broadband may incur significant costs in connection with its replacement of these billing services and may experience temporary disruptions to its operations. PROGRAMMING SUPPLIERS AT&T Broadband has various contracts to obtain basic and premium programming from program suppliers whose compensation is typically based on a fixed fee per customer or a percentage of its gross receipts for the particular service. AT&T Broadband has entered into long-term agreements with several programming suppliers, including ABC/Disney, AOL Time Warner, CBS/Viacom, NBC, News Corp. and Starz! Encore. Certain of these agreements provide for a flat fee or guaranteed payment obligation regardless of subscriber levels. AT&T Broadband's programming contracts are generally for a fixed period of time and are subject to negotiated renewal. Some program suppliers provide volume discount pricing structures or offer marketing support to AT&T Broadband. AT&T Broadband's programming costs have increased substantially in recent years due to additional programming being provided to its customers, increased costs to produce or purchase programming, inflationary increases and other factors affecting the cable television industry. AT&T Broadband also has various retransmission consent arrangements with commercial broadcast stations, which expire at various times over the next ten years, with a significant portion expiring prior to December 31, 2002. None of these consent arrangements requires payment of fees for carriage. However, AT&T Broadband does provide non-cash consideration, including entering into agreements with certain broadcast networks to carry satellite-delivered cable programming that is affiliated with the broadcast network. AGREEMENTS WITH LIBERTY MEDIA AT&T Broadband is a party to various arrangements with Liberty Media. Effective August 2001, Liberty Media was split off from AT&T and is no longer an affiliate of AT&T Broadband. Preferred Vendor Status. AT&T Broadband has granted Liberty Media preferred vendor status with respect to access, timing and placement of new programming services. This means that AT&T Broadband must use its reasonable efforts to provide digital basic distribution of new services created by Liberty Media and its affiliates, on mutual "most favored nation" terms and conditions, and otherwise consistent with industry practices, subject to the programming meeting standards that are consistent with the type, quality and character of AT&T Broadband's cable services as they may evolve over time. Extension of Term of Affiliation Agreements. AT&T Broadband has agreed to extend any existing affiliation agreement of Liberty Media and its affiliates that expires on or before March 9, 2004, to a date not before March 9, 2009, if most favored nation terms are offered and the arrangements are consistent with industry practice. Interactive Video Services. AT&T Broadband has agreed to enter into arrangements with Liberty Media for interactive video services under one of the following two arrangements, which will be at the election of AT&T Broadband: - Pursuant to a five-year arrangement, renewable for an additional four-year period on then-current most favored nation terms, AT&T Broadband will make available to Liberty Media capacity equal to one 6 MHz channel, in digital form and including interactive enablement, first screen access and hot links to relevant web sites -- all to the extent implemented by AT&T Broadband cable systems, to be used for interactive, category-specific video channels that will provide entertainment, information and merchandising programming. The foregoing, however, will not compel AT&T Broadband to disrupt other programming or other channel arrangements. The interactive video services are to be accessible through advanced set-top boxes deployed by AT&T Broadband, except that, unless specifically addressed in a mutually acceptable manner, AT&T Broadband will have no obligation to deploy set-top boxes of a type, design or cost materially different from that it would otherwise have deployed. The 23 content categories may include, among others, music, travel, health, sports, books, personal finance, automotive, home video sales and games. - AT&T Broadband may enter into one or more mutually agreeable ventures with Liberty Media for interactive, category-specific video channels that will provide entertainment, information and merchandising programming. Each venture will be structured as a 50/50 venture for a reasonable commercial term, and will provide that, for the duration of such term, Liberty Media and AT&T Broadband will not provide interactive services in the category(s) of interactive video services provided through the venture(s) other than the joint venture services in the applicable categories. When the distribution of interactive video services occurs through a venture arrangement, AT&T Broadband will share in the revenue and expense of the provision of the interactive services pro rata to its ownership interest in lieu of the commercial arrangements described in the preceding paragraph. At the third anniversary of the formulation of any such venture, AT&T Broadband may elect to purchase Liberty Media's ownership interest in the venture at fair market value. Liberty Media and AT&T Broadband have agreed to endeavor to make any such transaction tax efficient to Liberty Media. At the date of this document, AT&T Broadband has not entered into any further agreements with Liberty Media regarding the distribution of specific interactive television channels. As a result, the exact terms under which AT&T Broadband may provide carriage of these channels has not been determined, and AT&T Broadband has not made any election between the alternative carriage arrangements described above. Although AT&T Broadband will continue to endeavor to negotiate agreements with Liberty Media concerning distribution of interactive channels within the framework of the above arrangement, there can be no assurance that AT&T Broadband will be able to conclude any such agreement on acceptable terms. Affiliation Agreements. AT&T Broadband is party to affiliation agreements pursuant to which it purchases programming from Liberty Media's subsidiaries and affiliates. Some of these agreements provide for penalties and charges in the event the supplier's programming is not carried on AT&T Broadband's cable systems or not delivered to a contractually specified number of customers. Charges to AT&T Broadband for such programming are generally based upon customary rates and often provide for payments to AT&T Broadband by Liberty Media's subsidiaries and business affiliates for marketing support. In July 1997, AT&T Broadband's predecessor, TCI, and AT&T Broadband's subsidiary, Satellite Services, Inc., entered into a 25-year affiliation term sheet with Starz Encore Group, formerly Encore Media Group, pursuant to which AT&T Broadband may be obligated to make fixed monthly payments in exchange for unlimited access to Encore and Starz! programming. The commitment increases annually from $288 million in 2001 to $315 million in 2003, and will increase annually through 2022 with inflation. The affiliation term sheet further provides that to the extent Starz Encore Group's programming costs increase above certain levels, AT&T Broadband payments under the term sheet will be increased in proportion to the excess. Excess programming costs that may be payable by AT&T Broadband in future years are not presently estimable, and could be significant. By letter dated May 29, 2001, AT&T Broadband disputed the enforceability of the excess programming pass through provisions of the term sheet and questioned the validity of the term sheet as a whole. AT&T Broadband also raised certain issues concerning the uncertainty of the provisions of the term sheet and the contractual interpretation and application of certain of its provisions to, among other things, the acquisition and disposition of cable systems. In July 2001, Starz Encore Group filed suit seeking payment of the 2001 excess programming costs and a declaration that the term sheet is a binding and enforceable contract. In October 2001, AT&T Broadband and Starz Encore Group agreed to stay the litigation until August 31, 2002 to allow the parties time to continue negotiations toward a potential business resolution of this dispute. The Court granted the stay on October 30, 2001. The terms of the stay order allow either party to petition the Court to lift the stay after April 30, 2002 and to proceed with the litigation. OTHER ASSETS Joint Ventures. AT&T Broadband possesses a number of investments in companies, joint ventures and partnerships, the most significant of which are Time Warner Entertainment, Insight Midwest and Texas Cable Partners. 24 Time Warner Entertainment. Time Warner Entertainment is a Delaware limited partnership that was formed in 1992 to own and operate substantially all of the business of Warner Bros., HBO and the cable television businesses owned and operated by Time Warner prior to that time. AT&T Broadband's current interest in Time Warner Entertainment was acquired by AT&T Broadband in connection with the MediaOne acquisition. Currently, AT&T Broadband, through its wholly owned subsidiaries, owns limited partnership interests representing 25.51% of the pro rata senior priority (Series A) capital and residual equity capital of Time Warner Entertainment. The remaining 74.49% limited partnership interests in the Series A capital and residual capital of Time Warner Entertainment, as well as 100% of the junior priority (Series B) capital of Time Warner Entertainment, are held by subsidiaries of AOL Time Warner. Subsidiaries of AOL Time Warner act as the general partners of Time Warner Entertainment, and AT&T is not involved in the management or operation of the partnership or its business but has certain protective governance rights pertaining to certain limited significant matters relating to Time Warner Entertainment, such as the dissolution or merger or voluntary bankruptcy of Time Warner Entertainment. On February 28, 2001, AT&T submitted a request to Time Warner Entertainment, pursuant to the Time Warner Entertainment partnership agreement, that Time Warner Entertainment reconstitute itself as a corporation and register for sale in an initial public offering an amount of partnership interests held by AT&T Broadband (up to the full amount held by AT&T Broadband) determined by an independent investment banking firm so as to provide sufficient trading liquidity and minimize any initial public offering discount. Under the Time Warner Entertainment partnership agreement, upon this request, AT&T Broadband and Time Warner are to cause an independent investment banker to determine both such registrable amount of partnership interests and the price at which the registrable amount could be sold in a public offering. The partnership agreement provides that, upon determination of the registrable amount and the appraised value of the registrable amount, Time Warner Entertainment may elect not to register these interests, but instead to allow AT&T Broadband the option to require that Time Warner Entertainment purchase the registrable amount at the appraised value, subject to certain adjustments. If AT&T Broadband does put the registrable amount to Time Warner Entertainment under such circumstances, Time Warner Entertainment may call the remainder of AT&T Broadband's interest in Time Warner Entertainment at a price described in the Time Warner Entertainment partnership agreement. If Time Warner Entertainment elects to register the interests, then Time Warner Entertainment must promptly use its best efforts to cause the partnership to be in a position to be reconstituted as a corporation and to effect an initial public offering. However, Time Warner Entertainment may have an option to purchase these interests immediately prior to the time the public offering would otherwise have been declared effective by the SEC at the proposed public offering price less underwriting fees and discounts if the proposed public offering price (as determined by the managing underwriter) is less than 92.5% of the appraised value. If, at the conclusion of this process, AT&T Broadband has any remaining interests in Time Warner Entertainment, AT&T Broadband will have the right to request registration of those interests for public sale after July 1, 2002 if no public offering of Time Warner Entertainment shall have taken place, or 18 months after a public offering pursuant to AT&T Broadband's request. On February 28, 2001, AT&T Broadband agreed to suspend the registration rights process until March 15, 2001. Since then, AT&T Broadband and AOL Time Warner have been engaged in discussions regarding the retention of a mutually satisfactory investment banker to perform the appraisals of Time Warner Entertainment under the Time Warner Entertainment partnership agreement. If the procedures described above do not result in the disposition by AT&T Broadband of its entire interest in Time Warner Entertainment, then under the terms of the Time Warner Entertainment partnership agreement, AT&T may be required to offer Time Warner Entertainment the opportunity to repurchase the remaining interest in the partnership before the AT&T Comcast Transaction may be completed in its current form. AT&T has an option to increase its Series A priority capital and residual capital interests in Time Warner Entertainment by an amount determined by reference to a formula in the option agreement following an appraisal by an independent appraiser. On March 25, 2001, the appraisal of Time Warner Entertainment under the option agreement was completed by an independent appraiser jointly engaged by AT&T Broadband 25 and AOL Time Warner. Based on this appraisal, upon full exercise of the option on a cashless basis, AT&T's interest in Time Warner Entertainment will increase by 2 percentage points to 27.51% of the Series A priority capital and residual equity capital. AT&T has 45 days from March 25, 2001 to exercise the option, which it expects to do on a cashless basis. Insight Midwest, L.P. Insight Midwest is a Delaware limited partnership formed in 1999 which currently owns and operates certain cable systems in Indiana, Kentucky, Illinois, Georgia and Ohio. AT&T Broadband holds a 50% limited partnership interest and Insight Communications holds a 50% general partnership interest in Insight Midwest. The business of the partnership is managed by Insight Communications, as the general partner, although certain matters also require the approval of AT&T Broadband. Insight Midwest currently has approximately 1.2 million cable video subscribers. Texas Cable Partners, L.P. Texas Cable Partners is a Delaware limited partnership formed in December 1998 to own and operate certain cable systems in Texas. The partnership is owned 50% by AT&T Broadband and 50% by the Time Warner Entertainment-Advance/Newhouse Partnership, approximately two-thirds of which is owned by Time Warner Entertainment. The general manager of Texas Cable Partners is Time Warner Cable, a division of Time Warner Entertainment, although certain governance matters require the approval of the management committee on which the Time Warner Entertainment-Advance/Newhouse Partnership and AT&T Broadband have equal representation. Texas Cable Partners currently has approximately 1.1 million cable video subscribers. Other Investments. AT&T Broadband has interests in a number of different joint ventures and companies. LEGISLATIVE AND REGULATORY DEVELOPMENTS BUSINESS SERVICES AND CONSUMER SERVICES Telecommunications Act of 1996. In February 1996, the Telecommunications Act became law. The Telecommunications Act, among other things, was designed to foster local exchange competition by establishing a regulatory framework to govern new competitive entry in local and long distance telecommunications services. The Telecommunications Act permits a regional phone company to provide interexchange services originating in any state in its region after it demonstrates to the FCC that this provision is in the public interest and it satisfies the conditions for developing local competition established by the Telecommunications Act. In August 1996, the FCC adopted rules and regulations, including pricing rules, to implement the local competition provisions of the Telecommunications Act, including with respect to the terms and conditions of interconnection with local exchange carrier networks and the standards governing the purchase of unbundled network elements and wholesale services from local exchange carriers. These rules and regulations rely on state public utility commissions, or PUCs, to develop the specific rates and procedures applicable to particular states within the framework prescribed by the FCC. On July 18, 1997, the Eighth Circuit Court of Appeals issued a decision holding that the FCC lacked authority to establish pricing rules to implement the sections of the local competition provisions of the Telecommunications Act applicable to interconnection with incumbent local exchange carrier networks and the purchase of unbundled network elements and wholesale services from incumbent local exchange carriers. Accordingly, the Eighth Circuit Court of Appeals vacated the rules that the FCC had adopted in August 1996, and that had been stayed by the Court since September 1996. On October 14, 1997, the Eighth Circuit Court of Appeals vacated an FCC rule that prohibited incumbent local exchange carriers from separating network elements that are combined in an incumbent local exchange carrier's network, except at the request of the competitor purchasing the elements. This decision increased the difficulty and cost of providing competitive local service through the use of unbundled network elements purchased from incumbent local exchange carriers. 26 On January 25, 1999, the Supreme Court issued a decision reversing the Eighth Circuit Court of Appeals' holding that the FCC lacks jurisdiction to establish pricing rules applicable to interconnection and the purchase of unbundled network elements, and the Eighth Circuit Court of Appeals' decision to vacate the FCC's rule prohibiting incumbent local exchange carriers from separating network elements that are combined in an incumbent local exchange carrier's network. The effect of the Supreme Court's decision was to reinstate the FCC's rules governing pricing and the separation of unbundled network elements. The pricing issues were then remanded to the Eighth Circuit Court of Appeals to consider the incumbent local exchange carriers' claims that, although the FCC has jurisdiction to adopt pricing rules, the rules it adopted are not consistent with the applicable provisions of the Telecommunications Act. The Supreme Court also vacated the FCC's rule identifying and defining the unbundled network elements that incumbent local exchange carriers are required to make available to new entrants, and directed the FCC to reexamine this issue in light of the standards mandated by the Telecommunications Act. In response to the Supreme Court's decision, in November 1999, the FCC completed its reexamination of, and released an order identifying and defining, the unbundled network elements that incumbent local exchange carriers are required to make available to new entrants. That order re-adopted the original list of elements, with certain limited exceptions. An association of incumbent local exchange carriers has appealed the FCC's order to the District of Columbia Circuit Court of Appeals, and has asked this Court to hear the appeal on an expedited basis. A number of parties, including AT&T and other incumbent local exchange carriers, have petitioned the FCC to reconsider and/or clarify its order. The FCC has moved to hold the appeal in abeyance pending its disposition of the reconsideration petitions. In addition, in December 2001 the FCC opened a proceeding in which it proposes to review the availability of unbundled network elements based on current market conditions. The FCC has proposed to respond to issues raised in the earlier reconsideration petitions in this new docket. In July 2000, the Eighth Circuit Court of Appeals issued a decision addressing the incumbent local exchange carriers' claims that the FCC's pricing rules are not consistent with the applicable provisions of the Telecommunications Act. It rejected the incumbent local exchange carriers' claims that the prices for network elements must be based on their "historical costs" rather than, as the FCC had held, their "forward-looking" costs. It also held, however, that the FCC rule providing that forward-looking costs should be calculated on the basis of the cost of the most efficient alternatives was contrary to the Telecommunications Act. The Eighth Circuit Court of Appeals then stayed this ruling to enable the parties to seek review before the Supreme Court, so the FCC's rules remain in effect until the Supreme Court decides the case. The Supreme Court agreed to review the Eighth Circuit Court of Appeals' decision, and a decision by the Supreme Court is anticipated by the end of June 2002. The Supreme Court will be considering the claims of AT&T, the FCC and others that the Eighth Circuit Court of Appeals erred by invalidating the FCC rule, and the claim by the incumbent local exchange carriers that the Eighth Circuit Court of Appeals erred by not requiring prices to be based on their historical cost. The Supreme Court is also considering the Eighth Circuit's decision that incumbent local exchange carriers are not required to provide competitors with "new" combinations of unbundled network elements. The Eighth Circuit Court of Appeals also invalidated the FCC's rules setting the pricing methodology for resold local services. That aspect of its decision was not stayed and will not be reviewed by the Supreme Court. The effect of the most recent decision by the Eighth Circuit Court of Appeals is to increase the risks, costs, difficulties, and uncertainty of entering local markets through using the incumbent local exchange carriers' facilities and services. In addition, the United States House of Representatives has passed legislation that would permit the regional phone companies to provide certain long distance services without satisfying the Telecommunications Act's checklist of conditions and also would substantially reduce the regional phone companies' obligations to provide AT&T and other local competitors with the facilities needed to provide competitive local services, particularly high speed data services. The prospects that the United States Senate will pass such legislation remain uncertain. The FCC also opened a proceeding in February 2002 that could limit the obligations of the regional phone companies to provide AT&T and other local competitors with access to facilities needed to provide high speed data services. This proceeding, and the other FCC proceedings referenced above could also 27 reduce the regional phone companies obligations to provide facilities to AT&T and other local competitors, and could accelerate the regional phone companies' ability to provide long distance services. In view of the proceedings pending before the Supreme Court, the District of Columbia Circuit Court of Appeals, the FCC and state PUCs and possible legislation, there can be no assurance that the prices and other conditions established in each state will provide for effective local service entry and competition or provide AT&T with new market opportunities. Regulation of Rates. AT&T is subject to the jurisdiction of the FCC with respect to interstate and international rates, lines and services, and other matters. From July 1989 to October 1995, the FCC regulated AT&T under a system known as "price caps" whereby AT&T's prices, rather than its earnings, were limited. On October 12, 1995, recognizing a decade of enormous change in the long distance market and finding that AT&T lacked market power in the interstate long distance market, the FCC reclassified AT&T as a "non-dominant" carrier for its domestic interstate services. Subsequently, the FCC determined that AT&T's international services were also non-dominant. As a result, AT&T became subject to the same regulations as its long distance competitors for these services. Thus, AT&T was no longer subject to price cap regulation for these services, was able to file tariffs that are presumed lawful on one day's notice, and was free of other regulations and reporting requirements that apply only to dominant carriers. In subsequent orders, the FCC decided to exercise its authority to forbear from requiring non-dominant carriers to file tariffs for their services; first for domestic interstate services and then for international services. As a result, non-dominant carriers, including AT&T, have implemented mechanisms other than tariffs to establish the terms and conditions that apply both to domestic, interstate telecommunications services and international services, effective August 1, 2001. Accordingly these mechanisms apply to virtually all of AT&T's interstate and international telecommunications services. In May 1997, the FCC adopted orders relating to price caps, access reform and universal service that substantially revised the level and structure of access charges that AT&T, as a long distance carrier, pays to incumbent local exchange carriers. Under the price cap order, local exchange carriers were required to reduce their price cap indices by 6.5% annually, less an adjustment for inflation, which has resulted in significant reductions in access charges that long distance companies pay to local exchange carriers. The access reform order permitted increased flat-rate assessments to multiline business customers and to residential customers other than for the primary telephone line. AT&T has agreed to pass through to consumers any savings to AT&T as a result of these access charge reforms. Consequently, AT&T's results after June 1997 reflect lower revenue per minute of usage and lower access and other interconnection costs per minute of usage. In May 2000, the FCC adopted the CALLS order for the price cap local exchange carriers, which made additional significant access and price cap changes. The CALLS order reduced by $3.2 billion during 2000 the interstate access charges that AT&T and other long distance carriers paid to these local exchange carriers for access to their networks, and established target access rates for the long distance carriers companies, which, over the next two years, will result in further reductions, albeit of a much smaller magnitude. Once the target rates are reached, the annual price reductions required by the price cap order no longer apply. In addition, the CALLS order removed implicit subsidies from access charges and converted them into an explicit, portable subsidy administered as part of the universal service program described below. Also, under the CALLS order, the caps on certain line-based costs that do not vary with usage have been increased so that these costs increasingly are recovered from end user customers. These restructurings allowed the reduction in access charges assessed on long distance carriers on a usage basis. As part of the CALLS order, AT&T agreed to pass through to customers access charge reductions over the five-year life of the CALLS order and made certain other commitments regarding the rate structure of certain residential long distance offerings. The FCC CALLS order was recently reversed and remanded in part, and is the subject of ongoing remand proceedings before the FCC. Under the August 1999 local exchange carrier pricing flexibility order, which was affirmed by the District of Columbia Circuit Court of Appeals in February 2001, the FCC established certain triggers that enable the price cap local exchange carriers to obtain pricing flexibility for their interstate access services, including Phase II relief that permits them to remove these services from price cap regulation. Although these triggers 28 purportedly indicate a competitive presence, they may allow for premature deregulation that could force access rates upwards. Finally, in the universal service order, the FCC adopted a new mechanism for funding universal service, which includes programs that defray the costs of telephone service in high-cost areas, for low-income consumers, and for schools, libraries and rural health care providers. Specifically, the FCC expanded the set of carriers that must contribute to support universal service from solely long distance carriers to all carriers, including local exchange carriers, that provide interstate telecommunications services. Similarly, the set of carriers eligible for the universal service support has been expanded from only local exchange carriers to any eligible carrier providing local service to a customer, including AT&T Consumer Services as a new entrant in local markets. The universal service order also adopted measures to provide discounts on telecommunications services, Internet access and inside wiring for eligible schools and libraries and on telecommunications services only for rural health care providers. The mechanism used to collect universal service contributions relies on historical revenues, which disproportionately shifts the burden of these programs to carriers that are losing market share, like AT&T in the long distance market, to carriers that are growing market share. The FCC is currently considering reform of this mechanism. AT&T remains subject to the statutory requirements of Title II of the Communications Act of 1934, as amended. AT&T must offer telecommunications services under rates, terms and conditions that are just, reasonable and not unreasonably discriminatory. It also is subject to the FCC's complaint process, and it must give notice to the FCC and affected customers prior to discontinuance, reduction or impairment of service. In addition to the matters described above with respect to the Telecommunications Act, PUCs or similar authorities having regulatory power over intrastate rates, lines and services and other matters regulate AT&T's local and intrastate communications services. The system of regulation applied to AT&T's intrastate and local communications services varies from state to state and generally includes various forms of pricing flexibility rules. AT&T's services are not regulated in the states through rate of return regulation. CABLE REGULATION AND LEGISLATION The operation of cable television systems is extensively regulated by the FCC, some state governments and most local governments. The Telecommunications Act altered the regulatory structure governing the nation's telecommunications providers. It removed barriers to competition in both the cable television market and the local telephone market. Among other things, it reduced the scope of cable rate regulation. The Telecommunications Act required the FCC to implement numerous rulemakings, some of which are still subject to court challenges. Moreover, Congress and the FCC have frequently revisited the subject of cable television regulation and may do so again. Future legislative and regulatory changes could adversely affect AT&T Broadband's operations. This section briefly summarizes key laws and regulations currently affecting the growth and operation of AT&T Broadband's cable systems. Cable Rate Regulation. The 1992 Cable Act imposed an extensive rate regulation regime on the cable television industry, which regulation limited the ability of cable companies to increase subscriber fees. Under that regime, all cable systems were subjected to rate regulation, unless they faced effective competition in their local franchise area. U.S. federal law now defines "effective competition" on a community-specific basis as requiring satisfaction of various conditions, such as the penetration of competitive video services to 15% of the households in a cable system's franchise area. Although the FCC establishes all cable rate rules, local government units, commonly referred to as local franchising authorities, are primarily responsible for administering the regulation of the lowest level of cable service -- the basic service tier, which typically contains local broadcast stations and PEG access channels. Before a local franchising authority begins basic service tier rate regulation, it must certify to the FCC that it will follow applicable U.S. federal rules, and many local franchising authorities have voluntarily declined to exercise this authority. Local franchising authorities also have primary responsibility for regulating cable equipment rates. Under U.S. federal law, charges for various types of cable equipment must be unbundled 29 from each other and from monthly charges for programming services, and priced no higher than the operator's actual cost, plus an 11.25% rate of return. The FCC historically administered rate regulation of any cable programming service tiers (i.e., all tiers other than the basic service tier), which typically contain satellite-delivered programming. Under the Telecommunications Act, however, the FCC's authority to regulate cable programming service tier rates ended on March 31, 1999. Cable Entry into Telecommunications. The Telecommunications Act provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality and consumer protection. State and local governments also retain their authority to manage the public rights-of-way. Although the Telecommunications Act clarifies that traditional cable franchise fees may be based only on revenues related to the provision of cable television services, it also provides that local franchising authorities may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service. The Telecommunications Act prohibits local franchising authorities from requiring cable operators to provide telecommunications service or facilities as a condition of a franchise grant, renewal or transfer, except that local franchising authorities argue they can seek "institutional networks" as part of these franchise negotiations. Cable operators that provide telecommunications services and cannot reach agreement with local utilities over pole attachment rates in states that do not regulate pole attachment rates will be subject to a methodology prescribed by the FCC for determining the rates. These rates may be higher than those paid by cable operators that do not provide telecommunications services. The favorable pole attachment rates afforded cable operators under U.S. federal law can be increased by utility companies owning the poles during a five-year phase-in period beginning in 2001 if the cable operator provides telecommunications service as well as cable service over its plant. The FCC clarified that a cable operator's provision of cable Internet service does not affect the favorable pole rates, but a recent decision by the Eleventh Circuit Court of Appeals disagreed. In January 2002, the U.S. Supreme Court overturned the Eleventh Circuit decision and upheld the applicability of the more favorable FCC-prescribed pole rates regardless of the delivery of Internet services. Cable entry into telecommunications will be affected by the regulatory landscape now being fashioned by the FCC and state regulators, as well as the courts. One critical component of the Telecommunications Act intended to facilitate the entry of new telecommunications providers, including cable operators, is the interconnection obligation imposed on all telecommunications carriers. This requires, for example, that the incumbent local exchange carrier must allow new competing telecommunications providers to connect to the local telephone distribution system. A number of implementation details are subject to ongoing regulatory and judicial review, but the basic requirement is now well established. At the same time, incumbent local exchange carriers continue to make it difficult for competitors to lease and use parts of their network in order to provide competing services. Although local exchange carriers and cable operators can now expand their offerings across traditional service boundaries, the general prohibitions remain on local exchange carrier buyouts (i.e., any ownership interest exceeding 10%) of co-located cable systems, cable operator buyouts of co-located local exchange carrier systems, and joint ventures among cable operators and local exchange carriers in the same market. The Telecommunications Act provides a few limited exceptions to this buyout prohibition. Cable Systems Providing Internet Service. Although there is at present no significant U.S. federal regulation of cable system delivery of Internet services, and the FCC recently issued several reports and a declaratory ruling finding no immediate need to impose this regulation, this situation may change as cable systems expand their broadband delivery of Internet services. In particular, proposals have been advanced at the FCC and in the Congress that would require cable operators to provide "open access" to unaffiliated ISPs and on-line service providers. The Federal Trade Commission and the FCC recently imposed certain open access requirements on Time Warner and AOL in connection with their merger, but those requirements are 30 not applicable to other cable operators. Some states and local franchising authorities may seek to impose franchise conditions related to Internet access as part of cable franchise renewals or transfers. AT&T Broadband has completed a technical and operational trial to test how multiple ISPs can offer high-speed, always-on cable Internet service over a hybrid fiber/coaxial network. In March 2002, AT&T Broadband entered into an agreement with Earthlink pursuant to which Earthlink will initially launch it high speed Internet service in greater Boston and in the Seattle market. Cable Television Ownership Restrictions. Pursuant to the 1992 Cable Act, the FCC adopted regulations establishing a 30% limit on the number of multichannel video subscribers (including cable, direct broadcast satellite, Satellite Master Antenna Television, MMDS and other subscribers) that a cable operator may reach nationwide through cable systems in which it holds an attributable interest. The FCC stayed the effectiveness of its ownership limits pending judicial review. In January, 2000, the FCC lifted its stay of the 30% subscriber limit. In its June 2000 ruling on the MediaOne acquisition, the FCC allowed the MediaOne acquisition to go forward, but required AT&T to elect one of three divestiture options to come into compliance with the 30% ownership cap. Specifically, AT&T was required to either (1) divest its interest in Time Warner Entertainment, (2) terminate its involvement in Time Warner Entertainment's video programming activities, which would require divestiture of substantially all of AT&T's video programming interests, including its interest in Liberty Media, or (3) divest interests in cable systems. Compliance, or arrangements for compliance, was required by May 2001. The FCC order also established safeguards restricting AT&T Broadband's communication with Time Warner Entertainment, as well as its communication with, and participation in, Board meetings for iN DEMAND and certain other video programming services. The FCC previously adopted regulations limiting carriage by a cable operator of national programming services in which that operator holds an attributable interest to 40% of the activated channels on each of the cable operator's systems. These "channel occupancy" rules provide for the use of two additional channels or a 45% limit, whichever is greater, provided that the additional channels carry minority controlled programming services. The regulations also grandfather existing carriage arrangements that exceed the channel limits, but require new channel capacity to be devoted to unaffiliated programming services until the system achieves compliance with the regulations. These channel occupancy limits apply only up to 75 activated channels on the cable system, and the rules do not apply to local or regional programming services. In March 2001, the D.C. Circuit Court of Appeals struck down the rules adopted by the FCC pertaining to ownership and channel occupancy and remanded the issues back to the FCC for further review. Following this decision, the FCC initiated a rulemaking proceeding to determine what cable ownership and channel occupancy limits, if any, can and should be implemented in light of the court's decision. The FCC also suspended the compliance deadlines initially provided in its order related to the MediaOne acquisition pending the outcome of the FCC's new rulemaking proceeding. The Telecommunications Act eliminated statutory restrictions on broadcast/cable cross-ownership, including broadcast network/cable restrictions, but left in place existing FCC regulations prohibiting local cross-ownership between television stations and cable systems. The broadcast/cable cross ownership restriction were challenged in court on First Amendment and other grounds. In February 2002, the D.C. Circuit Court of Appeals vacated the FCC's regulations so this ban is no longer in effect. The Telecommunications Act leaves in place existing restrictions on cable cross-ownership with Satellite Master Antenna Television and MMDS facilities, but lifts those restrictions where the cable operator is subject to effective competition. In January 1995, however, the FCC adopted regulations that permit cable operators to own and operate Satellite Master Antenna Television systems within their franchise area, provided that this operation is consistent with local cable franchise requirements. Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years between requiring a cable system to carry the station, i.e., must carry, or negotiating for payments for granting permission to the cable operator to carry the station, i.e., retransmission consent. Less popular stations typically elect must carry, and more popular stations typically elect retransmission consent. Must carry 31 requests can dilute the appeal of a cable system's programming offerings, and retransmission consent demands may require substantial payments or other concessions (e.g., a requirement that the cable system also carry the local broadcaster's affiliated cable programming service). Either option has a potentially adverse effect on AT&T Broadband's business. The burden associated with must carry obligations could dramatically increase if television broadcast stations proceed with planned conversions to digital transmissions and if the FCC determines that cable systems must carry simultaneously all analog and digital services transmitted by the television stations during the multi-year transition in which a single broadcast licensee is authorized to transmit both an analog and a digital signal, or if the FCC determines that, post-transition, a cable operator is required to carry all of the multicast services in a broadcaster's digital feed, as opposed to just the "primary video" service. The FCC tentatively decided against imposition of dual digital and analog must carry in a January 2001 ruling, and also decided that only the broadcaster's primary video service must be carried by the cable operator. At the same time, however, it initiated further fact gathering, which, ultimately, could lead to a reconsideration of these conclusions. Access Channels. Local franchising authorities can include franchise provisions requiring cable operators to set aside certain channels for non-commercial PEG access programming. U.S. federal law also requires a cable system with 36 or more channels to designate a portion of its activated channel capacity, up to 15%, for commercial leased access by unaffiliated third parties. The FCC has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for use of this designated channel capacity, but use of commercial leased access channels has been relatively limited. "Anti-Buy Through" Provisions. U.S. federal law requires each cable system to permit customers to purchase premium services or pay-per-view video programming offered by the operator on a per-channel or a per-program basis without the necessity of subscribing to any tier of service, other than the basic service tier, unless the system's lack of addressable converter boxes or other technological limitation does not permit it to do so. The statutory exemption for cable systems that do not have the technological capability to comply expires in October 2002, but the FCC may extend that period on a case-by-case basis if deemed necessary pursuant to a specific waiver petition. Access to Programming. To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes satellite video programmers affiliated with cable operators from favoring cable operators over competing multichannel video programming distributors, such as direct broadcast satellite and MMDS distributors. This provision limits the ability of vertically integrated satellite cable programmers to offer exclusive programming arrangements, or preferred pricing or non-price terms, to AT&T Broadband. Both Congress and the FCC have considered proposals that would expand the program access rights of cable's competitors, including the possibility of subjecting both terrestrially delivered video programming and video programmers that are not affiliated with cable operators to all program access requirements. The FCC is currently considering whether the exclusivity restrictions of the program access rules should be allowed to sunset, on October 5, 2002, or whether an extension of these restrictions is required to continue to assist cable's competitors. Pursuant to the Satellite Home Viewer Improvement Act, the FCC has adopted regulations governing retransmission consent negotiations between broadcasters and all multichannel video programming distributors, including cable and direct broadcast satellite. Inside Wiring; Subscriber Access. FCC rules require an incumbent cable operator, upon expiration of a multiple dwelling unit service contract, to sell, abandon or remove "home run" wiring that was installed by the cable operator in the multiple dwelling unit building. These inside wiring rules are expected to assist building owners in their attempts to replace existing cable operators with new programming providers that are willing to pay the building owner a higher fee, where a higher fee is permissible. The FCC also has proposed abrogating or severely restricting all existing and future exclusive multiple dwelling unit service agreements held by incumbent cable operators, but allowing these contracts when held by new entrants. In another proceeding, the FCC has preempted restrictions on the deployment of private antennae on rental property within the exclusive use of a tenant, such as balconies and patios. This FCC ruling may limit the extent to which multiple dwelling unit owners may enforce certain aspects of multiple dwelling unit agreements that otherwise prohibit, for 32 example, placement of digital broadcast satellite receiver antennas in multiple dwelling unit areas under the exclusive occupancy of a renter. These developments may make it more difficult for AT&T Broadband to provide service in multiple dwelling unit complexes. Customer Equipment Regulation. Cable customer equipment is subject to rate regulation unless the cable system is deemed by the FCC to face effective competition. In addition, the FCC ruled that cable customers must be allowed to purchase cable converters and other such navigation device equipment from third parties, such as retailers, and established a multi-year phase-in during which security functions, which would remain in the operator's exclusive control, would be unbundled from non-security functions, which then could be supplied by third-party vendors. The first phase implementation date was July 1, 2000. Compliance was technically and operationally difficult in some locations, so AT&T Broadband and several other cable operators filed a request at the FCC that the requirement be waived in those systems. The request resulted in a temporary deferral of the compliance deadline for those systems. The separate security module requirement applies to all digital and "hybrid" devices (i.e., devices that access both analog and digital services), but not to analog-only devices. So long as multichannel video providers subject to the rules comply with the separate security module requirement, they may continue to provide "integrated devices" (i.e., navigation devices containing both embedded security and non-security functions) to their customers until January 1, 2005, at which time they will be barred from placing these devices in service. AT&T Broadband has advocated the elimination of this "integrated box ban." Other Regulations of the FCC. In addition to the FCC regulations noted above, there are other regulations of the FCC covering such areas as: - equal employment opportunity (currently suspended as a result of a judicial ruling, although the FCC recently has sought to reimpose a subset of these rules); - subscriber privacy; - programming practices, including, among other things, - syndicated program exclusivity, which requires a cable system to delete particular programming offered by a distant broadcast signal carried on the system that duplicates the programming for which a local broadcast station has secured exclusive distribution rights, - network program nonduplication, - local sports blackouts, - indecent programming, - lottery programming, - political programming, - sponsorship identification, - children's programming advertisements, - closed captioning; and - video description; - registration of cable systems and facilities licensing; - maintenance of various records and public inspection files; - aeronautical frequency usage; - lockbox availability; - antenna structure notification; - tower marking and lighting; 33 - consumer protection and customer service standards; - technical standards; - consumer electronics equipment compatibility; and - emergency alert systems. The FCC recently initiated an inquiry to determine whether the cable industry's future provision of interactive services should be subject to regulations ensuring equal access and competition among service vendors. The inquiry, which grew out of the FCC's review of the AOL/Time Warner merger, is in its earliest stages. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. Copyright. Cable television systems are subject to U.S. federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenue to a U.S. federal copyright royalty pool (this percentage varies depending on the size of the system and the number of distant broadcast television signals carried), cable operators can obtain blanket permission to retransmit copyrighted material on broadcast signals. The possible modification or elimination of this compulsory copyright license is subject to continuing review and could adversely affect AT&T Broadband's ability to obtain desired broadcast programming. In addition, the cable industry pays music licensing fees to Broadcast Music, Inc. and the American Society of Composers, Authors and Publishers. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. State and Local Regulation. Cable television systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity. The Telecommunications Act clarified that the need for an entity providing cable services to obtain a local franchise depends solely on whether the entity crosses public rights-of-way. U.S. federal law now prohibits franchise authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system's service area. Cable franchises generally are granted for fixed terms, and in many cases are terminable if the franchisee fails to comply with material provisions. Noncompliance by the cable operator with franchise provisions also may result in monetary penalties. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction. Each franchise generally contains provisions governing cable operations, service rates, franchise fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies. Although local franchising authorities have considerable discretion in establishing franchise terms, there are certain U.S. federal limitations. For example, local franchising authorities cannot insist on franchise fees exceeding 5% of the system's gross revenues from the provision of cable services, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming. U.S. federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the franchise authority may seek to impose new and more onerous requirements, such as significant upgrades in facilities and services or increased franchise fees and funding for PEG access channels as a condition of renewal. Similarly, if a franchise authority's consent is required for the purchase or sale of a cable system or franchise, this authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, franchises have been renewed for cable operators that have provided satisfactory services and have complied with the terms of their franchises. Since the 1992 adoption of the Cable Act, AT&T Broadband has never had a final determination or denial of one of its franchises. 34 Subscriber Privacy Regulation. Customer and subscriber privacy for cable and telecommunications companies are now specifically regulated under the Cable Communications Policy Act of 1984 and the Communications Act of 1934. Various federal and state regulatory and enforcement agencies including the FCC, Federal Trade Commission, and state attorneys general, are examining business practices in the communications sector, as well as other sectors, with regard to privacy of personal or proprietary customer information, data protection and information security. Numerous media reports indicate that these subjects are of increasing concern to businesses and the public, and may result in additional legislation, regulation, enforcement, and litigation concerning the data practices of communications companies. It is not possible to predict with certainty the direction of any such legislative, regulatory or enforcement initiatives, or future litigation, or how and whether they will occur, or what impact they will have on AT&T Comcast. Proposed Changes in Regulation. The regulation of cable television systems at the U.S. federal, state and local levels is subject to the political process and has been in constant flux over the past decade. Material changes in the law and regulatory requirements must be anticipated, and there can be no assurance that AT&T Broadband's business will not be affected adversely by future legislation, new regulations or by deregulation of AT&T Broadband's competitors. COMPETITION AT&T BUSINESS SERVICES AND AT&T CONSUMER SERVICES Competition in communications services is based on price and pricing plans, types of services offered, customer service, access to customer premises and communications quality, reliability and availability. AT&T's principal competitors include Worldcom, Inc., Sprint Corporation and regional phone companies. AT&T also experiences significant competition in long distance from newer entrants as well as dial-around resellers. In addition, long distance telecommunications providers have been facing competition from non-traditional sources, including as a result of technological substitutions, such as Internet telephony, high speed cable Internet service, e-mail and wireless services. Providers of competitive high-speed data offerings include cable television companies, direct broadcast satellite companies and DSL resellers. Incumbent local exchange carriers own the only universal telephone connection to the home, have very substantial capital and other resources, long-standing customer relationships and extensive existing facilities and network rights-of-way, and are AT&T's primary competitors in the local services market. In addition, it is anticipated that a number of long distance telecommunication, wireless and cable service providers and others have entered or will enter the local services market in competition with AT&T. Some of these potential competitors have substantial financial and other resources. AT&T also competes in the local services market with a number of competitive local exchange carriers, a few of which have existing local networks and significant financial resources. AT&T currently faces significant competition and expects that the level of competition will continue to increase. As competitive, regulatory and technological changes occur, including those occasioned by the Telecommunications Act, AT&T anticipates that new and different competitors will enter and expand their position in the communications services markets. These will include regional phone company competitors in existing states and new states plus entrants from other segments of the communications and information services industry or global competitors seeking to expand their market opportunities. Many of these new competitors are likely to enter with a strong market presence, well-recognized names and pre-existing direct customer relationships. The Telecommunications Act already has affected the competitive environment. Anticipating changes in the industry, non-regional phone company local exchange carriers, which are not required to implement the Telecommunications Act's competitive checklist prior to offering long distance in their home markets, have integrated their local service offerings with long distance offerings in advance of AT&T offering combined local and long distance service in these areas, adversely affecting AT&T's revenues and earnings in these service regions. 35 In addition, the Telecommunications Act permits regional phone companies to provide in-region interLATA interexchange services after demonstrating to the FCC that providing these services is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. Regional phone companies have petitioned the FCC for permission to provide interLATA interexchange services in one or more states within their home markets. In December 1999, Verizon became the first regional phone company to obtain approval to provide long distance in a state within its home territory, in New York. Petitions from regional phone companies have been granted with respect to 10 states prior to April 1, 2002. AT&T expects that the regional phone companies will be successful in obtaining approval to offer long distance in the majority of the remaining states by the end of 2002. To the extent that regional phone companies obtain in-region interLATA authority before the Telecommunications Act's checklist of conditions have been fully or satisfactorily implemented and adequate facilities-based local exchange competition exists, or before there is an ability to resell at fair and competitive rates there is a substantial risk that AT&T and other interexchange service providers, will be at a disadvantage to regional phone companies in providing both local service and combined service packages. Because it is widely anticipated that substantial numbers of long distance customers will seek to purchase local, interexchange and other services from a single carrier as part of a combined or full service package, any competitive disadvantage, inability to profitably provide local service at competitive rates or delays or limitations in providing local service or combined service packages could materially adversely affect AT&T's future revenue and earnings. In any event, the simultaneous entrance of numerous new competitors for interexchange and combined service packages is likely to materially adversely affect AT&T's future long distance revenue and could affect materially adversely future earnings. In addition to the matters referred to above, various other factors, including technological hurdles, market acceptance, start-up and ongoing costs associated with the provision of new services and local conditions and obstacles, could materially adversely affect the timing and success of AT&T's entrance into the local exchange services market and AT&T's ability to offer combined service packages that include local service. AT&T BROADBAND SERVICES Cable television competes for customers in local markets with other providers of entertainment, news and information. The competitors in these markets include direct broadcast satellite service, broadcast television and radio, satellite master antenna television systems, wireless cable providers, newspapers, magazines and other printed material, motion picture theatres, video cassettes, DVDs and other sources of information and entertainment, including directly competitive cable television operations and ISPs. The Cable Television Consumer Protection and Competition Act of 1992, or the 1992 Cable Act, and the Telecommunications Act are designed to increase competition in the cable television industry. Additionally, AT&T Broadband faces significant competition from both local telephone companies and new providers of services such as Internet service and telephone services. Providers of competitive high-speed data offerings include fixed wireless companies, direct broadcast satellite companies and DSL providers. There are alternative methods of distributing the same or similar services offered by cable television systems. Further, these technologies have been encouraged by the U.S. Congress and the FCC to offer services in direct competition with existing cable systems. Direct Broadcast Satellite. Direct broadcast satellite has emerged as significant competition to cable systems. The direct broadcast satellite industry has grown rapidly over the last several years, far exceeding the growth rate of the cable television industry, and now serves approximately 17.6 million subscribers nationwide. Direct broadcast satellite service allows a subscriber to receive video (as well as non-video) services directly via satellite using a relatively small dish antenna. Moreover, video compression technology allows direct broadcast satellite providers to offer more than 400 digital channels, thereby surpassing the typical analog or hybrid analog-digital cable system. Direct broadcast satellite companies historically were prohibited from retransmitting popular local broadcast programming, but a change to the existing copyright laws in November 1999 eliminated this legal impediment. Direct broadcast satellite companies now need to secure retransmission consent from the popular broadcast stations they wish to carry, and now face mandatory carriage 36 obligations of less popular broadcast stations as of January 2002. These new "must carry" rules require satellite companies to carry all local broadcast stations in a local market where they carry any such station pursuant to a new compulsory copyright license. In response to the legislation, DirecTV, Inc. and EchoStar Communications Corporation already have begun carrying the major network stations in the nation's top television markets. The direct broadcast satellite industry initiated a judicial challenge to the statutory requirement mandating carriage of less popular broadcast stations. This lawsuit alleges that the must-carry requirement is unconstitutional. The Court of Appeals for the Fourth Circuit recently upheld the constitutionality of these rules, but EchoStar and the Satellite Broadcasting and Communications Association have sought review in the U.S. Supreme Court. Direct broadcast satellite companies also have begun offering high-speed Internet services. EchoStar began providing high-speed Internet service in late 2000, and DirecTV, which has partnered with AOL Time Warner, reports that it will begin providing its own version of high-speed Internet service shortly. Further, in October 2001 EchoStar entered into an agreement to acquire DirecTV. EchoStar's applications for approval of the proposed merger are still pending before various governmental authorities. These developments will provide significant new competition to AT&T Broadband's offering of video programming and high-speed cable Internet service. Broadcast Television. Cable television has long competed with broadcast television, which consists of television signals that the viewer is able to receive without charge using an "off-air" antenna. The extent of this competition, which is for both the acquisition and delivery of programming, as well as for advertising, is dependent upon the quality and quantity of broadcast signals available through off-air reception compared to the services provided by the local cable system. The recent licensing of digital spectrum by the FCC will provide incumbent television licensees with the ability to deliver high definition television pictures and multiple digital-quality program streams, as well as advanced digital services, such as subscription video. DSL. The deployment of DSL technology allows the provision of Internet services to subscribers at data transmission speeds greater than available over conventional telephone lines. In addition, DSL providers offer voice services including offerings that divide up a phone line into several voice channels and an always-on data line. All significant local telephone companies and certain other telecommunications companies have launched DSL service. The FCC has a policy of encouraging the deployment of DSL and similar technologies, both by incumbent telephone companies and new, competing telephone companies. The FCC's regulations in this area are subject to change. The development and deployment of DSL technology by local telephone companies provides substantial competition to AT&T Broadband's high-speed cable Internet services and cable telephone services. Private Cable. AT&T Broadband also competes with Satellite Master Antenna Television systems, which provide multichannel program services and high-speed Internet services directly to hotel, motel, apartment, condominium and similar multi-unit complexes within a cable television system's franchise area, generally free of any regulation by federal, state and local government authorities and sometimes on an exclusive basis. FCC rules restrict the ability of cable operators to maintain ownership of cable wiring inside multi-unit buildings, thereby making it less expensive for Satellite Master Antenna Television competitors, as well as other competitors that are increasingly targeting multi-unit building subscribers such as direct broadcast satellite, to reach those customers. The FCC also has ruled that private cable operators can lease video distribution capacity from local telephone companies and, thereby, distribute cable programming services over the public rights-of-way without obtaining a franchise. In 1999, both the Fifth and Seventh Circuit Courts of Appeal upheld this FCC policy. This could provide a significant regulatory advantage for private cable operators in the future. The 1992 Cable Act ensures that Satellite Master Antenna Television Systems, as well as other providers of multichannel video programming to end users, will have access to most of the significant cable television programming services at nondiscriminatory rates. Cable System Overbuilds. Cable operators may compete with other cable operators or new entities seeking franchises for competing cable television systems at any time during the terms of existing franchises. The 1992 Cable Act promotes the granting of competitive franchises and AT&T Broadband systems operate under nonexclusive franchises. Several years ago, there was a significant increase in the number of cities that constructed their own cable television systems in a manner similar to city-provided utility services. These systems typically compete directly with the existing cable operator without the burdens of franchise fees or 37 other local regulation. The total number of municipal overbuild cable systems remains relatively small. Additionally, several years ago there was a significant increase in investments in private company overbuilders of cable systems. If this trend were to resume, AT&T Broadband cable systems could face an increasing number of markets in which a second cable system will be competing directly with an AT&T Broadband system, providing video, audio, interactive television, high-speed Internet and telephone services. To date, overbuilds have not had a material impact on AT&T Broadband's results. Telephone Company Entry. The Telecommunications Act eliminated the statutory and regulatory restrictions that prevented local telephone companies from competing with cable operators in the provision of video services. The Telecommunications Act allows local telephone companies, including regional phone companies, to compete with cable television operators both inside and outside their telephone service areas. AT&T Broadband expects that it could face competition from telephone companies for the provision of video services, whether it is through wireless cable or through upgraded telephone networks. AT&T Broadband assumes that all major telephone companies already have entered or may enter the business of providing video services. Although enthusiasm on the part of local exchange carriers is not clear, AT&T Broadband is aware that telephone companies have already built, or are in the process of building, competing cable system facilities in a number of AT&T Broadband's franchise areas. As AT&T Broadband continues to expand its offerings to include Internet and telecommunications services, it will be subject to competition from the local telephone companies and telecommunications providers. The telecommunications industry is highly competitive, and includes competitors with substantial financial and personnel resources, brand name recognition and long-standing relationships with regulatory authorities. Utility Company Entry. The Telecommunications Act eliminated certain U.S. federal restrictions on utility holding companies and thus frees all utility companies to provide cable television services. AT&T Broadband expects this could result in another source of competition in the delivery of video, telephone and high-speed Internet services. MMDS. Another alternative method of distribution is multichannel, multi-point distribution systems, or MMDS, which deliver programming services over microwave channels to customers equipped with special antennas. MMDSs are less capital intensive, are not required to obtain local franchises or pay franchise fees, and are subject to fewer regulatory requirements than cable television systems. Local Voice. AT&T Broadband's cable telephone service competes against incumbent local exchange carriers and competitive local exchange carriers in the provision of local voice services. Moreover, many of these carriers are expanding their offerings to include Internet service. The incumbent local exchange carriers have very substantial capital and other resources, longstanding customer relationships and extensive existing facilities and network rights-of-way. A few competitive local exchange carriers also have existing local networks and significant financial resources. Fixed Wireless. Fixed wireless technologies compete with AT&T Broadband in the provision of Internet and voice services. Fixed wireless providers serve the same functions as a wireline provider, by interconnecting private networks, bypassing a local exchange carrier or connecting to the Internet. The technology involved in point-to-point microwave connections has advanced, allowing the use of higher frequencies, and thus smaller antennas, resulting in lower costs and easier-to-deploy systems for private use and encouraging the use of such technology by carriers. Fixed wireless systems are designed to emulate cable connections, and they use the same interfaces and protocols, such as T1, frame relay, Ethernet and ATM. Fixed wireless systems also match the service parameters of cable systems, and consequently any application that operates over a cable should be able to operate over a fixed wireless system. Resellers. Among AT&T Broadband's competitors in the areas of voice and Internet services are resellers. Resellers typically are low-cost aggregators that serve price-conscious market segments and value-added resellers that target customers with special needs. IP Telephone. IP telephone providers compete directly against AT&T Broadband's cable telephone service. IP telephone providers derive most of their revenues from per-minute charges, but they also offer other services including voicemail and IP telephone equipment. Although the offerings of IP telephone 38 providers are limited mostly to voice services, these companies seek to expand to other areas of the telecommunications industry, and may succeed in doing so in the future. General. In addition to competition for customers, the cable television industry competes with broadcast television, radio, print media and other sources of information and entertainment for advertising revenue. As the cable television industry has developed additional programming, its advertising revenue has increased. Cable operators sell advertising spots primarily to local and regional advertisers. AT&T Broadband has no basis upon which to estimate the number of cable television companies and other entities with which it competes or may potentially compete. The full extent to which other media or home delivery services will compete with cable television systems may not be known for some time, and there can be no assurance that existing, proposed or as yet undeveloped technologies will not become dominant in the future. EMPLOYEES At December 31, 2001 AT&T employed approximately 117,800 persons in its operations, approximately 96% of whom are located domestically. About 27% of the domestically located employees of AT&T are represented by unions. Of those so represented, about 94% are represented by the Communications Workers of America (CWA), which is affiliated with the AFL-CIO; about 5% by the International Brotherhood of Electrical Workers (IBEW), which is also affiliated with the AFL-CIO. In addition, there is a very small remainder of domestic employees represented by other unions. Labor agreements with most of these unions extend through May 2002. At December 31, 2001, AT&T Business Services employed approximately 57,500 individuals in its operations. Of those employees, approximately 53,300 are located domestically. About 17,400 of the domestically located employees of AT&T Business Services are represented by unions. At December 31, 2001, AT&T Consumer Services employed approximately 13,800 individuals in its operations, virtually all of whom are located in the United States. About 75% of the domestically located employees of AT&T Consumer Services are represented by unions. At December 31, 2001, AT&T Broadband employed approximately 40,150 individuals in its operations, all of whom are located in the United States. Approximately 2,900 of these employees are represented by the Communications Workers of America or the International Brotherhood of Electrical Workers, both of which are affiliated with the AFL-CIO. SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION For information about the Company's research and development expense, see Note 3 to the Consolidated Financial Statements included in Item 8 to this Annual Report. For information about the consolidated operating revenue contributed by the Company's major classes of products and services, see the revenue tables and descriptions following the caption "Segment Results" in the Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7. SPECIAL CONSIDERATIONS Investors should carefully consider the following factors regarding their investment in AT&T Corp. securities. SPECIAL CONSIDERATIONS RELATING TO AT&T BUSINESS SERVICES AND AT&T CONSUMER SERVICES AT&T Consumer Services and AT&T Business Services Expect There to be a Continued Decline in the Long Distance Industry. Historically, prices for voice communications have fallen because of competition, the introduction of more efficient networks and advanced technology, product substitution, excess capacity and 39 deregulation. AT&T Consumer Services and AT&T Business Services expect these trends to continue, and each of AT&T Consumer Services and AT&T Business Services may need to reduce its prices in the future to remain competitive. In addition, AT&T Consumer Services and AT&T Business Services do not expect that they will be able to achieve increased traffic volumes in the near future to sustain their current revenue levels. The extent to which each of AT&T Consumer Services' and AT&T Business Services' business, financial condition, results of operations and cash flow could be materially adversely affected will depend on the pace at which these industry-wide changes continue and its ability to create new and innovative services to differentiate its offerings, enhance customer retention, and retain or grow market share. AT&T Consumer Services and AT&T Business Services Face Substantial Competition that May Materially Adversely Impact Both Market Share and Margins. Each of AT&T Consumer Services and AT&T Business Services currently faces significant competition, and AT&T expects the level of competition to continue to increase. Some of the potential materially adverse consequences of this competition include the following: - market share loss and loss of key customers; - possibility that customers shift to less profitable, lower margin services; - need to initiate or respond to price cuts in order to retain market share; - difficulties in AT&T Consumer Services' and AT&T Business Services' ability to grow new businesses, introduce new services successfully or execute on their business plan; and - inability to purchase fairly priced access services or fairly priced elements of local carriers' networks. As a result of competitive factors, AT&T Consumer Services and AT&T Business Services believe it is unlikely that they will sustain existing price or margin levels. AT&T Consumer Services and AT&T Business Services Face Competition from a Variety of Sources. - Competition from new entrants into long distance, including regional phone companies. AT&T Consumer Services and AT&T Business Services traditionally have competed with other long distance carriers. In recent years, AT&T Consumer Services and AT&T Business Services have begun to compete with incumbent local exchange carriers, which historically have dominated local telecommunications, and with other competitive local exchange carriers for the provision of long distance services. Some regional phone companies, such as Verizon Communications Inc. and SBC Communications Inc., already have been permitted to offer long distance services in some states within their regions. AT&T expects that the regional phone companies will seek to enter all states in their regions and eventually will be given permission to offer long distance services within their regions. The incumbent local exchange carriers presently have numerous advantages as a result of their historic monopoly control over local exchanges. - Competition from facilities-based companies, including regional phone companies. AT&T Consumer Services and AT&T Business Services also face the risk of increasing competition from entities that own their own access facilities, particularly the regional phone companies, which have access facilities across vast regions of the United States with the ability to control cost, cycle time and functionality for most end-to-end services in their regions. These entities can preserve large market share and high margins on access services as they enter new markets, including long distance and end-to-end services. This places them in superior position vis-a-vis AT&T Consumer Services and AT&T Business Services and other competitors that must purchase such high-margin access services. - Competition from lower-cost or less-leveraged providers. The cost structure of AT&T Consumer Services and AT&T Business Services also affects their competitiveness. Each faces the risk that it will not be able to maintain a competitive cost structure if newer technologies favor newer competitors that do not have legacy infrastructure and as technology substitution continues. The ability of each of AT&T Consumer Services and AT&T Business Services to make critical investments to improve cost structure also may be impaired by its current debt obligations. 40 - Competition as a result of technological change. AT&T Consumer Services and AT&T Business Services also may be subject to additional competitive pressures from the development of new technologies and the increased availability of domestic and international transmission capacity. The telecommunications industry is in a period of rapid technological evolution, marked by the introduction of new product and service offerings and increasing satellite, wireless, fiber optic and coaxial cable transmission capacity for services similar to those provided by AT&T Consumer Services and AT&T Business Services. AT&T cannot predict which of many possible future product and service offerings will be important to maintain its competitive position, or what expenditures will be required to develop and provide these products and services. In particular, the rapid expansion of usage of wireless services has led and is expected to lead to an overall decline in traffic volume on traditional wireline networks. - Competition as a result of excess capacity. Each of AT&T Consumer Services and AT&T Business Services faces competition as a result of excess capacity resulting from substantial network build out by competitors that had access to inexpensive capital. - Strength of competitors. Some of AT&T Consumer Services' and AT&T Business Services' existing and potential competitors have financial, personnel and other resources significantly greater than those of AT&T Consumer Services and AT&T Business Services. AT&T Faces Risk in connection with AT&T Canada. Assuming the completion of the Concert unwind, AT&T will have an approximately 31% equity ownership of AT&T Canada. In the event foreign ownership restrictions in Canada are lifted, in whole or in part, prior to June 30,2003, AT&T is required to purchase the outstanding shares (to the extent permitted by any remaining foreign ownership restrictions) at the greater of the floor price (Cdn$47.45 as of December 31, 2001) and the fair market value (such greater price, the "Back-end Price"). The floor price accretes at 4% each quarter, commencing on June 30, 2000. If foreign ownership restrictions in Canada are not lifted and AT&T does not exercise the call right by June 30, 2003, the shares may be put up for auction, and AT&T would have to make the shareholders whole for the amount, if any, by which the Back-end Price exceeds the proceeds received in auction. AT&T has the right to trigger the purchase of the remaining equity of AT&T Canada for the Back-end Price at any time prior to the earlier of a change in foreign ownership rules in Canada or June 30, 2003. In 2001, AT&T recorded $1.8 billion of after-tax charges ($3.0 billion pretax) reflecting the estimated loss on AT&T's commitment to purchase the publicly owned shares of AT&T Canada. Included in these charges was approximately $0.6 billion related to the assumption of BT's obligation to purchase the publicly owned shares of AT&T Canada. These charges reflect the difference between the underlying value of AT&T Canada shares and the price AT&T has committed to pay for them, and are included in "Net losses related to other equity investments" in the Consolidated Statement of Income and "Other long-term liabilities and deferred credits" in the Consolidated Balance Sheet. AT&T no longer records equity earnings or losses related to AT&T Canada since AT&T's investment balance was written down to zero, largely through losses generated by AT&T Canada. In the event AT&T acquires more than 50% of the voting equity of AT&T Canada, AT&T Canada's results will be consolidated into AT&T's results. At December 31, 2001, AT&T Canada had outstanding debt of $2.9 billion. On March 14, 2002, AT&T Canada announced that it had formed a board committee to help management address what AT&T Canada described as "complex issues" facing the company. It also said one of the committee's first steps had been to hire Greenhill & Co. LLC as its financial adviser to work with the committee and management to evaluate various scenarios regarding what it described as "the issues, opportunities and alternatives for the company." On March 15, 2002, a group of more than 20 investors holding almost $1 billion of AT&T Canada public notes announced that they have organized as an ad hoc committee to express their concerns about the company's business operations and financial prospects. They stated that the group was formed in response to several recent "troubling financial releases" from AT&T Canada and the rating agency downgrades of AT&T Canada's public notes, including the notes issued by MetroNet Communications. Adverse business developments involving AT&T Canada could affect AT&T in a variety of ways. For example, in the event AT&T no longer obtains telecommunications services from AT&T Canada, there are a 41 variety of other carriers that could provide AT&T with the telecommunications services necessary to service its customers. However, there may be some difficulty in obtaining services with comparable features, functions and prices from these carriers which could adversely impact AT&T's ability to provide products and services to its customers. In addition, AT&T may incur significant costs as a result. At December 31, 2001, the aggregate amount that AT&T would need to pay to acquire the shares of AT&T Canada that it does not own was approximately $3.2 billion. AT&T has the right to fund this obligation through cash or through the issuance of shares of AT&T Common Stock or for cash or any combination thereof. AT&T is currently exploring a variety of structures to satisfy its obligation to acquire the shares of AT&T Canada common stock. If AT&T does not raise funds to complete this acquisition prior to the completion of the AT&T Comcast transaction, to the extent AT&T directly or indirectly uses equity to do so, the percentage of shares of AT&T that would be required to be issued would be substantially increased. The Regulatory and Legislative Environment Creates Challenges for AT&T Consumer Services and AT&T Business Services. Each of AT&T Consumer Services and AT&T Business Services faces risks relating to regulations and legislation. These risks include: - difficulty of effective entry into local markets due to noncompetitive pricing and to regional phone company operational issues that do not permit rapid large-scale customer changes from regional phone companies to new service providers, - new head-on competition as regional phone companies begin to enter the long distance business, and - emergence of few facilities-based competitors to regional phone companies, and the absence of any significant alternate source of supply for most access and local services. This dependency on supply materially adversely impacts each of AT&T Consumer Services' and AT&T Business Services' cost structure, and ability to create and market desirable and competitive end-to-end products for customers. In addition, regional phone companies will be entering the long distance business while they still control substantially all the access facilities in their regions. This will likely result in an increased level of competition for long distance or end-to-end services as the services offered by regional phone companies expand. Each of AT&T Consumer Services and AT&T Business Services May Substantially Increase its Debt Level in the Future, Which Could Subject it to Various Restrictions and Higher Interest Costs and Decrease its Cash Flow and Earnings. Each of AT&T Consumer Services and AT&T Business Services may substantially increase its debt level in the future, which could subject it to various restrictions and higher interest costs and decrease its cash flow and earnings. It also may be difficult for AT&T Consumer Services and AT&T Business Services to obtain all the financing they need to fund their businesses and growth strategies on desirable terms. The amount of debt required in the future will depend upon the performance revenue and margin of each of AT&T Consumer Services and AT&T Business Services, which, in turn, may be materially adversely affected by competitive and other pressures. Any agreements governing indebtedness obtained by AT&T Consumer Services or AT&T Business Services may contain financial and other covenants that could impair AT&T Consumer Services' or AT&T Business Services' flexibility and restrict its ability to pursue growth opportunities. AT&T expects to explore and evaluate the relative advantages and disadvantages of various funding mechanisms for AT&T. These alternatives may include a bank credit line, commercial paper and other forms of public and private debt financing. The decision on debt composition is dependent on, among other things, the business and financial plans of AT&T and the market conditions at the time of financing. The Actual Amount of Funds Necessary to Implement Each of AT&T Consumer Services' and AT&T Business Services' Strategy and Business Plan May Materially Exceed Current Estimates, which Could have a Material Adverse Effect on its Financial Condition and Results of Operations. The actual amount of funds necessary to implement each of AT&T Consumer Services' and AT&T Business Services' strategy and 42 business plan may materially exceed AT&T Consumer Services' and AT&T Business Services' current estimates in the event of various factors, including: - competitive downward pressures on revenues and margins, - departures from AT&T Consumer Services' and AT&T Business Services' respective current business plans, - regulatory developments, - unforeseen competitive developments, - technological and other risks, - unanticipated expenses, - unforeseen delays and cost overruns, and - engineering design changes. If actual costs do materially exceed AT&T Consumer Services' and/or AT&T Business Services' current estimates for these or other reasons, this would have a material adverse effect on AT&T Consumer Services' and/or AT&T Business Services' financial condition and results of operations. AT&T Consumer Services' Potential Growth in its AT&T Worldnet High Speed Service Combining Voice and Data Services Utilizing DSL Technology Involves Technological, Marketing and Regulatory Hurdles and Requires Substantial Capital Expenditures. AT&T Consumer Services' business plan will require substantial capital expenditures in connection with its expansion into providing voice and data services through DSL technology. The development of voice and data services through DSL technology involves uncertainty relating to potential technological hurdles, marketing success, regulatory and legislative requirements and unforeseen costs. AT&T Consumer Services historically has not had to incur these capital expenditures, and it may not be able to obtain sufficient capital on favorable terms or at all. A failure to obtain capital could have a material adverse effect on AT&T Consumer Services, and result in the delay, change or abandonment of its development or expansion plans. Substantially All of the Telephone Calls Made by Each of AT&T Consumer Services' and AT&T Business Services' Customers are Connected Using Other Companies' Networks, Including Those of Competitors, which Makes Competition More Difficult for AT&T. AT&T Consumer Services principally is a long distance voice telecommunications company. AT&T Consumer Services does not own or operate any primary transmission facilities. Accordingly, it must route domestic and international calls made by its customers over transmission facilities that it obtains from AT&T Business Services. AT&T Business Services provides long distance and, to a limited extent, local telecommunications over its own transmission facilities. Because AT&T Business Services' network does not extend to homes, both AT&T Consumer Services and AT&T Business Services must route calls through a local telephone company to reach AT&T Business Services' transmission facilities and, ultimately, to reach their final destinations. In the United States, the providers of local telephone service generally are the incumbent local exchange carriers, including the regional phone companies. The permitted pricing of local transmission facilities that AT&T Consumer Services and AT&T Business Services lease in the United States is subject to legal uncertainties. In view of the proceedings pending before the courts and regulatory authorities, there can be no assurance that the prices and other conditions established in each state will provide for effective local service entry and competition or provide AT&T Consumer Services with new market opportunities. The effect of the most recent court decisions is to increase the risks, costs, difficulties and uncertainty of entering local markets through using the incumbent local exchange carriers' facilities and services. AT&T Consumer Services Must Rely on AT&T Business Services' Ability to Maintain, Upgrade and Reduce Costs Associated with the Core Network, Which May Lead to Additional Costs. AT&T Consumer Services currently is dependent upon AT&T Business Services for leased line capacity, data communications facilities, traffic termination services and physical space for offices and equipment. Although AT&T Consumer 43 Services expects to enter into a service agreement with AT&T Business Services for it to provide these services, if AT&T Business Services becomes unable to provide its current level of services to AT&T Consumer Services during the term of the service agreement or thereafter, AT&T Consumer Services may not be able to find replacement service providers on a timely basis. Failure to Develop Future Business Opportunities May have a Material Adverse Effect on AT&T Consumer Services' Growth Potential. AT&T Consumer Services intends to actively evaluate pursuing growth opportunities in providing services through DSL technology, which involve new services for which there are only limited proven markets. In addition, the ability to deploy and deliver these services relies, in many instances, on new and unproven technology. AT&T Consumer Services' DSL technology may not perform as expected and AT&T Consumer Services may not be able to successfully develop new enabling systems to effectively and economically deliver these services. In addition, these opportunities require substantial capital outlays, currently estimated to be approximately $1 billion over a three-year planning period, to deploy on the planned scale, but subject to adjustment for change in competitive conditions and market uncertainties. This capital may not be available to support these services. Furthermore, each of these opportunities entails additional operational risks. For example, the delivery of these services requires AT&T Consumer Services to provide installation and maintenance services, which services AT&T Consumer Services has never provided previously. This will require AT&T Consumer Services to hire, employ, train and equip technicians to provide installation and repair in each market served, or rely on subcontractors to perform these services. AT&T Consumer Services may not be able to hire and train sufficient numbers of qualified employees or subcontract these services, or do so on economically attractive terms. These services may not be successful when they are in place and customers may not purchase the services offered. AT&T Consumer Services existing marketing channels may not be an effective way to market these services. If these services are not successful or costs associated with implementation and completion of the rollout of these services materially exceed those currently estimated by AT&T Consumer Services, AT&T Consumer Services' financial condition and prospects could be materially adversely affected. AT&T and British Telecommunications, plc, or BT, Have Agreed to Unwind their Concert Global Joint Venture, Which May Adversely Affect AT&T Consumer Services and AT&T Business Services. On October 16, 2001, AT&T and BT announced that they had reached binding agreements to unwind their global joint venture called Concert. The dissolution of Concert will be complicated, involve a large number of steps and require the receipt of certain regulatory approvals. There can be no assurance that it will be completed in the time frames that AT&T currently expects or at all. In addition, the dissolution of Concert may lead to unsatisfactory, noncompetitive or disrupted service to Concert's multinational customers and there can be no assurance that AT&T Business Services will be able to regain and retain its former multinational customers that it assigned to Concert when the venture was formed. The dissolution of Concert may have a material adverse effect on AT&T, AT&T Business Services and on AT&T Business Services' ability to provide services internationally and to multinational customers. SPECIAL CONSIDERATIONS RELATING TO AT&T BROADBAND SERVICES Programming Costs Are Increasing and AT&T Broadband May Not Have the Ability to Pass These Increases on to Its Customers, Which Would Materially Adversely Affect Its Cash Flow and Operating Margins. Programming costs are AT&T Broadband's largest single expense item. In recent years, the cable and satellite video industries have experienced a rapid increase in the cost of programming, particularly sports programming. This increase is expected to continue, and AT&T Broadband may not be able to pass programming cost increases on to its customers. The inability to pass these programming cost increases on to its customers would have a material adverse impact on its cash flow and operating margins. In addition, as AT&T Broadband upgrades the channel capacity of its systems and adds programming to its basic, expanded basic and digital programming tiers, AT&T Broadband may face increased programming costs, which, in conjunction with the additional market constraints on its ability to pass programming costs on to its customers, may reduce operating margins. AT&T Broadband also will be subject to increasing financial and other demands by broadcasters to obtain the required consent for the transmission of broadcast programming to its subscribers. AT&T Broadband 44 cannot predict the financial impact of these negotiations or the effect on AT&T Broadband's subscribers should AT&T Broadband be required to stop offering this programming. AT&T Broadband Faces a Wide Range of Competition in Areas Served by its Cable Systems, Which Could Adversely Affect its Future Results of Operations. AT&T Broadband's cable communications systems compete with a number of different sources which provide news, information and entertainment programming to consumers. AT&T Broadband competes directly with program distributors and other companies that use satellites, build competing cable systems in the same communities AT&T Broadband serves or otherwise provide programming and other communications services to AT&T Broadband's subscribers and potential subscribers. In addition, federal law now allows local telephone companies to provide directly to subscribers a wide variety of services that are competitive with cable communications services. Some local telephone companies provide, or have announced plans to provide, video services within and outside their telephone service areas through a variety of methods, including broadband cable networks, satellite program distribution and wireless transmission facilities. Additionally, AT&T Broadband is subject to competition from telecommunications providers and ISPs in connection with offerings of new and advanced services, including telecommunications and Internet services. This competition may materially adversely affect AT&T Broadband's business and operations in the future. AT&T Broadband Has Substantial Capital Requirements Which May Require It to Obtain Additional Financing That May be Difficult to Obtain. AT&T Broadband expects that its capital expenditures will exceed, perhaps significantly, its net cash provided by operations, which may require it to obtain additional financing. Failure to obtain necessary financing could have a material adverse effect on AT&T Broadband. AT&T Broadband expects to upgrade a significant portion of its broadband systems over the coming years and make other capital investments, including with respect to its advanced services. AT&T Broadband is expected to incur substantial capital expenditures in future years. The actual amount of the funds required for capital expenditures may vary materially from management's estimate. The majority of these amounts is expected to be used to acquire equipment, such as set-top boxes, cable modems and telephone equipment, and to pay for installation costs for additional video and advanced services customers. In addition, capital is expected to be used to upgrade and rebuild network systems to expand bandwidth capacity and add two-way capability so that it may offer advanced services. There can be no assurance that these amounts will be sufficient to accomplish the planned system upgrades, equipment acquisitions and expansion. AT&T Broadband also has commitments under certain of their franchise agreements with local franchising authorities to upgrade and rebuild certain network systems. These commitments may require capital expenditures in order to avoid default and/or penalties. Historically, AT&T Broadband's capital expenditures have significantly exceeded its net cash provided by operations. For the years ended December 31, 2000 and 2001, AT&T Broadband's capital expenditures exceeded its net cash provided by operations by $3.6 billion and $3.5 billion, respectively. After completion of the AT&T Broadband transaction, AT&T Broadband expects that for some period of time its capital expenditures will exceed, perhaps significantly, its net cash provided by operating activities. This may require AT&T Broadband to obtain additional financing. AT&T Broadband may not be able to obtain or to obtain on favorable terms the capital necessary to fund the substantial capital expenditures described above that are required by its strategy and business plan. A failure to obtain necessary capital or to obtain necessary capital on favorable terms could have a material adverse effect on AT&T Broadband and result in the delay, change or abandonment of AT&T Broadband's development or expansion plans. AT&T Broadband Entities Are Subject to Long-Term Exclusive Agreements that May Limit Their Future Operating Flexibility and Materially Adversely Affect AT&T Broadband's Financial Results. Entities currently attributed to AT&T Broadband may be subject to long-term agreements relating to significant aspects of AT&T Broadband's operations, including long-term agreements for video programming, audio programming, electronic program guides, billing and other services. For example, TCI Communications, Inc. and Satellite Services, Inc., both affiliates of TCI, are parties to an affiliation term sheet with Starz Encore Group, an affiliate of Liberty Media, which extends to 2022 and provides for a fixed price payment, subject to 45 adjustment for various factors, including inflation, and may require AT&T Broadband to pay two-thirds of Starz Encore Group's programming costs above levels designated in the term sheet. Satellite Services, Inc. also entered into a ten-year agreement with TV Guide in January 1999 for interactive program guide services, which designates TV Guide Interactive as the interactive programming guide for AT&T Broadband systems. Furthermore, a subsidiary of AT&T Broadband is party to an agreement that does not expire until December 31, 2012 under which it purchases certain billing services from an unaffiliated third party. The price, terms and conditions of the Starz Encore term sheet, the TV Guide agreement and the billing agreement may not reflect the current market and they may materially adversely impact the financial performance of AT&T Broadband. By letter dated May 29, 2001, AT&T Broadband disputed the enforceability of the excess programming pass through provisions of the Starz Encore term sheet and questioned the validity of the term sheet as a whole. AT&T Broadband also has raised certain issues concerning the uncertainty of the provisions of the term sheet and the contractual interpretation and application of certain of its provisions to, among other things, the acquisition and disposition of cable systems. In July 2001, Starz Encore Group filed suit seeking payment of the 2001 excess programming costs and a declaration that the term sheet is a binding and enforceable contract. In October 2001, AT&T Broadband and Starz Encore agreed to stay the litigation until August 31, 2002 to allow the parties time to continue negotiations toward a potential business resolution of this dispute. The Court granted the stay on October 30, 2001. The terms of the stay order allow either party to petition the Court to lift the stay after April 30, 2002 and to proceed with the litigation. AT&T Broadband Is Subject to Regulation by Federal, State and Local Governments Which May Impose Costs and Restrictions. The federal, state and local governments extensively regulate the cable communications industry. AT&T Broadband expects that court actions and regulatory proceedings will refine the rights and obligations of various parties, including the government, under the Communications Act of 1934, as amended. The results of these judicial and administrative proceedings may materially affect AT&T Broadband's business operations. Local authorities grant AT&T Broadband franchises that permit them to operate their cable systems. AT&T Broadband will have to renew or renegotiate these franchises from time to time. Local franchising authorities often demand concessions or other commitments as a condition to renewal or transfer, which concessions or other commitments could be costly to obtain. AT&T Broadband Will Be Subject to Additional Regulatory Burdens in Connection With the Provision of Telecommunications Services, Which Could Cause It to Incur Additional Costs. AT&T Broadband will be subject to risks associated with the regulation of its telecommunications services by the FCC and state public utilities commissions, or PUCs. Telecommunications companies, including companies that have the ability to offer telephone services over the Internet, generally are subject to significant regulation. This regulation could materially adversely affect AT&T Broadband's business operations. AT&T Broadband's Competition May Increase Because of Technological Advances and New Regulatory Requirements, Which Could Adversely Affect its Future Results of Operations. Over the past several years, a number of companies, including telephone companies and Internet Service Providers, commonly known as ISPs, have asked local, state and federal government authorities to mandate that cable communications operators provide capacity on their broadband infrastructure so that these companies and others may deliver Internet and other interactive television services directly to customers over these cable facilities. Some cable operators, including AT&T Broadband, have initiated litigation challenging municipal efforts to unilaterally impose so-called "open access" requirements. The few court decisions dealing with this issue have been inconsistent. The FCC recently initiated a regulatory proceeding to consider "open access" and related regulatory issues, and in connection with its review of the AOL-Time Warner merger, imposed, together with the Federal Trade Commission, "open access," technical performance and other requirements related to the merged company's Internet and Instant Messaging platforms. Whether the policy framework reflected in these agencies' merger reviews will be imposed on an industry-wide basis or in connection with the AT&T Comcast transaction is uncertain. In addition, numerous companies, including telephone companies, have introduced Digital Subscriber Line technology, known as DSL, which will allow Internet access to subscribers at data transmission speeds equal to or greater than that of modems over conventional telephone lines. 46 AT&T Broadband expects other advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environment, to occur in the future. Other new technologies and services may develop and may compete with services that cable communications systems offer. The success of these ongoing and future developments could have a negative impact on AT&T Broadband's business and operations. AT&T Broadband Has Substantial Economic Interests in Joint Ventures in Which It Will Have Limited Management Rights. AT&T Broadband is a partner in several large joint ventures, such as Time Warner Entertainment, Texas Cable Partners and Kansas City Cable Partners, in which it has a substantial economic interest but does not have substantial control with regard to management policies or the selection of management. These joint ventures may be managed in a manner contrary to the best interests of AT&T Broadband, and the value of AT&T Broadband's investment in these joint ventures may be affected by management policies that are determined without input from AT&T Broadband or over the objections of AT&T Broadband. AT&T Broadband May Be Subject to Lawsuits or Other Losses Arising From Its and AT&T's Relationship with At Home Corporation. Through a subsidiary, AT&T owns approximately 23% of the outstanding common stock and 74% of the voting power of the outstanding common stock of At Home Corporation, which filed for bankruptcy protection on September 28, 2001. Until October 1, 2001, AT&T appointed a majority of At Home's directors and it now appoints none. Since September 28, 2001 some creditors of At Home have threatened to commence litigation against AT&T relating to the conduct of AT&T or its designees on the At Home board in connection with At Home's declaration of bankruptcy and At Home's subsequent aborted efforts to dispose of some of its businesses or assets in a bankruptcy-court-supervised auction, as well as in connection with other aspects of AT&T's relationship with At Home. The liability for any such suits would be shared equally between AT&T and AT&T Broadband. No such lawsuits have been filed to date. However, on or about January 25, 2002, At Home filed a draft proposed chapter 11 plan of liquidation, which, among other things, provides that all claims and causes of action of the bankrupt estate of At Home against third persons shall be transferred for prosecution to a limited liability company owned ratably by the creditors of At Home and funded with an as-yet undetermined dollar amount to finance the litigation of those claims. A schedule for finalizing and seeking approval of the joint plan has not yet been determined. In addition, purported class action lawsuits have been filed in California state court on behalf of At Home stockholders against AT&T, At Home, the directors of At Home, Cox and Comcast. The lawsuits claim that the defendants breached fiduciary obligations of care, candor and loyalty in connection with a transaction announced in March 2000 in which, among other things, AT&T, Cox and Comcast agreed to extend existing distribution agreements, the Board of Directors of At Home was reorganized, and AT&T agreed to give Cox and Comcast rights to sell their At Home shares to AT&T. These actions have been consolidated by the court and are subject to a stay. The liability for any such suits would be shared equally between AT&T and AT&T Broadband. In March 2002 a purported class action was filed in the United States District Court for the Southern District of New York against, inter alia, AT&T and certain of its senior officers alleging violations of the federal securities law in connection with the disclosures made by At Home in the period from April 17 through August 28, 2001. Any liabilities resulting from this suit would be shared equally between AT&T and AT&T Broadband. SPECIAL CONSIDERATIONS RELATING TO AT&T'S RESTRUCTURING PLAN AND THE AT&T COMCAST TRANSACTION AT&T Corp.'s restructuring plan and the AT&T Comcast transaction require fundamental changes to our businesses that may be hard to implement. If we complete our restructuring plan and the AT&T Comcast transaction, each of our businesses will need to make changes in its operations that will require substantial effort and involve substantial risks and costs. If any of these businesses is unable to make this transition smoothly or is not able to operate as effectively afterward, the financial position and results of operations of 47 that business could suffer and cause the trading value of securities intended to reflect the financial performance and economic value of that business to decline materially. The total value of the securities issued in our restructuring plan and pursuant to the AT&T Comcast transaction might be less than the value of AT&T common stock without such actions. If we complete our restructuring plan and the AT&T Comcast transaction as we currently contemplate, holders of AT&T common stock who do not dispose of their shares of AT&T common stock eventually will receive securities issued by or intended to reflect the financial performance and economic value of three businesses: AT&T Business Services, AT&T Consumer Services, and AT&T Comcast. The aggregate value of these shares could be less than what the value of AT&T common stock would be without such actions. The trading price of AT&T common stock may decline as a result of the implementation of these actions or as a result of other factors. If we complete the restructuring and the AT&T Comcast transaction, these new securities will begin trading publicly for the first time. Until orderly trading markets develop for each of these new securities, and after that time as well, there may be significant fluctuations in price. Also, we have not yet determined many of the details of AT&T's restructuring plan and these details could materially adversely impact the value of AT&T common stock. If we do not complete AT&T's restructuring plan and the AT&T Comcast transaction as we plan, there may be adverse consequences to AT&T. AT&T's restructuring plan is complicated, and involves a substantial number of steps and transactions. In addition, the AT&T Comcast transaction is subject to a number of conditions and contingencies. The implementation of AT&T's restructuring plan and the completion of the AT&T/Comcast transaction will require various approvals and be subject to various conditions, including IRS rulings. If we are unable to complete AT&T's restructuring plan or the AT&T/Comcast transaction as we expect, this could have a material adverse effect on AT&T, its business or the trading prices of its securities. AT&T's restructuring plan or the AT&T/Comcast merger may not occur as we currently expect or in the time frames that we currently contemplate, or at all. Alternative forms of restructuring, including sales of interests in these businesses, would reduce what is available for distribution to shareholders in the restructuring. AT&T's restructuring and the AT&T Broadband spin-off may adversely impact AT&T's competitive position. If the AT&T Comcast transaction is completed, AT&T and AT&T Comcast will compete in some markets. Competition between AT&T's and AT&T Comcast's business units in overlapping markets, including consumer markets where cable, telephone and digital subscriber lines, or DSL, solutions may be available at the same time, could result in material downward price pressure on product or service offerings which could materially adversely impact the companies. In addition, any incremental costs associated with operating as separate entities may materially adversely affect the different businesses and companies and their competitive positions. Synergies resulting from cooperation and joint ownership among AT&T's businesses may be lost due to the proposed transactions. AT&T Will Have to Abide By Potentially Significant Restrictions to Preserve the Tax Treatment of the AT&T Comcast Transaction. Because of the restrictions imposed by Section 355(e) of the Code and by the separation and distribution agreement, the ability of AT&T to engage in certain acquisitions, redeem stock or issue equity securities will be limited for a period of 25 months following the AT&T Broadband spin-off. These restrictions may limit the ability of AT&T to engage in certain business transactions that otherwise might be advantageous to AT&T shareholders. The AT&T Comcast Transaction is Conditioned on AT&T Obtaining Consents Under a Substantial Amount of Indebtedness, Which May Involve Material Costs and May Be Difficult to Complete. The AT&T Comcast transaction is conditioned on AT&T's obtaining Note Consents, as described below, or having defeased, purchased, exchanged or acquired debt, in respect of series representing at least 90% in aggregate principal amount of the securities issued under the AT&T indenture, dated September 7, 1990, and outstanding as of December 19, 2001. At December 19, 2001, there was approximately $12.7 billion in aggregate principal amount which was subject to this condition. "Note Consent" means, with respect to any series of securities issued under the indenture, the consent to the transactions contemplated by the separation and distribution agreement of the holders of at least a majority in aggregate principal amount of such series to 48 the AT&T Broadband spin-off under a substantial portion of AT&T's long-term indebtedness. AT&T may seek to obtain these consents through a variety of measures. Although AT&T Comcast has agreed to bear a portion of the related costs, the consent process and any related transaction may result in increased costs for, and additional covenants imposed upon, AT&T. In addition, the consent process itself involves a number of uncertainties and AT&T may not be able to complete it on a timely basis on commercially reasonable terms. AT&T and Comcast are exploring a variety of alternatives to satisfy this condition, including the possibility of offering to exchange new bonds of AT&T Broadband for one or more series of AT&T's existing long-term debt. To the extent any bonds were so exchanged, there would be an appropriate reduction in the amount of intercompany indebtedness AT&T Broadband would be required to repay to AT&T at the closing. AT&T and Comcast could mutually agree to waive this condition with respect to a portion of any indebtedness for which consents are not obtained. If the event that AT&T and Comcast do elect to waive the condition with respect to any portion of this indebtedness, if the holders were to assert successfully that completing the separation without their consents results in default under the indebtedness, AT&T would be required to refinance the indebtedness. Depending on the amount of such indebtedness, this could have a material adverse effect on AT&T and its financial condition. If the AT&T Comcast Transaction is Completed, AT&T Will Need to Obtain Financing on a Stand-Alone Basis, which may involve costs. Following the AT&T Comcast transaction, AT&T will have to raise financing with the support of a reduced pool of less diversified assets, and AT&T may not be able to secure adequate debt or equity financing on desirable terms. The cost to AT&T of financing without AT&T Broadband may be materially higher than the cost of financing with AT&T Broadband as part of AT&T. AT&T's current long-term/short-term debt ratings are A-3/P-2 by Moody's, BBB+/A-2 by Standard & Poor's, and A-/F-2 by Fitch. All long-term ratings are under further review for further downgrade. The short-term ratings are not under review. The credit rating of AT&T following the AT&T Comcast transaction may be different than the historical ratings of AT&T and different from what it would be without the AT&T Comcast transaction. Differences in credit ratings affect the interest rate charged on financings, as well as the amounts of indebtedness, types of financing structures and debt markets that may be available to AT&T following the AT&T Comcast transaction. AT&T may not be able to raise the capital it requires on favorable terms following the AT&T Comcast transaction. AT&T Could Incur Material U.S. Federal Income Tax Liabilities in Connection with the AT&T Comcast Transaction. AT&T may incur material U.S. federal income tax liabilities as a result of certain issuances of shares or change of control transactions with respect to AT&T Comcast, Liberty Media Corporation or AT&T Wireless Services, Inc. Under Section 355(e) of the Code, a split-off/spin-off that is otherwise tax free may be taxable to the distributing company (i.e., AT&T) if, as a result of certain transactions occurring generally within a two-year period after the split-off/spin-off, non-historic shareholders acquire 50% or more of the distributing company or the spun-off company. It is possible that transactions with respect to AT&T could cause all three split-offs or spin-offs to be taxable to AT&T. Under separate intercompany agreements between AT&T and each of Liberty Media Corporation, AT&T Wireless and AT&T Broadband Corp., AT&T generally will be entitled to indemnification from the spun-off company for any tax liability that results from the split-off or spin-off failing to qualify as a tax-free transaction, unless, in the case of AT&T Wireless and AT&T Comcast, the tax liability was caused by post split-off or spin-off transactions with respect to the stock or assets of AT&T. AT&T Comcast's indemnification obligation is generally limited to 50% of any tax liability that results from the split-off or spin-off failing to qualify as tax free, unless such liability was caused by a post split-off or spin-off transaction with respect to the stock or assets of AT&T Comcast. If one or more of the split-offs or spin-offs were taxable to AT&T and AT&T were not indemnified for this tax liability, the liability could have a material adverse effect on AT&T. To the extent AT&T is entitled to an indemnity with respect to the tax liability, AT&T would be required to collect the claim on an unsecured basis. 49 SPECIAL CONSIDERATIONS RELATING TO AT&T'S CREDIT RATING AND OTHER MATTERS The Financial Condition and Prospects of AT&T May be Materially Adversely Affected by Further Ratings Downgrades. In the fall of 2001, all of AT&T's long-term debt ratings were reduced and remain under review for further downgrade. AT&T's current long-term ratings are A3 by Moody's, BBB+ by Standard & Poor's, and A- by Fitch. In addition, all three of AT&T's short-term debt ratings were reduced in the fall of 2001, but are not under further review. These ratings are currently P-2 by Moody's, A-2 by Standard and Poor's, and F-2 by Fitch. Further ratings actions could occur at any time. As a result, the cost of any new financings may be higher. Ratings downgrades by Moody's and Standard & Poor's on the $10 billion AT&T global notes issued November 2001 would also trigger an increase in the interest rate, by 25 basis points for each rating notch downgraded, on these notes. Furthermore, with additional ratings downgrades, AT&T may not have access to the commercial paper market sufficient to satisfy its short-term borrowing needs. If necessary, AT&T could access its short-term credit facilities which currently expire in December 2002 or increase its borrowings under its securitization program. In addition, AT&T's $10 billion global offering includes provisions that would allow investors to require AT&T to repurchase the notes under certain conditions. These conditions will be evaluated at the time of notification to bondholders of the intention to separate Broadband and include a maximum adjusted debt to EBITDA ratio (adjusted) for pro forma AT&T excluding AT&T Broadband of no more than 2.75 times at specified times and a minimum rating of these notes of no lower than Baa3 from Moody's and BBB- from Standard and Poor's. If the ratings are Baa3 or BBB-, the minimum rating requirement will be satisfied if the ratings are not under review for downgrade or on CreditWatch with negative implications, respectively. If AT&T is required to repurchase the notes, it may not be able to obtain sufficient financing in the timeframe required. In addition, such replacement financing may be more costly or have additional covenants than current debt. To the extent that the combined outstanding short-term borrowings under the bank credit facilities and AT&T's commercial paper program were to exceed the market capacity for such borrowings at the expiration of the bank credit facilities, AT&T's continued liquidity would depend upon its ability to reduce such short-term debt through a combination of capital market borrowings, asset sales, operational cash generation, capital expenditure reduction and other means. AT&T's ability to achieve such objectives is subject to a risk of execution and such execution could materially impact AT&T's operational results. In addition, the cost of any capital market financing could be significantly in excess of AT&T's historical financing costs. Also, AT&T could suffer negative banking, investor, and public relations repercussions if AT&T were to draw upon the bank facilities, which are intended to serve as a back-up source of liquidity only. Such impacts could cause further deterioration in AT&T's cost of and access to capital. AT&T's labor agreements expire in May 2002. At December 31, 2001 AT&T employed approximately 117,800 persons. About 27% of the domestically located employees of AT&T are represented by unions. Of those so represented, about 94% are represented by the Communications Workers of America (CWA) and about 5% by the International Brotherhood of Electrical Workers (IBEW), both of which are affiliated with the AFL-CIO. Approximately 90% of these union employees are in AT&T Business Services or AT&T Consumer Services operations. Approximately one-third of AT&T Business Services employees are represented by unions and approximately three-fourths of AT&T Consumer Services employees are represented by unions. AT&T's labor agreements with the CWA and IBEW extend through May 11, 2002. AT&T began formal negotiations with these unions for new labor agreements in March 2002. Formal negotiations became necessary after the unions rejected in February 2002 an offer made by AT&T to extend the current contracts for up to 18 months. AT&T cannot predict the outcome of these negotiations. AT&T may be unable to reach an agreement with these unions prior to the expiration of the labor agreements. Union employees may take labor actions, including work stoppages or work slowdowns, which could cause material disruptions to AT&T's ability to provide services and prove costly to AT&T, including as a result of supporting service delivery through the use of contractor resources. In addition, new labor agreements may impose significant new costs on AT&T, which could impair its financial condition and results of operations in the future. 50 SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to: - AT&T's restructuring plan, including the AT&T Comcast transaction, - financial condition, - results of operations, - cash flows, - dividends, - financing plans, - business strategies, - operating efficiencies or synergies, - budgets, - capital and other expenditures, - network build-out and upgrade, - competitive positions, - availability of capital, - growth opportunities for existing products, - benefits from new technologies, - availability and deployment of new technologies, - plans and objectives of management, and - other matters. Statements in this Form 10-K 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. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or Form 8-K of AT&T 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, without limitation, those relating to the future business prospects, revenues, working capital, liquidity, capital needs, network build out, interest costs and income. 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 AT&T's control, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this Form 10-K. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation: - the risks associated with the implementation of AT&T's restructuring plan and the AT&T Comcast transaction, which are complicated and involve a substantial number of different transactions each with separate conditions, any or all of which may not occur as AT&T currently intends, or which may not occur in the timeframe AT&T currently expects, - the risks associated with each of AT&T's main business units, operating as independent entities as opposed to as part of an integrated telecommunications provider following completion of AT&T's restructuring plan, including the inability of these s to rely on the financial and operational resources of the combined company and these s having to provide services that were previously provided by a different part of the combined company, - the impact of existing and new competitors in the markets in which these compete, including competitors that may offer less expensive products and services, desirable or innovative products, technological substitutes, or have extensive resources or better financing, 51 - the impact of oversupply of capacity resulting from excessive deployment of network capacity, - the ongoing global and domestic trend towards consolidation in the telecommunications industry, which may have the effect of making the competitors of these entities larger and better financed and afford these competitors with extensive resources and greater geographic reach, allowing them to compete more effectively, - the effects of vigorous competition in the markets in which the company operates, which may decrease prices charged, increase churn and change customer mix, profitability and average revenue per user, - the ability to enter into agreements to provide, and the cost of entering new markets necessary to provide, services, - the ability to establish a significant market presence in new geographic and service markets, - the availability and cost of capital and the consequences of increased leverage, - the successful execution of plans to dispose of non-strategic assets as part of an overall corporate deleveraging plan, - the impact of any unusual items resulting from ongoing evaluations of the business strategies of the company, - the requirements imposed on the company or latitude allowed to competitors by the Federal Communications Commission (FCC) or state regulatory commissions under the Telecommunications Act of 1996 or other applicable laws and regulations, - the risks associated with technological requirements, technology substitution and changes and other technological developments, - the results of litigation filed or to be filed against the company, - the possibility of one or more of the markets in which the company competes being impacted by changes in political, economic or other factors, such as monetary policy, legal and regulatory changes or other external factors over which these s have no control, and - the risks related to AT&T's joint ventures. The words "estimate," "project," "intend," "expect," "believe," "plan" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. Moreover, in the future, AT&T, through its senior management, may make forward-looking statements about the matters described in this document or other matters concerning AT&T. ITEM 2. PROPERTIES The properties of AT&T Corp. consist primarily of plant and equipment used to provide long distance and local telecommunications services as well as broadband cable services. AT&T properties also include administrative office buildings. AT&T owns and leases properties to support its offices, facilities and equipment. Telecommunications plant and equipment consists of: central office equipment, including switching and transmission equipment; connecting lines (cables, wires, poles, conduits, etc.); land and buildings; and miscellaneous properties (work equipment, furniture, plant under construction, etc.). The majority of the connecting lines are on or under public roads, highways and streets and international and territorial waters. The remainder are on or under private property. Physical cable television (broadband) properties, which are located throughout the United States, consist of system components, motor vehicles, miscellaneous hardware, spare parts and other components. AT&T also operates a number of sales offices, customer care centers, and other facilities, such as research and development laboratories. AT&T continues to manage the deployment and utilization of its assets in order to meet its global growth objectives while at the same time ensuring that these assets are generating value for the shareholder. AT&T will continue to manage its asset base consistent with globalization initiatives, marketplace forces, productivity growth and technology change. 52 ITEM 3. LEGAL PROCEEDINGS In the normal course of business, AT&T Corp. is subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, AT&T Corp. is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 2001. While these matters could affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to AT&T Corp. beyond that provided for at year-end would not be material to AT&T Corp.'s annual consolidated financial position or results of operations. The Company has been named as a defendant in several purported securities class action lawsuits filed in the United States District Courts for the District of New Jersey and for the Southern District of New York purportedly filed on behalf of persons who purchased securities of the Company for various periods from October 25, 1999 through May 1, 2000. These lawsuits assert claims under Section 11 of the Securities Act of 1933, as amended, and Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and allege, among other things, that during the period referenced above, the Company made materially false and misleading statements and omitted to state material facts concerning its future business prospects. The complaints seek unspecified damages. The Company believes that the lawsuits are without merit and intends to defend them vigorously. In February 2002, certain shareholders of Comcast and AT&T initiated two purported class actions in the Supreme Court of the State of New York, County of New York, against Comcast, AT&T, and AT&T Comcast, alleging that the initial term of office of the directors of AT&T Comcast violates section 1724 of the Pennsylvania Business Corporation Law regarding the term of office of directors of non-classified boards. The plaintiffs seek among other relief compensatory damages, fees and expenses, and an order enjoining completion of the mergers. On February 28, 2002, the two actions were consolidated under the caption Norman Salsitz, Michael Grening, IRA, Samual Mayer and Sam Weitschner v. Comcast Corporation, AT&T Corp., and AT&T Comcast Corporation, Index No. 2002-600659, before Justice Helen E. Freedman. On March 14, 2002, the defendants served papers in support of a motion to dismiss the consolidated action for failure to state a cause of action. The plaintiffs' response to the motion to dismiss is due March 28, 2002, and the defendants' reply is due on April 4, 2002. Argument on the motion is scheduled for April 8, 2002. The companies believe that the consolidated action is without merit and intend to contest the action vigorously. In the normal course of business, AT&T Broadband is subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, AT&T Broadband is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 2001. While these matters could affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to AT&T Broadband beyond that provided for at year-end would not be material to AT&T Broadband's annual consolidated financial position or results of operations. Through a subsidiary, AT&T owns approximately 23% of the outstanding common stock and 74% of the voting power of the outstanding common stock of At Home Corporation, which filed for bankruptcy protection on September 28, 2001. Until October 1, 2001, AT&T appointed a majority of At Home's directors and it now appoints none. Since September 28, 2001 some creditors of At Home have threatened to commence litigation against AT&T relating to the conduct of AT&T or its designees on the At Home board in connection with At Home's declaration of bankruptcy and At Home's subsequent aborted efforts to dispose of some of its businesses or assets in a bankruptcy-court-supervised auction, as well as in connection with other aspects of AT&T's relationship with At Home. The liability for any such suits would be shared equally between AT&T and AT&T Broadband. No such lawsuits have been filed to date. However, on or about January 25, 2002, At Home filed a draft proposed chapter 11 plan of liquidation, which, among other things, provides that all claims and causes of action of the bankrupt estate of At Home against third persons shall be transferred for prosecution to a limited liability company owned ratably by the creditors of At Home and funded with an as- 53 yet undetermined dollar amount to finance the litigation of those claims. A schedule for finalizing and seeking approval of the joint plan has not yet been determined. In addition, purported class action lawsuits have been filed in California state court on behalf of At Home stockholders against AT&T, At Home, the directors of At Home, Cox and Comcast. The lawsuits claim that the defendants breached fiduciary obligations of care, candor and loyalty in connection with a transaction announced in March 2000 in which, among other things, AT&T, Cox and Comcast agreed to extend existing distribution agreements, the Board of Directors of At Home was reorganized, and AT&T agreed to give Cox and Comcast rights to sell their At Home shares to AT&T. These actions have been consolidated by the court and are subject to a stay. The liability for any such suits would be shared equally between AT&T and AT&T Broadband. In March 2002 a purported class action was filed in the United States District Court for the Southern District of New York against, inter alia, AT&T and certain of its senior officers alleging violations of the federal securities law in connection with the disclosures made by At Home in the period from April 17 through August 28, 2001. Any liabilities resulting from this suit would be shared equally between AT&T and AT&T Broadband. In July 1997, AT&T Broadband's predecessor, TCI, and AT&T Broadband's subsidiary, Satellite Services, Inc., entered into a 25-year affiliation term sheet with Starz Encore Group (formerly Encore Media Group), pursuant to which AT&T Broadband may be obligated to make fixed monthly payments in exchange for unlimited access to Encore and Starz! programming. The commitment increases annually from $288 million in 2001 to $315 million in 2003, and will increase annually through 2022 with inflation. The affiliation term sheet further provides that to the extent Starz Encore Group's programming costs increase above certain levels, AT&T Broadband payments under the term sheet will be increased in proportion to the excess. Excess programming costs that may be payable by AT&T Broadband in future years are not presently estimable, and could be significant. By letter dated May 29, 2001, AT&T Broadband disputed the enforceability of the excess programming pass through provisions of the term sheet and questioned the validity of the term sheet as a whole. AT&T Broadband also raised certain issues concerning the uncertainty of the provisions of the term sheet and the contractual interpretation and application of certain of its provisions to, among other things, the acquisition and disposition of cable systems. In July 2001, Starz Encore Group filed suit seeking payment of the 2001 excess programming costs and a declaration that the term sheet is a binding and enforceable contract. In October 2001, AT&T Broadband and Starz Encore Group agreed to stay the litigation until August 31, 2002 to allow the parties time to continue negotiations toward a potential business resolution of this dispute. The Court granted the stay on October 30, 2001. The terms of the stay order allow either party to petition the Court to lift the stay after April 30, 2002 and to proceed with the litigation. There is one environmental proceeding known to be contemplated by a government authority that is required to be reported pursuant to Instruction 5.C. of Item 103 of Regulation S-K. The U.S. Department of Justice has notified AT&T Corp. that it intends to seek a civil penalty, in an amount not yet specified but which could exceed the $100,000 threshold in Instruction 5.C., in connection with the construction in 1999 of a breakwater in St. Thomas, U.S. Virgin Islands, without a federal permit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AT&T (ticker symbol "T") is listed on the New York Stock Exchange, as well as the Boston, Chicago, Cincinnati, Pacific and Philadelphia exchanges in the United States, and on the Euronext-Paris and the IDR (International Depository Receipt) in Brussels as well as the London and Geneva stock exchanges. As of December 31, 2001, AT&T had approximately 3.5 billion shares outstanding, held by more than 4.5 million shareowners. For additional information about the market price and dividends related to the Company's common equity, see Note 22 to the Consolidated Financial Statements included in Item 8 to this Annual Report. 54 ITEM 6. SELECTED FINANCIAL DATA AT&T CORP. AND SUBSIDIARIES SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED) DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
2001 2000(1) 1999(2) 1998 1997 1996 -------- -------- -------- ------- -------- -------- RESULTS OF OPERATIONS AND EARNINGS PER SHARE Revenue............................. $ 52,550 $ 55,533 $ 54,973 $47,817 $ 46,910 $ 46,442 Operating income.................... 3,754 4,228 11,458 7,632 6,835 8,341 Income from continuing operations... (6,842) 4,133 3,861 5,052 4,088 5,064 INCOME FROM CONTINUING OPERATIONS AT&T Common Stock Group: (Loss) income..................... (4,131) 2,645 5,883 5,052 4,088 5,064 (Loss) earnings per basic share... (1.33) 0.76 1.91 1.89 1.53 1.92 (Loss) earnings per diluted share.......................... (1.33) 0.75 1.87 1.87 1.53 1.92 Dividends declared per share...... 0.15 0.6975 0.88 0.88 0.88 0.88 Liberty Media Group:(3) (Loss) income..................... (2,711) 1,488 (2,022) -- -- -- (Loss) earnings per basic and diluted share.................. (1.05) 0.58 (0.80) -- -- -- ASSETS AND CAPITAL Property, plant and equipment, net............................... $ 41,322 $ 41,269 $ 33,366 $21,780 $ 19,177 $ 16,871 Total assets -- continuing operations........................ 165,282 207,136 146,094 40,134 41,029 38,229 Total assets........................ 165,282 234,360 163,457 54,185 55,797 52,265 Long-term debt...................... 40,527 33,089 23,214 5,555 7,840 8,861 Total debt.......................... 53,485 64,927 35,694 6,638 11,895 11,334 Mandatorily redeemable preferred securities........................ 2,400 2,380 1,626 -- -- -- Shareowners' equity................. 51,680 103,198 78,927 25,522 23,678 21,092 Debt ratio(4)....................... 47.7% 57.2% 54.3% 36.7% 57.2% 61.6% Gross capital expenditures.......... 8,388 10,462 11,194 6,871 6,065 5,263 OTHER INFORMATION Operating income as a percent of revenue........................... 7.1% 7.6% 20.8% 16.0% 14.6% 18.0% Income from continuing operations attributable to AT&T Common Stock Group as a percent of revenue..... NMF(5) 4.8% 10.7% 10.6% 8.7% 10.9% Return on average common equity(6)......................... 14.7% 5.5% 15.2% 25.3% 19.7% 27.3% Employees -- continuing operations(6)..................... 117,800 136,800 129,500 94,500 116,800 117,100 AT&T year-end stock price per share(7).......................... 18.14 13.40 39.46 39.22 31.74 21.42
- --------------- (1) AT&T Common Stock Group continuing operations results exclude Liberty Media Group (LMG). In addition, on June 15, 2000, AT&T completed the acquisition of MediaOne Group, Inc. 55 (2) In connection with the March 9, 1999, merger with Tele-Communications, Inc., AT&T issued separate tracking stock for LMG. LMG was accounted for as an equity investment prior to its split-off from AT&T on August 10, 2001. (3) No dividends had been declared for LMG tracking stocks. (4) Debt ratio reflects debt from continuing operations as a percent of total capital (debt plus equity, excluding LMG and AT&T Wireless Group). For purposes of this calculation, equity includes convertible quarterly trust preferred securities as well as redeemable preferred stock of subsidiary. (5) Not meaningful measure as in 2001 there was a loss from continuing operations attributable to AT&T Common Stock Group. (6) Data provided excludes LMG. 2001 return on average common equity calculation includes a gain on the disposition of discontinued operations of $13.5 billion. Excluding this gain, the return on average common equity would be (7.0%). (7) Stock prices for 1996-2000 have been restated to reflect the split-off of AT&T Wireless Group. 56 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW AT&T Corp. (AT&T or the company) is among the world's communications leaders, providing voice, data and video communications services to large and small businesses, consumers and government agencies. We provide domestic and international long distance, regional and local communications services, cable (broadband) television and Internet communication services. RESTRUCTURING OF AT&T On October 25, 2000, AT&T announced a restructuring plan designed to fully separate or issue separately tracked stocks intended to reflect the financial performance and economic value of each of AT&T's four major operating units. On December 19, 2001, AT&T and Comcast Corporation (Comcast) announced an agreement to combine AT&T Broadband with Comcast. Under the terms of the agreement, AT&T will spin-off AT&T Broadband and simultaneously merge it with Comcast, forming a new company to be called AT&T Comcast Corporation (AT&T Comcast). AT&T shareowners will receive a number of shares of AT&T Comcast common stock based on an exchange ratio calculated pursuant to a formula specified in the merger agreement. If determined as of the date of the merger agreement, the exchange ratio would have been approximately 0.34, assuming the AT&T shares held by Comcast are included in the number of shares of AT&T common stock outstanding. Assuming Comcast retains its AT&T shares and converts them into exchangeable preferred stock of AT&T as contemplated by the merger agreement, the exchange ratio would be approximately 0.35. AT&T shareowners will own a 56% economic stake and an approximate 66% voting interest in the new company, calculated as of the date of the merger agreement. The merger of AT&T Broadband and Comcast is subject to regulatory review, approval by both companies' shareowners and certain other conditions, and is expected to close by the end of 2002. AT&T also intends to proceed with the creation of a tracking stock for its AT&T Consumer Services business, which is expected to be distributed to AT&T shareowners following shareowner approval in 2002. On February 11, 2002, the company filed a preliminary proxy with the SEC, seeking shareowner approval of the AT&T Broadband and Comcast merger, and the creation of the AT&T Consumer Services tracking stock, among other things. These restructuring activities are complicated and involve a substantial number of steps and transactions, including obtaining various approvals, such as Internal Revenue Service (IRS) rulings. AT&T anticipates, however, that the transactions associated with AT&T's restructuring plan will be tax-free to U.S. shareowners. Future financial conditions, superior alternatives or other factors may arise or occur that make it inadvisable to proceed with part or all of AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring plan may not occur as we currently expect or in the time frames that we currently contemplate, or at all. Alternative forms of restructuring, including sales of interests in these businesses, would reduce what is available for distribution to AT&T shareowners in the restructuring. On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176 shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T common stock validly tendered. A total of 372.2 million shares of AT&T common stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group tracking stock. In conjunction with the exchange offer, AT&T recorded an $80 premium as a reduction to net income available to common shareowners. The premium represents the excess of the fair value of the AT&T Wireless Group tracking stock issued over the fair value of the AT&T common stock exchanged. On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a separate, independently traded company. All AT&T Wireless Group tracking stock was converted into AT&T Wireless common stock on a one-for-one basis and 1,136 million shares of AT&T Wireless common stock held by AT&T were distributed to AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding. AT&T common shareowners received whole shares of AT&T Wireless and cash payments for fractional shares. The IRS ruled that the transaction qualified as tax-free for AT&T and its shareowners for 57 U.S. federal income tax purposes, with the exception of cash received for fractional shares. For accounting purposes, the deemed effective split-off date was June 30, 2001. At the time of split-off, AT&T retained approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of which was used in a debt-for-equity exchange in July in 2001. The remaining portion of these holdings was monetized in October and December through the issuance of debt that is exchangeable into Wireless shares (or their cash equivalents) at maturity. The split-off of AT&T Wireless resulted in a noncash tax-free gain of $13.5 billion, which represented the difference between the fair value of the AT&T Wireless tracking stock at the date of the split-off and AT&T's book value in AT&T Wireless Services. This gain was recorded in the third quarter of 2001 as a "Gain on disposition of discontinued operations" in the Consolidated Statement of Income. On August 10, 2001, AT&T completed the split-off of Liberty Media Corporation as an independent, publicly traded company (since AT&T did not exit the line of business that Liberty Media Group (LMG) operated in, LMG was not accounted for as a discontinued operation). AT&T redeemed each outstanding share of Class A and Class B LMG tracking stock for one share of Liberty Media Corporation's Series A and Series B common stock, respectively. The IRS ruled that the split-off of Liberty Media Corporation qualified as a tax-free transaction for AT&T, Liberty Media and their shareowners. For accounting purposes, the deemed effective split-off date was July 31, 2001. TRACKING STOCKS During the periods 1999 through 2001, AT&T had one or more tracking stocks outstanding. In 1999, in connection with the acquisition of Tele-Communications, Inc. (TCI), AT&T issued a separate tracking stock to reflect 100% of the performance of LMG. In 2000, AT&T issued a tracking stock to track the financial performance of AT&T Wireless Group. The shares initially issued tracked approximately 16% of the performance of AT&T Wireless Group. A tracking stock is designed to provide financial returns to its holders based on the financial performance and economic value of the assets it tracks. Ownership of shares of AT&T common stock, AT&T Wireless Group tracking stock or Liberty Media Class A or B tracking stock did not represent a direct legal interest in the assets and liabilities of any of the groups, but an ownership of AT&T in total. The specific shares represented an interest in the economic performance of the net assets of each of the groups. The earnings attributable to AT&T Wireless Group are excluded from the earnings available to AT&T Common Stock Group and are reflected as "Income (loss) from discontinued operations," net of applicable taxes of AT&T Wireless Group in the Consolidated Statements of Income. Similarly, the earnings and losses related to LMG are excluded from the earnings available to AT&T Common Stock Group. The remaining results of operations of AT&T, including the financial performance of AT&T Wireless Group not represented by the tracking stock, are referred to as the AT&T Common Stock Group and are represented by AT&T common stock. We did not have a controlling financial interest in LMG for financial accounting purposes; therefore, our ownership in LMG was reflected as an investment accounted for under the equity method in AT&T's consolidated financial statements. The amounts attributable to LMG are reflected in the accompanying consolidated financial statements as "Equity (losses) earnings from Liberty Media Group" and "Investment in Liberty Media Group and related receivables, net" prior to its split-off from AT&T. AT&T Wireless Group was an integrated business of AT&T, and LMG was a combination of certain assets and businesses of AT&T; neither was a stand-alone entity prior to its split-off from AT&T. MERGER WITH MEDIAONE GROUP, INC. We completed the merger with MediaOne Group, Inc. (MediaOne) on June 15, 2000, in a cash and stock transaction valued at approximately $45 billion. We issued approximately 603 million shares of AT&T common stock, of which 60 million were treasury shares, and made cash payments of approximately $24 billion. 58 The merger was recorded under the purchase method of accounting, whereby the assets and liabilities of MediaOne Group were recorded at fair value on the date of the acquisition. Accordingly, the results of MediaOne have been included with the financial results of AT&T, within AT&T Broadband, since the date of acquisition. In accordance with the purchase method of accounting, periods prior to the merger were not restated to include the results of MediaOne. FORWARD-LOOKING STATEMENTS This document may contain forward-looking statements with respect to AT&T's restructuring plan, financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, network build out and upgrade, competitive positions, availability of capital, growth opportunities for existing products, benefits from new technologies, availability and deployment of new technologies, plans and objectives of management, and other matters. These forward-looking statements, including, without limitation, those relating to the future business prospects, revenue, working capital, liquidity, capital needs, network build out, interest costs and income, are necessarily estimates reflecting the best judgment of senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements including, without limitation: - the risks associated with the implementation of AT&T's restructuring plan, which is complicated and involves a substantial number of different transactions each with separate conditions, any or all of which may not occur as we currently intend, or which may not occur in the timeframe we currently expect, - the risks associated with each of AT&T's main business units, operating as independent entities as opposed to as part of an integrated telecommunications provider following completion of AT&T's restructuring plan, including the inability of these groups to rely on the financial and operational resources of the combined company and these groups having to provide services that were previously provided by a different part of the combined company, - the impact of existing and new competitors in the markets in which these groups compete, including competitors that may offer less expensive products and services, desirable or innovative products, technological substitutes, or have extensive resources or better financing, - the impact of oversupply of capacity resulting from excessive deployment of network capacity, - the ongoing global and domestic trend toward consolidation in the telecommunications industry, which may have the effect of making the competitors of these entities larger and better financed and afford these competitors with extensive resources and greater geographic reach, allowing them to compete more effectively, - the effects of vigorous competition in the markets in which the company operates, which may decrease prices charged, increase churn and change customer mix, profitability and average revenue per user, - the ability to enter into agreements to provide services, and the cost of entering new markets necessary to provide services, - the ability to establish a significant market presence in new geographic and service markets, - the availability and cost of capital and the consequences of increased leverage, - the impact of any unusual items resulting from ongoing evaluations of the business strategies of the company, 59 - the requirements imposed on the company or latitude allowed to competitors by the Federal Communications Commission (FCC) or state regulatory commissions under the Telecommunications Act of 1996 or other applicable laws and regulations, - the risks associated with technological requirements, technology substitution and changes and other technological developments, - the results of litigation filed or to be filed against the company, - the possibility of one or more of the markets in which the company competes being impacted by changes in political, economic or other factors, such as monetary policy, legal and regulatory changes or other external factors over which these groups have no control, and - the risks related to AT&T's investments and joint ventures. The words "estimate," "project," "intend," "expect," "believe," "plan" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. Moreover, in the future, AT&T, through its senior management, may make forward-looking statements about the matters described in this document or other matters concerning AT&T. The discussion and analysis that follows provides information management believes is relevant to an assessment and understanding of AT&T's consolidated results of operations for the years ended December 31, 2001, 2000 and 1999, and financial condition as of December 31, 2001 and 2000. CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS AT&T's financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Management continually evaluates its estimates and judgments including those related to revenue recognition, allowances for doubtful accounts, useful lives of property, plant and equipment, internal use software and intangible assets, investments, derivative contracts, pension and other postretirement benefits and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, the following may involve a higher degree of judgment or complexity: Revenue recognition -- We only record revenue for transactions which are considered to be part of our central, ongoing operations. We recognize long distance and local voice and data services revenue based upon minutes of traffic processed or contracted fee schedules including sales of prepaid calling cards. Cable video and nonvideo installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution systems. Customer activation fees, along with the related costs up to but not exceeding the revenues, are deferred and amortized over the customer relationship period. We recognize other products and services revenue when the products are delivered and accepted by customers and when services are provided in accordance with contract terms. For contracts where we provide customers with an indefeasible right to use network capacity, we recognize revenue ratably over the stated life of the agreement. Any sales of installed fiber are not recognized as revenue. We consider these transactions to be sales of property, plant and equipment and record any gain or loss in "Other income (expense)" in the Consolidated Statements of Income. Allowances for doubtful accounts -- We maintain allowances for doubtful accounts for estimated losses which result from the inability of our customers to make required payments. We base our allowances on the likelihood of recoverability of accounts receivable based on past experience and taking into account current collection trends that are expected to continue. If economic or specific industry trends worsen beyond our 60 estimates, we would increase our allowances for doubtful accounts by recording additional expense. Accounts receivable are fully reserved for when past due 180 days or more. Estimated useful lives of property, plant and equipment, internal use software and intangible assets -- We estimate the useful lives of property, plant and equipment, internal use software and intangible assets in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The useful lives are estimated at the time the asset is acquired and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods. Alternatively, these types of technological changes could result in the recognition of an impairment charge to reflect the write-down in value of the asset. We review these types of assets for impairment annually, or when events or circumstances indicate that the carrying amount may be not be recoverable over the remaining lives of the assets. In assessing impairments, we use cash flows which take into account management's estimates of future operations. Beginning January 1, 2002, in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," we will no longer amortize goodwill, excess basis related to equity-method investments and franchise costs, but will test these assets at least annually for impairment. Investments -- We hold investments in other companies which we account for under either the cost method or equity method of accounting. Many of these companies are publicly traded and have volatile share prices however, some of these companies are not publicly traded and therefore the value may be difficult to determine. For investments that are not publicly traded we estimate fair value using market-based (comparable sales) and income-based (discounted cash flow) methods. In addition, we have monetized some of these investments by issuing debt that is tied to the trading price of the security, and which can be settled in shares or cash. Some of our cost-method investments are classified as "trading" securities under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and are marked-to-market through the income statement. However, other cost method investments are classified as "available-for-sale" under SFAS No. 115 and are marked-to-market through other comprehensive income on the balance sheet. We record an investment impairment charge on our "available-for-sale" and equity-method investments when we believe the decline in the investment value is other than temporary. When determining an other than temporary decline, we consider, among other items, the length of time the trading price has been below our carrying value, the financial condition of the investee company, including the industry in which they operate, and our ability or intent to retain the investment. If the financial condition of the investee company or the industry in which it operates were to be materially different than our expectation, we would record an expense to reflect the other than temporary decline in value of the investment. At December 31, 2001, unrealized losses on "available-for-sale" securities included in "Other comprehensive income" as a component of shareowners' equity were approximately $0.3 billion (pretax). Derivative contracts -- We enter into derivative contracts to mitigate market risk from changes in interest rates, foreign currency exchange rates and equity prices. Certain exchangeable debt (debt exchangeable into or tied to the value of securities we own) contain embedded derivatives that require accounting separate from the debt instrument, while other exchangeable debt has derivatives issued in conjunction with net purchased options. The fair value of option based derivatives is determined using the Black-Scholes option pricing model, which is based on a set of inputs, including the price of the underlying stock, volatility of the underlying stock and interest rates. These inputs are based on prevailing market indications that are either directly observable in the market, received from qualified investment banking firms or are internally calculated. Changes in these inputs would result in a change in the fair value of the option contracts. Changes in the fair value of option contracts accounted for as cash flow hedges would be recorded, net of income taxes, within Other Comprehensive Income on the balance sheet. Changes in the fair value of option contracts undesignated for accounting purposes would be recorded within other income (expense) on the income statement. Generally, fair value calculations of other derivative contracts (e.g., interest rate swaps and foreign exchange forwards) require less judgment and are valued based on market interest rates and foreign exchange rates. 61 Pension and postretirement benefits -- The amounts recognized in the financial statements related to pension and postretirement benefits are determined on an actuarial basis, which utilizes many assumptions in the calculation of such amounts. A significant assumption used in determining our net pension credit (income) and postretirement expense is the expected long-term rate of return on plan assets. In 2001, we assumed an expected long-term rate of return on plan assets of 9.5%. On average, our actual return on plan assets over the long-term has substantially exceeded 9.5%; however, in the past two years, the plan's assets have experienced rates of return substantially lower than 9.5%. For 2002, we will lower our expected long-term rate of return assumption from 9.50% to 9.0%, reflecting the generally expected moderation of long-term rates of return in the financial markets. We expect this decrease in the expected long-term rate of return to decrease operating income by approximately $0.1 billion. Another estimate that affects our net pension credit and postretirement expense is the discount rate used in the annual actuarial valuations of pension and postretirement benefit plan obligations. At the end of each year, we determine the appropriate discount rate, which represents the interest rate that should be used to determine the present value of future cash flows currently expected to be required to settle the pension and postretirement benefit obligations. The discount rate is generally based on the yield on high-quality corporate fixed-income investments. At December 31, 2001, we lowered our discount rate to 7.25% from 7.5% at December 31, 2000. Changes in the discount rate do not have a material impact on our results of operations. Income taxes -- We record deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of assets and liabilities. If enacted tax rates changed, we would adjust our deferred tax assets and liabilities, through the provision for income taxes in the period of change, to reflect the enacted tax rate expected to be in effect when the deferred tax items reverse. A one percentage point change in the enacted tax rates would increase or decrease net income by approximately $0.7 billion. We record a valuation allowance on deferred tax assets to reflect the expected future tax benefits to be realized. In determining the appropriate valuation allowance, we take into account the level of expected future taxable income and available tax planning strategies. If future taxable income was lower than expected or if expected tax planning strategies were not available as anticipated, we may record additional valuation allowance through income tax expense in the period such determination was made. At December 31, 2001, we had long-term deferred tax assets (included within long-term deferred tax liabilities) of $5.4 billion, which included a valuation allowance of $57 million. CONSOLIDATED RESULTS OF OPERATIONS The comparison of 2001 results with 2000 results was affected by events such as acquisitions and dispositions that occurred in these two years. For example, included in 2001 was a full year of MediaOne results; however, 2000 included MediaOne's results only since the June 15, 2000, date of acquisition. In addition, we had dispositions of certain cable systems during each year and disposed of international businesses during 2000. Cable systems and businesses disposed of in 2000 were included in 2000 results for part of the year and not in 2001 results. Likewise, cable systems disposed of in 2001 were included in 2000 results for the full year and in 2001 results for part of the year. Also, At Home Corp. (Excite@Home) affected the comparison of annual results. For the period January 1, 2000, through August 31, 2000, Excite@Home was accounted for as an equity method investment. For the period September 1, 2000, through December 31, 2000, Excite@Home was fully consolidated as a result of corporate governance changes, which gave AT&T the right to designate six of the 11 Excite@Home board members, and therefore, a controlling interest. In 2001, Excite@Home was fully consolidated for the period January 1, 2001, through September 28, 2001, the date Excite@Home filed for Chapter 11 bankruptcy protection. As a result of the bankruptcy and AT&T removing four of its six members from the Excite@Home board of directors, AT&T no longer consolidated Excite@Home as of September 30, 2001. The consolidation of Excite@Home (effective September 1, 2000) resulted in the inclusion of 100% of its results in each line item of AT&T's Consolidated Balance Sheets and Consolidated Statements of Income. The approximate 77% of Excite@Home not owned by AT&T is shown in the 2000 Consolidated Balance Sheet within "Minority Interest" and as a component of "Minority interest income (expense)" in the 2001 and 2000 Consolidated Statements of Income. As a result of the significant losses incurred by Excite@Home, 62 the minority interest balance was fully utilized (in September); therefore, in September 2001 AT&T recognized more than its 23% share of losses of Excite@Home. Under the equity method of accounting, any earnings or losses are included as a component of "Net losses related to other equity investments" in the Consolidated Statement of Income. Beginning October 1, 2001, AT&T no longer records equity earnings or losses related to Excite@Home since AT&T recognized losses in excess of its investment in Excite@Home. Effective July 1, 2000, the FCC eliminated Primary Interexchange Carrier Charges (PICC or per-line charges) that AT&T pays for residential and single-line business customers. The elimination of these per-line charges resulted in lower access expense as well as lower revenue, since AT&T has historically billed its customers for these charges. The comparison of 2000 results with 1999 results was also affected by the acquisition of MediaOne and the elimination PICC. In addition, we acquired TCI and the IBM Global Network (now AT&T Global Network Services or AGNS) during 1999. Therefore, twelve months of their results are included in 2000's results, but are included for only a part of 1999 (since their respective dates of acquisition). Dispositions of certain cable systems and international businesses occurred during 1999 and 2000, affecting comparability. The consolidation of Excite@Home, effective September 1, 2000, also affected comparability. Prior to September 1, 2000, Excite@Home was accounted for as an equity method investment. Finally, the comparison of 2000 results with 1999 results was impacted by the launch of Concert on January 5, 2000, our global joint venture with British Telecommunications plc (BT). AT&T contributed all of its international gateway-to-gateway assets and the economic value of approximately 270 multinational customers specifically targeted for direct sales by Concert. As a result, 2000 results do not include the revenue and expenses associated with these customers and businesses, while 1999 does, and 2000 results include our proportionate share of Concert's earnings in "Net losses related to other equity investments" in the Consolidated Statements of Income. On October 16, 2001, AT&T and BT announced that they had reached binding agreements to unwind Concert. Under the Concert dissolution agreement with BT, AT&T will reclaim customer contracts and assets that were initially contributed to the venture, including international transport facilities and gateway assets. In addition, AT&T Business Services will obtain ownership of certain frame relay assets located in the Asia Pacific region that BT initially contributed to the venture. AT&T Business Services expects to combine these assets with its existing international networking and other assets. The unwind of Concert is expected to close by the end of the first half of 2002. REVENUE
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS AT&T Business Services.................................. $28,024 $28,900 $28,692 AT&T Consumer Services.................................. 15,079 18,894 21,753 AT&T Broadband.......................................... 9,799 8,226 5,070 Corporate and other..................................... (352) (487) (542) ------- ------- ------- Total Revenue........................................... $52,550 $55,533 $54,973 ======= ======= =======
Total revenue decreased 5.4%, or $3.0 billion, in 2001 compared with 2000. The decline was largely driven by accelerating declines in long distance voice revenue of approximately $5.7 billion. Partially offsetting the decline was revenue of approximately $2.2 billion, primarily attributable to growth in data and Internet protocol (IP), local and outsourcing services within AT&T Business Services, and increased revenue from AT&T Broadband, primarily telephony, high-speed data, expanded basic cable and digital video. Also offsetting the decline was revenue of approximately $0.3 billion largely due to net acquisitions (primarily MediaOne), and the consolidation of Excite@Home, partially offset by the elimination of PICC. We expect long distance revenue to continue to be negatively impacted by ongoing competition and product substitution and while we expect data and IP revenue to continue to grow, we expect the growth rate to slow. Revenue in 2002 will be positively impacted by the inclusion of revenue resulting from the unwind of Concert, including 63 revenue from multinational customers and foreign-billed revenue previously contributed to Concert. In addition, we expect revenue from AT&T Broadband to increase. Total revenue increased 1.0%, or $0.6 billion, in 2000 compared with 1999 primarily driven by a growing demand for our IP, outsourcing within AT&T Business Services and growth in AT&T Broadband of approximately $2.2 billion, as well as the impact of acquisitions and the consolidation of Excite@Home, partially offset by the impact of Concert, dispositions and the elimination of PICC of approximately $1.5 billion. These revenue increases were partially offset by continued declines in long distance voice revenue of approximately $2.9 billion. Revenue by segment is discussed in greater detail in the segment results section.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS Access and other connection............................. $12,136 $13,140 $14,439
Access and other connection expenses decreased 7.6%, or $1.0 billion, in 2001 compared with 2000. Included within access and other connection expenses are costs that we pay to connect calls on the facilities of other service providers, as well as the Universal Service Fund contributions and per-line charges mandated by the FCC. Approximately $1.6 billion of the decrease was due to mandated reductions in per-minute access-rates, lower per-line charges and lower international connection rates. In July 2000, per-line charges that AT&T paid for residential and single-line business customers were eliminated by the FCC. These reductions were partially offset by a $0.6 billion increase due to overall volume growth primarily related to local and international services and higher Universal Service Fund contributions. Since most of these charges are passed through to the customer, the per-minute access-rate and per-line charge reductions and the increased Universal Service Fund contributions have generally resulted in a corresponding impact on revenue. In 2002, access and other connection expenses will continue to decline as a result of mandated reductions in per minute access rates, lower universal service fund contributions and lower long distance call volumes. These reductions will be partially offset by an increase in local connectivity expenses primarily due to growth in local services. In addition, the unwind of Concert will also result in lower access and other connections expenses, since in 2001 the charge from Concert was recorded as access and other connection expenses and in 2002 as we take back assets, we will record the expenses in each line item based on how the assets and customers are served and managed. Access and other connection expenses decreased 9.0% to $13.1 billion in 2000, compared with $14.4 billion in 1999. Mandated reductions in per-minute access costs and decreased per-line charges resulted in lower costs of approximately $1.5 billion. Also contributing to the decrease was more efficient network usage. These decreases were partially offset by approximately $0.6 billion of higher costs due to volume increases, and $0.5 billion as a result of higher Universal Service Fund contributions. Costs paid to telephone companies outside of the United States to connect calls made to countries outside of the United States (international settlements) are also included within access and other connection expenses. International interconnection charges decreased approximately $0.5 billion in 2000, as a result of the commencement of operations of Concert. Concert incurred most of our international settlements and earned most of our foreign-billed revenue, previously incurred and earned directly by AT&T. In 2000, Concert billed us a net expense composed of international settlement (interconnection) expense and foreign-billed revenue. The amount charged by Concert in 2000 was lower than interconnection expense incurred in 1999, since AT&T recorded these transactions as revenue and expense, as applicable. Partially offsetting the decline were costs incurred related to Concert products that AT&T now sells to its customers.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS Costs of services and products.......................... $13,960 $12,795 $11,013
64 Costs of services and products include the costs of operating and maintaining our networks, costs to support our outsourcing contracts (including cost of equipment sold), programming for cable services, the provision for uncollectible receivables and other service-related costs. These costs increased $1.2 billion, or 9.1%, in 2001 compared with 2000. Approximately $0.6 billion of the increase was driven by net acquisitions, primarily MediaOne, and the consolidation of Excite@Home. Also contributing to the increase was approximately $0.8 billion of higher costs associated with our growth businesses, primarily at AT&T Business Services, including the cost of equipment sold within our outsourcing solutions business, and higher cable television programming costs. In addition, costs increased approximately $0.3 billion due to estimated losses on certain long-term contracts at AT&T Business Services and a lower pension credit (income) and higher postretirement expense in 2001 resulting from a decreased return on plan assets. These increases were partially offset by approximately $0.4 billion of lower costs associated with lower revenue, primarily lower volumes at AT&T Business Services, including our international operations and lower payphone compensation costs. In 2002, costs of services and products are expected to increase slightly as a result of the unwind of Concert, significantly offset by the deconsolidation of Excite@Home. Costs of services and products increased $1.8 billion, or 16.2%, in 2000 compared with 1999. Nearly $1.9 billion of the increase was due to acquisitions and the impact of consolidating Excite@Home, net of the impact of Concert and divestments of international businesses. The expense also increased due to higher costs associated with new outsourcing contracts of approximately $0.5 billion and approximately $0.3 billion of higher cable television programming costs principally due to rate increases and higher costs associated with new broadband services. These increases were partially offset by approximately $0.9 billion of costs savings from continued cost control initiatives and a higher pension credit in 2000, primarily driven by a higher pension trust asset base, resulting from increased investment returns.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- -------- --------- DOLLARS IN MILLIONS Selling, general and administrative...................... $10,832 $9,752 $10,894
Selling, general and administrative (SG&A) expenses increased $1.1 billion, or 11.1%, in 2001 compared with 2000. Approximately $0.2 billion of the increase was due to expenses associated with acquisitions, primarily MediaOne, net of the impact of dispositions. Increased expenses in support of growth businesses, primarily data and IP, broadband, and local voice services, drove approximately $0.8 billion of the increase. These expenses included customer care, facilities and other related expenses, advertising, research and development and other general and administrative expenses. Also included in the increased SG&A expenses were transaction costs of approximately $0.2 billion associated with AT&T's restructuring announced in October 2000. A lower pension credit (income) and higher postretirement expense resulting from decreased return on plan assets, combined with higher compensation accruals contributed approximately $0.3 billion to the increase. Partially offsetting these increases were lower costs associated with the impact of cost control efforts and decreased customer care and billing expenses of approximately $0.8 billion primarily from AT&T Consumer Services. As a result of the unwind of Concert as well as lower pension credit (income), selling, general and administrative expenses are expected to increase slightly in 2002. Selling, general and administrative expenses decreased $1.1 billion, or 10.5%, in 2000 compared with 1999. Approximately $2.0 billion of the decrease was due to savings from continued cost-control initiatives and a higher pension credit in 2000, primarily driven by a higher pension trust asset base, resulting from increased historical investment returns. Partially offsetting this decrease was approximately $0.5 billion of higher 65 expenses associated with our growing broadband business, and nearly $0.5 billion of expenses associated with acquisitions and the consolidation of Excite@Home, net of the impact of Concert and dispositions.
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ------ ------ DOLLARS IN MILLIONS Depreciation and other amortization........................ $6,865 $5,924 $5,137
Depreciation and other amortization expenses increased $0.9 billion, or 15.9%, in 2001 compared with 2000. Approximately $0.4 billion of the increase was attributable to the acquisition of MediaOne and the consolidation of Excite@Home, partially offset by net dispositions, primarily cable systems. The remaining increase was primarily due to a higher asset base resulting from continued infrastructure investments. Depreciation and other amortization expenses are expected to increase in 2002 reflecting the infrastructure investments made in 2001 as well as the impact of the unwind of Concert. In 2000, depreciation and other amortization expenses rose $0.8 billion, or 15.3%, compared with 1999. Approximately $0.5 billion of the increase was due to acquisitions and the consolidation of Excite@Home, net of dispositions and the impact of Concert. The remaining increase was primarily due to a higher asset base resulting from continued infrastructure investment. Total capital expenditures for 2001, 2000 and 1999 were $8.4 billion, $10.5 billion and $11.2 billion, respectively. We continue to focus the vast majority of our capital spending on our growth businesses of broadband, data and IP, and local.
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ------ ------ DOLLARS IN MILLIONS Amortization of goodwill, franchise costs and other purchased intangibles.................................... $2,473 $2,665 $1,057
Amortization of goodwill, franchise costs and other purchased intangibles decreased $0.2 billion, or 7.2%, in 2001 compared with 2000. The decrease was primarily due to a lower goodwill balance relating to Excite@Home as a result of the impairment charges recorded in the fourth quarter of 2000 and the first quarter of 2001, partially offset by the acquisition of MediaOne. Franchise costs represent the value attributable to agreements with local authorities that allow access to homes in AT&T Broadband's service areas. Other purchased intangibles arising from business combinations primarily included customer relationships. In 2002, we will no longer amortize goodwill or franchise costs in accordance with the provisions of SFAS No. 142. Accordingly, amortization of goodwill, franchise costs and other purchased intangibles will be significantly lower in 2002. A further discussion of the impacts of SFAS No. 142 is included in "New Accounting Pronouncements" in this document. In 2000, amortization of goodwill, franchise costs and other purchased intangibles increased $1.6 billion, or 152.3%, compared with the prior year. This increase was largely attributable to the consolidation of Excite@Home, as well as acquisitions, primarily MediaOne and TCI.
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2001 2000 1999 ------ ------ ---- DOLLARS IN MILLIONS Net restructuring and other charges......................... $2,530 $7,029 $975
During 2001, we recorded $2,530 million of net restructuring and other charges including approximately $1,330 million of restructuring and exit costs associated with AT&T's continued cost reduction initiatives and $1,200 million of asset impairment charges which were primarily related to Excite@Home. 66 The $1,330 million of charges for restructuring and exit plans were comprised of $1,014 million for employee separations and benefit plan curtailment costs, $322 million for facility closings and $27 million related to termination of contractual obligations. The restructuring and exit plans support our cost reduction efforts through headcount reductions across all segments of the business, primarily network support and customer care functions in AT&T Business Services, continued cost reduction efforts by Excite@Home (which was still consolidated into AT&T's results until September 2001), in addition to impacts of the MediaOne merger. These charges were slightly offset by the reversal in December 2001 of $33 million related to the business restructuring plans for fourth quarter 1999 and first quarter 2000. Included in the $1,014 million of employee separations were $200 million of benefit plan curtailment costs associated with employee separations as part of these exit plans. Approximately 18 thousand employees will be separated in conjunction with these exit plans, approximately one-half of which are management and one-half are nonmanagement employees. Nearly 17 thousand employee separations related to involuntary terminations and more than one thousand related to voluntary terminations. Approximately 50% of the employees affected by the 2001 restructuring charges left their positions as of December 31, 2001, and the remaining will leave the company throughout 2002. Termination benefits of approximately $341 million were paid throughout 2001. The $1,200 million of asset impairments consisted of $1,032 million associated with the write-down of goodwill and other intangibles, warrants granted in connection with distributing the @Home service and fixed assets. These charges were due to continued deterioration in the business climate of, and reduced levels of venture capital funding activity for, Internet advertising and other Internet-related companies, continued significant declines in the market values of Excite@Home's competitors in the Internet advertising industry, and changes in its operating and cash flow forecasts for the remainder of 2001. These charges were also impacted by Excite@Home's decision to sell or shut down narrowband operations. As a result of the foregoing, and other factors, Excite@Home entered into bankruptcy proceedings in September 2001. In addition, AT&T recorded a related goodwill impairment charge of $139 million associated with its acquisition goodwill of Excite@Home. Since we consolidated, but only owned approximately 23% of Excite@Home, a portion of the charges recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in our 2001 Consolidated Statement of Income as a component of "Minority interest income (expense)." Additionally, we recorded asset impairment charges of $29 million related to the write-down of unrecoverable support assets where the carrying value was no longer supported by estimated future cash flows. The restructuring and exit plans did not yield cash savings (net of severance benefit payouts) in 2001. In subsequent years, the net cash savings will increase, due to the timing of actual separations and associated payments, until the completion of the exit plan at which time we expect to yield approximately $1.1 billion of cash savings per year. Accordingly, there was no benefit to operating income (net of the restructuring charges recorded) in 2001. In subsequent years, the operating income benefit will continue to increase, due to timing of actual separations, until the completion of the exit plan, at which time we expect a benefit to operating income of approximately $1.2 billion per year. As a result of continuing realignment within AT&T Broadband, we expect to record a restructuring charge in the first quarter of 2002 in the range of $50 million to $100 million. During 2000, we recorded $7,029 million of net restructuring and other charges including $6,179 million of asset impairment charges related to Excite@Home, $759 million for restructuring and exit costs associated with AT&T's initiative to reduce costs, and $91 million related to the government-mandated disposition of AT&T Communications (U.K.) Ltd., which would have competed directly with Concert. The asset impairment charges related to Excite@Home resulted from the deterioration of the market conditions and market valuations of Internet-related companies during the fourth quarter of 2000, which caused Excite@Home to conclude that intangible assets related to their acquisitions of Internet-related companies may not be recoverable. Accordingly, Excite@Home conducted a detailed assessment of the recoverability of the carrying amounts of acquired intangible assets. This assessment resulted in a determination that certain acquired intangible assets, including goodwill, related to these acquisitions, including Excite, 67 were impaired as of December 31, 2000. As a result, Excite@Home recorded impairment charges of $4,609 million in December 2000, representing the excess of the carrying amount of the impaired assets over their fair value. The impairment was allocated to each asset group based on a comparison of carrying values and fair values. The impairment write-down within each asset group was allocated first to goodwill, and if goodwill was reduced to zero, to identifiable intangible assets in proportion to carrying values. Since we consolidated but only owned approximately 23% of Excite@Home, 77% of the charge recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in our 2000 Consolidated Statement of Income as "Minority interest income (expense)." Also as a result of the foregoing, AT&T recorded a goodwill and acquisition-related impairment charge of $1,570 million associated with the acquisition of our investment in Excite@Home. The write-down of our investment to fair value was determined utilizing discounted expected future cash flows. The $759 million charge for restructuring and exit plans was primarily due to headcount reductions, mainly in AT&T Business Services, including network operations, primarily for the consolidation of customer-care and call centers, as well as synergies created by the MediaOne merger. Included in exit costs was $503 million of cash termination benefits associated with the separation of approximately 7,300 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were non-management employees. Approximately 6,700 employee separations were related to involuntary terminations and approximately 600 to voluntary terminations. We also recorded $62 million of network lease and other contract termination costs associated with penalties incurred as part of notifying vendors of the termination of these contracts during the year, and net losses of $32 million related to the disposition of facilities primarily due to synergies created by the MediaOne merger. Also included in restructuring and exit costs in 2000 was $144 million of benefit plan curtailment costs associated with employee separations as part of these exit plans. Further, we recorded an asset impairment charge of $18 million related to the write-down of unrecoverable assets in certain businesses where the carrying value was no longer supported by estimated future cash flows. During 1999, we recorded $975 million of net restructuring and other charges. A $594 million in-process research and development charge was recorded reflecting the estimated fair value of research and development projects at TCI, as of the date of the acquisition, which had not yet reached technological feasibility or had no alternative future use. The projects identified related to efforts to offer voice over IP, product-integration efforts for advanced set-top devices, cost-savings efforts for broadband-telephony implementation, and in- process research and development related to Excite@Home. We estimated the fair value of in-process research and development for each project using an income approach, which was adjusted to allocate fair value based on the project's percentage of completion. Under this approach, the present value of the anticipated future benefits of the projects was determined using a discount rate of 17%. For each project, the resulting net present value was multiplied by a percentage of completion based on effort expended to date versus projected costs to complete. Also in 1999, a $145 million charge for restructuring and exit costs was recorded as part of AT&T's initiative to reduce costs. The restructuring and exit plans primarily focused on the maximization of synergies through headcount reductions in AT&T Business Services, including network operations, primarily for the consolidation of customer-care and call centers. Included in exit costs was $142 million of cash termination benefits associated with the separation of approximately 2,800 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were non-management employees. Approximately 1,700 employee separations were related to involuntary terminations and approximately 1,100 to voluntary terminations. 68 We also recorded net losses of $307 million related to the government-mandated disposition of certain international businesses that would have competed directly with Concert, and $50 million related to a contribution agreement AT&T Broadband entered into with Phoenixstar, Inc. That agreement requires AT&T Broadband to satisfy certain liabilities owed by Phoenixstar and its subsidiaries. The remaining obligation under this contribution agreement and an agreement that MediaOne had is $35 million, which was fully accrued for at December 31, 2001. In addition, we recorded benefits of $121 million related to the settlement of pension obligations for former employees who accepted AT&T's 1998 voluntary retirement incentive program (VRIP) offer.
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2001 2000 1999 ------ ------ ------- DOLLARS IN MILLIONS Operating income.......................................... $3,754 $4,228 $11,458
In 2001, operating income decreased $0.5 billion, or 11.2%. The decline was primarily attributable to accelerating declines in the long distance business. In addition, the acquisition of MediaOne and net dispositions negatively impacted operating income by $0.7 billion. Significantly offsetting these decreases was the net impact of Excite@Home (including the effect of lower asset impairments). Operating income decreased $7.2 billion, or 63.1%, in 2000 compared with 1999. The decrease was primarily due to higher net restructuring and other charges of $6.1 billion. Also contributing to the decrease was the impact of the acquisition of MediaOne and the consolidation of Excite@Home, which lowered operating income by $1.5 billion. A majority of the impact of operating losses and the restructuring charge generated by Excite@Home was offset in "Minority interest income (expense)" in the Consolidated Statement of Income, reflecting the approximate 77% of Excite@Home we do not own. Partially offsetting these decreases were cost-control initiatives and a larger pension credit associated with our mature long distance businesses and related support groups, partially offset by lower long distance revenue.
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2001 2000 1999 ------- ------ ---- DOLLARS IN MILLIONS Other (expense) income...................................... $(1,547) $1,150 $826
Other (expense) income in 2001 was an expense of $1.5 billion compared with income of $1.2 billion in 2000. The unfavorable variance of $2.7 billion was driven primarily by higher investment impairment charges of $0.8 billion, mostly consisting of impairments of Vodafone plc and Time Warner Telecom. Also contributing to the higher expense was an expense of $0.8 billion reflecting mark-to-market charges in conjunction with the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and $0.8 billion of lower net gains on the sales of businesses and investments. Other (expense) income improved $0.3 billion, or 39.3%, in 2000 compared with 1999. This improvement was primarily due to greater net gains on sales of businesses and investments of approximately $0.7 billion, and higher investment-related income of approximately $0.3 billion. The higher gains on sales were driven by significant gains associated with the swap of cable properties with Comcast and Cox, the sale of our investment in Lenfest and related transactions, which gains aggregated approximately $0.5 billion. In 1999, we recorded significant gains associated with the sale of our Language Line Services business and a portion of our ownership interest in AT&T Canada, which aggregated approximately $0.3 billion. Offsetting the improvements to other (expense) income in 2000 was an approximate $0.5 billion charge reflecting the increase in the fair value of put options held by Comcast and Cox related to Excite@Home stock, and approximately $0.2 billion of higher investment impairment charges.
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ------ ------ DOLLARS IN MILLIONS Interest expense........................................... $3,242 $2,964 $1,503
69 In 2001, interest expense increased $0.3 billion, or 9.4%. The increase was due primarily to a higher average debt balance in 2001, compared with 2000. The higher average debt balance was primarily a result of our June 2000 acquisition of MediaOne, including outstanding debt of MediaOne and debt issued to fund the MediaOne acquisition. The impact of MediaOne was partially offset by the company's debt reduction efforts in 2001. Interest expense increased 97.2%, or $1.5 billion, in 2000 compared with 1999. The increase was primarily due to a higher average debt balance as a result of our June 2000 acquisition of MediaOne, including outstanding debt of MediaOne and debt issued to fund the MediaOne acquisition, and our March 1999 acquisition of TCI.
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2001 2000 1999 ----- ------ ------ DOLLARS IN MILLIONS (Benefit) provision for income taxes........................ $(791) $3,284 $4,016
The effective income tax rate is the (benefit) provision for income taxes as a percent of (loss) income from continuing operations before income taxes. The effective income tax rate was 76.4% in 2001, 136.1% in 2000 and 37.3% in 1999. In 2001, the effective tax rate was positively impacted by a significant net tax benefit related to Excite@Home, including a benefit from the deconsolidation and the put obligation settlement with Cox and Comcast, partially offset by the prior consolidation of its operating losses (which included asset impairment charges) for which the company was unable to record tax benefits. Also positively impacting the effective tax rate was the net impact of a tax-free exchange with Comcast of AT&T stock held by Comcast for an entity owning certain cable systems and the resulting reduction of a previously established deferred tax liability. In addition, a benefit was recognized associated with the tax-free gain from the disposal of a portion of AT&T's retained interest in AT&T Wireless in a debt-for-equity exchange. In 2000, the effective tax rate was negatively impacted by Excite@Home, for which the company was unable to record tax benefits associated with its pretax losses. Therefore, the $4.6 billion restructuring charges taken by Excite@Home in 2000 had no associated tax benefit. The company also recorded a related nondeductible asset impairment charge of $1.6 billion associated with its acquisition of Excite@Home and a nondeductible charge to reflect the increase in the fair value of the put options related to Excite@Home held by Comcast and Cox, both of which negatively impacted the effective tax rate. The 2000 effective tax rate was positively impacted by a tax-free gain resulting from an exchange of AT&T stock for an entity owning certain cable systems and other assets with Cox and the benefit of the write-off of the related deferred tax liability. The 1999 effective tax rate was negatively impacted by a non-tax-deductible research and development charge, but positively impacted by a change in the net operating loss utilization tax rules that resulted in a reduction in the valuation allowance and the income tax provision.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ---- ------ ----- DOLLARS IN MILLIONS Minority interest income (expense).......................... $963 $4,103 $(126)
Minority interest income (expense), which is recorded net of income taxes, represents an adjustment to AT&T's income to reflect the less than 100% ownership of consolidated subsidiaries as well as dividends on preferred stock issued by subsidiaries of AT&T. Minority interest income (expense) decreased $3.1 billion in 2001 compared with 2000 primarily due to lower losses generated by Excite@Home, mainly as a result of lower goodwill impairment charges recorded by Excite@Home in 2001 compared with 2000. As a result of significant losses incurred by Excite@Home, AT&T fully utilized the minority interest balance during the third quarter of 2001; therefore, we no longer recorded minority interest income related to Excite@Home. The $4.2 billion increase in minority interest income (expense) in 2000 resulted from the consolidation of Excite@Home effective September 1, 2000. The minority interest income in 2000 primarily reflects losses 70 generated by Excite@Home, including the goodwill impairment charge, that were attributable to the approximate 77% of Excite@Home not owned by AT&T. The income tax benefit within minority interest income (expense) was $100 million in both 2001 and 2000, and a benefit of $54 million in 1999.
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 2001 2000 1999 ------- ------ ------- DOLLARS IN MILLIONS Equity (losses) earnings from Liberty Media Group........ $(2,711) $1,488 $(2,022)
Equity (losses) earnings from LMG, which are recorded net of income taxes, were a loss of $2.7 billion in 2001, compared with earnings of $1.5 billion in 2000. The decline of $4.2 billion was largely driven by gains on dispositions recorded in 2000, including gains associated with the mergers of various companies that LMG had investments in, as well as higher stock compensation expense in 2001 compared with 2000. Partially offsetting these declines were lower impairment charges recorded on LMG's investments to reflect other than temporary declines in value. Equity losses for 2001 reflect results through July 31, 2001, the deemed effective date of the split-off. Equity (losses) earnings from LMG were earnings of $1.5 billion in 2000, compared with losses of $2.0 billion in 1999. The improvement was primarily due to gains on dispositions, including gains associated with the mergers of various companies that LMG had investments in. Gains were recorded for the difference between the carrying value of LMG's interest in the acquired company and the fair value of securities received in the merger. In addition, lower stock compensation expense in 2000 compared with 1999 contributed to the improvement. These were partially offset by impairment charges recorded on LMG's investments to reflect other than temporary declines in value and higher losses relating to LMG's equity affiliates.
FOR THE YEARS ENDED DECEMBER 31, -------------------- 2001 2000 1999 ------ ---- ---- DOLLARS IN MILLIONS Net losses related to other equity investments.............. $4,850 $588 $756
Net losses related to other equity investments were $4.9 billion in 2001 compared with $0.6 billion in 2000, an increase of approximately $4.3 billion. The increase was driven primarily by higher net equity investment impairment charges of $4.3 billion. The pretax impairment charges were $7.0 billion and consisted primarily of $3.0 billion in charges related to the estimated loss on AT&T's commitment to purchase the shares of AT&T Canada we do not own, a $2.9 billion impairment charge related to the unwind of Concert and an impairment of our investment in Net2Phone of $1.1 billion. In addition, we recorded higher equity losses of $0.7 billion from Concert and Net2Phone. These losses were partially offset by $0.6 billion in losses recorded for Excite@Home in the first eight months of 2000 when we recorded the investment as an equity method investment. Excite@Home was fully consolidated beginning in September 2000. In 2000, net losses related to other equity investments were $0.6 billion, a 22.2% improvement compared with 1999. This improvement was primarily a result of higher earnings from our investment in Cablevision Systems Corp. (Cablevision) of approximately $0.2 billion due to gains from cable-system sales. Partially offsetting this improvement were losses from our stake in TWE, which we acquired in connection with the MediaOne merger, and greater equity losses from Excite@Home, which aggregated approximately $0.1 billion. The income tax benefit recorded on net losses related to other equity investments was $0.4 billion in both 2001 and 2000, and a benefit of $0.5 billion in 1999. The amortization of excess basis associated with nonconsolidated investments, recorded as a reduction of income, totaled $0.2 billion in 2001, and $0.5 billion 71 in both 2000 and 1999. Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, we will no longer amortize excess basis related to nonconsolidated investments.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ------- ---- ---- DOLLARS IN MILLIONS Gain on disposition of discontinued operations.............. $13,503 $-- $--
In 2001, we realized a gain on the disposition of discontinued operations of $13.5 billion, representing the difference between the fair value of the AT&T Wireless tracking stock on July 9, 2001, the date of the split-off, and AT&T's book value in AT&T Wireless Services.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ----- ----- ----- DOLLARS IN MILLIONS Cumulative effect of accounting change...................... $904 $-- $--
Cumulative effect of accounting change, net of applicable income taxes, is comprised of $0.4 billion for AT&T Group (other than LMG) and $0.5 billion for LMG in 2001. The $0.4 billion recorded by AT&T, excluding LMG, was attributable primarily to fair value adjustments of equity derivative instruments embedded in indexed debt instruments and warrants held in by public and private companies due to the adoption of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." The $0.5 billion recorded by LMG represents the impact of separately recording the embedded call option obligations associated with LMG's senior exchangeable debentures due to the adoption of SFAS No. 133.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ----- ----- ----- DOLLARS IN MILLIONS Dividend requirements of preferred stock.................... $652 $-- $--
Dividend requirements of preferred stock were $0.7 billion in 2001. The preferred stock dividend represented interest in connection with convertible preferred stock issued to NTT DoCoMo in January of 2001 as well as accretion of the beneficial conversion feature associated with this preferred stock. The beneficial conversion feature was recorded upon the issuance of the NTT DoCoMo preferred stock and represented the excess of the fair value of the preferred shares issued over the proceeds received. On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group, these preferred shares were converted into AT&T Wireless common stock. As a result, we fully amortized the remaining beneficial conversion feature balance.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ----- ----- ----- DOLLARS IN MILLIONS Premium on exchange of AT&T Wireless tracking stock......... $80 $-- $--
The premium on exchange of AT&T Wireless tracking stock was $80 million in 2001. The premium, which is a reduction of net income available to common shareowners, represents the excess of the fair value of the AT&T Wireless tracking stock issued over the fair value of the AT&T common stock exchanged and was 72 calculated based on the closing share prices of AT&T common stock and AT&T Wireless tracking stock on May 25, 2001.
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2001 2000 1999 ------- ------ ------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) AT&T Common Stock Group -- per basic share: (Loss) earnings from continuing operations................ (1.33) 0.76 1.91 AT&T Common Stock Group earnings.......................... 2.50 0.89 1.77 AT&T Common Stock Group -- per diluted share: (Loss) earnings from continuing operations................ (1.33) 0.75 1.87 AT&T Common Stock Group earnings.......................... 2.50 0.88 1.74
In 2001, AT&T had a loss from continuing operations before cumulative effect of accounting change per diluted share of $1.33, compared with earnings of $0.75 per diluted share in 2000. The decline of $2.08 per diluted share was primarily attributable to an unfavorable variance in net losses related to other equity investments, other (expense) income and lower operating income, excluding net restructuring and other charges, in 2001 compared with 2000, partially offset by lower net restructuring and other charges in 2001. Earnings per diluted share (EPS) attributable to continuing operations of the AT&T Common Stock Group were $0.75 in 2000 compared with $1.87 in 1999, a decrease of 59.9%. The decrease was primarily due to higher restructuring and asset impairment charges and the MediaOne acquisition, including the impact of shares issued, operating losses of MediaOne and additional interest expense. Also contributing to the decrease was the impact of Excite@Home, including the mark-to-market adjustment related to the put options held by Comcast and Cox. These decreases were partially offset by improvements in other (expense) income, primarily associated with higher net gains on sales of businesses and investments, and higher investment-related income, and lower losses from equity investments. Also impacting EPS was higher operating income associated with our mature long distance businesses. In 2001, diluted EPS of AT&T Common Stock Group of $2.50 included a loss from continuing operations as discussed above of $1.33, income from discontinued operations of $0.03, a gain on the disposition of discontinued operations of $3.70 and income related to the cumulative effect of accounting change of $0.10. In 2000, diluted EPS of AT&T Common Stock Group of $0.88 included earnings from continuing operations as discussed above of $0.75 and income from discontinued operations of $0.13. In 1999, diluted EPS of AT&T Common Stock Group of $1.74 included earnings from continuing operations as discussed above of $1.87 and a loss from discontinued operations of $0.13. LMG reported a loss per share, excluding the cumulative effect of an accounting change, of $0.84 in 2001 through its split-off from AT&T on August 10, 2001. In 2000, LMG reported earnings per basic and diluted share of $0.58. The decline of $1.42 per share was primarily due to gains on dispositions reported in 2000, including gains associated with the mergers of various companies that LMG had investments in. Partially offsetting the decline were charges recorded on LMG's investments in 2000. EPS for LMG was $0.58 in 2000, compared with a loss of $0.80 per share in 1999. The increase in EPS was primarily due to gains on dispositions, including gains associated with the mergers of various companies that LMG had investments in. In addition, lower stock compensation expense in 2000 compared with 1999 contributed to the increase. These increases were partially offset by impairment charges recorded on LMG's investments to reflect other than temporary declines in value and higher losses relating to LMG's equity affiliates. In 2001, EPS for the AT&T Wireless Group, through its split-off date from AT&T on July 9, 2001, was $0.08 per basic and diluted share. EPS for AT&T Wireless Group for the period from April 27, 2000, the stock offering date, through December 31, 2000, was $0.21 per basic and diluted share. 73 DISCONTINUED OPERATIONS Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statements of AT&T reflect the disposition of AT&T Wireless, which was split-off from AT&T on July 9, 2001, as discontinued operations. Accordingly, the revenue, costs and expenses, and cash flows of AT&T Wireless through June 30, 2001, the effective split-off date for accounting purposes, have been excluded from the respective captions in the 2001, 2000 and 1999 Consolidated Statements of Income and Consolidated Statements of Cash Flows and have been reported as "Income (loss) from discontinued operations," net of applicable income taxes; and as "Net cash provided by (used in) discontinued operations." The assets and liabilities of AT&T Wireless have been excluded from the respective captions in the December 31, 2000 Consolidated Balance Sheet, and are reported as "Net assets of discontinued operations." The gain associated with the disposition of AT&T Wireless is recorded as "Gain on disposition of discontinued operations," in the Consolidated Statement of Income. SEGMENT RESULTS In support of the services we provided in 2001, we segment our results by the operating units that support our primary lines of business: AT&T Business Services, AT&T Consumer Services and AT&T Broadband. The balance of AT&T's operations, excluding LMG, is included in a corporate and other category. Although not a segment, we also discuss the results of LMG prior to its split-off as an independent company. EBIT and EBITDA are the primary measures used by AT&T's chief operating decision makers to measure AT&T's operating results and to measure segment profitability and performance. AT&T calculates EBIT as operating income (loss) plus other income (expense), pretax minority interest income (expense) and net pretax losses related to other equity investments. EBITDA is defined as EBIT, excluding minority interest income (expense) other than Excite@Home's minority interest income (expense), plus depreciation and amortization. Interest and income taxes are not factored into the segment profitability measure used by the chief operating decision makers; therefore, trends for these items are discussed on a consolidated basis. Management believes EBIT and EBITDA are meaningful to investors because they provide analyses of operating results using the same measures used by AT&T's chief operating decision makers. In addition, we believe that both EBIT and EBITDA allow investors a means to evaluate the financial results of each segment in relation to total AT&T. EBIT for AT&T was a deficit of $4.8 billion and earnings of $8.4 billion and $10.9 billion for the years ended December 31, 2001, 2000 and 1999, respectively. EBITDA for AT&T was $4.7 billion, $17.1 billion and $17.7 billion for the years ended December 31, 2001, 2000 and 1999, respectively. Our calculations of EBIT and EBITDA may or may not be consistent with the calculation of these measures by other public companies. EBIT and EBITDA should not be viewed by investors as an alternative to generally accepted accounting principles (GAAP) measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. In addition, EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes which can affect cash flow. The discussion of segment results includes revenue, EBIT, EBITDA, capital additions and total assets. The discussion of EBITDA for AT&T Broadband is modified to exclude other income (expense) and net pretax losses related to equity investments. Total assets for each segment generally include all assets, except intercompany receivables. Prepaid pension assets and corporate-owned or leased real estate are generally held at the corporate level, and therefore are included in the corporate and other group. In addition, all impacts of the adoption of SFAS No. 133, as well as the ongoing investment and derivative revaluation, are reflected in the corporate and other group. The net assets of discontinued operations and the related income (loss) and gain on disposition are not reflected in the corporate and other group. Capital additions for each segment include capital expenditures for property, plant and equipment, acquisitions of licenses, additions to nonconsolidated investments, increases in franchise costs and additions to internal-use software. In connection with our corporate restructuring program set forth in late 2000, our existing segments reflect certain managerial changes that were implemented during 2001. The changes are as follows: AT&T 74 Business Services was expanded to include the results of international operations and ventures. In addition, certain corporate costs that were previously recorded within the corporate and other group have been allocated to the respective segments in an effort to ultimately have the results of these businesses reflect all direct corporate costs as well as overhead for shared services. All prior period results have been restated to reflect these changes. Reflecting the dynamics of our business, we continuously review our management model and structure, which may result in additional adjustments to our operating segments in the future. AT&T BUSINESS SERVICES AT&T Business Services offers a variety of global communications services to small and medium-sized businesses, large domestic and multinational businesses and government agencies. AT&T Business' services include long distance, international, toll-free and local voice; data and IP networking; managed networking services and outsourcing solutions; and wholesale transport services (sales of services to service resellers).
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS External revenue Services revenue...................................... $27,056 $27,972 $28,070 Equipment and product sales revenue................... 228 185 17 Total external revenue.................................. $27,284 $28,157 $28,087 Internal revenue........................................ 740 743 605 Total revenue........................................... 28,024 28,900 28,692 EBIT.................................................... (2,154) 5,990 5,248 EBITDA.................................................. 1,949 10,200 9,468 Capital additions....................................... 5,456 6,839 9,091
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- Total assets............................................ $40,339 $42,747
REVENUE In 2001, AT&T Business Services revenue decreased $0.9 billion, or 3.0%, to $28.0 billion. A decline in long distance voice revenue of approximately $2.1 billion drove the revenue decline. Significantly offsetting the decline was approximately $1.4 billion of growth in data and IP services, local voice services and outsourcing solutions, including equipment sales. In 2000, AT&T Business Services revenue grew $0.2 billion, or 0.7%, compared with 1999. Strength in data and IP services as well as growth in outsourcing solutions contributed $1.8 billion to the increase. This growth was largely offset by an approximate $0.9 billion decline in long distance voice services as a result of continued pricing pressures in the industry and approximately $0.5 billion due to the net impacts of Concert, international dispositions and acquisitions. In 2001, long distance voice revenue declined at a low-teen percentage rate reflecting the continuing impact of pricing pressures, mitigated somewhat by volume growth. While volumes grew at a low single-digit percentage rate, the rate of growth declined from a high single-digit percentage growth rate in 2000, reflecting the economic weakness impacting many key industry sectors, including travel, financial services, technology and retail, as well as the impact of wireless and e-mail substitution. These factors, along with pricing pressures, are expected to continue to negatively impact revenue in 2002. In 2000, long distance voice services revenue declined at a mid single-digit percentage rate after excluding the impact of Concert. The decline was primarily due to a declining average price per minute reflecting the competitive forces within the industry. Partially offsetting this decline was the high single-digit percentage growth rate in volumes. 75 Data and IP services (including related product sales) grew at a low double-digit percentage rate in 2001 compared with 2000. The growth was led by packet services, which include frame relay, IP and Asynchronous Transfer Mode (ATM). Packet services grew at a rate in the mid-20 percent range. Total IP services (a component of packet services), which include IP connectivity services, Virtual Private Network (VPN) services and hosting services, also grew in the mid-20 percent rate range. The rate of growth of data services revenue declined in 2001 due primarily to a slow-down in the rate of growth of high-speed private line services and frame relay services as well as a decline in international private line services. In 2002, we expect data and IP revenue to grow; however, we expect the growth rate to decline from the 2001 growth rate. The 2000 data and IP services growth rate (including related product sales), as compared with 1999, was impacted by acquisitions and the formation of Concert. Excluding these impacts, data services grew at a high-teens percentage rate. Growth was led by the continued strength of frame relay services; IP services, which include IP-connectivity services and VPN services; and high-speed private-line services. Local voice services revenue grew more than 20% in 2001 compared with 2000, and grew nearly 20% in 2000 compared with 1999. In 2001, AT&T added more than 670 thousand access lines and added more than 867 thousand lines in 2000. Access lines at the end of 2001 and 2000 were more than 2.9 million and nearly 2.3 million, respectively. Access lines enable AT&T to provide local service to customers by allowing direct connection from customer equipment to the AT&T network. At the end of 2001, AT&T served more than 6,300 buildings on-network (buildings where AT&T owns the connection that runs into the building), representing an increase of approximately 3.2% over 2000. At the end of 2000, AT&T served more than 6,100 buildings on-network, compared with slightly more than 5,800 buildings at the end of 1999. In 2002, we expect local voice services revenue to grow; however, we expect the growth rate to decline from the 2001 growth rate. AT&T Business Services internal revenue was essentially flat in 2001 compared with 2000, and increased $138 million, or 22.7%, in 2000 compared with 1999. The impact of internal revenue is included in the revenue by product discussions, above. In 2001, AT&T Business Services had lower internal revenue due to the split-off of AT&T Wireless on July 9, 2001, as these sales are now reported as external revenue. This decrease was almost entirely offset by greater sales of services to other AT&T units, primarily AT&T Broadband. The increase in 2000 was the result of greater sales of business long distance services to other AT&T units that resell such services to their external customers, primarily AT&T Broadband and AT&T Wireless. EBIT/EBITDA In 2001, EBIT decreased $8.1 billion, or 136.0%, compared with 2000. EBITDA declined $8.3 billion, or 80.9%, in 2001 compared with 2000. The declines in EBIT and EBITDA were primarily due to charges of $3.0 billion in 2001, related to the estimated loss on AT&T's commitment to purchase the remaining public shares of AT&T Canada, and charges of $2.9 billion in 2001 related to the unwind of Concert. Also reflected in the declines was the impact of pricing pressure within the long distance voice business, as well as a shift from higher margin long distance services to lower margin growth services. In 2002, EBIT and EBITDA are expected to improve, primarily due to the 2001 charges we recorded related to AT&T Canada and the unwind of Concert, partially offset by lower net gains recorded in other (expense) income and lower operating income, reflecting continued softness in the long distance market. EBIT improved $0.7 billion, or 14.2%, and EBITDA improved $0.7 billion, or 7.7%, in 2000 compared with 1999. The improvements reflect an increase in revenue and lower costs as a result of our continued cost-control efforts, partially offset by the formation of Concert and the acquisition of AGNS. OTHER ITEMS Capital additions decreased $1.4 billion in 2001, and decreased $2.3 billion in 2000. In 2001, the decrease was a result of lower capital expenditures for the AT&T world-wide intelligent network, as well as a reduced investment in Concert. In 2000 the decrease was a result of lower spending for our network and lower infusions into nonconsolidated international investments. 76 Total assets decreased $2.4 billion, or 5.6%, at December 31, 2001, compared with December 31, 2000. The decrease was primarily due to a decline in our investments in nonconsolidated subsidiaries, primarily due to the write-down of our investment in Concert and equity losses from Concert, and reduced receivables resulting from lower revenue and increased collection efforts. These declines were partially offset by an increase in property, plant and equipment. AT&T CONSUMER SERVICES AT&T Consumer Services provides a variety of communications services to residential customers including domestic and international long distance; transaction based long distance, such as operator assisted service and prepaid phone cards; local and local toll (intrastate calls outside the immediate local area); and dial-up Internet.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS Revenue................................................. $15,079 $18,894 $21,753 EBIT.................................................... 4,875 6,893 7,619 EBITDA.................................................. 5,075 7,060 7,803 Capital additions....................................... 140 148 299
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- Total assets............................................ $ 2,141 $ 3,150
REVENUE AT&T Consumer Services revenue declined $3.8 billion, or 20.2%, in 2001 compared with 2000. The decline was primarily due to a $3.7 billion decline in traditional voice services, such as domestic and international dial services (long distance calls where the number "1" is dialed before the call), and domestic calling card services. The traditional voice services were negatively impacted by an acceleration of wireless and e-mail product substitution, and the impact of ongoing competition, which has led to a loss of market share. In addition, the continued migration of customers to lower-priced products and optional calling plans has also negatively impacted revenue. As a result of the acceleration of substitution and competition, calling volumes declined at a low double-digit percentage rate in 2001. The revenue decline also reflects a $0.5 billion impact due to the elimination of per-line charges in July 2000. Partially offsetting these revenue declines was revenue growth of $0.6 billion for prepaid card and local services. We expect product substitution, competition (including the continued entry of the Regional Bell Operating Companies into the long distance market) and customer migration to lower-priced calling plans and products to continue to negatively impact AT&T Consumer Services revenue in 2002. In 2000, AT&T Consumer Services revenue decreased 13.1%, or $2.9 billion, compared with 1999. Approximately $0.9 billion of the decline was due to the elimination of per-line charges in 2000 and the impact of Concert. The remainder of the decline was primarily due to a decline in traditional voice services, reflecting the ongoing competitive nature of the consumer long distance industry, which has resulted in pricing pressures and a loss of market share. Also negatively impacting revenue was product substitution and market migration away from direct-dial wireline and higher-priced calling-card services to the rapidly growing wireless services and lower-priced prepaid-card services. As a result, calling volumes declined at a mid single-digit percentage rate in 2000. EBIT/EBITDA EBIT declined $2.0 billion, or 29.3%, and EBITDA declined $2.0 billion, or 28.1%, in 2001 compared with 2000. In 2001, EBIT and EBITDA margins declined to 32.3% and 33.7%, from 36.5% and 37.4% in 2000, respectively. As customers substitute long distance calling with wireless and e-mail services and migrate to 77 lower priced calling plans and lower margin products, they tend to remain AT&T Consumer Services customers. These customers generate less revenue, however, the billing, customer care and fixed costs remain, resulting in lower EBIT margins. The margin decline was also impacted by a slight increase in marketing spending targeted at high value customers, partially offset by a $0.2 billion settlement of disputes relating to obligations resulting from the sale of AT&T Universal Card Services to Citigroup in 1998, as well as cost control initiatives. In 2002, we expect the impacts of revenue decline to continue to negatively impact EBIT and EBITDA. EBIT and EBITDA both declined $0.7 billion, or 9.5%, in 2000 compared with 1999. The declines primarily reflect the decline in the long distance business, offset somewhat by cost-control initiatives. In addition, the declines reflect $0.2 billion of lower gains on sales of businesses, due primarily to the 1999 sale of Language Line Services, and higher restructuring charges. Reflecting our cost-control initiatives, EBIT and EBITDA margins in 2000 improved to 36.5% and 37.4%, respectively, compared with 35.0% and 35.9%, respectively, in 1999. OTHER ITEMS In 2001, capital additions decreased $8 million, or 5.2%, compared with 2000. Capital additions decreased $0.2 billion, or 50.6%, in 2000 compared with 1999 as a result of reduced spending on internal-use software, as most of the functionality upgrades were completed in 1999. Total assets declined $1.0 billion, or 32.0%, in 2001. The decline was primarily due to lower accounts receivable, reflecting lower revenue. AT&T BROADBAND AT&T Broadband offers a variety of services through our cable (broadband) network, including traditional analog video and advanced services, such as digital video, high-speed data and broadband telephony.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- --------- -------- DOLLARS IN MILLIONS External revenue...................................... $ 9,785 $ 8,212 $ 5,069 Internal revenue...................................... 14 14 1 Total revenue......................................... 9,799 8,226 5,070 EBIT.................................................. (3,215) (1,240) (1,545) EBITDA*............................................... 2,040 1,639 733 Capital additions..................................... 3,607 4,968 4,759
AT DECEMBER 31, ------------------- 2001 2000 -------- -------- Total assets.......................................... $103,060 $114,848
- --------------- * EBITDA for AT&T Broadband excludes net losses related to equity investments and other income (expense). Results of operations for the year ended December 31, 2001, include a full twelve months of MediaOne operations, while the year ended December 31, 2000, includes the results of MediaOne since its acquisition on June 15, 2000, and the year ended December 31, 1999, does not include any results of MediaOne. Additionally, the results of operations for the year ended December 31, 1999, include 10 months of TCI's results, reflecting its acquisition in March 1999, while 2000 and 2001 include a full 12 months of TCI's results. 78 REVENUE AT&T Broadband revenue grew $1.6 billion in 2001, or 19.1%, compared with 2000. Approximately $0.6 billion of the increase was due to the acquisition of MediaOne, partially offset by the net dispositions of cable systems. In addition, the increase was attributable to revenue growth from advanced services (broadband telephony and high-speed data) of approximately $0.6 billion and growth in other video services, primarily expanded basic cable and digital video, of approximately $0.4 billion. We expect 2002 revenue to increase as demand for advanced services continues to grow. AT&T Broadband revenue grew $3.2 billion in 2000, or 62.3%, compared with 1999. Approximately $2.8 billion of the increase in revenue was due to the acquisition of MediaOne in 2000 and TCI in 1999. In addition, revenue from advanced services and a basic-cable rate increase contributed approximately $0.4 billion to the revenue increase. At December 31, 2001, AT&T Broadband serviced approximately 13.6 million basic cable customers, passing approximately 24.6 million homes, compared with 16.0 million basic cable customers, passing approximately 28.3 million homes at December 31, 2000. The decrease in the number of homes passed and basic cable customers primarily reflect the net disposition of cable systems in 2001. In addition, the number of basic cable customers declined due to the impacts of competition. At December 31, 2001, we provided digital video service to approximately 3.5 million customers, high-speed data service to approximately 1.5 million customers and broadband telephony service to approximately 1.0 million customers. This compares with approximately 2.8 million digital-video customers, approximately 1.1 million high-speed data customers, and approximately 547 thousand broadband telephony customers at December 31, 2000. These amounts reflect the acquisition of MediaOne. At December 31, 1999, AT&T Broadband serviced approximately 11.4 million basic cable customers, passing approximately 19.7 million homes. At December 31, 1999, we provided digital video service to approximately 1.8 million customers, high-speed data service to approximately 207 thousand customers and broadband telephony service to nearly 8,300 customers. EBIT/EBITDA The EBIT deficit in 2001 increased $2.0 billion to $3.2 billion from the 2000 deficit of $1.2 billion. The increased deficit was largely due to the impacts of the acquisition of MediaOne and the net dispositions of cable systems of approximately $0.8 billion, as well as a $0.9 billion impact of net losses on the sales of businesses and investments recorded in 2001 compared with net gains recorded in 2000. In 2001, we recorded net losses from the sale of cable properties to Comcast, as well as a loss on the sale of part of our ownership interest in Cablevision. In 2000, we recorded a gain on the sale of Lenfest and gains on the sales of properties to Cox and Comcast. Also contributing to the increased deficit were higher depreciation and amortization, programming and advertising expenses and higher restructuring and other charges of approximately $0.8 billion, as well as greater investment impairment charges of $0.4 billion. These increases to the deficit were partially offset by $0.3 billion of lower pretax equity losses, improved EBIT of approximately $0.4 billion in other video services, primarily expanded basic cable and digital video, and improved EBIT in advanced services of approximately $0.2 billion. EBITDA, which excludes net losses related to equity investments and other income (expense), was $2.0 billion in 2001, an improvement of $0.4 billion compared with $1.6 billion in 2000. This improvement was primarily due to the acquisition of MediaOne of $0.4 billion and improved EBITDA in other video services, primarily expanded basic cable and digital video, of approximately $0.4 billion and improved EBITDA in advanced services of approximately $0.2 billion. Partially offsetting this improvement was the impact of net dispositions of cable systems of $0.4 billion, increased programming and advertising expenses of $0.2 billion, and higher restructuring and other charges of $0.1 billion. In 2002, we expect EBITDA, which excludes net losses related to equity investments and other income (expense), to increase as a result of expense reductions generated from previous years' restructuring charges as well as continued growth from advances services (broadband telephony and high-speed data). 79 EBIT in 2000 was a deficit of $1.2 billion, an improvement of $0.3 billion, or 19.7% compared with 1999. This improvement was due to approximately $0.5 billion of higher gains on sales of businesses and investments, primarily gains on the swap of cable properties with Cox and Comcast and the sale of our investment in Lenfest, and $0.4 billion lower restructuring charges primarily associated with an in-process research and development charge recorded in connection with the 1999 acquisition of TCI. Also contributing to the improvement were lower pretax losses from equity investments of $0.5 billion, due in part to a $0.3 billion improvement from our investment in Cablevision due to gains from cable-system sales. These improvements were largely offset by the impact of the acquisition of MediaOne and TCI of approximately $0.5 billion and higher expenses associated with high-speed data and broadband telephony services of approximately $0.4 billion. EBITDA, which excludes net losses related to equity investments and other income, was $1.6 billion in 2000, an improvement of $0.9 billion compared with 1999. This improvement was due to the impact of the MediaOne and TCI acquisitions of $0.7 billion and lower restructuring charges of $0.4 billion. Higher expenses associated with high-speed data and broadband telephony of approximately $0.2 billion partially offset these increases. OTHER ITEMS Capital additions decreased $1.4 billion, or 27.4%, to $3.6 billion in 2001, from $5.0 billion in 2000. This decrease was primarily driven by a $0.9 billion decrease in capital expenditures combined with a $0.5 billion decrease in infusions into nonconsolidated investments. The 2001 spending was primarily related to the growth and support of advanced services and plant upgrade expenditures. Capital additions increased 4.4% to $5.0 billion in 2000, from $4.8 billion in 1999. The increase was due to higher capital expenditures of $0.8 billion, primarily due to MediaOne, which was almost entirely offset by decreased contributions to various nonconsolidated investments of $0.7 billion. The 2000 spending was primarily related to the growth and support of advanced services and plant upgrade expenditures. In 1999, spending was largely directed toward cable-distribution systems, focusing on the upgrade of cable plant assets, as well as equity infusions into various investments. Total assets at December 31, 2001, decreased $11.8 billion, or 10.3%, to $103.1 billion compared with $114.8 billion at December 31, 2000. The decrease in total assets was primarily due to lower franchise costs as a result of the net disposition of cable systems and the current year amortization; lower investments, primarily related to the impairment of and settlement of exchangeable notes with Vodafone ADRs, the sale of certain investments, including shares of Cablevision and Rainbow Media and unfavorable mark-to-market adjustments on certain investments; and lower other assets primarily due to unfavorable mark-to-market adjustments on certain derivative instruments, and the amortization of purchased intangibles. CORPORATE AND OTHER This group reflects the results of corporate staff functions, the elimination of transactions between segments, as well as the impacts of Excite@Home.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- ------- DOLLARS IN MILLIONS Revenue................................................. $ (352) $ (487) $(542) EBIT.................................................... (4,324) (3,279) (441) EBITDA.................................................. (3,737) (2,382) 37 Capital additions....................................... 327 1,683 271
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- Total assets.............................................. $19,742 $12,101
80 REVENUE Revenue for corporate and other primarily includes negative revenue of $0.8 billion in both 2001 and 2000, representing the elimination of intercompany revenue, and revenue of Excite@Home of $0.4 billion in 2001 and $0.2 billion in 2000. The increase in revenue of Excite@Home is primarily due to nine months of revenue included in our 2001 results compared with four months of revenue included in our 2000 results. The elimination of intercompany revenue was essentially flat in 2001 compared with 2000, however, we had a higher elimination of intercompany revenue in 2001 resulting from increased sales from AT&T Business Services and Excite@Home to AT&T Broadband, offset by lower intercompany revenue from AT&T Wireless due to its split-off on July 9, 2001. Corporate and other revenue was negative $0.5 billion in both 2000 and 1999. Revenue in 2000 primarily included $0.8 billion of negative revenue, representing the elimination of intercompany revenue, and revenue of Excite@Home of $0.2 billion. Revenue in 1999 primarily included $0.6 billion of negative revenue representing the elimination of intercompany revenue. EBIT/EBITDA EBIT and EBITDA deficits in 2001 increased $1.0 billion and $1.4 billion to deficits of $4.3 billion and $3.7 billion, respectively. The deficit increases were largely due to $1.5 billion of greater investment impairment charges, which included a $1.1 billion impairment charge for Net2Phone and a $0.3 billion impairment charge for Time Warner Telecom recorded in 2001; and $0.8 billion of expense due to the adoption, in 2001, of SFAS No. 133. Also contributing to the deficit increases were higher restructuring and other charges (other than Excite@Home) and higher transaction costs associated with AT&T's restructuring announced in October 2000, totaling $0.4 billion; lower net gains on sales of investments and lower interest income, totaling $0.4 billion; and a lower pension credit (income) and higher postretirement expense of $0.3 billion. These increases to the deficits were largely offset by the improved EBIT and EBITDA of Excite@Home of $2.6 billion primarily due to the goodwill impairment charges recorded in 2000 by Excite@Home and AT&T related to Excite@Home, partially offset by a $0.3 billion greater loss in 2001 on the Excite@Home put obligation with Cox and Comcast. In 2000, EBIT and EBITDA deficits increased $2.8 billion and $2.4 billion to $3.3 billion and $2.4 billion, respectively. The increases in the deficits were largely related to Excite@Home. In 2000, restructuring and other charges, net of minority interest, were $2.9 billion higher primarily due to goodwill impairment charges recorded by Excite@Home and AT&T related to Excite@Home. Other impacts included a charge of approximately $0.5 billion for the fair market value increase of put options held by Comcast and Cox related to Excite@Home, and operating losses from Excite@Home. Partially offsetting these declines was an increase in the pension credit due to a higher pension trust asset base resulting from increased investment returns, and lower expenses associated with our continued efforts to reduce costs, which aggregated approximately $0.6 billion. In addition, higher net gains on sales of investments and an increase in interest income increased EBIT and EBITDA by approximately $0.6 billion. OTHER ITEMS Capital additions decreased $1.4 billion in 2001 and increased $1.4 billion in 2000. The spike in capital additions in 2000 was driven by our investment in Net2Phone. Total assets increased $7.6 billion, to $19.7 billion in 2001. The increase was primarily driven by a higher cash balance at December 31, 2001, mainly a result of proceeds received from our $10 billion bond offering in November 2001, and an investment in AT&T Wireless (which was monetized in the fourth quarter of 2001). These increases were partially offset by the impact of Excite@Home, the write-down of our investment in Net2Phone and the transfer of a loan to Concert to the AT&T Business Services segment, which was written off in the third quarter of 2001. 81 LIBERTY MEDIA GROUP LMG produces, acquires and distributes entertainment, educational and informational programming services through all available formats and media. LMG is also engaged in electronic-retailing services, direct-marketing services, advertising sales relating to programming services, infomercials and transaction processing. LMG was split-off from AT&T on August 10, 2001. The operating results of LMG were reflected as "Equity (losses) earnings from Liberty Media Group" in the Consolidated Statements of Income prior to its split-off from AT&T. Our investment in LMG was included in the Consolidated Balance Sheet at December 31, 2000. Losses from LMG were $2.7 billion in 2001 through July 31, 2001, the deemed effective split-off date for accounting purposes, compared with earnings of $1.5 billion in 2000. The decline was primarily due to gains on dispositions reported in 2000, including gains associated with the mergers of various companies that LMG had investments in. Gains were recorded for the difference between the carrying value of LMG's interest in the acquired company and the fair value of securities received in the merger. Partially offsetting the decline were charges recorded on LMG's investments in 2000, to reflect other than temporary declines in value. In 2001, LMG also recorded income of $0.5 billion for the cumulative effect of accounting change representing the impact of separately recording the embedded call option obligations associated with LMG's senior exchangeable debentures due to the adoption of SFAS No. 133. In 2000, earnings from LMG were $1.5 billion, compared with losses of $2.0 billion from the date of acquisition through December 31, 1999. The improvement was primarily due to gains on dispositions, including gains associated with the mergers of various companies that LMG had investments in. In addition, lower stock compensation expense in 2000 compared with 1999 contributed to the improvement, partially offset by impairment charges recorded on LMG's investments to reflect other than temporary declines in value and higher losses relating to LMG's equity affiliates. LIQUIDITY
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- DOLLARS IN MILLIONS CASH FLOWS: Provided by operating activities of continuing operations............................................ $10,558 $11,665 $10,509 Used in investing activities of continuing operations... (1,860) (30,045) (23,884) (Used in) provided by financing activities of continuing operations............................................ (3,030) 25,732 13,854 Provided by (used in) discontinued operations........... 4,860 (8,306) (2,594)
Net cash provided by operating activities of $10.6 billion for the year ended December 31, 2001, primarily included the $12.8 billion of income from continuing operations, adjusted to exclude noncash income items and net gains on sales of businesses and investments, and a decrease in accounts receivable of $0.7 billion, partially offset by net changes in other operating assets and liabilities of $2.2 billion and a decrease in accounts payable of $0.8 billion. Net cash provided by operating activities of $11.7 billion for the year ended December 31, 2000, primarily included income from continuing operations, excluding noncash income items and the adjustment for net gains on sales of businesses and investments of $15.1 billion, partially offset by an increase in accounts receivable of $2.5 billion and a decrease in accounts payable of $0.6 billion. Net cash provided by operating activities of $10.5 billion for the year ended December 31, 1999, primarily included income from continuing operations excluding noncash income items and the adjustment for net gains on sales of businesses and investments of $14.9 billion, partially offset by an increase in accounts receivable of $2.4 billion and net changes in other operating assets and liabilities of $1.8 billion. AT&T's investing activities resulted in a net use of cash of $1.9 billion in 2001, compared with $30.0 billion in 2000. During 2001, AT&T spent $9.3 billion on capital expenditures and $0.4 billion on nonconsolidated investments and received approximately $4.9 billion, primarily from the net dispositions of cable systems, and approximately $3.0 billion from the sales of investments. During 2000, AT&T used approximately $16.7 billion for acquisitions of businesses, primarily MediaOne, and spent $11.5 billion on 82 capital expenditures. During 1999, AT&T spent approximately $11.9 billion on capital expenditures, approximately $6.0 billion on acquisitions of businesses, primarily AGNS, and contributed $5.5 billion of cash to LMG. During 2001, net cash used in financing activities was $3.0 billion, compared with net cash provided by financing activities of $25.7 billion in 2000. During 2001, AT&T made net debt payments of $6.4 billion, paid AT&T Wireless $5.8 billion to settle an intercompany loan in conjunction with its split-off from AT&T, and paid dividends of $0.5 billion. Partially offsetting these outflows was the receipt of $9.8 billion from the issuance of convertible preferred stock to NTT DoCoMo. During 2000, AT&T received $10.3 billion from the AT&T Wireless Group tracking stock offering and had net borrowings of debt of $19.5 billion. These were partially offset by the payment of $3.0 billion in dividends. In 1999, AT&T had net borrowings of debt of $16.3 billion and received $4.6 billion from the issuance of redeemable preferred securities. These sources of cash were partially offset by the acquisition of treasury shares of $4.6 billion and the payment of dividends of $2.7 billion. Since the announced restructuring plans to create four new businesses, AT&T's credit ratings have been under review by the applicable rating agencies. As a result of this review, in 2001, AT&T's short-term and the long-term ratings were downgraded as outlined below. These actions have resulted in an increased cost of borrowings and decreased our access to the capital markets. Our current credit ratings are as follows:
SHORT-TERM CREDIT LONG-TERM CREDIT CHARACTERIZATION OF LONG-TERM CREDIT RATING AGENCY RATING RATING CREDIT RATING - -------------------- ----------------- ---------------- ----------------------------- Standard & Poor's........ A-2 BBB+ On credit watch with negative implications Moody's.................. P-2 A3 Under review with possibility of downgrade Fitch Ratings............ F-2 A- Rating watch negative
There are provisions in several of our debt instruments that require us to pay up to the $0.9 billion present value of future interest payments if our credit ratings are downgraded below investment grade. We do not believe downgrades below investment grade are likely to occur. In November 2001, we completed a $10 billion private bond offering which includes provisions that would allow bondholders to require AT&T to repurchase the notes if certain conditions are not met in conjunction with the spin-off or other separation of AT&T Broadband from AT&T at the time of notification to bondholders of the intention to separate AT&T Broadband. These conditions include a maximum debt to EBITDA ratio (adjusted) for pro forma AT&T, excluding AT&T Broadband, of no more than 2.75 times. In addition, the Moody's and Standard & Poor's credit ratings for pro forma AT&T, excluding AT&T Broadband, are required to be at least Baa3 and BBB-, respectively, with such ratings having at least a stable outlook. On December 14, 2001, we amended and restated a pre-existing revolving-credit facility. The amended facility, which is syndicated to 30 banks, makes $8 billion available to AT&T for a 364-day term. At December 31, 2001, we had not utilized this facility, and we currently have the entire $8 billion facility available to us. The credit facility agreement contains a financial covenant that requires AT&T to maintain a net debt-to-EBITDA ratio (as defined in the credit agreement) not exceeding 3.00 to 1.00 for four consecutive quarters ending on the last day of each fiscal quarter. At December 31, 2001, we were in compliance with this covenant. If AT&T were to become noncompliant it could result in the cancellation of the credit facility with any amounts outstanding under the credit facility becoming payable immediately. The holder of certain private debt has an annual right to cause AT&T to repay up to the $0.7 billion face value of the debt upon payment of an exercise fee. In exchange for the elimination of this put right for 2002, AT&T will obtain a letter of credit collateralized by $0.4 billion of cash which will be restricted in its use. The creditor could also accelerate repayment of the debt if unfavorable local law changes were to occur in its country of operation. 83 If AT&T's debt ratings are further downgraded or any of the risks or covenants noted above are triggered, AT&T may not be able to obtain sufficient financing in the timeframe required, and/or such replacement financing may be more costly or have additional covenants than we had in connection with our debt at December 31, 2001. In addition, if the financial markets become more cautious regarding the industry/ratings category we operate in, our ability to issue commercial paper would be further reduced. This could negatively impact our ability to pursue acquisitions, make capital expenditures to expand our network and cable plant or to pay dividends. At December 31, 2001, we had current assets of $22.5 billion and current liabilities of $25.4 billion. Included in current assets was $10.6 billion of cash and cash equivalents. Included in current liabilities was $13.0 billion of debt maturing within one year, including $9.2 billion of commercial paper and debt with an original maturity of one year or less. We expect to fund our operations primarily with cash from operations, cash on hand, commercial paper and our securitization program. If economic conditions worsen or do not improve and/or competition and product substitution accelerate beyond current expectations, our cash flow from operations would decrease, negatively impacting our liquidity. In addition, potential sources of funds include the sale of our ownership interest in TWE. On February 28, 2001, we exercised our registration rights in TWE and formally requested TWE to begin the process of converting the limited partnership into a corporation with registered equity securities. On May 14, 2001, we named Credit Suisse First Boston as our investment banker for the registration process under the TWE partnership agreement. If the proposed spin-off of AT&T Broadband occurs as currently structured, our investment in TWE will be included in the net assets spun-off. In the event our cash flow from operations or access to the commercial paper markets are negatively impacted, we have alternative funding available through the utilization of our $8 billion credit facility, as long as we are in compliance with certain covenants discussed above and our $2.7 billion receivables securitization program, which is limited by eligible receivables that change from month to month. Subsequent to December 31, 2001, AT&T notified holders of certain Trust Originated Preferred Securities, originally issued by TCI and MediaOne, that it will call these securities for early redemption on February 28, 2002, March 4, 2002 and April 1, 2002. These debt redemptions total approximately $1.4 billion and will be funded with cash on hand. Such amounts are included within "Short-term debt" on the Consolidated Balance Sheet at December 31, 2001. On February 27, 2002, AT&T signed an agreement with AT&T Latin America (ALA) that restructured approximately $725 million of ALA's short-term and long-term debt and preferred stock held by AT&T, plus accrued interest and dividends. At December 31, 2001, $72 million of the $725 million financing was not drawn. ALA's senior secured vendor financing of $298 million became effective on March 27, 2002. The AT&T provided debt and preferred facilities are subordinated to the ALA senior secured vendor financing. The agreement between AT&T and ALA, which also took effect on March 27, 2002, extends the maturity and redemption dates of all ALA debt and preferred stock payable to AT&T to October 2008. In addition, while the vendor financing is outstanding, the agreement defers interest payments on all AT&T debt and dividend payments on AT&T preferred stock until October 2008. If the proposed spin-off of AT&T Broadband occurs as currently structured, the debt of TCI and MediaOne will be included in the net assets spun-off and will be included in AT&T Comcast. The amount of this third-party debt at December 31, 2001, was $19.3 billion. The intercompany debt of AT&T Broadband payable to AT&T that is outstanding at the time of the spin-off will be repaid immediately prior to the spin-off. At December 31, 2001 such intercompany debt amounted to approximately $4.0 billion. In addition, AT&T's quarterly convertible income preferred securities, which had a book value of $4.7 billion at December 31, 2001, will be included in the net assets spun-off and will be included in AT&T Comcast. 84 The following summarizes AT&T's contractual cash obligations and commercial commitments at December 31, 2001, and the effect such obligations are expected to have on liquidity and cash flow in future periods.
PAYMENTS DUE BY PERIOD ----------------------------------------------------- LESS THAN 2-3 4-5 AFTER 5 CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS - ----------------------- ------- --------- --------- --------- ------- (DOLLARS IN MILLIONS) Long-term debt, including current maturities(a)..................... $35,008 $2,975 $5,850 $6,958 $19,225 Operating leases(b)................. 2,996 550 924 648 874 Unconditional purchase Obligations(c)(d)(e)(f)(g)........ 8,532 810 894 910 5,918 ------- ------ ------ ------ ------- Total Contractual Cash Obligations....................... $46,536 $4,335 $7,668 $8,516 $26,017 ======= ====== ====== ====== =======
- --------------- (a) Long-term debt excludes debt that is exchangeable or collateralized by securities (monetized debt) since AT&T has the option to settle this debt in shares or cash. Amounts due less than one year were $679 million; two to three years $4,918 million; and four to five years $3,312 million at December 31, 2001. In addition, debt excludes discounts and excess of fair value over the recorded value of debt in connection with the TCI and MediaOne mergers. (b) Under certain real estate operating leases, we could be required to make payments to the lessor up to $586 million at the end of the lease term (lease terms range from 2002 through 2011). The actual amount paid, if any, would be reduced by amounts received by the lessor upon remarketing of the property. (c) AT&T has contractual obligations to utilize network facilities from local exchange carriers with terms greater than one year. These contracts are based on volumes and have penalty fees if certain volume levels are not met. We assessed our minimum exposure based on penalties to exit the contracts. At December 31, 2001, penalties to exit these contracts in any given year totaled approximately $1.5 billion. (d) AT&T has contractual obligations that extend through 2006 for services that include computer application design, development and testing as well as the operation of a data center that hosts many of the computer applications operated throughout AT&T. These contracts are based on the level of services we require and include termination fees if the level of services required is reduced in excess of limits outlined in the agreements. These contracts also include termination fee clauses if we exit the contracts. Since these contracts are based on the level of services we require, we assess our minimum exposure based on the termination fees to exit the contracts which decline each year throughout the term of the contracts. If we elect to exit these contracts, the maximum termination fees we would be obligated to pay in the year of termination would be approximately $475 million in 2002, $360 million in 2003, $310 million in 2004, $240 million in 2005 or $165 million in 2006. (e) In connection with the decision to unwind Concert, AT&T has agreed to acquire the 9% interest of AT&T Canada owned by British Telecommunications plc (BT) and assume BT's portion of the obligation to purchase the AT&T Canada shares not already owned by AT&T and BT. We do not know the timing or amounts we will have to pay in connection with this obligation but, in 2001, AT&T recorded a liability of $3.0 billion reflecting the estimated loss on AT&T's commitment to purchase the publicly owned shares of AT&T Canada. (f) AT&T Broadband is party to an agreement under which it purchases certain billing services from CSG Systems, Inc. ("CSG"). Unless terminated by either party pursuant to terms of the agreement, the agreement expires on December 31, 2012. The agreement calls for monthly payments which are subject to adjustments and conditions pursuant to the terms of the underlying agreements. (g) In 1997, AT&T Broadband's predecessor, TCI, entered into a 25-year affiliation term sheet with Starz Encore Group pursuant to which AT&T may be obligated to pay fixed monthly amounts in exchange for unlimited access to all of the existing Encore and STARZ! programming. The future commitment, which 85 is calculated based on a fixed number of subscribers, increases annually from $306 in 2002 to $315 in 2003 and will increase annually through 2022 with inflation, subject to certain adjustments, including increases in the number of subscribers. The amounts in the above table do not take into account any increase in subscribers or expected inflation. The affiliation term sheet further provides that to the extent Starz Encore Group's programming costs increase above certain levels, AT&T's payments under the term sheet will be increased in proportion to the excess. Excess programming costs that may be payable by AT&T in future years are not presently estimable and could be significant.
COMMITMENTS BY PERIOD ----------------------------------------------------------- TOTAL AMOUNTS LESS THAN 2-3 4-5 AFTER 5 OTHER COMMERCIAL COMMITMENTS COMMITTED 1 YEAR YEARS YEARS YEARS - ---------------------------- ------------- --------- --------- --------- ------- (DOLLARS IN MILLIONS) Guarantees........................ $1,522 $55 $-- $-- $1,467
RISK MANAGEMENT We are exposed to market risk from changes in interest and foreign exchange rates, as well as changes in equity prices associated with previously affiliated companies. In addition, we are exposed to market risk from fluctuations in the prices of securities, some of which we have monetized through the issuance of debt. On a limited basis, we use certain derivative financial instruments, including interest rate swaps, options, forwards, equity hedges and other derivative contracts, to manage these risks. We do not use financial instruments for trading or speculative purposes. All financial instruments are used in accordance with board-approved policies. We enter into foreign currency contracts to minimize our exposure to risk of adverse changes in currency exchange rates. We are subject to foreign exchange risk for foreign-currency-denominated transactions, such as debt issued, recognized payables and receivables and forecasted transactions. As of December 31, 2001, our foreign currency market exposures were principally Canadian dollars, Euros, Japanese yen, Swiss francs and Brazilian reais. The fair value of foreign exchange contracts is subject to the changes in foreign currency exchange rates. For the purposes of assessing specific risks, we use a sensitivity analysis to determine the effects that market risk exposures may have on the fair value of our financial instruments and results of operations. To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of a hypothetical 10% change in the value of foreign currencies, assuming no change in interest rates. For contracts outstanding at December 31, 2001 and 2000, a 10% appreciation of the US dollar against foreign currencies from the prevailing rates would have resulted in an incremental pretax net unrealized loss of approximately $492 million and $6 million, respectively. The increase of the change from last year is primarily due to approximately $5.3 billion of foreign exchange contracts entered into relating to the commencement of a Euro Commercial Paper Program and our obligation to purchase the outstanding AT&T Canada shares we do not own. Because our foreign exchange contracts are entered into for hedging purposes, we believe that these losses would be largely offset by gains on the underlying transactions. The model to determine sensitivity assumes a parallel shift in all foreign currency exchange rates, although exchange rates rarely move in the same direction. Additionally, the amounts above do not necessarily represent the actual changes in fair value we would incur under normal market conditions, because all variables other than the exchange rates are held constant in the calculations. We use interest rate swaps to manage the impact of interest rate changes on earnings and cash flows. We monitor our interest rate risk on the basis of changes in fair value. The fair value of our fixed-rate long-term debt is sensitive to changes in interest rates. Interest rate changes would result in gains or losses in the market value of the debt due to differences between the market interest rates and rates at the inception of the obligation. We perform a sensitivity analysis on our fixed-rate long-term debt to assess the risk of changes in fair value. The model to determine sensitivity assumes a hypothetical 10% parallel shift in all interest rates. At December 31, 2001 and 2000, assuming a 10% increase in interest rates, the fair value of interest rate swaps and the underlying hedged debt would have decreased by $22 million and $11 million, respectively. 86 In both 2001 and 2000, we entered into combined interest rate forward contracts to hedge foreign-currency-denominated debt. Assuming a 10% downward shift in interest rates, the fair value of the contracts and the underlying hedged debt would have changed by $112 million and $88 million respectively. Assuming a 10% downward shift in interest rates at December 31, 2001 and 2000, the fair value of unhedged debt would have increased by $1.4 billion and $1.2 billion, respectively. We have certain notes which are indexed to the market price of equity securities we own. Certain of these notes contain embedded derivatives, while other debt is issued in conjunction with net purchased options. Changes in the market prices of these securities result in changes in the fair value of the derivatives. Assuming a 10% downward change in the market price of these securities, the fair value of the combined collars and underlying debt would decrease by $661 million and $534 million at December 31, 2001, and 2000 respectively. Because these collars hedge the underlying equity securities monetized, we believe that the increase in the fair value of the collars would be largely offset by decreases in the fair value of the underlying equity securities. The changes in fair values referenced above do not represent the actual changes in fair value we would incur under normal market conditions because all variables other than the equity prices were held constant in the calculations. We use equity hedges to manage our exposure to changes in equity prices associated with stock appreciation rights (SARs) of previously affiliated companies. Assuming a 10% decrease in equity prices of these companies, the fair value of the equity hedges (net liability) would have increased by $27 million and $29 million at December 31, 2001 and 2000, respectively. Because these contracts are entered into for hedging purposes, we believe that the decrease in fair value would be largely offset by decreases in the underlying SAR liabilities. In order to determine the changes in fair value of our various financial instruments, including options, equity collars and SARS, we use certain financial modeling techniques, including Black-Scholes. We apply rate sensitivity changes directly to our interest rate swap transactions and forward rate sensitivity to our foreign currency forward contracts. The changes in fair value, as discussed above, assume the occurrence of certain market conditions, which could have an adverse financial impact on the Company. They do not consider the potential effect of changes in market factors that would result in favorable impacts to us, and do not represent projected losses in fair value that we expect to incur. Future impacts would be based on actual developments in global financial markets. We do not foresee any significant changes in the strategies used to manage interest rate risk, foreign currency rate risk or equity price risk in the near future. FINANCIAL CONDITION
AT DECEMBER 31, ------------------- 2001 2000 -------- -------- DOLLARS IN MILLIONS Total assets................................................ $165,282 $234,360 Total liabilities........................................... 105,322 121,611 Total shareowners' equity................................... 51,680 103,198
Total assets decreased $69.1 billion, or 29.5%, to $165.3 billion at December 31, 2001, from $234.4 billion at December 31, 2000. This decrease was primarily due to the split-off of LMG in August 2001 and AT&T Wireless in July 2001. In addition, the decrease was due to lower investments and related advances resulting from the write-down of Concert and Net2Phone, and unfavorable mark-to-market adjustments on certain investments as well as the sale of other investments; lower franchise costs as a result of the net disposition of cable systems and amortization; and lower goodwill, primarily driven by the impairments associated with Excite@Home, as well as amortization. Partially offsetting these decreases was a higher cash balance, primarily reflecting proceeds from our $10.0 billion bond offering in November 2001. Total liabilities decreased $16.3 billion, or 13.4%, to $105.3 billion at December 31, 2001, from $121.6 billion at December 31, 2000. This decrease was primarily a result of lower debt, due to repayments, 87 partially offset by our bond offering. In addition, deferred income taxes were lower, primarily resulting from deferred tax assets recorded as a result of the write-down of Concert, our obligation to purchase all of the outstanding shares of AT&T Canada and cable systems sales, partially offset by a higher deferred tax liability associated with greater tax depreciation. Also contributing to the total liability decrease was the settlement with AT&T common stock of the Excite@Home put obligation with Cox and Comcast. Partially offsetting these decreases was an increase in other long-term liabilities and deferred credits recorded in the third quarter of 2001 for our obligation to purchase all of the outstanding shares of AT&T Canada. Minority interest decreased $1.3 billion, or 26.5%, to $3.6 billion at December 31, 2001, from $4.8 billion at December 31, 2000. This decrease was primarily due to Excite@Home. Due to the significant losses of Excite@Home, we fully utilized the minority interest balance during the third quarter of 2001, and therefore no longer have a minority interest balance related to Excite@Home. Total shareowners' equity decreased $51.5 billion, or 49.9%, to $51.7 billion at December 31, 2001, from $103.2 billion at December 31, 2000. This decrease was primarily due to the split-off of LMG, the net impacts of the split-off of AT&T Wireless and net losses from continuing operations. The decrease was partially offset by the issuance of stock to settle the Excite@Home put obligation with Cox and Comcast. In September and December 2001, when AT&T declared its quarterly dividends to the AT&T Common Stock Group shareowners, the company was in an accumulated deficit position primarily as a result of the split-off of AT&T Wireless. As a result, the company reduced additional paid-in capital by $0.3 billion, the entire amount of the dividends declared. The ratio of total debt to total capital for AT&T's continuing operations, excluding LMG (debt of continuing operations divided by total debt of continuing operations and equity excluding discontinued operations and LMG) was 47.7% at December 31, 2001, compared with 57.2% at December 31, 2000. For purposes of this calculation, equity includes the convertible trust preferred securities, as well as subsidiary redeemable preferred stock and excludes the equity of discontinued operations and LMG at December 31, 2000. In addition, included in debt of continuing operations was approximately $8.6 billion and $8.7 billion of notes at December 31, 2001 and 2000, respectively, which are exchangeable into or collateralized by securities we own. Excluding this debt, the debt ratio for AT&T's continuing operations at December 31, 2001, was 43.4%, compared with 53.6% at December 31, 2000. The lower debt, as well as increased equity drove the decreases in the debt ratios. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" which supercedes Accounting Principles Board (APB) Opinion No. 16. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method. In addition, SFAS No. 141 establishes criteria for the recognition of intangible assets separately from goodwill. The adoption of SFAS No. 141 will not have a material effect on AT&T's results of operations, financial position or cash flows. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" which supercedes APB Opinion No. 17. Under SFAS No. 142, goodwill and indefinite-lived intangible assets will no longer be amortized, but rather will be tested for impairment upon adoption and at least annually thereafter. In addition, the amortization period of intangible assets with finite lives will no longer be limited to 40 years. SFAS No. 142 is effective for AT&T as of January 1, 2002. In connection with the adoption of this standard, AT&T's unamortized goodwill balance and excess basis related to equity method investments will no longer be amortized, but will continue to be tested for impairment. The goodwill balance as of December 31, 2001, was $24.7 billion, and the related amortization in 2001 was $0.9 billion. The excess basis balance at December 31, 2001, was $8.8 billion, with related amortization in 2001 of $207 million. In addition, we have determined that our franchise costs are indefinite-lived assets, as defined in SFAS No. 142, and therefore will not be subject to amortization beginning in 2002. The balance of our franchise costs as of December 31, 2001, was $42.8 billion and the related amortization for 2001 was $1.2 billion. The adoption of SFAS No. 142 will have a significant impact on our future operating results due to the cessation of goodwill and franchise cost amortization. For 88 2001, the amortization of goodwill, excess basis and franchise costs had an approximate impact of $0.45 per share. In accordance with SFAS No. 142, goodwill was tested for impairment by comparing the fair value of our reporting units to their carrying values. As of January 1, 2002, the fair value of the reporting units' goodwill exceeded their carrying value, and therefore no impairment loss will be recognized upon adoption. In accordance with SFAS No. 142, the franchise costs were tested for impairment as of January 1, 2002, by comparing the fair value to the carrying value (at market level). An impairment loss of $0.9 billion, net of taxes of $0.5 billion will be recognized as a change in accounting principle in the first quarter of 2002. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard requires that obligations associated with the retirement of tangible long-lived assets be recorded as liabilities when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an asset retirement obligation, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, this liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. For AT&T, this means that the standard will be adopted on January 1, 2003. AT&T does not expect that the adoption of this statement will have a material impact on AT&T's results of operations, financial position or cash flows. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived assets, including discontinued operations, and consequently amends APB opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 also amends Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for AT&T as of January 1, 2002. The adoption of SFAS No. 144 will not have a material impact on AT&T's results of operations, financial position or cash flows. SUBSEQUENT EVENTS In March 2002, AT&T Canada announced the formation of a committee of the board of directors to help AT&T Canada with issues they are facing in the foreseeable future. Such issues include a significant regulatory decision expected in the next month which could have a significant impact on the future of sustainable competition in Canada; the effect of AT&T satisfying its obligation to purchase the share of AT&T Canada it does not own; and the impact of these events on operating and financial results of AT&T Canada. In addition, the committee appointed financial advisors to evaluate various scenarios regarding issues, opportunities and alternatives for AT&T Canada. It is expected that the outcome of these evaluations will have a negative effect on the underlying value of AT&T Canada shares, which will result in AT&T recording up to $250 million of additional losses on its commitment to purchase the publicly owned shares of A&T Canada, excluding any impact of the floor price accretion. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is contained in the section entitled "Risk Management" in Item 7. 89 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and all other financial information included in this report. Management is also responsible for maintaining a system of internal controls as a fundamental requirement for the operational and financial integrity of results. The financial statements, which reflect the consolidated accounts of AT&T Corp. and subsidiaries (AT&T) and other financial information shown, were prepared in conformity with generally accepted accounting principles. Estimates included in the financial statements were based on judgments of qualified personnel. To maintain its system of internal controls, management carefully selects key personnel and establishes the organizational structure to provide an appropriate division of responsibility. We believe it is essential to conduct business affairs in accordance with the highest ethical standards as set forth in the AT&T Code of Conduct. These guidelines and other informational programs are designed and used to ensure that policies, standards and managerial authorities are understood throughout the organization. Our internal auditors monitor compliance with the system of internal controls by means of an annual plan of internal audits. On an ongoing basis, the system of internal controls is reviewed, evaluated and revised as necessary in light of the results of constant management oversight, internal and independent audits, changes in AT&T's business and other conditions. Management believes that the system of internal controls, taken as a whole, provides reasonable assurance that (1) financial records are adequate and can be relied upon to permit the preparation of financial statements in conformity with generally accepted accounting principles, and (2) access to assets occurs only in accordance with management's authorizations. The Audit Committee of the Board of Directors, which is composed of directors who are not employees, meets periodically with management, the internal auditors and the independent accountants to review the manner in which these groups of individuals are performing their responsibilities and to carry out the Audit Committee's oversight role with respect to auditing, internal controls and financial reporting matters. Periodically, both the internal auditors and the independent accountants meet privately with the Audit Committee and have access to its individual members at any time. The consolidated financial statements in this annual report have been audited by PricewaterhouseCoopers LLP, Independent Accountants. Their audits were conducted in accordance with generally accepted auditing standards and include an assessment of the internal control structure and selective tests of transactions. Their report follows. C. Michael Armstrong Charles H. Noski Chairman of the Board, Vice Chairman, Chief Executive Officer Chief Financial Officer
90 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of AT&T Corp.: In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareowners' equity and of cash flows present fairly, in all material respects, the financial position of AT&T Corp. and its subsidiaries (AT&T) at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of AT&T's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements as of and for the years ended December 31, 2000 and 1999 of Liberty Media Group, an equity method investee, which was acquired by AT&T on March 9, 1999. AT&T's financial statements include an investment of $34,290 million as of December 31, 2000, and equity method earnings (losses) of $1,488 million and $(2,022) million, for the years ended December 31, 2000 and 1999, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Liberty Media Group, as of and for the years ended December 31, 2000 and 1999, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. As discussed in the notes to the financial statements, AT&T was required to adopt Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001. PRICEWATERHOUSECOOPERS LLP New York, New York March 25, 2002 91 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2001 2000 1999 ------- ------- ------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) Revenue..................................................... $52,550 $55,533 $54,973 ------- ------- ------- Operating Expenses Costs of services and products (excluding depreciation of $4,818, $4,410 and $4,215 included below)................. 13,960 12,795 11,013 Access and other connection................................. 12,136 13,140 14,439 Selling, general and administrative......................... 10,832 9,752 10,894 Depreciation and other amortization......................... 6,865 5,924 5,137 Amortization of goodwill, franchise costs and other purchased intangibles..................................... 2,473 2,665 1,057 Net restructuring and other charges......................... 2,530 7,029 975 ------- ------- ------- Total operating expenses.................................... 48,796 51,305 43,515 ------- ------- ------- Operating income............................................ 3,754 4,228 11,458 Other (expense) income...................................... (1,547) 1,150 826 Interest expense............................................ 3,242 2,964 1,503 ------- ------- ------- (Loss) income from continuing operations before income taxes, minority interest, and (losses) earnings related to equity investments........................................ (1,035) 2,414 10,781 (Benefit) provision for income taxes........................ (791) 3,284 4,016 Minority interest income (expense).......................... 963 4,103 (126) Equity (losses) earnings from Liberty Media Group........... (2,711) 1,488 (2,022) Net losses related to other equity investments.............. 4,850 588 756 ------- ------- ------- (Loss) income from continuing operations.................... (6,842) 4,133 3,861 Income (loss) from discontinued operations (net of income taxes of $158, $307, and $(238)).......................... 150 536 (433) Gain on disposition of discontinued operations.............. 13,503 -- -- ------- ------- ------- Income before cumulative effect of accounting change........ 6,811 4,669 3,428 Cumulative effect of accounting change -- (net of income taxes of $578)............................................ 904 -- -- ------- ------- ------- Net income.................................................. 7,715 4,669 3,428 Dividend requirements of preferred stock.................... 652 -- -- Premium on exchange of AT&T Wireless tracking stock......... 80 -- -- ------- ------- ------- Net income available to common shareowners.................. $ 6,983 $ 4,669 $ 3,428 ======= ======= ======= AT&T Common Stock Group -- per basic share: (Loss) earnings from continuing operations.................. $ (1.33) $ 0.76 $ 1.91 Earnings (loss) from discontinued operations................ 0.03 0.13 (0.14) Gain on disposition of discontinued operations.............. 3.70 -- -- Cumulative effect of accounting change...................... 0.10 -- -- ------- ------- ------- AT&T Common Stock Group earnings............................ $ 2.50 $ 0.89 $ 1.77 ======= ======= ======= AT&T Common Stock Group -- per diluted share: (Loss) earnings from continuing operations.................. $ (1.33) $ 0.75 $ 1.87 Earnings (loss) from discontinued operations................ 0.03 0.13 (0.13) Gain on disposition of discontinued operations.............. 3.70 -- -- Cumulative effect of accounting change...................... 0.10 -- -- ------- ------- ------- AT&T Common Stock Group earnings............................ $ 2.50 $ 0.88 $ 1.74 ======= ======= ======= AT&T Wireless Group -- per basic and diluted share: Earnings from discontinued operations....................... $ 0.08 $ 0.21 $ -- Liberty Media Group -- per basic and diluted share: (Loss) earnings -- before cumulative effect of accounting change.................................................... $ (1.05) $ 0.58 $ (0.80) Cumulative effect of accounting change...................... 0.21 -- -- ------- ------- ------- Liberty Media Group (loss) earnings......................... $ (0.84) $ 0.58 $ (0.80) ======= ======= =======
The notes are an integral part of the consolidated financial statements. 92 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, --------------------- 2001 2000 --------- --------- (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents................................... $ 10,592 $ 64 Accounts receivable, less allowances of $827 and $1,185..... 7,736 9,408 Other receivables........................................... 1,645 1,645 Investments................................................. 668 2,102 Deferred income taxes....................................... 1,230 720 Other current assets........................................ 657 781 -------- -------- Total Current Assets 22,528 14,720 -------- -------- Property, plant and equipment, net.......................... 41,322 41,269 Franchise costs, net of accumulated amortization of $2,501 and $1,664................................................ 42,819 48,218 Goodwill, net of accumulated amortization of $1,307 and $609...................................................... 24,675 26,782 Investment in Liberty Media Group and related receivables, net....................................................... -- 34,290 Other investments and related advances...................... 23,818 30,875 Prepaid pension costs....................................... 3,337 3,003 Other assets................................................ 6,783 7,979 Net assets of discontinued operations....................... -- 27,224 -------- -------- Total Assets................................................ $165,282 $234,360 ======== ======== LIABILITIES Accounts payable............................................ $ 4,744 $ 5,382 Payroll and benefit-related liabilities..................... 2,084 1,991 Debt maturing within one year............................... 12,958 31,838 Liability under put options................................. -- 2,564 Other current liabilities................................... 5,641 6,200 -------- -------- Total Current Liabilities................................... 25,427 47,975 -------- -------- Long-term debt.............................................. 40,527 33,089 Long-term benefit-related liabilities....................... 3,594 3,670 Deferred income taxes....................................... 28,160 32,054 Other long-term liabilities and deferred credits............ 7,614 4,823 -------- -------- Total Liabilities........................................... 105,322 121,611 -------- -------- Minority Interest........................................... 3,560 4,841 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T................................... 4,720 4,710 SHAREOWNERS' EQUITY Common Stock: AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 3,542,405,744 shares (net of 851,746,431 treasury shares) at December 31, 2001 and 3,760,151,185 shares (net of 416,887,452 treasury shares) at December 31, 2000...................................... 3,542 3,760 AT&T Wireless Group Common Stock, $1 par value, authorized 6,000,000,000 shares, issued and outstanding 361,802,200 shares at December 31, 2000............................... -- 362 Liberty Media Group Class A Common Stock, $1 par value, authorized 4,000,000,000 shares, issued and outstanding 2,363,738,198 shares (net of 59,512,496 treasury shares) at December 31, 2000...................................... -- 2,364 Liberty Media Group Class B Common Stock, $1 par value, authorized 400,000,000 shares, issued and outstanding 206,221,288 shares (net of 10,607,776 treasury shares) at December 31, 2000......................................... -- 206 Additional paid-in capital.................................. 51,964 90,496 (Accumulated deficit) retained earnings..................... (3,484) 7,408 Accumulated other comprehensive loss........................ (342) (1,398) -------- -------- Total Shareowners' Equity................................... 51,680 103,198 -------- -------- Total Liabilities and Shareowners' Equity................... $165,282 $234,360 ======== ========
The notes are an integral part of the consolidated financial statements. 93 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- --------- -------- (DOLLARS IN MILLIONS) AT&T Common Stock Balance at beginning of year.............................. $ 3,760 $ 3,196 $ 2,630 Shares issued (acquired), net: Under employee plans................................... 15 3 -- For acquisitions....................................... 44 607 566 Settlement of put option............................... 155 -- -- For Wireless tracking stock exchange................... (372) -- -- Other*................................................. (60) (46) -- -------- -------- ------- Balance at end of year...................................... 3,542 3,760 3,196 -------- -------- ------- AT&T Wireless Group Common Stock Balance at beginning of year.............................. 362 -- -- Shares issued: For stock offering..................................... -- 360 -- Under employee plans................................... 2 2 -- For Wireless stock exchange............................ 438 -- -- Conversion of preferred stock.......................... 406 -- -- AT&T Wireless Group split-off............................... (1,208) -- -- -------- -------- ------- Balance at end of year...................................... -- 362 -- -------- -------- ------- Liberty Media Group Class A Common Stock Balance at beginning of year.............................. 2,364 2,314 -- Shares issued (acquired), net: For acquisitions....................................... -- 62 2,280 Other.................................................. 14 (12) 34 Liberty Media Group split-off............................. (2,378) -- -- -------- -------- ------- Balance at end of year...................................... -- 2,364 2,314 -------- -------- ------- Liberty Media Group Class B Common Stock Balance at beginning of year.............................. 206 217 -- Shares issued (acquired), net............................. 6 (11) 220 Liberty Media Group split-off............................. (212) -- -- Other..................................................... -- -- (3) -------- -------- ------- Balance at end of year...................................... -- 206 217 -------- -------- ------- Additional Paid-In Capital Balance at beginning of year.............................. 90,496 59,526 15,195 Shares issued (acquired), net: Under employee plans................................... 279 98 431 For acquisitions....................................... 827 23,097 42,425 Settlement of put option............................... 3,237 -- -- Other*................................................. (1,007) (2,767) 323 Proceeds in excess of par value from issuance of AT&T Wireless common stock.................................. -- 9,915 -- Common stock warrants issued.............................. -- -- 306 Gain on issuance of common stock by affiliates............ 20 530 667 Conversion of preferred stock............................. 9,631 -- -- AT&T Wireless Group split-off............................. (20,955) -- --
94 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- --------- -------- (DOLLARS IN MILLIONS) Liberty Media Group split-off............................. (30,768) -- -- Wireless tracking stock exchange.......................... 14 -- -- Beneficial conversion value of preferred stock............ 295 -- -- Dividends declared -- AT&T Common Stock Group............. (265) -- -- Other..................................................... 160 97 179 -------- -------- ------- Balance at end of year...................................... 51,964 90,496 59,526 -------- -------- ------- Guaranteed ESOP Obligation Balance at beginning of year.............................. -- (17) (44) Amortization.............................................. -- 17 27 -------- -------- ------- Balance at end of year...................................... -- -- (17) -------- -------- ------- (Accumulated Deficit)/Retained Earnings Balance at beginning of year.............................. 7,408 6,712 7,800 Net income................................................ 7,715 4,669 3,428 Dividends declared -- AT&T Common Stock Group............. (275) (2,485) (2,807) Dividends accrued -- preferred stock...................... (652) -- -- Premium on exchange of AT&T Wireless tracking stock....... (80) -- -- Treasury shares issued at less than cost.................. (7) (1,488) (1,709) AT&T Wireless Group split-off............................. (17,593) -- -- -------- -------- ------- Balance at end of year...................................... (3,484) 7,408 6,712 -------- -------- ------- Accumulated Comprehensive Income Balance at beginning of year.............................. (1,398) 6,979 (59) Other comprehensive income................................ 1,742 (8,377) 7,038 AT&T Wireless Group split-off............................. 72 -- -- Liberty Media Group split-off............................. (758) -- -- -------- -------- ------- Balance at end of year...................................... (342) (1,398) 6,979 -------- -------- ------- Total Shareowners' Equity................................... $ 51,680 $103,198 $78,927 ======== ======== ======= Summary of Total Comprehensive Income (Loss): Income before cumulative effect of accounting change........ $ 6,811 $ 4,669 $ 3,428 Cumulative effect of accounting change...................... 904 -- -- Net income.................................................. 7,715 4,669 3,428 Other comprehensive income (loss)[net of income taxes of $1,119, $(5,348) and $4,600].............................. 1,742 (8,377) 7,038 -------- -------- ------- Comprehensive Income (Loss)................................. $ 9,457 $ (3,708) $10,466 ======== ======== =======
- --------------- AT&T accounts for treasury stock as retired stock. We have 100 million authorized shares of preferred stock at $1 par value. * Other activity in 2001 and 2000 represents AT&T common stock received in exchange for entities owning certain cable systems. The notes are an integral part of the consolidated financial statements. 95 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- -------- -------- (DOLLARS IN MILLIONS) OPERATING ACTIVITIES Net income.................................................. $ 7,715 $ 4,669 $ 3,428 Deduct: Income (loss) from discontinued operations................ 150 536 (433) Gain on disposition of discontinued operations............ 13,503 -- -- -------- -------- -------- (Loss) income from continuing operations.................... (5,938) 4,133 3,861 Adjustments to reconcile (loss) income from continuing operations to net cash provided by operating activities of continuing operations: Cumulative effect of accounting change -- net of income taxes................................................... (904) -- -- Net gains on sales of businesses and investments.......... (528) (1,321) (585) Cost investment impairment charges........................ 1,083 248 40 Put option settlement loss and mark-to-market charges..... 838 537 -- Net restructuring and other charges....................... 2,343 6,793 678 Depreciation and amortization............................. 9,338 8,589 6,194 Provision for uncollectible receivables................... 1,130 1,080 1,216 Deferred income taxes..................................... (4,818) 341 354 Net revaluation of certain financial instruments.......... 809 -- -- Minority interest (income) expense........................ (1,263) (4,329) 24 Net equity losses (earnings) from Liberty Media Group..... 2,711 (1,488) 2,022 Net losses related to other equity investments............ 7,889 1,017 1,223 Decrease (increase) in receivables........................ 716 (2,512) (2,409) Decrease in accounts payable.............................. (819) (577) (165) Net change in other operating assets and liabilities...... (2,153) (376) (1,785) Other adjustments, net.................................... 124 (470) (159) -------- -------- -------- Net Cash Provided by Operating Activities of Continuing Operations................................................ 10,558 11,665 10,509 -------- -------- -------- INVESTING ACTIVITIES Capital expenditures and other additions.................... (9,300) (11,511) (11,876) Proceeds from sale or disposal of property, plant and equipment................................................. 83 600 286 (Increase) decrease in other receivables.................... (114) (1,052) 17 Sales of marketable securities.............................. 102 96 -- Purchases of marketable securities.......................... (18) -- -- Investment distributions and sales.......................... 3,014 992 1,574 Investment contributions and purchases...................... (378) (2,394) (7,837) Net dispositions (acquisitions) of businesses, net of cash disposed/acquired......................................... 4,913 (16,657) (5,969) Other investing activities, net............................. (162) (119) (79) -------- -------- -------- Net Cash Used in Investing Activities of Continuing Operations................................................ (1,860) (30,045) (23,884) -------- -------- -------- FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..................................................... 12,415 4,601 8,396 Retirement of long-term debt................................ (1,661) (2,118) (2,255) (Decrease) increase in short-term borrowings, net........... (17,168) 16,973 10,173 Repayment of borrowings from AT&T Wireless.................. (5,803) -- -- Issuance of convertible preferred securities and warrants... 9,811 -- 4,638 Redemption of redeemable securities......................... -- (152) -- Issuance of AT&T common shares.............................. 224 99 -- Issuance of AT&T Wireless Group common shares............... 54 10,314 -- Net issuance (acquisition) of treasury shares............... 24 (581) (4,624) Dividends paid on common stock.............................. (549) (3,047) (2,712) Dividends paid on preferred securities...................... (336) (294) (135) Other financing activities, net............................. (41) (63) 373 -------- -------- -------- Net Cash (Used in) Provided by Financing Activities of Continuing Operations..................................... (3,030) 25,732 13,854 -------- -------- -------- Net cash provided by (used in) discontinued operations...... 4,860 (8,306) (2,594) Net increase (decrease) in cash and cash equivalents........ 10,528 (954) (2,115) Cash and cash equivalents at beginning of year.............. 64 1,018 3,133 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 10,592 $ 64 $ 1,018 ======== ======== ========
The notes are an integral part of the consolidated financial statements. 96 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED (EXCEPT PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include all controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in majority-owned subsidiaries where control does not exist and investments in which we exercise significant influence but do not control (generally a 20% to 50% ownership interest) are accounted for under the equity method of accounting. Investments in which there is no significant influence (generally less than a 20% ownership interest) are accounted for under the cost method of accounting. FOREIGN CURRENCY TRANSLATION For operations outside the United States that prepare financial statements in currencies other than the U.S. dollar, we translate income statement amounts at average exchange rates for the year, and we translate assets and liabilities at year-end exchange rates. We present these translation adjustments as a component of accumulated other comprehensive income within shareowners' equity. Gains and losses from foreign currency transactions are included in results of operations. REVENUE RECOGNITION We recognize long distance, local voice and data services revenue based upon minutes of traffic processed or contracted fee schedules. Cable video and nonvideo installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution systems. Customer activation fees, along with the related costs up to but not exceeding the revenue, are deferred and amortized over the customer relationship period. We recognize other products and services revenue when the products are delivered and accepted by customers and when services are provided in accordance with contract terms. For contracts where we provide customers with an indefeasible right to use network capacity, we recognize revenue ratably over the stated life of the agreement. ADVERTISING AND PROMOTIONAL COSTS We expense costs of advertising and promotions, including cash incentives used to acquire customers, as incurred. Advertising and promotional expenses were $1,549, $1,377 and $1,418 in 2001, 2000 and 1999, respectively. Of these amounts, $236, $288 and $320 were cash incentives to acquire customers in 2001, 2000 and 1999, respectively. INCOME TAXES Under the balance sheet method we recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the future, we provide a corresponding valuation allowance against the deferred tax asset. We amortize investment tax credits as a reduction to the provision for income taxes over the useful lives of the assets that produced the credits. CASH EQUIVALENTS We consider all highly liquid investments with original maturities of generally three months or less to be cash equivalents. 97 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT We state property, plant and equipment at cost. Construction costs, labor and applicable overhead related to installations and interest during construction are capitalized. Costs of additions and substantial improvements to property, plant and equipment are capitalized. The costs of maintenance and repairs of property, plant and equipment are charged to operating expense. Depreciation is determined based upon the assets' estimated useful lives using either the group or unit method. The useful lives of communications and network equipment range from three to 15 years. The useful lives of other equipment ranges from three to seven years. The useful lives of buildings and improvements range from 10 to 40 years. The group method is used for most depreciable assets, including the majority of communications and network equipment. The unit method is primarily used for large computer systems, buildings and support assets. Under the group method, a specific asset group has an average life. The depreciation rate is developed based on the average useful life for the specific asset group. This method requires the periodic revision of depreciation rates. Under the unit method, assets are depreciated based on the useful life of the individual asset. When we sell or retire assets depreciated using the group method, the cost is deducted from property, plant and equipment and charged to accumulated depreciation, without recognition of a gain or loss. When we sell assets that were depreciated using the unit method, we include the related gains or losses in "Other income (expense)" in the Consolidated Statements of Income. We use accelerated depreciation methods primarily for certain high-technology computer-processing equipment and digital equipment used in the telecommunications network, except for switching equipment placed in service before 1989, where a straight-line method is used. All other plant and equipment is depreciated on a straight-line basis. FRANCHISE COSTS Franchise costs include the value assigned to agreements with local authorities that allow access to homes in cable service areas acquired in connection with business combinations. Such amounts are amortized on a straight-line basis over 25 or 40 years. Beginning in 2002, in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", such franchise costs will no longer be amortized, but will continue to be tested for impairment (see Note 23). GOODWILL Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method. We amortize goodwill on a straight-line basis over the periods benefited, ranging from five to 40 years. Beginning in 2002, in accordance with the provisions of SFAS No. 142 such goodwill will no longer be amortized, but will continue to be tested for impairment (see Note 23). SOFTWARE CAPITALIZATION Certain direct development costs associated with internal-use software are capitalized, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are included within other assets and are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred. AT&T also capitalizes initial operating-system software costs and amortizes them over the life of the associated hardware. AT&T also capitalizes costs associated with the development of application software incurred from the time technological feasibility is established until the software is ready to provide service to customers. These 98 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) capitalized costs are included in property, plant and equipment and are amortized over a useful life not to exceed five years. VALUATION OF LONG-LIVED ASSETS Long-lived assets, such as property, plant and equipment, franchise costs, goodwill, investments and software, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES We use derivative financial instruments to mitigate market risk from changes in interest rates, foreign currency exchange rates and equity prices. Derivative financial instruments may be exchange-traded or contracted in the over-the-counter market and include swaps, options, warrants and forward contracts. We do not use derivative financial instruments for speculative purposes. All derivatives are recognized on the balance sheet at fair value. To qualify for hedge accounting treatment, derivatives, at inception, must be designated as hedges and evaluated for effectiveness throughout the hedge period. We designate certain derivative contracts, at the date entered into, as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge) or (3) a foreign currency fair value or cash flow hedge (foreign currency hedge). Other derivatives (undesignated) are not formally designated for accounting purposes. These derivatives, except for warrants, although undesignated for accounting purposes are entered into to hedge economic risks. We record changes in the fair value of fair-value hedges (including fair value foreign currency hedges), along with the changes in fair value of the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), in "Other income (expense)" in the Consolidated Statement of Income. We record changes in the fair value of cash-flow hedges (including foreign currency cash flow hedges) that are highly effective in "Other comprehensive income", net of income taxes, as a component of shareowners' equity, until earnings are affected by the variability of cash flows of the hedged transaction. Changes in the fair value of undesignated derivatives are recorded in "Other income (expense)" in the Consolidated Statement of Income, along with the change in fair value of any related asset or liability. We currently do not have any net investment hedges in a foreign operation. We assess embedded derivatives to determine whether (1) the economic characteristics of the embedded instruments are not clearly and closely related to the economic characteristics of the remaining component of the financial instrument (the host instrument) and (2) whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that both conditions exist, we designate the derivatives as described above, and recognize at fair value. We formally document all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. 99 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We discontinue hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value of cash flows of a hedged item (2) the derivative expires or is sold, terminated, or exercised; (3) it is determined that the forecasted hedged transaction will no longer occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment or (5) management determines that the designation of the derivative as a hedge instrument is no longer appropriate. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be adjusted for changes in fair value through "Other income (expense)" in the Consolidated Statement of Income, and the hedged asset or liability will no longer be adjusted for changes in fair value. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the derivative will continue to be adjusted for changes in the fair value through "Other income (expense)" in the Consolidated Statement of Income, and any asset or liability that was recorded pursuant to the recognition of the firm commitment will be removed from the balance sheet and recorded in current period earnings. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will then be adjusted for changes in the fair value through "Other income (expense)" in the Consolidated Statement of Income, and gains and losses that were accumulated in "Other comprehensive income" as a component of shareowners' equity, will be recognized immediately in "Other income (expense)" in the Consolidated Statement of Income. In all other situations in which hedge accounting is discontinued, the derivative will continue to be carried at fair value on the balance sheet, with changes in its fair value recognized in "Other income (expense)" in the Consolidated Statement of Income. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as allowances for doubtful accounts, depreciation and amortization, employee benefit plans, taxes, restructuring reserves and contingencies. CONCENTRATIONS As of December 31, 2001, we do not have any significant concentration of business transacted with a particular customer, supplier or lender that could, if suddenly eliminated, severely impact our operations. We also do not have a concentration of available sources of labor, services, franchises or other rights that could, if suddenly eliminated, severely impact our operations. We invest our cash with several high-quality credit institutions. ISSUANCE OF COMMON STOCK BY AFFILIATES Changes in our proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such entity, are recognized as increases or decreases to additional paid-in capital in the Consolidated Statements of Shareowners' Equity. 100 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECLASSIFICATIONS AND RESTATEMENTS We reclassified certain amounts for previous years to conform to the 2001 presentation. 2. RESTRUCTURING OF AT&T On October 25, 2000, AT&T announced a restructuring plan designed to fully separate or issue separately tracked stocks intended to reflect the financial performance and economic value of each of AT&T's four major operating units. On December 19, 2001, AT&T and Comcast Corporation (Comcast) announced an agreement to combine AT&T Broadband with Comcast. Under the terms of the agreement, AT&T will spin-off AT&T Broadband and simultaneously merge it with Comcast, forming a new company to be called AT&T Comcast Corporation (AT&T Comcast). AT&T shareowners will receive a number of shares of AT&T Comcast common stock based on an exchange ratio calculated pursuant to a formula specified in the merger agreement. If determined as of the date of the merger agreement, the exchange ratio would have been approximately 0.34, assuming the AT&T shares held by Comcast are included in the number of shares of AT&T common stock outstanding. Assuming Comcast retains its AT&T shares and converts them into exchangeable preferred stock of AT&T as contemplated by the merger agreement, the exchange ratio would have been approximately 0.35. AT&T shareowners will own a 56% economic stake and an approximate 66% voting interest in the new company, calculated as of the date of the merger agreement. The merger of AT&T Broadband and Comcast is subject to regulatory review, approval by both companies' shareowners and certain other conditions and is expected to close by the end of 2002. AT&T also intends to proceed with the creation of a tracking stock for its AT&T Consumer Services business, which is expected to be distributed to AT&T shareowners following shareowner approval in 2002. On February 11, 2002, the company filed a preliminary proxy with the SEC, seeking shareowner approval of the AT&T Broadband and Comcast merger, and the creation of the AT&T Consumer Services tracking stock, among other things. These restructuring activities are complicated and involve a substantial number of steps and transactions, including obtaining various approvals, such as Internal Revenue Service (IRS) rulings. AT&T expects, however, that the transactions associated with AT&T's restructuring plan will be tax-free to U.S. shareowners. Future financial conditions, superior alternatives or other factors may arise or occur that make it inadvisable to proceed with part or all of AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring plan may not occur as we currently expect or in the time frames that we currently contemplate, or at all. Alternative forms of restructuring, including sales of interests in these businesses, would reduce what is available for distribution to shareowners in the restructuring. On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176 shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T common stock validly tendered. A total of 372.2 million shares of AT&T common stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group tracking stock. In conjunction with the exchange offer, AT&T recorded an $80 premium as a reduction to net income available to common shareowners. The premium represents the excess of the fair value of the AT&T Wireless Group tracking stock issued over the fair value of the AT&T common stock exchanged. On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a separate, independently traded company. All AT&T Wireless Group tracking stock was converted into AT&T Wireless common stock on a one-for-one basis, and 1,136 million shares of AT&T Wireless common stock, held by AT&T were distributed to AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding. AT&T common shareowners received whole shares of AT&T Wireless and cash payments for fractional shares. The IRS ruled that the transaction qualified as tax-free for AT&T and its shareowners for U.S. federal income tax purposes, with the exception of cash received for fractional shares. For accounting 101 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purposes, the deemed effective split-off date was June 30, 2001. At the time of split-off, AT&T retained approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of which was used in a debt-for-equity exchange in July 2001. The remaining portion of these holdings was monetized in October and December of 2001 through the issuance of debt that is exchangeable into Wireless shares (or their cash equivalent) at maturity. The split-off of AT&T Wireless resulted in a noncash tax-free gain of $13.5 billion, which represented the difference between the fair value of the AT&T Wireless tracking stock at the date of the split-off and AT&T's book value in AT&T Wireless. This gain was recorded in the third quarter of 2001 as a "Gain on disposition of discontinued operations." On August 10, 2001, AT&T completed the split-off of Liberty Media Corporation as an independent, publicly traded company (since AT&T did not exit the line of business that Liberty Media Group (LMG) operated in, LMG was not accounted for as a discontinued operation). AT&T redeemed each outstanding share of Class A and Class B LMG tracking stock for one share of Liberty Media Corporation's Series A and Series B common stock, respectively. The IRS ruled that the split-off of Liberty Media Corporation qualified as a tax-free transaction for AT&T, Liberty Media and their shareowners. For accounting purposes, the deemed effective split-off date was July 31, 2001. 3. SUPPLEMENTARY FINANCIAL INFORMATION SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2001 2000 1999 ------- ------ ---- INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Research and development expenses........................... $ 325 $ 402 $550 ======= ====== ==== OTHER (EXPENSE) INCOME Cost investment impairment charges.......................... $(1,083) $ (248) $(40) Settlement loss and mark-to-market charges on Excite@Home put options............................................... (838) (537) -- Net revaluation of certain financial instruments............ (809) -- -- Net gains on sales of businesses and investments............ 528 1,321 585 Investment-related income................................... 426 512 203 Miscellaneous, net.......................................... 229 102 78 ------- ------ ---- Total other (expense) income................................ $(1,547) $1,150 $826 ======= ====== ====
102 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31, ------------------- 2001 2000 -------- -------- PROPERTY, PLANT AND EQUIPMENT Communications, network and other equipment................. $ 64,372 $ 60,232 Buildings and improvements.................................. 8,512 8,643 Land and improvements....................................... 484 523 -------- -------- Total property, plant and equipment......................... 73,368 69,398 Accumulated depreciation.................................... (32,046) (28,129) -------- -------- Property, plant and equipment, net.......................... $ 41,322 $ 41,269 ======== ========
LEVERAGED LEASES We lease airplanes, energy-producing facilities and transportation equipment under leveraged leases having original terms of 10 to 30 years, expiring in various years from 2004 through 2020. The investment in leveraged leases is primarily included in other assets on the balance sheet. Following is a summary of our investment in leveraged leases:
AT DECEMBER 31, --------------- 2001 2000 ------ ------ Rentals receivable (net of nonrecourse debt*)............... $1,241 $1,278 Estimated unguaranteed residual values...................... 964 976 Unearned income............................................. (953) (997) Allowance for credit losses................................. (31) (33) ------ ------ Investment in leveraged leases (included in other assets)... 1,221 1,224 Deferred taxes.............................................. 1,105 1,124 ------ ------ Net investment.............................................. $ 116 $ 100 ====== ======
- --------------- * The rentals receivable are net of nonrecourse debt of $3.2 billion and $3.4 billion at December 31, 2001 and 2000, respectively. 103 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2001 2000 1999 ------ ------- ------ OTHER COMPREHENSIVE INCOME (LOSS) Net foreign currency translation adjustment [net of income taxes of $(160), $(181) and $87](1)..................... $ (250) $ (309) $ 148 Net revaluation of certain financial instruments: Unrealized gains (losses) [net of income taxes of $343, $(4,686) and $4,499](2).............................. 475 (7,317) 6,868 Recognition of previously unrealized losses (gains) on available-for-sale securities [net of income taxes of $950, $(480) and $7](3).............................. 1,535 (750) 10 Net minimum pension liability adjustment [net of income taxes of $(14), $(1) and $7]............................ (18) (1) 12 ------ ------- ------ Total other comprehensive income (loss)................... $1,742 $(8,377) $7,038 ====== ======= ======
- --------------- (1) Includes LMG's foreign currency translation adjustments, net of applicable income taxes, totaling $(149) in 2001 through July 31, 2001, $(202) in 2000 and $60 in 1999, from March 1, 1999, date of acquisition, to December 31, 1999. (2) Includes LMG's unrealized gains (losses) on available-for-sale securities, net of applicable income taxes, totaling $1,286 in 2001 through July 31, 2001, $(6,117) in 2000 and $6,497 in 1999, from March 1, 1999, date of acquisition, to December 31, 1999. (3) See below for a summary of the "Recognition of previously unrealized losses (gains) on available-for-sale securities" and the income statement line items impacted. 104 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS) ON AVAILABLE-FOR-SALE SECURITIES AND THE INCOME STATEMENT LINE ITEMS IMPACTED
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 2001 2000 1999 ------------------ ------------------- ------------------ PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX ------ --------- ------- --------- ------ --------- AT&T GROUP: Other (expense) income: Reclassification of securities to "trading" in conjunction with the adoption of SFAS No. 133(4)....................... $1,154 $ 713 $ -- $ -- $-- $-- Sales of various securities.... 317 196 (476) (294) (3) (2) Other-than-temporary investment impairments.................. 985 608 290 179 -- -- LIBERTY MEDIA GROUP: Earnings (losses) from Liberty Media Group: Sale of various securities..... 173 105 (1,044) (635) 20 12 Cumulative effect of accounting change(4)...................... (144) (87) -- -- -- -- ------ ------ ------- ----- --- --- Total recognition of previously unrealized losses (gains) on available-for-sale securities..... $2,485 $1,535 $(1,230) $(750) $17 $10 ====== ====== ======= ===== === ===
- --------------- (4) See Note 14 for detailed discussion. SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Interest payments, net of capitalized interest of $138, $177 and $143.......................................... $3,396 $3,059 $1,292 Income tax payments...................................... 803 2,369 3,948
4. MERGERS WITH MEDIAONE GROUP, INC., AND TELE-COMMUNICATIONS, INC. MERGER WITH MEDIAONE GROUP, INC. On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc. (MediaOne) in a cash and stock transaction valued at approximately $45 billion. For each share of MediaOne stock, MediaOne shareowners received, in the aggregate 0.95 of a share of AT&T common stock and $36.27 per share in cash, consisting of $30.85 per share as stipulated in the merger agreement and $5.42 per share based on AT&T's stock price preceding the merger, which was below a predetermined amount. AT&T issued approximately 603 million shares of common stock in the transaction, of which approximately 60 million were treasury shares. The AT&T shares had an aggregate market value of approximately $21 billion, and cash payments totaled approximately $24 billion. 105 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The merger was accounted for under the purchase method. Accordingly, the results of MediaOne have been included in the accompanying consolidated financial statements since the date of acquisition as part of our AT&T Broadband segment. Approximately $17 billion of the purchase price of $45 billion has been attributed to agreements with local franchise authorities that allow access to homes in our broadband service areas (franchise costs) and is being amortized on a straight-line basis over 40 years. Also included in the purchase price was approximately $22 billion related to nonconsolidated investments, including investments in Time Warner Entertainment Company, L.P. (TWE) and Vodafone Group plc (Vodafone), approximately $5 billion related to property, plant and equipment, and approximately $5 billion of other net assets. In addition, included was approximately $13 billion in deferred income tax liabilities, approximately $10 billion attributable to MediaOne debt, and approximately $1 billion of minority interest in Centaur Funding Corporation, a subsidiary of MediaOne. The purchase resulted in goodwill of approximately $20 billion, which is being amortized on a straight-line basis over 40 years. MERGER WITH TELE-COMMUNICATIONS, INC. On March 9, 1999, AT&T completed a merger with Tele-Communications, Inc. (TCI), renamed AT&T Broadband, in an all-stock transaction valued at approximately $52 billion. Each share of TCI Group Series A common stock was converted into 1.16355 shares of AT&T common stock, and each share of TCI Group Series B common stock was converted into 1.27995 shares of AT&T common stock. AT&T issued approximately 664 million shares of common stock in the transaction, of which approximately 149 million were treasury shares. The AT&T shares had an aggregate market value of approximately $27 billion. Certain subsidiaries of TCI held TCI Group Series A common stock, which was converted into 216 million shares of AT&T common stock. These shares were held by the subsidiaries throughout 1999 and 2000 and were reflected as treasury stock in the balance sheet. In the second quarter of 2001, these shares were converted into AT&T Subsidiary Exchangeable Preferred Stock. Each subsidiary preferred share is exchangeable into 1,000 shares of AT&T Common Stock. In addition, TCI simultaneously combined its LMG programming business with its TCI Ventures Group technology investment business, forming LMG. In connection with the closing, AT&T issued separate tracking stock in exchange for the TCI, LMG and TCI Ventures Group tracking shares previously outstanding. We issued 2,280 million shares of LMG Class A tracking stock (including 120 million shares related to the conversion of convertible notes) and 220 million shares of Liberty Media Group Class B tracking stock. The tracking stock was designed to reflect the separate financial performance and economic value of LMG. These shares had an aggregate market value of approximately $23 billion. LMG was split-off from AT&T as an independent, publicly-traded company on August 10, 2001 (see Notes 2 and 10). The TCI merger was accounted for under the purchase method. Accordingly, the results of TCI have been included in the financial results of AT&T since the date of acquisition as part of our AT&T Broadband segment. The operating results of TCI have been included in the accompanying consolidated financial statements at their fair value since March 1, 1999, the deemed effective date of acquisition for accounting purposes. The impact of the results from March 1 through March 9, 1999, were deemed immaterial to our consolidated results. Approximately $20 billion of the purchase price of $52 billion was attributed to franchise costs and is being amortized on a straight-line basis over 40 years. Pursuant to SFAS No. 109, "Accounting for Income Taxes", AT&T recorded an approximate $13 billion deferred tax liability in connection with this franchise intangible, which is also included in franchise costs. We do not expect that this deferred tax liability will ever be paid. This deferred tax liability is being amortized on a straight-line basis over 40 years and is included in the provision for income taxes. Also included was approximately $11 billion related to nonconsolidated investments, approximately $5 billion related to property, plant and equipment, approximately $11 billion of 106 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) TCI long-term debt and approximately $7 billion related to other net liabilities. In addition, our investment in LMG was recorded at approximately $34 billion, including approximately $11 billion of goodwill. In 2002, in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", we will no longer amortize goodwill, franchise costs or the deferred tax liability associated with franchise costs related to the mergers discussed above (see Note 23). Following is a summary of the pro forma results of AT&T as if the mergers with MediaOne and TCI had closed effective January 1, 1999:
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2000 1999 -------- -------- (SHARES IN MILLION) (UNAUDITED) Revenue..................................................... $56,858 $58,609 Income from continuing operations........................... 5,081 6,885 Weighted-average AT&T common shares......................... 3,762 3,784 Weighted-average AT&T common shares and potential common shares.................................................... 3,821 3,906 Weighted-average Liberty Media Group shares................. 2,572 2,519 AT&T Common Stock Group earnings from continuing operations per common share: Basic..................................................... $ 0.96 $ 2.41 Diluted................................................... 0.95 2.34 Liberty Media Group earnings (loss) per common share: Basic and diluted......................................... $ 0.58 $ (0.89)
Pro forma data may not be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented, nor does it intend to be a projection of future results. 5. CONCERT AND AT&T CANADA On October 16, 2001, AT&T announced a decision to unwind Concert, its global venture with British Telecommunications plc (BT), which was launched in January 2000. Under the partnership termination agreement, each of the partners generally will reclaim the customer contracts and assets that were initially contributed to the joint venture, including international transport facilities and gateway assets. In addition, AT&T will assume certain other assets that BT originally contributed to the joint venture. AT&T also will acquire BT's 9% interest in AT&T Canada and assume BT's obligation to purchase a portion of the publicly owned shares of AT&T Canada. The agreement to dissolve the Concert venture, impacted AT&T's intent and ability to hold its investment in Concert, therefore, AT&T recorded a $1.8 billion after-tax investment impairment charge ($2.9 billion pretax) in 2001 included in "Net losses related to other equity investments" in the Consolidated Statement of Income. This charge primarily relates to the difference between the fair market value of the net assets AT&T will receive in the transaction and the carrying value of AT&T's investment in Concert which included a note receivable from Concert of approximately $1.1 billion. Our investment in Concert was accounted for as an equity method investment. The remaining carrying value of our investment in Concert was approximately $0.1 billion at December 31, 2001. The agreement to dissolve Concert remains subject to regulatory approval in the United States, Europe and other jurisdictions and is expected to close by the first-half of 2002. Through a joint venture, AT&T and BT have an approximate 31% equity ownership of AT&T Canada. In connection with the decision to unwind Concert, AT&T has agreed to acquire BT's 9% interest in AT&T Canada and assume BT's portion of the obligation to purchase the AT&T Canada shares not already owned by 107 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T and BT. AT&T has the right to trigger, at any time, the purchase by AT&T or another entity the remaining equity of AT&T Canada for the Back-end Price which is the greater of the floor price (Cdn $47.45 as of December 31, 2001) and the fair market value. The floor price accretes at 4% each quarter, commencing on June 30, 2000. In the event foreign ownership restrictions in Canada are lifted, in whole or in part, prior to June 30, 2003, AT&T is required to purchase the outstanding shares (to the extent permitted by any remaining foreign ownership restrictions) at the Back-end Price. If foreign ownership restrictions in Canada are not lifted and we do not exercise the call right by June 30, 2003, the shares would be put up for auction, and AT&T would have to make the shareholders whole for the amount, if any, by which the Back-End Price exceeds the proceeds received in auction. In 2001, AT&T recorded $1.8 billion after-tax charges ($3.0 billion pretax) reflecting the estimated loss on AT&T's commitment to purchase the publicly owned shares of AT&T Canada. Included in these charges was approximately $0.6 billion related to the assumption of BT's obligation to purchase the publicly owned shares of AT&T Canada. These charges reflect the difference between the underlying value of AT&T Canada shares and the price AT&T has committed to pay for them, including the 4% accretion of the floor price, and are included in "Net losses related to other equity investments" in the Consolidated Statement of Income and the related liability within "Other long-term liabilities and deferred credits" in the Consolidated Balance Sheet. The purchase commitment will continue to be evaluated against the difference between the floor price and underlying value of AT&T Canada shares, which could result in the recognition of future charges. AT&T no longer records equity earnings or losses related to AT&T Canada since AT&T's investment balance was written down to zero largely through losses generated by AT&T Canada. In the event AT&T acquires more than 50% of the voting equity of AT&T Canada, AT&T Canada's results will be consolidated into AT&T's results. At December 31, 2001, AT&T Canada had outstanding debt of $2.9 billion and other net assets of $2.8 billion. 6. OTHER ACQUISITIONS, EXCHANGES, STOCK OFFERING, AND DISPOSITIONS CABLEVISION SYSTEMS CORPORATION On October 23, 2001, AT&T sold approximately 19.2 million shares of Cablevision NY Group Class A common stock and, monetized through a trust, 26.9 million shares of a mandatorily exchangeable trust security that is exchangeable into up to 26.9 million shares of Cablevision NY Group Class A common stock at maturity in three years. The offering price was $36.05 per share for both the common shares and the exchangeable securities. The offerings generated approximately $1.4 billion of pretax proceeds, net of underwriting fees. The sale resulted in a pretax loss of approximately $0.3 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. On January 8, 2001, AT&T and Cablevision Systems Corporation (Cablevision) completed the transfer of cable systems in which AT&T received cable-systems serving 358 thousand customers in Boston and Eastern Massachusetts. In exchange, Cablevision received cable-systems serving approximately 130 thousand customers in the northern New York suburbs, and 44 million shares of AT&T common stock valued at approximately $0.9 billion, and approximately $0.2 billion in cash. Cablevision recorded a gain as a result of the transaction. AT&T did not record any gain or loss on the transaction, however due to its ownership interest in Cablevision, AT&T recorded a proportionate amount of a gain recorded by Cablevision of approximately $0.1 billion included within "Net losses related to other equity investments" in the Consolidated Statement of Income. AT HOME CORPORATION On August 28, 2000, AT&T and At Home Corporation (Excite@Home) announced shareholder approval of a new board of directors and governance structure for Excite@Home. AT&T was given the right to designate six of the 11 Excite@Home board members. In addition, Excite@Home converted approximately 50 million of 108 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T's Series A shares into Series B shares, each of which has 10 votes. As a result of these governance changes, AT&T gained a controlling interest and began consolidating Excite@Home's results upon the closing of the transaction on September 1, 2000. As of December 31, 2000, AT&T had, on a fully diluted basis, approximately 23% of the economic interest and 74% of the voting interest in Excite@Home. The consolidation of Excite@Home resulted in minority interest of approximately $2.2 billion, goodwill of approximately $2.4 billion, short-term liabilities of approximately $2.4 billion (including an initial put option liability), other net assets of approximately $1.2 billion and the removal of our investment in Excite@Home of approximately $1.9 billion. On September 28, 2001, At Home Corporation filed for bankruptcy protection under Chapter 11 in the U.S. Bankruptcy Court, for the Northern District of California. As a result of the bankruptcy and AT&T's removal of four of its six members from the Excite@Home board of directors, AT&T ceased consolidating Excite@Home as of September 30, 2001. Beginning October 1, 2001, AT&T no longer records equity earnings or losses related to Excite@Home since AT&T recognized losses in excess of its investment in Excite@Home. The noncash impacts of the deconsolidation of At Home Corporation primarily included a reduction to property, plant and equipment of approximately $0.3 billion, goodwill of approximately $0.3 billion and debt of approximately $1.0 billion. This resulted in the recording of a liability of approximately $0.4 billion. This liability will continue to be evaluated. In addition, other noncash items included a tax benefit of $0.7 billion reflecting changes to deferred tax liabilities. COX COMMUNICATIONS, INC. AND COMCAST -- EXCITE@HOME PUT OPTIONS In August 2000, in exchange for Cox Communications, Inc. (Cox) and Comcast relinquishing their rights under the shareholder agreement in connection with Excite@Home's governance change, AT&T granted put options to Cox and Comcast. The obligation under these put options was recorded at fair value, with gains or losses resulting from changes in fair value being recorded as a component of "Other (expense) income" in the Consolidated Statement of Income. For 2001 and 2000, changes in fair market value resulted in a pretax expense of $63 and $537, respectively. On May 18, 2001, AT&T, Cox and Comcast reached an agreement to revise the terms of the put options. Under the new agreement, Cox and Comcast retained their stakes in Excite@Home and AT&T issued 75 million AT&T common shares to Cox and more than 80 million AT&T common shares to Comcast. We recorded an approximate $0.8 billion loss in "Other (expense) income" in the Consolidated Statement of Income for this put option settlement in 2001. The new agreement resulted in a tax benefit to AT&T, which essentially offset this loss. COMCAST CABLE SYSTEM TRANSACTIONS On June 30, 2001, AT&T transferred its 99.75% interest in an entity owning the Baltimore Maryland cable-system serving approximately 115 thousand customers to Comcast for approximately $0.5 billion cash. The transaction resulted in a pretax gain of $0.1 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. On April 30, 2001, AT&T received 63.9 million shares of AT&T common stock held by Comcast in exchange for cable systems that served approximately 590 thousand customers in six states. The transaction resulted in a pretax loss of $0.3 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. JAPAN TELECOM CO. LTD On April 27, 2001, AT&T completed the sale of our 10% stake in Japan Telecom Co. Ltd to Vodafone for $1.35 billion in cash. The proceeds from the transaction were split evenly between AT&T and AT&T 109 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Wireless Group since AT&T Wireless Group held approximately one-half of AT&T's investment. The transaction resulted in a pretax gain of approximately $0.5 billion recorded in "Other (expense) income" and a pretax gain of approximately $0.5 billion recorded in "Income from discontinued operations" in the Consolidated Statement of Income. INSIGHT COMMUNICATIONS COMPANY LP Effective January 1, 2001, AT&T sold to Insight Communications Company LP (Insight) several Illinois cable systems serving approximately 98 thousand customers for $0.4 billion. Insight subsequently contributed the purchased cable system and additional cable systems serving approximately 177 thousand customers to Insight Midwest L.P. in which AT&T has a 50% interest. AT&T also contributed cable systems serving approximately 248 thousand customers in Illinois to Insight Midwest L.P. The transactions resulted in a pretax gain of $0.2 billion, which was deferred due to a debt support agreement with Insight Midwest, L.P. AT&T WIRELESS GROUP On April 27, 2000, AT&T created a new class of stock and completed a public stock offering of 360 million shares, which represented 15.6% of AT&T Wireless Group tracking stock at a price of $29.50 per share. This stock was intended to track the financial performance and economic value of AT&T's wireless services business. The net proceeds to AT&T, after deducting the underwriter's discount and related fees and expenses, were $10.3 billion. AT&T allocated $7.0 billion of the net proceeds to AT&T Wireless Group, which were used for acquisitions, network expansion, capital expenditures and general corporate purposes. The remaining net proceeds of $3.3 billion were utilized by AT&T for general corporate purposes. On July 9, 2001, AT&T completed the split-off of AT&T Wireless (see Notes 2 and 7). COX -- CABLE SYSTEM TRANSACTION On March 15, 2000, AT&T received 50.3 million shares of AT&T common stock held by Cox in exchange for an entity owning cable systems serving approximately 312 thousand customers and certain other net assets. The transaction resulted in a pretax gain of $0.2 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. LENFEST COMMUNICATIONS, INC. On January 18, 2000, AT&T sold its ownership in Lenfest Communications, Inc. to a subsidiary of Comcast. In connection with the sale, we received 47.3 million shares of Comcast Class A Special common stock. The transaction resulted in a pretax gain of $0.2 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. ACC EUROPE On November 5, 1999, AT&T sold ACC Corp. (ACC) in Europe, including ACC's principal operations in the United Kingdom as well as ACC's operating companies in France, Germany and Italy, to WORLDxCHANGE Communications. We were required to dispose of this investment pursuant to a government mandate since it would have competed directly with Concert. The transaction resulted in a pretax loss of $0.2 billion recorded in "Other (expense) income" in the Consolidated Statement of Income. IBM GLOBAL NETWORK On April 30, 1999, AT&T completed its acquisition of the IBM Global Network business (renamed AT&T Global Network Services or AGNS) and its assets in the United States. The non-U.S. acquisitions were completed in phases throughout 1999 and during the first quarter of 2000. Under the terms of the 110 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) agreement, AT&T acquired the global network of IBM, and the two companies entered into outsourcing agreements with each other. The acquisition was accounted for under the purchase method. Accordingly, the operating results of AGNS have been included in the accompanying consolidated financial statements since the date of acquisition. The pro forma impact of AGNS on historical AT&T results is not material. 7. DISCONTINUED OPERATIONS Pursuant to AT&T's restructuring plan (see Note 2), AT&T completed the split-off of AT&T Wireless as a separate, independently traded company on July 9, 2001. All AT&T Wireless tracking stock was converted into AT&T Wireless common stock on a one-for-one basis and 1,136 million shares of AT&T Wireless common stock, held by AT&T, were distributed to AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding. AT&T common shareowners received whole shares of AT&T Wireless and cash payments for fractional shares. The IRS ruled that the transaction qualified as tax-free for AT&T and its shareowners for U.S. federal income tax purposes, with the exception of cash received for fractional shares. AT&T retained approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of which was used in a debt-for-equity exchange in July resulting in a $0.5 billion gain recorded in "Other (expense) income" in the Consolidated Statement of Income. The remaining portion of these holdings was monetized in October and December of 2001 through the issuance of debt that is exchangeable into Wireless shares (or their cash equivalent) at maturity (see Note 12). In connection with the split-off of AT&T Wireless, AT&T wrote-up the net assets of AT&T Wireless to fair value. This resulted in a tax-free noncash gain of $13.5 billion, which represented the difference between the fair value of AT&T Wireless at the date of the split-off and AT&T's book value in AT&T Wireless. This gain was recorded as a "Gain on disposition of discontinued operations" in the Consolidated Statement of Income. The consolidated financial statements of AT&T have been restated to reflect AT&T Wireless as a discontinued operation. Accordingly, the revenue, costs and expenses, assets and liabilities and cash flows of AT&T Wireless have been excluded from the respective captions in the Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have been reported through June 30, 2001, the deemed effective split-off date for accounting purposes, as "Income from discontinued operations", net of applicable income taxes; as "Net assets of discontinued operations"; and as "Net cash provided by (used in) discontinued operations". The impact of the operating results from July 1 through July 9, 2001, were deemed immaterial to our consolidated results. Revenue for discontinued operations was $6,592, $10,448 and $7,627 for 2001, 2000 and 1999, respectively. At December 31, 2000, "Net Assets of Discontinued Operations" included total assets of $35,087 and total liabilities of $7,822. Total assets were comprised primarily of licensing costs, property, plant and equipment, goodwill and investments. Total liabilities were comprised primarily of deferred income taxes, accounts payable and other short-term liabilities. Net assets of discontinued operations also included minority interest of $41 at December 31, 2000. Interest expense of $153, $330 and $253 was allocated to discontinued operations in 2001, 2000 and 1999, respectively, based on the debt of AT&T that was attributable to AT&T Wireless. This debt was repaid to AT&T in connection with the split-off of AT&T Wireless. The noncash impacts of the split-off of AT&T Wireless include the reduction of assets of approximately $39.7 billion and reduced shareowners' equity of approximately $39.7 billion, including the $13.5 billion noncash gain on split-off. 111 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE Income (loss) attributable to the different classes of AT&T common stock is as follows:
AT&T WIRELESS AT&T COMMON STOCK GROUP GROUP LIBERTY MEDIA GROUP ------------------------- ------------------ -------------------------- FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 ------- ------ ------ ---- ---- ---- ------- ------ ------- (Loss) income from continuing operations before cumulative effect of accounting change................. $(4,131) $2,645 $5,883 $-- $-- $-- $(2,711) $1,488 $(2,022) Dividend requirements of preferred stock................................ 652 -- -- -- -- -- -- -- -- Premium on Wireless tracking stock exchange............................. 80 -- -- -- -- -- -- -- -- (Loss) income from continuing operations available to common shareowners.......................... (4,863) 2,645 5,883 -- -- -- (2,711) 1,488 (2,022) Income (loss) from discontinued operations........................... 115 460 (433) 35 76 -- -- -- -- Gain on disposition of discontinued operations........................... 13,503 -- -- -- -- -- -- -- -- Cumulative effect of accounting change............................... 359 -- -- -- -- -- 545 -- -- ------- ------ ------ --- --- -- ------- ------ ------- Net income (loss) available to common shareowners.......................... $ 9,114 $3,105 $5,450 $35 $76 $-- $(2,166) $1,488 $(2,022) ======= ====== ====== === === == ======= ====== =======
Basic earnings (loss) per share for AT&T Common Stock Group for 2001, 2000 and 1999 were computed by dividing AT&T Common Stock Group income (loss) by the weighted-average number of shares outstanding of 3,643 million, 3,486 million and 3,082 million during 2001, 2000 and 1999, respectively. Since AT&T recorded a loss from continuing operations for 2001, the diluted loss per share is the same as basic, as any potentially dilutive securities would be antidilutive to continuing operations. At December 31, 2001, potentially dilutive securities outstanding, included shares issuable for stock options, convertible quarterly income preferred securities, TCI Pacific Communications, Inc. preferred securities and the settlement of AT&T's commitment to purchase the public shares of AT&T Canada (see Note 5). Diluted earnings per share (EPS) for AT&T Common Stock Group for 2000 and 1999 were computed by dividing AT&T Common Stock Group income, adjusted for the conversion of securities, by the weighted-average number of shares and dilutive potential shares outstanding during the year, assuming conversion of the potential shares at the beginning of the years presented using the treasury stock method, which assumes any (after-tax) proceeds are used to repurchase shares. Shares issuable upon conversion of preferred stock of subsidiaries, convertible debt securities of a subsidiary and stock options have been included in the diluted calculation of weighted-average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. The convertible quarterly income preferred securities were antidilutive and were excluded from the computation of diluted EPS. 112 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the income and share components for basic and diluted EPS calculations with respect to AT&T Common Stock Group continuing operations is as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------- 2000 1999 -------- -------- AT&T Common Stock Group: Income from continuing operations......................... $2,645 $5,883 Income impact of assumed conversion of preferred stock of subsidiary............................................. 32 26 Income adjusted for conversion of securities.............. $2,677 $5,909 Shares in millions Weighted-average common shares............................ 3,486 3,082 Stock options............................................. 19 35 Preferred stock of subsidiary............................. 40 33 Convertible debt securities of subsidiary................. -- 2 Weighted-average common shares and potential common shares................................................. 3,545 3,152
Basic EPS from discontinued operations for AT&T Wireless Group for 2001 through June 30, 2001, the deemed effective split-off date for accounting purposes, and from April 27, 2000, the stock offering date, through December 31, 2000, was computed by dividing income attributable to AT&T Wireless Group by the weighted-average number of shares outstanding of AT&T Wireless Group of 438 million and 361 million, respectively. Basic (loss) earnings per share for LMG was computed by dividing (loss) income attributable to LMG by the weighted-average number of LMG shares outstanding of 2,582 million in 2001 through July 31, 2001, the deemed effective split-off date for accounting purposes, 2,572 million in 2000 and 2,519 million from March 9, 1999, date of issuance through December 31, 1999. Potentially dilutive securities, including fixed and nonvested performance awards and stock options, have not been factored into the dilutive calculations because past history indicated that these contracts were generally settled in cash. 9. NET RESTRUCTURING AND OTHER CHARGES During 2001, we recorded $2,530 of net restructuring and other charges. These charges included approximately $1,330 of restructuring and exit costs associated with AT&T's continued cost reduction initiatives and $1,200 of asset impairment charges which were primarily related to Excite@Home. The $1,330 of charges for restructuring and exit plans were primarily due to headcount reductions with $1,014 for employee separations and benefit plan curtailment costs, $322 for facility closings and $27 related to termination of contractual obligations. The restructuring and exit plans support our cost reduction efforts through headcount reductions across all segments of the business, primarily network support and customer care functions in AT&T Business Services, continued cost reduction efforts by Excite@Home (which was still consolidated into AT&T's results through September 2001), in addition to impacts of the MediaOne merger. These charges were slightly offset by the reversal in December 2001 of $33 related to the business restructuring plans for fourth quarter 1999 and first quarter 2000. Included in the $1,014 of employee separations were $200 of benefit plan curtailment costs associated with employee separations as part of these exit plans. Approximately 18 thousand employees will be separated in conjunction with these exit plans, approximately one-half of which are management and one-half are non-management employees. Nearly 17 thousand employee separations related to involuntary terminations and more than 1 thousand related to voluntary terminations. Approximately 50% of the employees affected by the 113 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2001 restructuring charges left their positions as of December 31, 2001, and the remaining will leave the company throughout 2002. Termination benefits of approximately $341 were paid throughout 2001. The following table displays the activity and balances of the restructuring reserve account:
TYPE OF COST ------------------------------------------ EMPLOYEE FACILITY SEPARATIONS CLOSINGS OTHER TOTAL ----------- -------- ----- ------ Balance at January 1, 1999.................... $ 118 $ 369 $ 30 $ 517 Additions................................... 142 -- 3 145 Deductions.................................. (110) (130) (12) (252) Balance at December 31, 1999.................. 150 239 21 410 Additions................................... 503 32 62 597 Deductions.................................. (394) (98) (47) (539) Balance at December 31, 2000.................. 259 173 36 468 Additions, net.............................. 1,014 322 27 1,363 Deductions.................................. (765) (179) (44) (988) Balance at December 31, 2001.................. $ 508 $ 316 $ 19 $ 843
Deductions reflect cash payments of $209, $369, and $428 for 1999, 2000 and 2001, respectively. These payments included cash termination benefits of $40, $257 and $341, respectively, which were primarily funded through cash from operations. Deductions also reflect noncash utilization of $43, $170 and $560 for 1999, 2000 and 2001, respectively. Noncash utilization in 2001 includes $200 associated with benefit plan curtailment costs, $188 associated with management separation benefits in connection with U.S. based managers expected to be funded through AT&T's pension assets, $121 for the deconsolidation of Excite@Home, reversal of $33 related to the 1999 and 2000 business restructuring plan (of which $15 related to employee separations and $18 related to contract terminations) and $18 of deferred severance payments primarily related to executives. Noncash utilization in 1999 and 2000 included deferred severance payments primarily related to executives. The business restructuring plans of 1999 and 2000 are substantially complete as of December 31, 2001. The $1,200 million of asset impairments consisted of $1,032 million associated with the write-down of goodwill and other intangibles, warrants granted in connection with distributing the @Home service and fixed assets. These charges were due to continued deterioration in the business climate of, and reduced levels of venture capital funding activity for, Internet advertising and other Internet-related companies, continued significant declines in the market values of Excite@Home's competitors in the Internet advertising industry, and changes in their operating and cash flow forecasts for the remainder of 2001. These charges were also impacted by Excite@Home's decision to sell or shut down narrowband operations. As a result of the foregoing, and other factors, Excite@Home entered into bankruptcy proceedings in September 2001. In addition, AT&T recorded a related goodwill impairment charge of $139 associated with its acquisition goodwill of Excite@Home. Since we consolidated, but only owned approximately 23% of Excite@Home, a portion of the charges recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in our Consolidated Statement of Operations as a component of "Minority interest income (expense)." Additionally, we recorded asset impairment charges of $29 related to the write-down of unrecoverable support assets where the carrying value was no longer supported by estimated future cash flows. During 2000, we recorded $7,029 of net restructuring and other charges, which included $6,179 of asset impairment charges related to Excite@Home, $759 for restructuring and exit costs associated with AT&T's initiative to reduce costs, and $91 related to the government-mandated disposition of AT&T Communications (U.K.) Ltd., which would have competed directly with Concert. 114 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The charges related to Excite@Home included $4,609 of asset impairment charges recorded by Excite@Home associated with the impairment of goodwill from various acquisitions, including Excite, and a related goodwill impairment charge of $1,570 recorded by AT&T associated with goodwill from the acquisition of our investment in Excite@Home. The impairments resulted from the deterioration of the market conditions and market valuations of Internet-related companies during the fourth quarter of 2000, which caused Excite@Home to conclude that intangible assets related to their acquisitions of Internet-related companies may not be recoverable. In accordance with SFAS No. 121, "Accounting For The Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", Excite@Home conducted a detailed assessment of the recoverability of the carrying amounts of acquired intangible assets. This assessment resulted in a determination that certain acquired intangible assets, including goodwill, related to these acquisitions, including Excite, were impaired as of December 31, 2000. As a result, Excite@Home recorded impairment charges of $4,609 in December 2000, representing the excess of the carrying amount of the impaired assets over their fair value. The review for impairment included a review of publicly traded Internet companies that are comparable to the companies that Excite@Home acquired. These companies experienced a substantial decline in stock price and market capitalization during the fourth quarter of 2000. Excite@Home also reviewed the business climate for Internet advertising and web-based infrastructure companies as of December 31, 2000, and observed the following: (1) investor and consumer enthusiasm for the Internet sector severely deteriorated during the fourth quarter of 2000; (2) many Internet companies, including those acquired by Excite@Home, experienced significant decelerations in their growth both as a result of economic conditions and due to Internet-sector specific issues such as competition and the weakening of the Internet advertising market; and (3) funding sources for Internet-based consumer businesses, which require considerable amounts of capital, had substantially evaporated as of December 31, 2000. As a result, Excite@Home concluded that fundamental, permanent and significant adverse changes had occurred during the fourth quarter of 2000 in the business climate for companies providing Internet advertising and other web-based services. In addition, Excite@Home reviewed operating and cash flow projections that existed at the time Excite@Home made the acquisitions and that were used as a basis upon which the decisions to complete the acquisitions were made. These operating and cash flow projections indicated that the acquired companies, over their useful lives, would be profitable and generate positive cash flows. The operating and cash flow projections were compared to operating results after the date of the acquisitions through December 31, 2000, as well as to projected operating results for 2001. These comparisons indicated that certain acquisitions generated operating and cash flow losses through the end of 2000, and were projected to continue generating operating and cash flow losses for the foreseeable future. As a result of these factors, Excite@Home determined that the intangible assets related to the acquisitions might not be recoverable and conducted impairment tests. Generally, the impairment tests were performed at an asset group level corresponding to the lowest level at which cash flows independent of other assets could be identified. Each asset group consisted of the goodwill and acquired identifiable intangible assets related to a specific acquisition. Acquired intangible assets were combined for those acquisitions where separately identifiable cash flows that are largely independent of the cash flows of other groups of assets could not be identified. For each of the asset groups to be tested for impairment, Excite@Home projected undiscounted cash flows over a future projection period of five years, based on Excite@Home's determination of the current remaining useful lives of the asset groups, plus an undiscounted terminal period cash flow to reflect disposition of the entities at the end of their useful lives. Undiscounted future cash flows were estimated using projected net realizable value in a sales transaction (undiscounted cash flows during the expected remaining holding 115 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) period until disposition were estimated as negligible). The undiscounted future cash flows were compared to the carrying amount of each asset group and for those asset groups where the carrying amount exceeded the undiscounted future cash flows, Excite@Home concluded that the asset group was impaired. Excite@Home measured the impairment loss related to impaired asset groups based on the amount by which the carrying amount of the asset group exceeded the fair value of the asset group. Measurement of fair value was based on an analysis by Excite@Home utilizing the best information available in the circumstances using reasonable and supportable assumptions and projections, and including the discounted cash flow and market comparison valuation techniques. The discounted cash flow analysis considered the likelihood of possible outcomes and was based on Excite@Home's best estimate of projected future cash flows, including terminal value cash flows expected to result from the disposition of the asset at the end of its useful life, discounted at our weighted average cost of capital. Weighted average cost of capital was based on historical risk premiums required by investors for companies of Excite@Home's size, industry and capital structure and included risk factors specific to Excite@Home. The market comparison model represented Excite@Home's estimate of the prices that a buyer would be willing to pay currently for similar assets, based on comparable products and services, customer base, risks, earnings capabilities and other factors. Based on the foregoing, Excite@Home recorded an impairment write-down of $4,609 in the aggregate, which was allocated to each asset group based on a comparison of carrying values and fair values. The impairment write-down within each asset group was allocated first to goodwill, and if goodwill was reduced to zero, to identifiable intangible assets in proportion to carrying values. Also as a result of the foregoing, AT&T recorded a goodwill and acquisition-related impairment charge of $1,570 associated with the acquisition of our investment in Excite@Home. The write-down of our investment to fair value was determined utilizing discounted expected future cash flows. Since we consolidated but owned only approximately 23% of Excite@Home, 77% of the charge recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in the Consolidated Statement of Income as "Minority interest income (expense)." The $759 charge for restructuring and exit plans was primarily due to headcount reductions, mainly in AT&T Business Services, including network services, primarily for the consolidation of customer-care and call centers, as well as synergies created by the MediaOne merger. Included in exit costs was $503 of cash termination benefits associated with the separation of approximately 7,300 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were non-management employees. Approximately 6,700 employee separations were related to involuntary terminations and approximately 600 to voluntary terminations. We also recorded $62 of network lease and other contract termination costs associated with penalties incurred as part of notifying vendors of the termination of these contracts during the year, and net losses of $32 related to the disposition of facilities primarily due to synergies created by the MediaOne merger. Also included in restructuring and exit costs in 2000 was $144 of benefit plan curtailment costs associated with employee separations as part of these exit plans. Further, we recorded an asset impairment charge of $18 related to the write-down of unrecoverable assets in certain businesses where the carrying value was no longer supported by estimated future cash flows. During 1999, we recorded $975 of net restructuring and other charges. A $594 in-process research and development charge was recorded reflecting the estimated fair value of research and development projects at TCI, as of the date of acquisition, which had not yet reached technological feasibility or had no alternative future use. The projects identified related to efforts to offer voice over Internet protocol (IP), product-integration efforts for advanced set-top devices that would enable the offering of next-generation digital 116 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) services and cost-savings efforts for broadband-telephony implementation. In addition, Excite@Home had research and development efforts underway, including projects to allow for self-provisioning of devices and the development of next-generation client software, network and back-office infrastructure to enable a variety of network devices beyond personal computers, and improved design for the regional data centers' infrastructure. Also in 1999, a $145 charge for restructuring and exit costs was recorded as part of AT&T's initiative to reduce costs. The restructuring and exit plans primarily focused on the maximization of synergies through headcount reductions in AT&T Business Services, including network operations, primarily for the consolidation of customer-care and call centers. Included in exit costs was $142 of cash termination benefits associated with the separation of approximately 2,800 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were non-management employees. Approximately 1,700 employee separations were related to involuntary terminations and approximately 1,100 to voluntary terminations. We also recorded net losses of $307 related to the government-mandated disposition of certain international businesses that would have competed directly with Concert, and $50 related to a contribution agreement AT&T Broadband entered into with Phoenixstar, Inc. That agreement requires AT&T Broadband to satisfy certain liabilities owed by Phoenixstar and its subsidiaries. In addition, we recorded benefits of $121 related to the settlement of pension obligations for former employees who accepted AT&T's 1998 voluntary retirement incentive program (VRIP) offer. 10. INVESTMENT IN LIBERTY MEDIA GROUP As a result of our merger with TCI, we acquired Liberty Media Group (LMG). Although LMG was wholly-owned, we accounted for it as an equity method investment since we did not have a controlling financial interest. On August 10, 2001, AT&T completed the split-off of Liberty Media Corporation (LMC) as an independent, publicly-traded company (see Note 2). The operating results of LMG from March 1, 1999, the date of acquisition through July 31, 2001, the deemed effective split-off date for accounting purposes, were reflected as "Equity (losses) earnings from Liberty Media Group" in the Consolidated Statements of Income. The impact of the operating results from August 1 through August 10, 2001, were deemed immaterial to our consolidated results. Our investment in LMG at December 31, 2000, was reflected as "Investment in Liberty Media Group and related receivables, net" in the accompanying Consolidated Balance Sheet. Upon split-off, AT&T paid LMG $0.8 billion pursuant to a tax sharing agreement, related to TCI net operating losses generated prior to AT&T's merger with TCI. In addition, AT&T received approximately $0.1 billion from LMG related to taxes pursuant to a tax-sharing agreement between LMG and AT&T Broadband which existed prior to the TCI merger. At December 31, 2000, this receivable was included in "Investment in Liberty Media Group and related receivables, net" in the Consolidated Balance Sheet. At December 31, 2001, the remaining receivable from LMG under the tax-sharing agreement was $0.1 billion and was included in "Accounts receivable" in the Consolidated Balance Sheet. 117 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized results of operations for LMG were as follows:
FOR THE SEVEN FOR THE TEN MONTHS ENDED FOR THE YEAR ENDED MONTHS ENDED JULY 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 ------------- ------------------ ----------------- Revenue................................ $ 1,190 $1,526 $ 729 Operating (loss) income................ (426) 436 (2,214) (Loss) income from continuing operations before cumulative effect of accounting change................. (2,711) 1,488 (2,022) Cumulative effect of accounting change............................... 545 -- -- Net (loss) income...................... $(2,166) $1,488 $(2,022)
AT DECEMBER 31, 2000 ------------ Current assets.............................................. $ 2,954 Noncurrent assets........................................... 51,314 Current liabilities......................................... 2,962 Noncurrent liabilities...................................... 16,668 Minority interest........................................... 348
During 2000, certain investees of LMG issued common stock. Changes in the equity of the investees, net of the dilution of LMG's ownership interest, resulted in an increase to AT&T's additional paid-in capital of $355. 11. OTHER INVESTMENTS We have investments in various companies and partnerships that are accounted for under the equity method of accounting and included within "Other investments and related advances" in the Consolidated Balance Sheets. Under the equity method, investments are stated at initial cost, and are adjusted for subsequent contributions and our share of earnings, losses and distributions. At December 31, 2001 and 2000, we had equity investments (other than LMG) of $4.6 billion and $10.5 billion, respectively. The carrying value of these investments exceeded our share of the underlying reported net assets by approximately $3.1 billion and $8.3 billion, at December 31, 2001 and 2000, respectively. The excess basis, or goodwill is being amortized over periods ranging from 15 to 40 years. Pretax amortization of excess basis was $0.2 billion, $0.5 billion and $0.5 billion in 2001, 2000 and 1999, respectively. The amortization is shown as a component of "Net losses related to other equity investments" in the Consolidated Statements of Income. Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, this excess basis will no longer be amortized (see Note 23). Distributions from equity investments totaled $25, $13, and $85, for the years ended December 31, 2001, 2000 and 1999, respectively. 118 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Ownership of significant equity investments was as follows:
AT DECEMBER 31, ----------------- 2001 2000 ------ ------ Cablevision Systems Corporation............................. N/A(a) 27.98%(a) Concert..................................................... 50.00%(b) 50.00%(b) AT&T Canada Corporation..................................... 21.52%(c) 21.52%(c) Texas Cable Partnerships.................................... 50.00% 50.00% Net2Phone, Inc.............................................. N/A(d) 31.34%(d) Insight Midwest LP.......................................... 50.00% 50.00% Century-TCI California, LP.................................. 25.00% 25.00% Kansas City Cable Partners.................................. 50.00% 50.00% Midcontinent Communications................................. 50.00% 50.00% Parnassos, LP............................................... 33.33% 33.33%
- --------------- (a) In June 2001, as a result of AT&T no longer having representation on the Cablevision board of directors, the accounting of our investment in Cablevision was changed from equity method to cost method of accounting. At December 31, 2001, we owned 29.8 million shares, or a 16.8% ownership interest, of Cablevision NY Group Class A common stock, which had a closing market price of $47.45 per share. At December 31, 2000, we owned 48.9 million shares of Cablevision Systems Corporation Class A common stock, which had a closing market price of $84.94 per share. (b) On October 16, 2001, AT&T announced a decision to unwind Concert, its Global venture with BT formed on January 5, 2000 (see Note 5). (c) AT&T no longer records equity earnings or losses related to AT&T Canada because AT&T recognized losses in excess of its investment in AT&T Canada (see Note 5). (d) At December 31, 2000, we owned 18.9 million shares of Net2Phone, Inc. Class A common stock, which had a closing market price of $7.38 per share on that date. In 2001, AT&T recorded a pretax investment impairment charge of $1.1 billion included in "Net losses related to other equity investments" in the Consolidated Statement of Income. This charge primarily represents the difference between the fair market value and the carrying value of our investment in Net2Phone, resulting from the deterioration of market valuations of Internet-related companies. Also, in October 2001, AT&T contributed its investment of 18.9 million shares in Net2Phone to NTOP Holdings, LLC (NTOP), and received 189 units of NTOP ownership. AT&T then sold 160 units of NTOP to LMC Animal Planet, a subsidiary of Liberty Media Corporation, and IDT Corporation. AT&T retained 29 units of NTOP ownership at December 31, 2001, which was accounted for as a cost method investment. 119 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized combined financial information for investments accounted for under the equity method derived from unaudited financial data was as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- -------- --------- CONCERT Revenue.................................................. $ 6,189 $7,748 -- Operating (loss) income.................................. (1,025) 329 -- (Loss) income from continuing operations before extraordinary items and cumulative effect of accounting change................................................. (1,116) 99 -- Net (loss) income........................................ (1,116) 99 --
AT DECEMBER 31, --------------- 2001 2000 ------ ------ Current assets.............................................. $3,444 $4,471 Non-current assets.......................................... 4,342 4,884 Current liabilities......................................... 3,994 4,631 Non-current liabilities..................................... 132 2,108 Redeemable preferred stock.................................. -- -- Minority interest........................................... -- 56
FOR THE YEARS ENDED DECEMBER 31, ---------------------------- 2001 2000 1999 ------- ------- ------ AT&T CANADA Revenue................................................... $1,000 $1,001 $ 590 Operating (loss).......................................... (226) (225) (248) (Loss) from continuing operations before extraordinary items and cumulative effect of accounting change........ (530) (351) (4) Net (loss)................................................ (528) (351) (4)
AT DECEMBER 31, --------------- 2001 2000 ------ ------ Current assets.............................................. $ 391 $ 227 Non-current assets.......................................... 2,590 2,661 Current liabilities......................................... 256 276 Non-current liabilities..................................... 2,963 2,439 Redeemable preferred stock.................................. -- -- Minority interest........................................... -- --
120 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- --------- --------- OTHER EQUITY INVESTMENTS Revenue.................................................. $8,150 $18,686 $ 8,376 Operating income (loss).................................. 87 (1,051) (1,278) Income (loss)from continuing operations before extraordinary items and cumulative effect of accounting change................................................. 729 (1,503) (2,266) Net income (loss)........................................ 716 (1,550) (2,373)
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- Current assets.............................................. $ 654 $ 4,994 Non-current assets.......................................... 11,183 25,015 Current liabilities......................................... 1,188 4,042 Non-current liabilities..................................... 7,010 17,970 Redeemable preferred stock.................................. 151 623 Minority interest........................................... 7 1,589
We also have investments accounted for under the cost method of accounting. At December 31, 2001 and 2000, we had cost method investments included in "Other investments and related advances" in the Consolidated Balance Sheets of $19.2 billion and $20.4 billion, respectively. At December 31, 2001 and 2000, approximately $7.9 billion and $6.5 billion, respectively, of our cost investments are indexed to certain long term debt instruments (see Note 12). In addition, there were approximately $0.7 billion $2.1 billion of investments that were classified as current assets at December 31, 2001 and 2000, respectively, since they are indexed to certain currently maturing debt instruments. Under the cost method, investments are stated at cost, and earnings are recognized to the extent distributions are received from the accumulated earnings of the investee. Distributions received in excess of accumulated earnings are recognized as a reduction of our investment balance. These investments, are covered under the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and are carried at fair value. Some of our cost method investments are classified as "trading" securities, and are marked-to-market through the income statement. Other cost investments are classified as "available-for-sale" securities, and are marked-to-market through other comprehensive income on the balance sheet. We record an investment impairment charge on our "available-for-sale" securities in "Other (expense) income" in the Consolidated Statement of Income when we believe the decline in the investment value is other than temporary. During 2001, we recorded impairment charges on such securities of $1.1 billion, consisting primarily of charges related to Vodafone plc and Time Warner Telecom of $0.4 billion and $0.3 billion, respectively. In addition, at December 31, 2001 and 2000, our 25.5% interest in TWE is accounted for as a cost method investment since we do not have the right to exercise significant influence. On February 28, 2001, we exercised our registration rights in TWE and formally requested TWE to begin the process of converting the limited partnership into a corporation with registered equity securities. If the proposed spin-off of AT&T Broadband occurs as currently structured, our investment in TWE will be included in the net assets spun-off. 121 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. DEBT OBLIGATIONS DEBT MATURING WITHIN ONE YEAR
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- Commercial paper............................................ $ 5,087 $16,234 Short-term notes............................................ 3,970 11,505 Currently maturing long-term debt........................... 3,779 3,724 Other....................................................... 122 375 ------- ------- Total debt maturing within one year......................... $12,958 $31,838 ======= ======= Weighted-average interest rate of short-term debt........... 5.4% 6.5%
SECURITIZATIONS During 2001, AT&T initiated a 364-day accounts receivable securitization program providing for up to $2.7 billion of funding, limited by monthly eligible receivables. Under the program, AT&T Business Services and AT&T Consumer Services accounts receivable were sold on a discounted, revolving basis, to a special purpose, wholly-owned subsidiary of AT&T, which assigns interests in such receivables to unrelated third-party financing entities. The securitization proceeds were recorded as a borrowing and included in "Debt maturing within one year" in the Consolidated Balance Sheet. At December 31, 2001, such short-term notes totaled $2.3 billion. The interest payment for the associated loan was approximately $54 for the year ending December 31, 2001. Interest is currently paid based on a floating London Interbank Offered Rate (LIBOR) set by the corresponding agreements. At December 31, 2001, the borrowing was collateralized by $5.4 billion of accounts receivable. CREDIT FACILITY On December 14, 2001, we amended and restated a pre-existing revolving-credit facility. The amended facility, which is syndicated to 30 banks, is for commercial paper back-up and makes $8 billion available to AT&T for a 364-day term. At December 31, 2001, AT&T had not utilized this facility, and currently has the entire $8 billion facility available to us. The credit facility agreement contains a financial covenant that requires AT&T to maintain a net debt-to-EBITDA ratio (as defined in the credit agreement) not exceeding 3.00 to 1.00 for four consecutive quarters ending on the last day of each fiscal quarter. At December 31, 2001, we were in compliance with this covenant. If AT&T were to become noncompliant it could result in the cancellation of the credit facility and any amounts outstanding under the credit facility becoming payable immediately. 122 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LONG-TERM DEBT
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- DEBENTURES, NOTES AND TRUST PREFERRED SECURITIES(A)
INTEREST RATES(B) MATURITIES - ----------------- ---------- 4.00% -- 6.00% 2002 -- 2009.......................................... $ 7,353 $ 6,639 6.06% -- 6.50% 2002 -- 2029.......................................... 7,253 6,660 6.55% -- 7.50% 2002 -- 2037.......................................... 8,252 6,470 7.53% -- 8.50% 2002 -- 2097.......................................... 7,788 5,267 8.60% -- 19.95%* 2002 -- 2038.......................................... 6,994 7,317 Variable rate 2002 -- 2054.......................................... 6,744 4,164 ------- -------
Total debentures, notes and trust preferred securities...... 44,384 36,517 Other....................................................... 382 360 Unamortized discount, net................................... (460) (64) ------- ------- Total long-term debt........................................ 44,306 36,813 Less: Currently maturing long-term debt..................... 3,779 3,724 ------- ------- Net long-term debt.......................................... $40,527 $33,089 ======= =======
- --------------- * 19.95% interest rate relates to bank loans held by AT&T Latin America in the amount of $2.7 million (a) Included in these balances was $858 and $946 representing the remaining excess of the fair value over the recorded value of debt in connection with the TCI and MediaOne mergers at December 31, 2001 and December 31, 2000, respectively. The excess is being amortized to interest expense over the remaining lives of the underlying debt obligations. (b) The actual interest paid on our debt obligations may have differed from the stated amount due to our entering into interest rate swap contracts to manage our exposure to interest rate risk and our strategy to reduce finance costs (see Note 14). The following table shows the maturities at December 31, 2001, of the $44,306 in total long-term obligations:
2002 2003 2004 2005 2006 LATER YEARS ---- ---- ---- ---- ---- ----------- $3,779.. $4,753 $5,801 $4,357 $5,867 $19,749
On November 21, 2001, AT&T completed a private bond offering which consists of $1.5 billion in five-year Senior Notes with an interest rate of 6.5%, $2.75 billion in 10 year Senior Notes with an interest rate of 7.30%, $2.75 billion in 30 year Senior Notes with an interest rate of 8.00%, 1.5 billion Euros of two-year Senior Notes with a floating interest rate of Euro Interbank Offered Rate (EURIBOR) plus 1.50% and 2.0 billion Euros of five-year Senior Notes with an interest rate of 6.00%. We received net proceeds of approximately $10.0 billion from the sale of the notes. The proceeds will primarily be utilized to retire short-term indebtedness and for general corporate purposes. The bond offering included provisions that would allow bondholders to require AT&T to repurchase the notes if certain conditions are not met in conjunction with the spin-off or the separation of AT&T Broadband from AT&T at the time of notification to bondholders of the intention to separate AT&T Broadband. These conditions include a maximum debt to EBITDA ratio (adjusted) for pro forma AT&T excluding AT&T Broadband of no more than 2.75 times at specified times and if credit ratings of these notes are downgraded below a certain level. 123 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES Included in long-term and short-term debt are subsidiary-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities. Certain subsidiary trusts of TCI (TCI Trusts) had preferred securities outstanding at December 31, 2001 and 2000, as follows:
CARRYING AMOUNT INTEREST MATURITY --------------- SUBSIDIARY TRUST RATE DATE 2001 2000 - ---------------- -------- -------- ------ ------ TCI Communications Financing I.................... 8.72% 2045 $ 527 $ 528 TCI Communications Financing II................... 10.00% 2045 513 514 TCI Communications Financing III.................. 9.65% 2027 380 357 TCI Communications Financing IV................... 9.72% 2036 204 204 ------ ------ Total............................................. $1,624 $1,603 ====== ======
The TCI Trusts exist for the purpose of issuing trust preferred securities and investing the proceeds into subordinated deferrable interest notes (subordinated debt securities) of TCI. The subordinated debt securities have interest rates equal to the interest rate of the corresponding trust preferred securities and have maturity dates ranging from 30 to 49 years from the date of issuance. The preferred securities are mandatorily redeemable upon repayment of the subordinated debt securities, and are callable by AT&T. The Financing I and II trust preferred securities were redeemable at face value beginning in January and May 2001, respectively. Financing III trust preferred securities are callable at 104.825% of face value beginning in March 2007. Financing IV trust preferred securities are callable at face value beginning in March 2002. On February 28, 2002, AT&T called for early redemption Financing I and II preferred securities. On February 26, 2002, AT&T announced that it was notifying holders that it will call Financing IV preferred securities for early redemption on April 1, 2002. At December 31, 2001, the Financing I, II and IV trust preferred securities were reclassed from long-term debt to short-term debt. TCI effectively provides a full and unconditional guarantee of the TCI Trusts' obligations under the trust preferred securities. During 2000, AT&T provided a full and unconditional guarantee of the trust preferred securities for TCI Communications Financing I, II and IV subsidiary trusts (see Note 21). AT&T has the right to defer interest payments up to 20 consecutive quarters; as a consequence, dividend payments on the trust preferred securities can be deferred by the trusts during any such interest-payment period. Certain subsidiary trusts of MediaOne (MediaOne Trusts) had preferred securities outstanding at December 31, 2001 and 2000, as follows:
CARRYING AMOUNT INTEREST MATURITY ----------- SUBSIDIARY TRUST RATE DATE 2001 2000 - ---------------- -------- -------- ---- ---- MediaOne Financing A................................. 7.96% 2025 $ 30 $ 30 MediaOne Financing B................................. 8.25% 2036 28 28 MediaOne Finance II.................................. 9.50% 2036 214 214 MediaOne Finance III................................. 9.04% 2038 504 504 ---- ---- Total................................................ $776 $776 ==== ====
124 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The MediaOne Trusts exist for the purpose of issuing the trust preferred securities and investing the proceeds into subordinated deferrable interest notes (subordinated deferrable notes) of MediaOne Group Funding, Inc., a wholly owned subsidiary of MediaOne. The subordinated deferrable notes have the same interest rate and maturity date as the trust preferred securities to which they relate. All of the subordinated deferrable notes are redeemable by AT&T at a redemption price of $25.00 per security, plus accrued and unpaid interest. Upon redemption of the subordinated deferrable notes, the trust preferred securities will be mandatorily redeemable, at a price of $25.00 per share, plus accrued and unpaid distributions. The 7.96% subordinated deferrable notes became redeemable after September 11, 2000. The 9.50% and 8.25% subordinated deferrable notes became redeemable after October 29, 2001. The 9.04% subordinated deferrable notes are redeemable after October 28, 2003. On March 4, 2002, AT&T called for early redemption MediaOne Financing A, MediaOne Financing B and MediaOne Financing II preferred securities. At December 31, 2001, the Financing A, B and II preferred securities were reclassed from long-term debt to short-term debt. MediaOne has effectively provided a full and unconditional guarantee of the MediaOne Trusts' obligations under the trust preferred securities. During 2000, AT&T provided a full and unconditional guarantee of MediaOne's trust preferred securities (see Note 21). AT&T has the right to defer interest payments up to 20 consecutive quarters; as a consequence, dividend payments on the trust preferred securities can be deferred by the trusts during any such interest-payment period. EXCHANGEABLE NOTES Included in long-term and short-term debt are exchangeable notes. During 2001, we issued exchangeable notes which are mandatorily redeemable at AT&T's option into shares of AT&T Wireless and Cablevision NY Group Class A (Cablevision) common stock and Rainbow Media Group Class A (Rainbow Media Group) tracking stock, as applicable or its cash equivalent. During 2000, we issued exchangeable notes which are mandatorily redeemable at AT&T's option into shares of Comcast and Microsoft Corporation (Microsoft) common stock, as applicable, or its cash equivalent. During 1999 and 1998, MediaOne issued exchangeable notes which are mandatorily redeemable at AT&T's option into (i) Vodafone American Depository Receipts (ADRs) held by MediaOne, (ii) the cash equivalent, or (iii) a combination of cash and Vodafone ADRs. The maturity value of these exchangeable notes varies based upon the fair market value of the security it is indexed to. Following is a summary of the exchangeable notes outstanding at December 31, 2001, which are indexed to 45.8 million shares of AT&T Wireless common stock:
PUT PRICE PER CALL PRICE CARRYING MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE VALUE - ---------- ---------- ------------- --------- ---------- -------- 2005....................... $220 LIBOR + 0.4% $14.41 $18.87 $220 2006....................... 220 LIBOR + 0.4% 14.41 19.31 219 2006....................... 220 LIBOR + 0.4% 14.41 19.74 219
125 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a summary of the exchangeable notes outstanding at December 31, 2001, which are indexed to 45 million shares of AT&T Wireless common stock:
PUT PRICE PER CALL PRICE CARRYING MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE VALUE - ---------- ---------- ------------- --------- ---------- -------- 2006....................... $204 LIBOR + 0.4% $13.57 $19.03 $216 2006....................... 201 LIBOR + 0.4% 13.37 19.27 216 2006....................... 204 LIBOR + 0.4% 13.57 19.90 216
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of AT&T Wireless common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of AT&T Wireless common stock is greater than the call price, the exchange ratio will be a fraction, the numerator of which is equal to the sum of (i) the put price, plus (ii) the excess of the fair market value of a share of AT&T Wireless common stock over the call price, and the denominator of which is equal to the fair market value of a share of AT&T Wireless common stock; (b) If the fair market value of a share of AT&T Wireless common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of AT&T Wireless common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of AT&T Wireless common stock. Following is a summary of the exchangeable notes outstanding at December 31, 2001, which are indexed to 26.9 million shares of Cablevision common stock:
PUT PRICE PER CALL PRICE CARRYING MATURITY FACE VALUE INTEREST RATE SHARE PER SHARE VALUE - -------- ---------- ------------- --------- ---------- -------- 2004.......................... $970 6.50% $36.05 $43.98 $1,030
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Cablevision common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Cablevision common stock is greater than the call price, the exchange ratio will be 0.8197; (b) If the fair market value of a share of Cablevision common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Cablevision common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Cablevision common stock. 126 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a summary of the exchangeable notes outstanding at December 31, 2001, which are indexed to 9.8 million shares of Rainbow Media Group tracking stock:
PUT PRICE PER CALL PRICE CARRYING MATURITY FACE VALUE INTEREST RATE SHARE PER SHARE VALUE - -------- ---------- ------------- --------- ---------- -------- 2005.......................... $220 6.25% $22.50 $27.45 $196
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Rainbow Media Group tracking stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Rainbow Media Group tracking stock is greater than the call price, the exchange ratio will be 0.8197; (b) If the fair market value of a share of Rainbow Media Group tracking stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Rainbow Media Group tracking stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Rainbow Media Group tracking stock. Following is a summary of the exchangeable notes outstanding at December 31, 2001 and 2000, which are indexed to 25 million shares of Comcast common stock:
PUT PRICE CARRYING VALUE PER CALL PRICE -------------- MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000 - ---------- ---------- ------------- --------- ---------- ----- ----- 2003.................... $371 6.75% $41.50 $49.80 $320 $371 2004.................... 314 5.50% 41.06 49.27 277 314 2005.................... 329 4.63% 39.13 46.96 286 329
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Comcast common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Comcast common stock is greater than the call price, the exchange ratio will be 0.8333; (b) If the fair market value of a share of Comcast common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Comcast common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Comcast common stock. 127 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a summary of the exchangeable notes outstanding at December 31, 2001 and 2000, which are indexed to 10 million shares of Microsoft common stock:
PUT PRICE CARRYING VALUE PER CALL PRICE -------------- MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000 - ---------- ---------- ------------- --------- ---------- ----- ----- 2003.................... $227 6.96% $67.87 $97.39 $201 $145 2004.................... 226 7.00% 67.87 111.64 198 144 2005.................... 226 7.04% 67.87 128.60 196 144
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Microsoft common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Microsoft common stock is greater than the call price, the exchange ratio will be a fraction, the numerator of which is equal to the sum of (i) the put price, plus (ii) the excess of the fair market value of a share of Microsoft common stock over the call price, and the denominator of which is equal to the fair market value of a share of Microsoft common stock; (b) If the fair market value of a share of Microsoft common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Microsoft common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Microsoft common stock. Following is a summary of the exchangeable notes outstanding at December 31, 2001 and 2000, which are indexed to 22.3 million shares of Comcast common stock:
PUT PRICE CARRYING VALUE PER CALL PRICE -------------- MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000 - ---------- ---------- ------------- --------- ---------- ----- ----- 2003.................... $267 6.76% $35.89 $50.64 $244 $267 2004.................... 267 6.80% 35.89 58.39 244 267 2005.................... 267 6.84% 35.89 67.97 245 267
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Comcast common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Comcast common stock is greater than or equal to the call price, the exchange ratio will be a fraction, the numerator of which is equal to the sum of (i) the put price, plus (ii) the excess of the fair market value of a share of Comcast common stock over the call price, and the denominator of which is equal to the fair market value of a share of Comcast common stock; (b) If the fair market value of a share of Comcast common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Comcast common stock is less than the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Comcast common stock. 128 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a summary of the exchangeable notes outstanding at December 31, 2001 and 2000, which are indexed to Vodafone ADRs:
PUT PRICE CARRYING VALUE PER CALL PRICE -------------- MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000 - ---------- ---------- ------------- --------- ---------- ---- ------ 2001.................. $1,686 6.25% $19.65 $25.10 $ -- $2,337 2002.................. $1,129 7.00% 43.44 51.26 715 1,012
In the third quarter of 2001, exchangeable notes that were indexed to a portion of holdings of Vodafone ADR securities matured. Prior to the settlement, the carrying value of the notes was $1,634. These notes were settled with approximately 70 million shares of Vodafone ADR's and $252 million in cash. Approximately 57 million shares of the Vodafone ADR's used in the settlement were accounted for as "trading" securities and the remaining shares were accounted for as "available-for-sale" securities under SFAS No. 115. The settlement resulted in a pretax loss of approximately $392, which was reclassified from "Other comprehensive income" to "Other (expense) income" in the Consolidated Statement of Income. The exchangeable notes that mature in 2002 are indexed to 26 million Vodafone ADRs, and will be exchanged at maturity as follows: (a) If the fair market value of a Vodafone ADR is greater than or equal to the call price, each exchangeable note is equivalent to 0.8475 of a Vodafone ADR; (b) If the fair market value of a Vodafone ADR is less than or equal to the put price, each exchangeable note is equivalent to one Vodafone ADR; or (c) If the fair market value of a Vodafone ADR is less than the call price but greater than the put price, each exchangeable note is equivalent to a fraction of a Vodafone ADR equal to (i) the put price divided by (ii) the fair market value of a Vodafone ADR. The exchangeable notes indexed to AT&T Wireless, Cablevision, Comcast and Microsoft common stock and Rainbow Media Group that are secured by AT&T's investments in AT&T Wireless, Cablevision, Comcast, Microsoft and Rainbow Media Group. The exchangeable notes indexed to Vodafone ADRs that are unsecured obligations, ranking equally in right of payment with all other unsecured and unsubordinated obligations of AT&T. These exchangeable notes are being accounted for as indexed debt instruments since the maturity value of the debt is dependent upon the fair market value of the underlying securities. These exchangeable notes contain embedded derivatives that require separate accounting as the maturity value of the debt is dependent upon the fair market value of the underlying AT&T Wireless, Cablevision, Rainbow Media Group, Comcast, Microsoft and Vodafone securities, as applicable. The economic characteristics of the embedded derivatives (i.e., equity like features) are not clearly and closely related to that of the host instruments (a debt security). As a result the embedded derivatives are separated from the host debt instrument for valuation purposes and are carried at fair value within the host debt instrument. The embedded derivatives for AT&T Wireless, Cablevision and Rainbow Media Group exchangeable notes are designated as cash flow hedges. These designated options are carried at fair value with changes in fair value recorded, net of income taxes, within "Other comprehensive income" as a component of shareowners' equity. There was no ineffectiveness recognized on the cash flow hedges. The Comcast, Microsoft, Vodafone and certain of the Cablevision and Rainbow Media Group options are undesignated and are carried at fair value with changes in fair value recorded in "Other income (expense)" in the Consolidated Statement of Income. The options hedge the market risk of a decline in value of AT&T Wireless, Cablevision, Rainbow Media Group, Comcast, Microsoft and Vodafone securities. The market risk of a decline in these securities, below the respective put prices has been eliminated. In addition, any market gains we may earn have been limited to 129 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the call prices, with the exception of certain debt indexed to Comcast stock, the Cablevision stock, Rainbow Media Group and Vodafone ADRs, which provide for our participation in a portion of the market gains above the call price. Since all the AT&T Wireless, Cablevision and Rainbow Media Group securities and a portion of the Comcast, Microsoft and Vodafone ADR securities are cost method investments being accounted for as "available-for-sale" securities under SFAS No. 115, changes in the maturity value of the options and the underlying securities are being recorded as unrealized gains or losses, net of income taxes, within "Other comprehensive income as a component of shareowners' equity." The remaining portion of the Comcast, Microsoft and Vodafone securities are cost method investments being accounted for as "trading" securities as permitted under SFAS No. 115 and changes in the fair value of the options and the underlying securities are being recorded as net revaluation of certain financial instruments within "Other income (expense)" in the Consolidated Statement of Income. OTHER DEBT Included in long-term debt is other debt. During 2000, we entered into a series of purchased and written options on 21.9 million shares of Microsoft common stock, and issued floating rate debt. The carrying value of the debt at both December 31, 2001 and 2000, was $1,369, which pays interest at three-month LIBOR plus 0.4%. The debt in conjunction with the options is, repayable at AT&T's option in either Microsoft stock or cash and matures annually with $458 maturing in 2003 and 2004, and $453 maturing in 2005 (see Note 14). In addition, during 1999 two subsidiaries of MediaOne, MediaOne SPC IV and MediaOne SPC VI, entered into a series of purchased and written options on Vodafone ADRs contributed to them by MediaOne, and issued floating rate debt. The carrying value of the debt at both December 31, 2001 and 2000, was $1,739, which pays interest at three-month LIBOR plus 0.5%. This debt matures in equal quarterly installments beginning in 2003 and ending in 2005. The assets of MediaOne SPC IV, which are primarily 29.1 million Vodafone ADRs, are available only to pay the creditors of MediaOne SPC IV. Likewise, the assets of MediaOne SPC VI, which are primarily 18.0 million Vodafone ADRs, are available only to pay the creditors of MediaOne SPC VI. MediaOne SPC IV and VI will generate cash to settle these notes by selling its Vodafone ADRs to the market (or to AT&T, at AT&T's option) and cash settle the option (see Note 14). 13. OTHER SECURITIES PREFERRED STOCK OF SUBSIDIARIES Prior to the TCI merger, TCI Pacific Communications Inc. (Pacific) issued 5% Class A Senior Cumulative Exchangeable preferred stock, which was outstanding as of December 31, 2001. Each share is exchangeable, from and after August 1, 2001, for approximately 8.365 shares of AT&T common stock (as adjusted for the July 2001 split-off of AT&T Wireless Services, Inc. from AT&T), subject to certain antidilution adjustments. Additionally, Pacific may elect to make any dividend, redemption or liquidation payment in cash, shares of AT&T common stock or a combination of the foregoing. Dividends on the Pacific preferred stock were $31, $31 and $26 for the years ended December 31, 2001, 2000 and 1999, respectively and are reported within "Minority interest income (expense)" in the Consolidated Statements of Income. The Pacific preferred stock is reflected within "Minority Interest" in the Consolidated Balance Sheets, and aggregated $2.1 billion at both December 31, 2001 and 2000. As of December 31, 2001, 59 thousand shares of the Pacific preferred stock had been exchanged for 495 thousand shares of AT&T common stock. At December 31, 2001 and 2000 there were approximately 6.2 million and 6.3 million shares outstanding, respectively. 130 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pacific has elected to exercise its right to redeem all outstanding shares of the Pacific preferred stock, that have not been exchanged as of April 26, 2002, at a price of $102.50 per share plus accrued dividends of $0.96 per share. The redemption price will be paid in AT&T Common Stock, up to a maximum of 52.3 million shares which were registered with the SEC in February of 2002, with any shortfall paid in cash. COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF AT&T AND RELATED WARRANTS On June 16, 1999, AT&T Finance Trust I (AT&T Trust), a wholly owned subsidiary of AT&T, completed the private sale of 100 million shares of 5.0% cumulative quarterly income preferred securities (quarterly preferred securities) to Microsoft. Proceeds of the issuance were invested by the AT&T Trust in junior subordinated debentures (debentures) issued by AT&T due 2029, which represent the sole asset of the AT&T Trust. The quarterly preferred securities pay dividends at an annual rate of 5.0% of the liquidation preference of fifty dollars per security, and are convertible at any time prior to maturity into 88.016 million shares of AT&T common stock (as adjusted for the July 2001 split-off of AT&T Wireless Services, Inc. from AT&T). The quarterly preferred securities are subject to mandatory redemption upon repayment of the debentures at maturity or their earlier redemption. The conversion feature can be terminated, under certain conditions, after three years. The debentures make a quarterly payment in arrears of 62.5 cents per security on the last day of March, June, September and December of each year. AT&T has the right to defer such interest payments up to 20 consecutive quarters. As a consequence, quarterly dividend payments on the quarterly preferred securities can be deferred by the AT&T Trust during any such interest-payment period. If AT&T defers any interest payments, we may not, among other things, pay any dividends on our common stock until all interest in arrears is paid to the AT&T Trust. Dividends paid on the quarterly preferred securities were $250, $250 and $135 for the years ended December 31, 2001, 2000 and 1999, respectively, and were reported within "Minority interest income (expense)" in the Consolidated Statements of Income. On June 16, 1999, AT&T also issued to Microsoft 53 million warrants, each to purchase one share of AT&T common stock at a price of fifty-seven dollars per share at the end of three years (as adjusted for the July 2001 split-off of AT&T Wireless Services, Inc. from AT&T). Alternatively, the warrants are exercisable on a cashless basis. If the warrants are not exercised on the three-year anniversary of the closing date, the warrants expire. A discount on the quarterly preferred securities equal to the value of the warrants of $306 was recognized and is being amortized over the 30-year life of the quarterly preferred securities as a component of "Minority interest income (expense)" in the Consolidated Statements of Income. In connection with the merger of Comcast and AT&T Broadband (see Note 2), AT&T Comcast Corporation will assume the quarterly preferred securities. In conjunction with this transaction, Microsoft Corporation has agreed to convert these preferred securities into 115 million shares of AT&T Comcast Corporation common stock. CENTAUR FUNDING CORPORATION Centaur Funding Corporation (Centaur), a subsidiary of MediaOne, issued three series of preferred shares prior to AT&T's acquisition of MediaOne. Centaur was created for the principal purpose of raising capital through the issuance of preferred shares and investing those proceeds into notes issued by MediaOne SPC II, a subsidiary of MediaOne. Principal and interest payments from the notes are expected to be 131 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Centaur's primary source of funds to make dividend and redemption payments on the preferred shares. In addition, the dividend and certain redemption payments on the preferred shares will be determined by reference to the dividend and redemption activity of the preferred stock of AirTouch Communications, Inc. (ATI Shares) held by MediaOne SPC II. Payments on the preferred shares are neither guaranteed nor secured by MediaOne or AT&T. The assets of MediaOne SPC II, which include the ATI shares, are available only to pay the creditors of MediaOne SPC II. These securities remained outstanding at December 31, 2001 and 2000 as follows:
CARRYING AMOUNT --------------- DIVIDEND RATE MATURITY DATE 2001 2000 ------------- ------------- ------ ------ Series A.................................. Variable None $ 100 $ 100 Series B.................................. 9.08% April, 2020 927 927 Series C.................................. None April, 2020 127 118 ------ ------ Total..................................... $1,154 $1,145 ====== ======
The Auction Market Preference Shares, Series A, have a liquidation value of $250 thousand per share and dividends are payable quarterly when declared by Centaur's board of directors out of funds legally available. The 9.08% Cumulative Preference Shares, Series B, have a liquidation value of $1 thousand per share and dividends are payable quarterly in arrears when declared by Centaur's board of directors out of funds legally available. In addition, dividends may be declared and paid only to the extent that dividends have been declared and paid on the ATI shares. The preference shares, Series C, have a liquidation value of $1 thousand per share at maturity. The value of the Series C will be accreted to reach its liquidation value upon maturity. The Series B shares rank equally with the Series C shares as to redemption payments and upon liquidation, and the Series B and Series C shares rank senior to the Series A shares as to redemption payments and upon liquidation. The preference shares issued by Centaur are reflected within "Minority interest" in the Consolidated Balance Sheets. Dividends on the preferred shares were $99 for the year ended December 31, 2001 and $55 for the period ended December 31, 2000, and were included within "Minority interest income (expense)" in the Consolidated Statements of Income. CONVERTIBLE PREFERRED STOCK On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for 812,512 shares of a new class of AT&T preferred stock with a par value of $1 per share; and five-year warrants to purchase the equivalent of an additional 41.7 million shares of AT&T Wireless Group tracking stock at $35 per share. The $9.8 billion of proceeds were recorded based on their relative fair values as $9.2 billion for the preferred shares, $0.3 billion for the warrants in other current liabilities and $0.3 billion for the amortizable beneficial conversion feature. The beneficial conversion feature represented the excess of the fair value of the preferred shares issued over the proceeds received and were recorded in "Additional paid-in capital" in the Consolidated Balance Sheet. Prior to the split-off of AT&T Wireless Group, the preferred shares, convertible at NTT DoCoMo's option, were economically equivalent to 406 million shares (a 16 percent interest) of AT&T Wireless Group tracking stock. On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group, these preferred shares were converted into AT&T Wireless common stock. Upon conversion, AT&T reduced its portion of the financial performance and economic value in the AT&T Wireless Group by 178 million shares, and the balance of the 406 million shares came from the issuance of 228 million new shares of AT&T Wireless common stock. 132 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 2001, included in "Dividends requirements of preferred stock" in the Consolidated Statement of Income, was the amortization of the beneficial conversion feature of $0.3 billion as well as dividends on the preferred shares of $0.3 billion. 14. FINANCIAL INSTRUMENTS ADOPTION OF SFAS NO. 133 Effective January 1, 2001, AT&T adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and its corresponding amendments under SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. The adoption of SFAS No. 133 on January 1, 2001, resulted in a pretax cumulative-effect increase to income of $1.5 billion ($0.9 billion net-of-tax). $0.6 billion ($0.4 billion net-of-tax) and $0.9 billion ($0.5 billion net-of-tax) were attributable to AT&T Group (other than LMG) and LMG, respectively. AT&T GROUP AT&T Group's cumulative-effect increase to net income of $0.4 billion was attributable primarily to equity based derivative instruments embedded in indexed debt instruments and warrants held in both public and private companies. Included in the after-tax cumulative effect benefit of $0.4 billion, was a $0.2 billion benefit for the changes in the valuation of the embedded and non-embedded net purchased options related to the indexed debt instruments and $0.2 billion benefit for changes in the fair value of warrants. Upon adoption, AT&T Group, as permitted by SFAS No. 133, reclassified $9.3 billion of securities from "available-for-sale" to "trading." This reclassification resulted in the recognition, in the income statement, of losses previously recorded within accumulated Other Comprehensive Income (OCI). A portion of the loss ($1.6 billion pretax; $1.0 billion net-of-tax) was recorded as part of the cumulative effect of adoption. This loss completely offset a gain for amounts also previously recorded within accumulated OCI on the indexed debt obligation that had been considered a hedge of Comcast, Microsoft and Vodafone available-for-sale securities. The reclassification of securities also resulted in a pretax charge of $1.2 billion ($0.7 billion net-of-tax) recorded in "Other (expense) income" in the Consolidated Statement of Income. In addition, the adoption of SFAS No. 133 also resulted in a pretax charge to OCI of $10 ($6 net-of-tax) on cash flow hedges. The net derivative loss included in OCI as of January 1, 2001 will be reclassified into earnings over the life of the instruments, of which the last expires in February 2005. LMG LMG's cumulative-effect increase to income of $0.5 billion was attributable primarily to separately recording the embedded call option obligations associated with LMG's senior exchangeable debentures. Also included in the cumulative-effect was $87 previously included in OCI related primarily to changes in the fair value of LMG's warrants and options to purchase certain available-for-sale securities. FINANCIAL INSTRUMENTS In the normal course of business, we use various financial instruments, including derivative financial instruments, for purposes other than trading. These instruments include letters of credit, guarantees of debt, interest rate swap agreements, foreign currency exchange contracts, option contracts, equity contracts and warrants. Collateral is generally not required for these types of instruments. 133 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) By their nature, all such instruments involve risk, including the credit risk of nonperformance by counterparties, and our maximum potential loss may exceed the amount recognized in our balance sheet. However, at December 31, 2001 and 2000, in management's opinion, there was no significant risk of loss in the event of nonperformance of the counterparties to these financial instruments. We control our exposure to credit risk through credit approvals, credit limits and monitoring procedures. We do not have any significant exposure to any individual customer or counterparty, nor do we have any major concentration of credit risk related to any financial instruments. LETTERS OF CREDIT Letters of credit are purchased guarantees that ensure our performance or payment to third parties in accordance with specified terms and conditions. Management has determined that the Company's letters of credit do not create additional risk to AT&T. The notional amounts outstanding at December 31, 2001 and 2000 were $696 and $833 respectively. The fair values of the letters of credit, based on the fees paid to obtain the obligations, were immaterial at December 31, 2001 and 2000. GUARANTEES OF DEBT From time to time, we guarantee the debt of our subsidiaries and certain unconsolidated joint ventures. TCI, primarily before the merger, had agreed to take certain steps to support debt compliance with respect to obligations aggregating $1,461 at both December 31, 2001 and 2000 of certain cable television partnerships in which TCI has a noncontrolling ownership interest. Although there can be no assurance, management believes that it will not be required to meet its obligations under such guarantees. Additionally, in connection with the restructuring of AT&T in 1996, we issued guarantees for certain debt obligations of our former subsidiaries AT&T Capital Corp. and NCR. The amount of guaranteed debt associated with AT&T Capital Corp. and NCR was $51 at both December 31, 2001 and 2000, respectively. Total notional amounts of guaranteed debt at December 31, 2001 and 2000 were $1,522 and $1,557, respectively. At December 31, 2001 and 2000, there were no quoted market prices for similar agreements. INTEREST RATE SWAP AGREEMENTS We enter into interest rate swaps, which are typically designated as either cash flow or fair value hedges, to manage our exposure to changes in interest rates. We enter into swap agreements to manage the fixed/floating mix of our debt portfolio in order to reduce aggregate risk to interest rate movements. Interest rate swaps also allow us to raise funds at floating rates and effectively swap them into fixed rates that are generally lower than those available to us if fixed-rate borrowings were made directly. These agreements involve the exchange of floating-rate for fixed-rate payments or fixed-rate for floating-rate without the exchange of the underlying principal amount. Floating-rate payments are based on rates tied to LIBOR. The following table indicates the types of swaps in use at December 31, 2001 and 2000, the respective notional amounts and their weighted-average interest rates. Average variable rates are those in effect at the reporting date, and may change significantly over the lives of the contracts:
2001 2000 ----- ----- Fixed-rate to variable-rate swaps -- notional amount........ $ 500 $ 750 Average receive rate...................................... 9.68% 8.16% Average pay rate.......................................... 4.02% 8.16% Variable-rate to fixed-rate swaps -- notional amount........ $ 218 $ 218 Average receive rate...................................... 2.08% 6.81% Average pay rate.......................................... 7.31% 7.31%
134 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition, we also have combined interest rate, foreign currency swap agreements for foreign-currency-denominated debt, which hedge our risk to both interest rate and currency movements. At December 31, 2001 and 2000 the notional amounts related to these contracts were $3,826 and $739 respectively. The increase is primarily related to the hedges associated with our Euro bond offering in 2001. The notional amounts of these hedges were approximately $3,087 at December 31, 2001. The table below summarizes the fair and carrying values of the interest rate swaps. These swaps are valued using current market quotes which were obtained from dealers.
2001 2000 ----------------- ----------------- FAIR/CARRYING FAIR/CARRYING VALUE VALUE ----------------- ----------------- ASSET LIABILITY ASSET LIABILITY ----- --------- ----- --------- Interest rate swap agreements......................... $26 $19 $4 $5 Combined interest rate foreign currency swap agreements.......................................... 18 26 1 3
FOREIGN EXCHANGE We enter into foreign currency forward contracts to manage our exposure to changes in currency exchange rates related to foreign-currency-denominated transactions. Although we do not designate most of our foreign exchange contracts as accounting hedges, we have certain contracts that are designated as foreign currency cash flow hedges in accordance with SFAS No. 133. In 2001, our foreign exchange contracts consisted principally of Canadian dollars, related to our obligation to purchase the remaining shares of AT&T Canada (the Canadian obligation), Euros, Japanese yen, Swiss francs, and Brazilian reais related to debt. In 2000, our foreign exchange contracts consisted principally of Brazilian reais and Swiss francs related to debt. In addition, we are subject to foreign exchange risk related to other foreign-currency-denominated transactions. The notional amounts under contract at December 31, 2001 and 2000 were $6,422 and $71 respectively. The increase in our foreign currency contract activity was primarily related to foreign exchange contracts entered into relating to the commencement of a Euro commercial paper program and the Canadian obligation with notional amounts outstanding of $5.3 billion respectively at December 31, 2001. The following table summarizes the fair and carrying values of the foreign exchange contracts at December 31, 2001 and 2000.
2001 2000 ----------------- ------------------------------------- FAIR/CARRYING VALUE FAIR VALUE CARRYING VALUE ----------------- ----------------- ----------------- ASSET LIABILITY ASSET LIABILITY ASSET LIABILITY ----- --------- ----- --------- ----- --------- Foreign Exchange Contracts............ $72 $299 $1 $2 $-- $1
EQUITY COLLARS In 2000, we entered into three series of option agreements (Microsoft collars) with a single bank counterparty (counterparty) to hedge our exposure to 21.9 million shares of Microsoft common stock. These option agreements, combined with the underlying shares, secure a floating-rate borrowing from the counterparty, the face value of which is equal to the product of (i) the underlying shares multiplied by (ii) the put price. (see Note 12) The option agreements are a series of purchased and written options that hedge a portion of our holdings in Microsoft common stock. The Microsoft collar is undesignated for accounting purposes in accordance with SFAS No. 133 and is carried on our balance sheet at fair value, with unrealized gains or losses being recorded in "Other income (expense)" in the Consolidated Statement of Income. These unrealized gains or losses are largely offset by the changes in the fair value of a certain number of our shares of Microsoft common stock that are classified as "trading in accordance with SFAS No. 115." The carrying value of the Microsoft collar 135 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was $6 and $419 at December 31, 2001 and 2000, respectively. The fluctuation of the carrying value of the collars is primarily due to the change in the market prices of the underlying shares, which were $66.25 per share and $43.375 per share at December 31, 2001 and 2000, respectively and the adoption of SFAS No. 133, which required valuing the instruments at fair value rather than intrinsic value. The following is a summary of the Microsoft collars outstanding at December 31, 2001:
MATURITY DATE 2003 2004 2005 - ------------- ------ ------- ------- Put price per share...................................... $62.48 $ 62.48 $ 62.48 Call price per share..................................... 86.26 100.44 118.36
Since the debt and the collar are contracted with the same counterparty, the treatment is similar to a debt instrument with an embedded instrument and will be net settled as follows: At the expiration of the Microsoft collar, we will satisfy the debt and collar net obligations under the floating-rate debt by delivering (i) a number of Microsoft shares equal to the underlying share amount multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at expiration in the following manner: (a) If the fair market value of a share of Microsoft common stock is greater than the call price, the exchange ratio will be a fraction, the numerator of which is equal to the sum of (i) the put price, plus (ii) the excess of the fair market value of a share of Microsoft common stock over the call price, and the denominator of which is equal to the fair market value of a share of Microsoft common stock; (b) If the fair market value of a share of Microsoft common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Microsoft common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Microsoft common stock. Prior to our merger with MediaOne, two subsidiaries of MediaOne, MediaOne SPC IV and MediaOne SPC VI, each entered into a series of option agreements ("Vodafone collars") with a single bank counterparty ("counterparty") to hedge its exposure to 47.2 million Vodafone ADRs. In conjunction with the Vodafone collars, MediaOne SPC IV and MediaOne SPC VI also issued floating-rate debt in a series of private placements, the face value of which is equal to the product of (i) the underlying shares multiplied by (ii) the put price. Simultaneous with the execution of the Vodafone collars, MediaOne SPC IV and MediaOne SPC VI each entered into floating-to-fixed interest rate swaps in which future fixed payments were prepaid by each of MediaOne SPC IV and MediaOne SPC VI at inception. Therefore, the on-going interest payments on the floating-rate notes are paid by the counterparty. These prepaid interest rate swaps are designated as cash flow hedges in accordance with SFAS No. 133. The option agreements are a series of purchased and written options that hedge a portion of our holdings in Vodafone ADRs. The Vodafone collars are undesignated for accounting purposes in accordance with SFAS No. 133 and are carried on our balance sheet at fair value, with unrealized gains or losses being recorded to "Other income (expense)" in the Consolidated Statement of Income. These unrealized gains or losses are largely offset by the changes in the fair value of a certain number of our Vodafone ADRs that are classified as "trading". The carrying value of the Vodafone collars was $462 and $(453) at December 31, 2001 and 2000, respectively. The fluctuation of the carrying value of the collars is primarily due to the change in the per share market price of the underlying ADRs, which was $25.68 per share and $35.81 per share at December 31, 2001 and 2000, respectively, and the adoption of SFAS No. 133, which requires valuing the instruments at fair value rather than intrinsic value. 136 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of the Vodafone collars outstanding at December 31, 2001:
MATURITY DATE ------------------------ MEDIAONE SPC IV VODAFONE COLLARS 2003 2004 2005 - -------------------------------- ------ ------ ------ Average put price per share................................ $34.06 $33.78 $33.53 Average call price per share............................... 49.13 48.85 48.60
MATURITY DATE ------------------------ MEDIAONE SPC VI VODAFONE COLLARS 2003 2004 2005 - -------------------------------- ------ ------ ------ Average put price per share................................ $39.85 $39.86 $39.86 Average call price per share............................... 57.72 57.72 57.73
Since the debt and the collars are contracted with different counterparties, the instruments will be settled independently. MediaOne SPC IV and MediaOne SPC VI will satisfy its obligations to the floating-rate debt holders by delivering cash equal to the face value (see note 12). At the expiration of the Vodafone collars, MediaOne SPC IV and MediaOne SPC VI will cash settle its collars with the counterparty. Cash settlement of the Vodafone collars will be completed in the following manner: a. If the fair market value of a Vodafone ADR is greater than the call price, MediaOne SPC IV or MediaOne SPC VI (as appropriate) will pay a sum of cash equal to the excess of the fair market value of a Vodafone ADR over the call price; b. If the fair market value of a Vodafone ADR is less than the put price, the counterparty will pay to MediaOne SPC IV or MediaOne SPC VI (as appropriate) a sum of cash equal to the excess of the put price over the fair market price of a Vodafone ADR; c. If the fair market value of a Vodafone ADR is less than or equal to the call price but greater than or equal to the put price, the Vodafone collar will expire worthless and no cash payment will be made or received by MediaOne SPC IV or MediaOne SPCL VI (as appropriate). The net value of (i) the sale of all Vodafone ADRs and (ii) the cash settlement of the Vodafone collars will always be equal to or greater than the face value of the floating-rate notes. Any remaining cash will retained by MediaOne SPC IV and MediaOne SPC VI and would become available to AT&T for general corporate purposes. EQUITY OPTION AND EQUITY SWAP CONTRACTS We enter into equity option and equity swap contracts, which are undesignated in accordance with SFAS No. 133, to manage our exposure to changes in equity prices associated with stock appreciation rights of previously affiliated companies. The notional amounts outstanding on these contracts at December 31, 2001 and 2000 were $360 and $392 million, respectively. The following table summarizes the carrying and fair values of these instruments. Market prices are based on market quotes.
2001 2000 ----------------- ----------------- CARRYING/FAIR CARRYING/FAIR VALUE VALUE ----------------- ----------------- ASSET LIABILITY ASSET LIABILITY ----- --------- ----- --------- Equity hedges......................................... $-- $85 $2 $100
WARRANTS We may obtain warrants to purchase equity securities in other private and public companies as a result of certain transactions. Private warrants and public warrants that provide for net share settlement (i.e. allow for 137 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cashless exercise) are considered to be derivative instruments and recognized on our balance sheet at fair value (in accordance with SFAS No. 133). Warrants are not eligible to be designated as hedging instruments because there is no underlying exposure. Instead, these are effectively investments in private and public companies. The fair value of these warrants was $41 at December 31, 2001. DEBT AND PREFERRED SECURITIES The carrying value of debt maturing within one year approximates market value. The table below summarizes the carrying and fair values of long-term debt, excluding capital leases, and certain preferred securities. The market values of long-term debt were obtained based on quotes or rates available to us for debt with similar terms and maturities, and the market value of the preferred securities was based on market quotes. It is not practicable to estimate the fair market value of our quarterly preferred securities that aggregated $4,720 and $4,710 at December 31, 2001 and 2000, respectively as there are no current markets quotes available on this private placement.
2001 2000 --------------------------- --------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ---------- -------------- ---------- Long-term Debt, excluding capital leases................................ $43,978 $41,845 $32,591 $29,735 Pacific preferred stock................. 2,100 948 2,121 595
DERIVATIVE IMPACTS For the year ended December 31, 2001, "Other comprehensive income", as a component of shareowners' equity, net of tax, included deferred net unrealized losses of $244 relating to derivatives that are designated as cash flow hedges. This amount included net losses of $166 related to the ongoing fair value adjustments of equity based derivative instruments embedded in certain debt instruments, net losses of $78 related to certain swaps and foreign currency transactions. For the year ended December 31, 2001, "Other (expense) income" in the Consolidated Statement of Income, included net gains of $1,328, relating to ongoing fair value adjustments of undesignated derivatives and derivatives designated as fair value hedges. The fair value adjustments included net gains of $1,247 for equity based derivatives instruments related to certain debt instruments, net gains of $81 for changes in the fair value of warrants, swaps and foreign currency transactions. These gains were offset by the ongoing mark- to-market adjustments of the "trading" securities underlying the monetizations of $(983). 15. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS We sponsor noncontributory, defined benefit pension plans covering the majority of our employees. Pension benefits for management employees are based principally on career-average pay. Pension benefits for occupational employees are not directly related to pay. Pension trust contributions are made to trust funds held for the sole benefit of plan participants. Our benefit plans for current and certain future retirees include health-care benefits, life insurance coverage and telephone concessions. 138 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table shows the components of the net periodic benefit costs included in our Consolidated Statements of Income:
PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------- ------------------------ FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2001 2000 1999 2001 2000 1999 ------- ------- ------- ------ ------ ------ Service cost benefits earned during the period......................... $ 257 $ 248 $ 247 $ 27 $ 35 $ 54 Interest cost on benefit obligations........................ 951 991 919 346 352 324 Amortization of unrecognized prior service cost....................... 172 174 159 4 4 13 Credit for expected return on plan assets............................. (1,660) (1,821) (1,458) (201) (230) (200) Amortization of transition asset..... (89) (156) (158) -- -- -- Amortization of gains................ (181) (332) (10) -- (16) (1) Charges for special termination benefits*.......................... 188 -- -- 28 16 5 Net curtailment losses (gains)*...... 112 121 -- 58 (14) -- Net settlement losses (gains)*....... 4 8 (121) -- -- -- ------- ------- ------- ----- ----- ----- Net periodic benefit (credit)cost.... $ (246) $ (767) $ (422) $ 262 $ 147 $ 195 ======= ======= ======= ===== ===== =====
- --------------- * Primarily included in "Net restructuring and other charges" in the Consolidated Statements of Income. In connection with our restructuring plan announced in the fourth quarter of 2001 we recorded a $188 charge related to management employee separation benefits expected to be funded by assets of the AT&T Management Pension Plan. We also recorded pension and postretirement benefit curtailment charges of $170 and a $28 charge related to expanded eligibility for postretirement benefits for certain employees expected to exit under the plan. In 1998 we offered a voluntary retirement incentive program (VRIP) to employees who were eligible participants in the AT&T Management Pension Plan. Approximately 15,300 management employees accepted the VRIP offer and had terminated employment as of December 31, 1999. The VRIP permitted employees to choose either a total lump-sum distribution of their pension benefits or periodic future annuity payments. Lump-sum pension settlements resulted in settlement gains of $121 recorded in 1999. 139 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets, and a statement of the funded status:
PENSION BENEFITS POSTRETIREMENT BENEFITS ----------------- ------------------------ FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- 2001 2000 2001 2000 ------- ------- ---------- ---------- CHANGE IN BENEFIT OBLIGATIONS: Benefit obligation, beginning of year......... $13,063 $12,868 $ 4,886 $ 4,642 Service cost.................................. 257 248 27 35 Interest cost................................. 951 991 346 352 Plan amendments............................... 62 32 -- (45) Actuarial losses (gains)...................... 655 5 376 203 Acquisition................................... -- 204 -- 38 Benefit payments.............................. (1,117) (1,228) (407) (362) Special termination benefits.................. 188 -- 28 16 Settlements................................... (17) (57) -- -- Curtailment losses............................ (7) -- 60 7 ------- ------- ------- ------- Benefit obligation, end of year............... $14,035 $13,063 $ 5,316 $ 4,886 ======= ======= ======= ======= CHANGE IN FAIR VALUE OF PLAN ASSETS: Fair value of plan assets, beginning of year........................................ $21,203 $21,854 $ 2,526 $ 2,852 Actual return on plan assets.................. (1,650) 335 (214) (128) Employer contributions........................ 66 94 255 159 Acquisition................................... -- 205 -- 5 Benefit payments.............................. (1,117) (1,228) (407) (362) Settlements................................... (17) (57) -- -- ------- ------- ------- ------- Fair value of plan assets, end of year........ $18,485 $21,203 $ 2,160 $ 2,526 ======= ======= ======= ======= At December 31, Funded (unfunded) benefit obligation.......... $ 4,450 $ 7,992 $(3,156) $(2,360) Unrecognized net (gain) loss.................. (2,506) (6,493) 605 (188) Unrecognized transition asset................. (34) (123) -- -- Unrecognized prior service cost............... 883 1,100 (12) (9) ------- ------- ------- ------- Net amount recorded........................... $ 2,793 $ 2,476 $(2,563) $(2,557) ======= ======= ======= =======
At December 31, 2001, our pension plan assets included $31 of AT&T common stock. At December 31, 2000, our pension plan assets included $34 of AT&T common stock and $26 of LMG Series A common stock, and $2 of AT&T Wireless Group common stock. 140 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table provides the amounts recorded in our Consolidated Balance Sheets:
PENSION BENEFITS POSTRETIREMENT BENEFITS ----------------- ------------------------ AT DECEMBER 31, -------------------------------------------- 2001 2000 2001 2000 ------- ------- ---------- ---------- Prepaid pension cost............................ $3,337 $3,003 $ -- $ -- Benefit related liabilities..................... (648) (579) (2,563) (2,557) Intangible asset................................ 50 30 -- -- Accumulated other comprehensive income.......... 54 22 -- -- ------ ------ ------- ------- Net amount recorded............................. $2,793 $2,476 $(2,563) $(2,557) ====== ====== ======= =======
Our nonqualified pension plans had an unfunded accumulated benefit obligation of $132 and $125 at December 31, 2001 and 2000, respectively. On January 1, 2001 our postretirement health and life benefit plans were merged into one plan. At December 31, 2000, our postretirement health and telephone benefit plans had accumulated postretirement benefit obligations of $4,282, which were in excess of plan assets of $1,413. The assumptions in the following table were used in the measurement of the pension and postretirement benefit obligations and the net periodic benefit costs as applicable.
WEIGHTED-AVERAGE ASSUMPTIONS AT DECEMBER 31: ------------------ 2001 2000 1999 ---- ---- ---- Discount rate............................................... 7.25% 7.5% 7.75% Expected return on plan assets.............................. 9.5% 9.5% 9.5% Rate of compensation increase............................... 4.5% 4.5% 4.5%
We assumed a rate of increase in the per capita cost of covered health-care benefits (the health-care cost trend rate) of 9.5%. This rate was assumed to gradually decline after 2001 to 5.0% by 2012 and then remain level. Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one percentage point increase or decrease in the assumed health-care cost trend rate would increase or decrease the total of the service and interest-cost components of net periodic postretirement health-care benefit cost by $11 and $10, respectively, and would increase or decrease the health-care component of the accumulated postretirement benefit obligation by $155 and $135, respectively. We also sponsor savings plans for the majority of our employees. The plans allow employees to contribute a portion of their pretax and/or after-tax income in accordance with specified guidelines. We match a percentage of the employee contributions up to certain limits. Our contributions amounted to $185 in 2001, $220 in 2000 and $197 in 1999. 16. STOCK-BASED COMPENSATION PLANS Under the 1997 Long-term Incentive Program (Program), which was effective June 1, 1997, and amended on May 19, 1999 and March 14, 2000, we grant stock options, performance shares, restricted stock and other awards on AT&T common stock as well as stock options on AT&T Wireless Group tracking stock prior to the split-off of AT&T Wireless. Under the initial terms of the Program, there were 150 million shares of AT&T common stock available for grant with a maximum of 22.5 million common shares that could be used for awards other than stock options. Subsequent to the 1999 modification, beginning with January 1, 2000, the remaining shares available for grant at December 31 of the prior year, plus 1.75% of the shares of AT&T common stock outstanding on January 1 of each year, become available for grant. Under the amended terms, a maximum of 37.5 million 141 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) shares can be used for awards other than stock options. As a result of the equity restructuring of stock options and other awards in connection with the AT&T Wireless split-off, the number of shares available for stock option grants and the number of shares available for other stock-based awards increased by 17.7 million and 2.9 million, respectively. The exercise price of any stock option is equal to the stock price when the option is granted. Generally, the options vest over three or four years and are exercisable up to 10 years from the date of grant. Under the Program, performance share units are awarded to key employees in the form of either common stock or cash at the end of a three-year period, based on certain financial-performance targets. On April 27, 2000, AT&T created a new class of stock and completed an offering of AT&T Wireless Group tracking stock. Under the Program, 5% of the outstanding AT&T Wireless Group shares became available for grant with a maximum of 1.25% of the outstanding shares that could be used for awards other than options. On January 1, 2001, the remaining AT&T Wireless Group shares available for grant at December 31, 2000, plus 2% of the outstanding AT&T Wireless Group shares on January 1 became available for grant. The exercise price of any stock option was equal to the stock price when the option was granted. When granted, the options had a two to three and one-half year vesting period. They are exercisable up to 10 years from the date of grant. In 2001 and 2000, there were no grants of awards other than stock options. On April 27, 2000, substantially all employees were granted AT&T Wireless Group tracking stock options. On July 9, 2001, AT&T completed the split-off of AT&T Wireless Group as a separate, independently traded company. All AT&T Wireless Group tracking stock was converted into AT&T Wireless common stock on a one-for-one basis, and AT&T Wireless common stock held by AT&T was distributed to AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding. All outstanding AT&T Wireless Group tracking stock options and all AT&T common stock options granted prior to January 1, 2001 were treated in a similar manner. AT&T modified the terms and conditions of all outstanding stock option grants to allow the AT&T Wireless common stock options held by AT&T employees to immediately vest and become exercisable for their remaining contractual term and to also allow the AT&T common stock options held by AT&T Wireless employees to immediately vest and become exercisable for their remaining contractual term. In 2001, AT&T recognized $3 of compensation expense related to these modifications. Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was effective July 1, 1996, and amended on May 23, 2001, we are authorized to sell up to 105 million shares of AT&T common stock to our eligible employees through June 30, 2006. Under the terms of the Plan, employees may have up to 10% of their earnings withheld to purchase AT&T's common stock. The purchase price of the stock on the date of exercise is 85% of the average high and low sale prices of shares on the New York Stock Exchange for that day. Under the Plan, we sold approximately 6 million shares to employees in both 2001 and 2000 and 3 million shares to employees in 1999. We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our plans. Accordingly, no compensation expense has been recognized for our stock-based compensation plans other than for our performance-based and restricted stock awards and stock appreciation rights (SARs). Stock based-compensation (expense) income was $(121), $253 and $(462) in 2001, 2000 and 1999, respectively. These amounts included (expense) income of $(3), $269 and $(382) in 2001, 2000 and 1999, respectively, related to grants of SARs of affiliated companies held by certain employees subsequent to the TCI merger. We also entered into an equity hedge in 1999 to offset potential future compensation costs associated with these SARs. (Expense) income related to this hedge was $(16), $(324) and $227 in 2001, 2000 and 1999, respectively. 142 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the AT&T common stock option transactions is shown below:
WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE 2001 PRICE 2000 PRICE 1999 PRICE ------- --------- ------- --------- ------- --------- SHARES IN THOUSANDS Outstanding at January 1....................... 249,026 $35.82 168,763 $37.42 131,904 $30.41 Options assumed in mergers................. -- 29,613 $24.71 11,770 $14.79 Options granted........... 68,402 $22.17 74,570 $36.12 47,927 $57.13 AT&T Wireless split-off adjustments............. 21,644 Options and SARs exercised............... (5,218) $11.63 (11,446) $22.07 (17,858) $22.87 Options canceled or forfeited............... (16,308) $31.07 (12,474) $45.61 (4,980) $42.44 AT DECEMBER 31: Options outstanding....... 317,546 $24.58 249,026 $35.82 168,763 $37.42 Options exercisable....... 171,446 $26.05 131,450 $30.44 57,894 $28.21 Shares available for grant................... 34,718 34,204 41,347
The weighted average exercise prices for the period prior to the AT&T Wireless split-off in 2001, and for the years ended December 31, 2000 and 1999 have not been adjusted to reflect the impact of the split-off. At December 31, 2001, there were 4.5 million AT&T stock options with 2.2 million tandem SARs outstanding that were originally assumed in connection with our merger with MediaOne. All of the SARs were exercisable at a price of $19.33. There were no SARs exercised during 2001 or 2000. 143 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about the AT&T common stock options outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- -------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 2001 LIFE PRICE 2001 PRICE - ------------------------ -------------- ----------- --------- -------------- --------- (IN THOUSANDS) (IN THOUSANDS) $2.03 -- $13.65............ 16,245 4.9 $ 7.90 15,767 $ 7.75 $13.70 -- $16.77........... 12,968 8.6 $15.84 3,882 $15.38 $16.85 -- $17.33........... 28,866 9.4 $16.86 1,319 $16.95 $17.39..................... 48,088 9.2 $17.39 2,907 $17.39 $17.44 -- $18.49........... 11,193 5.3 $17.88 7,312 $17.78 $18.50..................... 14,420 5.6 $18.50 14,420 $18.50 $18.53 -- $19.77........... 9,325 5.7 $19.12 8,159 $19.11 $19.79..................... 15,858 5.1 $19.79 15,858 $19.79 $19.88 -- $24.13........... 19,659 5.8 $22.88 14,768 $22.83 $24.23..................... 25,088 8.6 $24.23 6,287 $24.23 $24.30 -- $31.74........... 24,575 7.4 $27.98 17,337 $28.89 $31.79..................... 23,874 6.1 $31.79 23,874 $31.79 $31.85 -- $34.30........... 19,406 8.1 $34.16 7,372 $34.00 $34.33 -- $44.98........... 22,925 7.7 $38.80 16,105 $38.42 $45.20 -- $46.90........... 25,056 7.1 $45.21 16,079 $45.21 ------- ------- 317,546 7.4 $24.58 171,446 $26.05
A summary of the AT&T Wireless Group tracking stock option transactions is shown below:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE 2001 PRICE 2000 PRICE ------- --------- ------ --------- SHARES IN THOUSANDS OUTSTANDING AT JANUARY 1...................... 73,626 $29.29 -- $ -- Options granted............................... 4,037 $22.57 76,983 $29.29 Options exercised............................. (1) $22.03 -- $ -- Options canceled or forfeited................. (2,711) $29.11 (3,357) $29.43 Options assumed by AT&T Wireless on July 9th......................................... (74,951) AT DECEMBER 31: Options outstanding........................... -- 73,626 $29.29 Options exercisable........................... -- 12,391 $29.48 Shares available for grant.................... -- 41,874
AT&T has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". If AT&T had elected to recognize compensation costs based on the fair value at the date of 144 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) grant of the awards, consistent with the provisions of SFAS No. 123, net income and earnings per share amounts would have been as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2001 2000 1999 ------- ------ ------ AT&T COMMON STOCK GROUP: (Loss) income from continuing operations available to common shareowners...................................... $(5,423) $2,342 $5,685 Income (loss) from discontinued operations................ 58 283 (492) Gain on sale of discontinued operations................... 13,503 -- -- Cumulative effect of accounting change.................... 359 -- -- Net income available to common shareowners................ $ 8,497 $2,625 $5,193 (LOSS) EARNINGS PER AT&T COMMON STOCK GROUP COMMON SHARE -- BASIC: Continuing operations..................................... $ (1.48) $ 0.67 $ 1.84 Discontinued operations................................... 0.01 0.08 (0.16) Gain on sale of discontinued operations................... 3.70 -- -- Cumulative effect of accounting change.................... 0.10 -- -- AT&T Common Stock Group earnings.......................... 2.33 $ 0.75 $ 1.68 (LOSS) EARNINGS PER AT&T COMMON STOCK GROUP COMMON SHARE -- DILUTED: Continuing operations..................................... $ (1.48) $ 0.66 $ 1.80 Discontinued operations................................... 0.01 0.08 (0.15) Gain on sale of discontinued operations................... 3.70 -- -- Cumulative effect of accounting change.................... 0.10 -- -- AT&T Common Stock Group earnings.......................... 2.33 $ 0.74 $ 1.65 AT&T WIRELESS GROUP: Income.................................................... $ 18 $ 51 $ -- EARNINGS PER SHARE: Basic and diluted......................................... $ 0.04 $ 0.14 $ --
The pro forma effect on net loss from continuing operations available to AT&T common shareowners for 2001 includes an expense of $50 due to the conversion of AT&T common stock options in connection with the split-off of AT&T Wireless, and also includes an expense of $175 due to the accelerated vesting of AT&T Wireless stock options held by AT&T employees after the split-off. The weighted-average fair values at date of grant for AT&T common stock options granted during 2001, 2000 and 1999 were $7.90, $12.10 and $15.64, respectively, and were estimated using the Black-Scholes option-pricing model. The weighted-average risk-free interest rates applied for 2001, 2000 and 1999 were 4.61%, 6.29% and 5.10%, respectively. The following assumptions were applied for 2001, 2000 and 1999, respectively: (i) expected dividend yields of .85%, 1.6% and 1.7%, (ii) expected volatility rates of 36.9%, 33.5% and 28.3% and (iii) expected lives of 4.7 years in 2001 and 2000 and 4.5 years in 1999. The weighted-average fair values at date of grant for AT&T Wireless Group tracking stock options granted during 2001 and 2000 were $11.58 and $14.20, respectively, and were estimated using the Black-Scholes option-pricing model. The following weighted-average assumptions were applied for 2001 and 2000, 145 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respectively: (i) risk-free rate of 4.92% and 6.53%, (ii) expected volatility rate of 55.0% in 2001 and 2000 and (iii) expected lives of 4.8 years and 3.9 years. In January 2002, AT&T modified its outstanding stock option agreements for AT&T stock options and other equity awards held by current AT&T Broadband employees to provide that upon the change in control of AT&T Broadband their stock options and other equity awards granted prior to January 1, 2002 will be immediately vested and exercisable through their remaining contractual term. The potential compensation cost associated with this modification for current AT&T Broadband employees has been measured as of the modification date and is approximately $50 pretax. The actual charge will be finalized and recorded by AT&T Broadband at the time of the change in control in connection with the anticipated merger with Comcast. 17. INCOME TAXES The following table shows the principal reasons for the difference between the effective income (benefit) tax rate and the U.S. federal statutory income tax rate:
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2001 2000 1999 ------- ------ ------ U.S. federal statutory income tax rate.................... 35% 35% 35% Federal income tax (benefit) provision at statutory rate.................................................... $ (362) $ 845 $3,774 Amortization of investment tax credits.................... (18) (23) (10) State and local income tax (benefit) provision, net of federal income tax provision (benefit) effect........... (92) 176 279 In-process research and development write-off............. -- -- 208 Amortization of intangibles............................... 188 91 26 Foreign rate differential................................. 209 104 56 Taxes on repatriated and accumulated foreign income, net of tax credits.......................................... (84) (84) (45) Research and other credits................................ (43) (37) (61) Valuation allowance....................................... -- -- (76) Investment dispositions, acquisitions and legal entity restructurings.......................................... (176) (445) (94) Operating losses and charges relating to Excite@Home...... 649 2,757 -- Deconsolidation of and put obligation settlement related to Excite@Home.......................................... (1,045) -- -- Other differences, net.................................... (17) (100) (41) ------- ------ ------ (Benefit) provision for income taxes...................... $ (791) $3,284 $4,016 Effective income (benefit) tax rate....................... 76.4% 136.1% 37.3%
146 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The U.S. and foreign components of (loss) income from continuing operations before income taxes and the (benefit) provision for income taxes are presented in this table:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 --------- -------- --------- (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES United States.......................................... $(1,030) $2,823 $10,449 Foreign................................................ (5) (409) 332 ------- ------ ------- Total.................................................. $(1,035) $2,414 $10,781 (BENEFIT) PROVISION FOR INCOME TAXES CURRENT.................................................. $ 1,392 $2,323 $ 2,896 Federal................................................ 152 281 417 State and local........................................ 102 89 100 ------- ------ ------- Foreign................................................ 1,646 2,693 3,413 DEFERRED................................................. (2,125) 633 593 Federal................................................ (293) (14) 12 State and local........................................ (1) (5) 8 ------- ------ ------- Foreign................................................ (2,419) 614 613 Deferred investment tax credits.......................... (18) (23) (10) ------- ------ ------- (Benefit) provision for income taxes..................... $ (791) $3,284 $ 4,016
In addition, we also recorded current and deferred income tax benefits related to minority interest income (expense) and net equity losses related to other equity investments, respectively in the amounts of $756 and $2,383 in 2001, $279 and $251 in 2000 and $273 and $249 in 1999, respectively. Deferred income tax liabilities are taxes we expect to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of differences in the book and tax basis of certain assets and liabilities. 147 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income tax liabilities and assets consist of the following:
AT DECEMBER 31, ----------------- 2001 2000 ------- ------- LONG-TERM DEFERRED INCOME TAX LIABILITIES Property, plant and equipment............................. $ 6,420 $ 5,393 Investments............................................... 7,768 9,558 Franchise costs........................................... 16,839 18,571 Other..................................................... 2,519 2,694 ------- ------- Total long-term deferred income tax liabilities........... 33,546 36,216 LONG-TERM DEFERRED INCOME TAX ASSETS Business restructuring.................................... 163 127 Net operating loss/credit carryforwards................... 180 602 Employee pensions and other benefits, net................. 1,027 1,470 Reserves and allowances................................... 1,724 99 Other..................................................... 2,349 2,604 Valuation allowance....................................... (57) (740) ------- ------- Total net long-term deferred income tax assets.............. 5,386 4,162 Net long-term deferred income tax liabilities............... $28,160 $32,054 CURRENT DEFERRED INCOME TAX LIABILITIES Investments............................................... $ 11 $ 670 Other..................................................... 121 310 ------- ------- Total current deferred income tax liabilities............. 132 980 CURRENT DEFERRED INCOME TAX ASSETS Business restructuring.................................... 216 155 Employee pensions and other benefits...................... 182 377 Reserves and allowances................................... 493 621 Other..................................................... 471 586 Valuation allowance....................................... (0) (39) ------- ------- Total net current deferred income tax assets................ 1,362 1,700 Net current deferred income tax assets...................... $ 1,230 $ 720
At December 31, 2001, we had net operating loss carryforwards (tax effected) for federal and state income tax purposes of $15 and $116, respectively, expiring through 2020. In addition, we had federal tax credit carryforwards of $17, of which $1 has no expiration date and $16 expire through 2003. We also had state tax credit carryforwards (tax effected) of $32 expiring through 2003. In connection with the TCI and MediaOne mergers, we acquired certain federal and state net operating loss carryforwards that are subject to a valuation allowance of $23 at December 31, 2001. If in the future, the realization of these acquired deferred tax assets becomes more likely than not, any reduction of the associated valuation allowance will be allocated to reduce franchise costs and other intangibles. On September 30, 2001, the assets and liabilities of Excite@Home were deconsolidated from AT&T's consolidated balance sheet. Accordingly, AT&T's deferred income tax assets and liabilities at December 31, 2001, presented above, exclude any amounts related to Excite@Home. 148 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. COMMITMENTS AND CONTINGENCIES In the normal course of business we are subject to proceedings, lawsuits and other claims, including proceedings under laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 2001. These matters could affect the operating results of any one quarter when resolved in future periods. However, we believe that after final disposition, any monetary liability or financial impact to us beyond that provided for at year-end would not be material to our annual consolidated financial statements. We lease land, buildings and equipment through contracts that expire in various years through 2050. Our rental expense under operating leases was $696 in 2001, $705 in 2000 and $622 in 1999. The total of minimum rentals to be received in the future under non-cancelable operating subleases as of December 31, 2001, was $189. The following table shows our future minimum commitments due under non-cancelable operating and capital leases at December 31, 2001:
OPERATING CAPITAL LEASES LEASES --------- ------- 2002........................................................ $ 550 $ 66 2003........................................................ 492 63 2004........................................................ 432 60 2005........................................................ 350 58 2006........................................................ 298 44 Later years................................................. 874 131 ------ ---- Total minimum lease payments................................ $2,996 $422 ====== ==== Less: Amount representing interest.......................... 95 ---- Present value of net minimum lease payments................. $327 ====
In addition, under certain real estate operating leases, we could be required to make payments to the lessor up to $586 at the end of the lease term (lease terms range from 2002 through 2011). The actual amount paid, if any, would be reduced by amounts received by the lessor upon remarketing of the property. AT&T has an agreement with Motorola, Inc. to purchase a minimum of 1.6 million digital set-top devices at an average price of $234 per unit in 2002. During 2001, AT&T satisfied its obligation under a previous agreement with Motorola, Inc. to purchase set-top devices. AT&T has certain commitments relating to AT&T Canada (see Note 5). In 1997, AT&T Broadband's predecessor, TCI, entered into a 25-year affiliation term sheet with Starz Encore Group pursuant to which AT&T may be obligated to pay fixed monthly amounts in exchange for unlimited access to all of the existing Encore and STARZ! programming. Starz Encore Group is a subsidiary of LMG. The future commitment, which is calculated based on a fixed number of subscribers, increases annually from $306 in 2002 to $315 in 2003 and will increase annually through 2022 with inflation, subject to certain adjustments, including increases in the number of subscribers. The affiliation term sheet further provides that to the extent Starz Encore Group's programming costs increase above certain levels, AT&T's payments under the term sheet will be increased in proportion to the excess. Excess programming costs that may be payable by AT&T in future years are not presently estimable and could be significant. By letter dated May 29, 2001, AT&T Broadband indicated that in its view the Starz Encore term sheet as a whole is 149 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) unenforceable and reserved its right to terminate the term sheet. Starz Encore subsequently initiated a lawsuit against AT&T Broadband seeking a declaration that the term sheet is a binding and enforceable contract. AT&T has contractual obligations to utilize network facilities from local exchange carriers with terms greater than one year. These contracts are based on volumes and have penalty fees if certain volume levels are not met. We assessed our minimum exposure based on penalties to exit the contracts. At December 31, 2001, penalties to exit these contracts in any given year totaled approximately $1.5 billion. AT&T Broadband is party to an agreement under which it purchases certain billing services from CSG Systems, Inc. ("CSG"). Unless terminated by either party pursuant to terms of the agreement, the agreement expires on December 31, 2012. The agreement calls for monthly payments which are subject to adjustments and conditions pursuant to the terms of the underlying agreements. The annual commitment under the agreement is $130 for 2002 and will increase annually with inflation. 19. RELATED PARTY TRANSACTIONS AT&T has various related party transactions with Concert. Included in "Revenue" in the Consolidated Statements of Income was $1,080 for services provided to Concert for the years ended December 31, 2001 and 2000. Included in "Access and other connection" in the Consolidated Statements of Income are charges from Concert representing costs incurred on our behalf to connect calls made to foreign countries (international settlements) and costs paid by AT&T to Concert for distributing Concert products totaling $2,073 and $2,364 for the year ended December 31, 2001 and 2000, respectively. AT&T loaned $1,000 to Concert; that loan was included within "Other investments and related advances" in the Consolidated Balance Sheet. Interest income of $67 was recognized for the year ended December 31, 2000. This loan together with the associated accrued interest was written off in connection with the decision to unwind Concert (see Note 5). At December 31, 2001 and 2000, AT&T had a floating rate loan payable to Concert in the amount of $80 and $126, respectively. The loan, which is due on demand, is included in "Debt maturing within one year" in the Consolidated Balance Sheets. Interest expense was $3 and $6 for the year ended December 31, 2001 and 2000, respectively. Included in "Accounts receivable" in the Consolidated Balance Sheets at December 31, 2001 and 2000, was $438 and $462, respectively, related to telecommunications transactions with Concert. Included in "Accounts payable" in the Consolidated Balance Sheets at December 31, 2001 and 2000, was $201 and $518, respectively, related to transactions with Concert. Included in "Other receivables" in the Consolidated Balance Sheets at December 31, 2001 and 2000, was $781 and $1,106, respectively, related to administrative transactions performed on behalf of Concert. Included in "Other current liabilities" in the Consolidated Balance Sheets at December 31, 2001 and 2000, was $935 and $1,032, respectively, related to administrative transactions performed on behalf of Concert. We had various related party transactions with LMG. Included in costs of services and products were programming expenses related to services from LMG. These expenses amounted to $199 for the 7 months ended July 31, 2001, the effective split-off date of LMG for accounting purposes, $239 for the year ended December 31, 2000, and $184 for the 10 months ended December 31, 1999 (see Note 9). 20. SEGMENT REPORTING AT&T's results are segmented according to the way we manage our business: AT&T Business Services, AT&T Consumer Services and AT&T Broadband. 150 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T Business Services includes long distance, international and toll-free voice, local, data and Internet protocol (IP) networking, managed networking services and outsourcing solutions, and wholesale transport services (sales of services to service resellers). AT&T Consumer Services provides a variety of communications services to residential customers, including domestic and international long distance, transaction based long distance, such as operator-assisted and prepaid phone cards, local and local toll (intrastate calls outside the immediate local area) and dial-up Internet. AT&T Broadband offers a variety of services through our cable (broadband) network, including traditional analog video and advanced services such as digital video, high-speed data and broadband telephony. The balance of AT&T's continuing operations (excluding LMG) is included in a "Corporate and Other" group. This group reflects corporate staff functions and the elimination of transactions between segments, as well as the impacts of Excite@Home. In addition, all impacts of the adoption of SFAS No. 133 as well as the ongoing investment and derivative revaluations are reflected in the Corporate and Other group. LMG was not an operating segment of AT&T prior to its split-off from AT&T because AT&T did not have a controlling financial interest in LMG for financial accounting purposes. Therefore, we accounted for this investment under the equity method. Additionally, LMG's results were not reviewed by the chief operating decision-makers for purposes of determining resources to be allocated. Total assets for our reportable segments generally include all assets, except intercompany receivables. AT&T prepaid pension assets and Corporate-owned or leased real estate are held at the corporate level and therefore, are included in the Corporate and Other group. AT&T Broadband and MediaOne prepaid pension assets and owned or leased real estate is included in the AT&T Broadband segment. In addition, as the "Net Assets of Discontinued Operations" is not considered to be a part of AT&T's ongoing operations, it is included in a category separate from reportable segments and Corporate and Other group for reporting purposes. Capital additions for each segment include capital expenditures for property, plant and equipment, additions to nonconsolidated investments, increases in franchise costs and additions to internal-use software. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1). AT&T evaluates performance based on several factors, of which the primary financial measure is earnings before interest and taxes, including pretax minority interest and net pretax losses from other equity investments (EBIT). Generally, AT&T accounts for AT&T Business Services' and AT&T Broadband's Inter-segment transactions at market prices. 151 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- AT&T Business Services external revenue................. $27,284 $28,157 $28,087 AT&T Business Services internal revenue............... 740 743 605 ------- ------- ------- Total AT&T Business Services revenue.................... 28,024 28,900 28,692 AT&T Consumer Services external revenue................. 15,079 18,894 21,753 AT&T Broadband external revenue....................... 9,785 8,212 5,069 AT&T Broadband internal revenue....................... 14 14 1 ------- ------- ------- Total AT&T Broadband revenue............................ 9,799 8,226 5,070 ------- ------- ------- Total reportable segments.......................... 52,902 56,020 55,515 Corporate and Other(1).................................. (352) (487) (542) ------- ------- ------- Total revenue........................................... $52,550 $55,533 $54,973 ======= ======= =======
- --------------- (1) Includes $418, $248 and $10 related to Excite@Home in 2001, 2000 and 1999, respectively. DEPRECIATION AND AMORTIZATION(1)
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ------ ------ ------ AT&T Business Services..................................... $4,215 $4,220 $4,219 AT&T Consumer Services..................................... 200 167 184 AT&T Broadband............................................. 4,376 3,063 1,636 ------ ------ ------ Total reportable segments............................. 8,791 7,450 6,039 Corporate and Other(2)..................................... 547 1,139 155 ------ ------ ------ Total depreciation and amortization........................ $9,338 $8,589 $6,194 ====== ====== ======
- --------------- (1) Includes the amortization of goodwill, franchise costs and other purchased intangibles. (2) Includes $404, $991 and $38 related to Excite@Home in 2001, 2000 and 1999, respectively. (LOSSES) EARNINGS FROM OTHER EQUITY INVESTMENTS
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2001 2000 1999 ------- ----- ----- AT&T Business Services..................................... $(3,978) $ 35 $ (72) AT&T Broadband............................................. (40) (215) (396) ------- ----- ----- Total reportable segments............................. (4,018) (180) (468) Corporate and Other(1)..................................... (832) (408) (288) ------- ----- ----- Total net losses related to other equity investments....... $(4,850) $(588) $(756) ======= ===== =====
- --------------- (1) Includes $(29), $(382) and $(311) related to Excite@Home in 2001, 2000 and 1999, respectively. 152 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECONCILIATION OF EBIT TO INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST AND LOSSES RELATED TO OTHER EQUITY INVESTMENTS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- AT&T Business Services.................................. $(2,154) $ 5,990 $ 5,248 AT&T Consumer Services.................................. 4,875 6,893 7,619 AT&T Broadband.......................................... (3,215) (1,240) (1,545) ------- ------- ------- Total reportable segments.......................... (494) 11,643 11,322 Corporate and Other(1).................................. (4,324) (3,279) (441) Deduct: Pretax minority interest income (expense)....... 864 4,003 (180) Add: Pretax losses related to other equity investments........................................... 7,889 1,017 1,223 Interest expense........................................ (3,242) (2,964) (1,503) ------- ------- ------- Total income from continuing operations before income taxes, minority interest and losses from other equity investments........................................... $(1,035) $ 2,414 $10,781 ======= ======= =======
- --------------- (1) Includes $(714), $(3,603) and $(686) related to Excite@Home in 2001, 2000 and 1999, respectively. ASSETS
AT DECEMBER 31, ------------------------------ 2001 2000 1999 -------- -------- -------- AT&T Business Services............................... $ 40,339 $ 42,747 $ 37,974 AT&T Consumer Services............................... 2,141 3,150 3,781 AT&T Broadband....................................... 103,060 114,848 53,810 -------- -------- -------- Total reportable segments....................... 145,540 160,745 95,565 Corporate and Other Assets: Other segments..................................... 1,145 1,174 1,204 Prepaid pension costs.............................. 3,329 3,003 2,464 Deferred income taxes.............................. 960 406 527 Other corporate assets(1)(2)....................... 14,308 7,518 7,874 Net assets of discontinued operations................ -- 27,224 17,363 Investment in Liberty Media Group and Related receivables, net................................... -- 34,290 38,460 -------- -------- -------- Total assets......................................... $165,282 $234,360 $163,457 ======== ======== ========
- --------------- (1) Includes $2,541 and $2,726 related to Excite@Home for 2000 and 1999, respectively. (2) 2001 amount includes cash of $10,425. 153 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EQUITY INVESTMENTS (EXCLUDING LMG)
AT DECEMBER 31, -------------------------- 2001 2000 1999 ------ ------- ------- AT&T Business Services................................... $ 84 $ 2,355 $ 582 AT&T Broadband........................................... 4,287 6,473 10,327 ------ ------- ------- Total reportable segments........................... 4,371 8,828 10,909 Corporate and Other(1)................................... 228 1,666 3,012 ------ ------- ------- Total equity investments................................. $4,599 $10,494 $13,921 ====== ======= =======
- --------------- (1) Includes $35 and $2,726 related to Excite@Home for 2000 and 1999, respectively. CAPITAL ADDITIONS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- --------- --------- AT&T Business Services................................... $5,456 $ 6,839 $ 9,091 AT&T Consumer Services................................... 140 148 299 AT&T Broadband........................................... 3,607 4,968 4,759 ------ ------- ------- Total reportable segments........................... 9,203 11,955 14,149 Corporate and Other(1)................................... 327 1,683 271 ------ ------- ------- Total capital additions.................................. $9,530 $13,638 $14,420 ====== ======= =======
- --------------- (1) Includes $181 and $92 related to Excite@Home in 2001 and 2000, respectively. Geographic information is not presented due to the immateriality of revenue attributable to international customers. Reflecting the dynamics of our business, we continually review our management model and structure, which may result in additional adjustment to our operating segments in the future. 21. GUARANTEE OF PREFERRED SECURITIES TCI SECURITIES: Prior to the consummation of the TCI merger, TCI issued mandatorily redeemable preferred securities through subsidiary trusts that held subordinated debt securities of TCI. At December 31, 2001, $1,244 of the guaranteed redeemable preferred securities remained outstanding. In the first quarter of 2002, AT&T notified holders that it will call the mandatorily redeemable preferred securities issued by TCI Communications Financing I, TCI Communications Financing II and TCI Communications Financing IV for early redemption. (see Note 12) MEDIAONE SECURITIES: Prior to the consummation of the MediaOne merger, MediaOne issued mandatorily redeemable preferred securities through subsidiary trusts that held subordinated debt securities of MediaOne. At December 31, 2001, $776 of the guaranteed securities remained outstanding. 154 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In the first quarter of 2002, AT&T notified holders that it will call the mandatorily redeemable preferred securities issued by MediaOne Financing A, MediaOne Financing B and MediaOne Financing II for early redemption (see Note 12). AT&T provides a full and unconditional guarantee on the outstanding securities issued by TCI Communications Financing I, II and IV and the outstanding securities issued by MediaOne Financing A and B and MediaOne Finance II and III. Following are the condensed consolidating financial statements of AT&T Corp., which include the financial results of TCI and MediaOne for each of the corresponding periods. The results of MediaOne have been included in the financial results of AT&T since the date of acquisition on June 15, 2000, and the results of TCI have been included since the March 9, 1999, date of acquisition. 155 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED BALANCE SHEET AS OF DECEMBER 31, 2001
TCI MEDIAONE MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE AT&T SUBSIDIARY SUBSIDIARY ------------------ --------- ----------- PARENT TCI MEDIAONE I II IV A B II III --------- ---------- ---------- ---- ---- ---- --- --- ---- ---- (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents......... $ 10,415 $ -- $ 12 $ -- $ -- $ -- $-- $-- $ -- $ -- Receivables....................... 11,682 Investments....................... Deferred income taxes............. 729 Other current assets.............. 302 71 689 527 513 204 31 29 220 11 Total Current Assets.............. 23,128 71 701 527 513 204 31 29 220 11 Property, plant & equipment, net.............................. 8,580 135 Franchise costs, net.............. 20 Goodwill, net..................... 70 2,526 Investment in Liberty Media Group and related receivables, net..... Other investments and related advances......................... 130,219 12,747 41,413 Other assets...................... 5,445 91 21 16 16 516 Net assets of discontinued operations....................... Total Assets...................... $167,442 $13,064 $44,640 $527 $513 $204 $52 $45 $236 $527 LIABILITIES Debt maturing within one year..... $ 34,195 $ 616 $ 753 $527 $513 $204 $30 $28 $214 Liability under put options....... Other current liabilities......... 8,763 597 59 1 1 6 11 Total Current Liabilities......... 42,958 1,213 812 527 513 204 31 29 220 11 Long-term debt.................... 23,810 9,866 676 504 Deferred income taxes............. 1,147 934 Other long-term liabilities and deferred credits................. 6,850 45 23 Total Liabilities................. 74,765 11,124 2,445 527 513 204 31 29 220 515 Minority Interest................. Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T............... 4,720 SHAREOWNERS' EQUITY AT&T Common Stock................. 3,542 AT&T Wireless Group common stock.. Liberty Media Group Class A Common Stock............................ Liberty Media Group Class B Common Stock............................ Preferred stock issued to subsidiaries..................... 10,559 Other shareowners' equity......... 73,856 1,940 42,195 21 16 16 12 Total Shareowners' Equity......... 87,957 1,940 42,195 21 16 16 12 Total Liabilities and Shareowners' Equity........................... $167,442 $13,064 $44,640 $527 $513 $204 $52 $45 $236 $527 ELIMINATION AND NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------------- ------------- ------------ (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents......... $ 165 $ -- $ 10,592 Receivables....................... 44,516 (46,817) 9,381 Investments....................... 668 668 Deferred income taxes............. 501 1,230 Other current assets.............. (45) (1,895) 657 Total Current Assets.............. 45,805 (48,712) 22,528 Property, plant & equipment, net.............................. 32,607 41,322 Franchise costs, net.............. 42,799 42,819 Goodwill, net..................... 22,079 24,675 Investment in Liberty Media Group and related receivables, net..... -- Other investments and related advances......................... 63,996 (224,557) 23,818 Other assets...................... 8,835 (4,820) 10,120 Net assets of discontinued operations....................... -- Total Assets...................... $216,121 $(278,089) $165,282 LIABILITIES Debt maturing within one year..... $ 8,985 $ (33,107) $ 12,958 Liability under put options....... -- Other current liabilities......... 11,419 (8,388) 12,469 Total Current Liabilities......... 20,404 (41,495) 25,427 Long-term debt.................... 14,640 (8,969) 40,527 Deferred income taxes............. 26,079 28,160 Other long-term liabilities and deferred credits................. 7,378 (3,088) 11,208 Total Liabilities................. 68,501 (53,552) 105,322 Minority Interest................. 3,560 3,560 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T............... 4,720 SHAREOWNERS' EQUITY AT&T Common Stock................. 3,542 AT&T Wireless Group common stock.. -- Liberty Media Group Class A Common Stock............................ -- Liberty Media Group Class B Common Stock............................ -- Preferred stock issued to subsidiaries..................... (10,559) -- Other shareowners' equity......... 144,060 (213,978) 48,138 Total Shareowners' Equity......... 144,060 (224,537) 51,680 Total Liabilities and Shareowners' Equity........................... $216,121 $(278,089) $165,282
156 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2001
TCI MEDIAONE MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE AT&T SUBSIDIARY SUBSIDIARY --------------- ------------- --------- PARENT TCI MEDIAONE I II IV A B II III --------- ---------- ---------- --- --- --- ----- ----- --- --- (DOLLARS IN MILLIONS) Revenue............................... $19,587 $ -- $ -- $-- $-- $-- $ -- $ -- $-- $-- Operating Expenses Costs of services and products........ 3,310 1 Access and other connection........... 6,355 Selling, general and administrative... 1,600 406 14 Depreciation and other amortization... 1,470 57 Amortization of goodwill, franchise costs and other purchased intangibles.......................... 35 3 71 Net restructuring and other charges... 693 Total operating expenses.............. 13,463 466 86 Operating income (loss)............... 6,124 (466) (86) Other (expense) income................ 1,245 91 978 43 46 17 4 3 21 47 Interest expense (benefit)............ 4,214 1,149 180 43 46 17 3 2 20 45 (Loss) income from continuing operations before income taxes, minority interest, and (losses) earnings related to other equity investments.......................... 3,155 (1,524) 712 1 1 1 2 (Benefit) provision for income taxes................................ (237) (569) 299 Minority interest income (expense).... (160) Equity losses from Liberty Media Group................................ 2,711 Net (losses) earnings related to other equity investments................... (2,690) (2,098) (2,577) (Loss) income from continuing operations........................... 542 (5,764) (2,164) 1 1 1 2 Income (loss) from discontinued operations (net of income taxes)..... Gain on disposition of discontinued operations........................... 13,503 Income (loss) before cumulative effect of accounting change................. 14,045 (5,764) (2,164) 1 1 1 2 Cumulative effect of accounting change (net of income taxes)................ 508 545 540 Net income (loss)..................... 14,553 (5,219) (1,624) 1 1 1 2 Dividend requirements of preferred stock................................ 652 Premium on exchange of AT&T Wireless tracking stock....................... 80 Net income (loss) available to common shareowners.......................... $13,821 $(5,219) $(1,624) $-- $-- $-- $ 1 $ 1 $ 1 $ 2 ELIMINATION AND NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------------- ------------- ------------ (DOLLARS IN MILLIONS) Revenue............................... $35,413 $(2,450) $52,550 Operating Expenses Costs of services and products........ 12,871 (2,222) 13,960 Access and other connection........... 5,976 (195) 12,136 Selling, general and administrative... 8,822 (10) 10,832 Depreciation and other amortization... 5,338 6,865 Amortization of goodwill, franchise costs and other purchased intangibles.......................... 2,364 2,473 Net restructuring and other charges... 1,837 2,530 Total operating expenses.............. 37,208 (2,427) 48,796 Operating income (loss)............... (1,795) (23) 3,754 Other (expense) income................ (834) (3,208) (1,547) Interest expense (benefit)............ 1,263 (3,740) 3,242 (Loss) income from continuing operations before income taxes, minority interest, and (losses) earnings related to other equity investments.......................... (3,892) 509 (1,035) (Benefit) provision for income taxes................................ (284) (791) Minority interest income (expense).... 1,123 963 Equity losses from Liberty Media Group................................ 2,711 Net (losses) earnings related to other equity investments................... (4,382) 6,897 (4,850) (Loss) income from continuing operations........................... (6,867) 7,406 (6,842) Income (loss) from discontinued operations (net of income taxes)..... 178 (28) 150 Gain on disposition of discontinued operations........................... 13,503 Income (loss) before cumulative effect of accounting change................. (6,689) 7,378 6,811 Cumulative effect of accounting change (net of income taxes)................ (689) 904 Net income (loss)..................... (7,378) 7,378 7,715 Dividend requirements of preferred stock................................ 652 Premium on exchange of AT&T Wireless tracking stock....................... 80 Net income (loss) available to common shareowners.......................... $(7,378) $ 7,378 $ 6,983
157 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2001
TCI MEDIAONE MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE AT&T SUBSIDIARY SUBSIDIARY --------------- --------- --------- PARENT TCI MEDIAONE I II IV A B II III --------- ---------- ---------- --- --- --- --- --- --- --- (DOLLARS IN MILLIONS) Net Cash Provided by (Used in) Operating Activities of Continuing Operations........................... $ 6,500 $ (1,238) $ 808 $ 1 $ 1 $ 1 $ 2 INVESTING ACTIVITIES Capital expenditures and other additions............................ (1,325) (67) Investment distributions and sales.... 813 19,730 59 Net (acquisitions) dispositions of businesses, net of cash acquired/disposed.................... 14 Other................................. 6,136 158 Net Cash (Used in) Provided by Investing Activities of Continuing Operations........................... 5,638 19,821 59 FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..... 11,281 Proceeds from debt from AT&T.......... 3,990 Retirement of long-term debt.......... (629) (252) Retirement of AT&T debt............... (5,867) (22,213) (354) Repayment of borrowings from AT&T Wireless............................. Issuance of convertible preferred securities and warrants.............. 9,811 (Decrease)increase in short-term borrowings, net...................... (19,589) (360) (Decrease)increase in short-term borrowings from AT&T, net............ 2,471 (249) Other................................. 799 (1) (1) (1) (2) Net Cash (Used in) Provided by Financing Activities of Continuing Operations........................... (1,723) (18,583) (855) (1) (1) (1) (2) Net cash provided by (used in) discontinued operations.............. Net increase (decrease) in cash and cash equivalents..................... 10,415 12 Cash and cash equivalents at beginning of year.............................. Cash and cash equivalents at end of period............................... $ 10,415 $ -- $ 12 $-- $-- $-- $-- $-- $-- $-- ELIMINATION AND NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------------- ------------- ------------ (DOLLARS IN MILLIONS) Net Cash Provided by (Used in) Operating Activities of Continuing Operations........................... $ 4,520 $ (37) $ 10,558 INVESTING ACTIVITIES Capital expenditures and other additions............................ (7,825) (9,217) Investment distributions and sales.... 2,201 (19,789) 3,014 Net (acquisitions) dispositions of businesses, net of cash acquired/disposed.................... 4,899 4,913 Other................................. 2,725 (9,589) (570) Net Cash (Used in) Provided by Investing Activities of Continuing Operations........................... 2,000 (29,378) (1,860) FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..... 1,134 12,415 Proceeds from debt from AT&T.......... (3,990) Retirement of long-term debt.......... (780) (1,661) Retirement of AT&T debt............... 28,434 Repayment of borrowings from AT&T Wireless............................. (5,803) (5,803) Issuance of convertible preferred securities and warrants.............. 9,811 (Decrease)increase in short-term borrowings, net...................... 2,781 (17,168) (Decrease)increase in short-term borrowings from AT&T, net............ (649) (1,573) Other................................. (7,801) 6,383 (624) Net Cash (Used in) Provided by Financing Activities of Continuing Operations........................... (11,118) 29,254 (3,030) Net cash provided by (used in) discontinued operations.............. 4,699 161 4,860 Net increase (decrease) in cash and cash equivalents..................... 101 10,528 Cash and cash equivalents at beginning of year.............................. 64 64 Cash and cash equivalents at end of period............................... $ 165 $ -- $ 10,592
158 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED BALANCE SHEET AS OF DECEMBER 31, 2000
TCI MEDIAONE MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE AT&T SUBSIDIARY SUBSIDIARY ------------------ --------- ----------- PARENT TCI MEDIAONE I II IV A B II III --------- ---------- ---------- ---- ---- ---- --- --- ---- ---- (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents........ $ -- $ -- $ -- $ -- $ -- $ -- $-- $-- $ -- $ -- Receivables...................... 11,424 2,577 78 Investments...................... Deferred income taxes............ 811 Other current assets............. 1,103 11 Total Current Assets............. 13,338 2,588 78 Property, plant & equipment, net............................. 9,463 102 22 Franchise costs, net............. 838 30 Goodwill, net.................... 161 19,786 Investment in Liberty Media Group and related receivables, net.... 34,290 Other investments and related advances........................ 164,844 32,650 27,712 Other assets..................... 5,500 186 528 514 204 51 44 230 516 Net assets of discontinued operations...................... Total Assets..................... $194,144 $69,846 $47,598 $528 $514 $204 $51 $44 $230 $516 LIABILITIES Debt maturing within one year.... $ 52,556 $ 664 $ 2,337 $ -- $ -- $ -- $-- $-- $ -- $ -- Liability under put options...... Other current liabilities........ 9,535 1,129 76 Total Current Liabilities........ 62,091 1,793 2,413 Long-term debt................... 21,333 30,096 1,702 528 514 204 30 28 214 504 Deferred income taxes............ 569 230 Other long-term liabilities and deferred credits................ 7,341 773 129 Total Liabilities................ 91,334 32,662 4,474 528 514 204 30 28 214 504 Minority Interest................ Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T.............. 4,710 SHAREOWNERS' EQUITY AT&T Common Stock................ 4,176 AT&T Wireless Group common stock........................... 362 Liberty Media Group Class A Common Stock.................... 2,364 Liberty Media Group Class B Common Stock.................... 206 Other shareowners' equity........ 90,992 37,184 43,124 21 16 16 12 Total Shareowners' Equity........ 98,100 37,184 43,124 21 16 16 12 Total Liabilities and Shareowners' Equity............. $194,144 $69,846 $47,598 $528 $514 $204 $51 $44 $230 $516 ELIMINATION AND NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------------- ------------- ------------ (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents........ $ 64 $ -- $ 64 Receivables...................... 48,896 (51,922) 11,053 Investments...................... 2,102 2,102 Deferred income taxes............ (91) 720 Other current assets............. (328) (5) 781 Total Current Assets............. 50,643 (51,927) 14,720 Property, plant & equipment, net............................. 31,685 (3) 41,269 Franchise costs, net............. 47,350 48,218 Goodwill, net.................... 6,835 26,782 Investment in Liberty Media Group and related receivables, net.... 34,290 Other investments and related advances........................ 19,673 (214,004) 30,875 Other assets..................... 15,714 (12,505) 10,982 Net assets of discontinued operations...................... 24,876 2,348 27,224 Total Assets..................... $196,776 $(276,091) $234,360 LIABILITIES Debt maturing within one year.... $ 5,432 $ (29,151) $ 31,838 Liability under put options...... 2,564 2,564 Other current liabilities........ 11,219 (8,386) 13,573 Total Current Liabilities........ 19,215 (37,537) 47,975 Long-term debt................... 2,558 (24,622) 33,089 Deferred income taxes............ 31,255 32,054 Other long-term liabilities and deferred credits................ 331 (81) 8,493 Total Liabilities................ 53,359 (62,240) 121,611 Minority Interest................ 4,841 4,841 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T.............. 4,710 SHAREOWNERS' EQUITY AT&T Common Stock................ (416) 3,760 AT&T Wireless Group common stock........................... 362 Liberty Media Group Class A Common Stock.................... 2,364 Liberty Media Group Class B Common Stock.................... 206 Other shareowners' equity........ 138,992 (213,851) 96,506 Total Shareowners' Equity........ 138,576 (213,851) 103,198 Total Liabilities and Shareowners' Equity............. $196,776 $(276,091) $234,360
159 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2000
TCI MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING AT&T SUBSIDIARY SUBSIDIARY --------------------- ------------- PARENT TCI MEDIAONE I II IV A B --------- ---------- ---------- ----- ----- ----- ----- ----- (DOLLARS IN MILLIONS) Revenue................................. $22,234 $ -- $ -- $ -- $ -- $ -- $ -- $ -- Operating Expenses Costs of services and products.......... 2,961 Access and other connection............. 7,047 Selling, general and administrative..... 2,071 19 29 Depreciation and other amortization..... 1,806 52 7 Amortization of goodwill, franchise costs and other purchased intangibles............................ 50 6 226 Net restructuring and other charges..... 443 60 Total operating expenses................ 14,378 137 262 Operating income (loss)................. 7,856 (137) (262) Other (expense) income.................. 971 30 64 43 46 18 2 2 Interest expense (benefit).............. 4,786 1,793 170 43 46 18 1 1 (Loss) income from continuing operations before income taxes, minority interest and (losses) earnings from equity investments............................ 4,041 (1,900) (368) 1 1 (Benefit) provision for income taxes.... 1,505 (727) (54) Minority interest income (expense)...... (161) Equity earnings from Liberty Media Group.................................. 1,488 Net (losses) earnings related to other equity investments..................... 6,258 (3,765) (202) (Loss) income from continuing operations............................. 8,633 (3,450) (516) 1 1 Income from discontinued operations (net of income taxes)....................... Net income (loss)....................... 8,633 (3,450) (516) 1 1 Dividend requirements on preferred stock held by AT&T, net...................... Net income (loss) after preferred stock dividends.............................. $ 8,633 $(3,450) $(516) $ -- $ -- $ -- $ 1 $ 1 MEDIAONE ELIMINATION FINANCE NON- AND ------------- GUARANTOR CONSOLIDATION CONSOLIDATED II III SUBSIDIARIES ADJUSTMENTS AT&T CORP. ----- ----- ------------ ------------- ------------ (DOLLARS IN MILLIONS) Revenue................................. $ -- $ -- $35,386 $(2,087) $55,533 Operating Expenses Costs of services and products.......... 11,536 (1,702) 12,795 Access and other connection............. 6,425 (332) 13,140 Selling, general and administrative..... 7,649 (16) 9,752 Depreciation and other amortization..... 4,059 5,924 Amortization of goodwill, franchise costs and other purchased intangibles............................ 2,383 2,665 Net restructuring and other charges..... 6,526 7,029 Total operating expenses................ 38,578 (2,050) 51,305 Operating income (loss)................. (3,192) (37) 4,228 Other (expense) income.................. 11 25 4,242 (4,304) 1,150 Interest expense (benefit).............. 11 24 311 (4,240) 2,964 (Loss) income from continuing operations before income taxes, minority interest and (losses) earnings from equity investments............................ 1 739 (101) 2,414 (Benefit) provision for income taxes.... 1 2,559 3,284 Minority interest income (expense)...... 4,264 4,103 Equity earnings from Liberty Media Group.................................. 1,488 Net (losses) earnings related to other equity investments..................... (586) (2,293) (588) (Loss) income from continuing operations............................. 1,858 (2,394) 4,133 Income from discontinued operations (net of income taxes)....................... 546 (10) 536 Net income (loss)....................... 2,404 (2,404) 4,669 Dividend requirements on preferred stock held by AT&T, net...................... 111 (111) Net income (loss) after preferred stock dividends.............................. $ -- $ -- $ 2,293 $(2,293) $ 4,669
160 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000
TCI MEDIAONE MEDIAONE GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE AT&T SUBSIDIARY SUBSIDIARY --------------------- --------- ------------- PARENT TCI MEDIAONE I II IV A B II III --------- ---------- ---------- ----- ----- ----- --- --- ----- ----- (DOLLARS IN MILLIONS) Net Cash Provided by (used in) Operating Activities of Continuing Operations........................... $ 2,735 $ (374) $ (138) $ -- $ -- $ -- $ 1 $ 1 $ -- $ -- INVESTING ACTIVITIES Capital expenditures and other additions............................ (51) (79) (21) Investment distributions and sales.... 363 1,384 Investment contributions and purchases............................ (1,700) (7,360) Net (acquisitions) dispositions of businesses, net of cash acquired/disposed.................... (23,943) Other................................. (2,057) (48) Net Cash (used in) Provided by Investing Activities of Continuing Operations........................... (27,388) (7,487) 1,363 FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..... 739 Proceeds from debt from AT&T.......... 5,867 13,743 275 Retirement of long-term debt.......... (498) (1,058) Retirement of AT&T debt............... (4,990) (1,500) Issuance of AT&T Wireless Group common shares............................... 10,314 Dividends paid on common stock........ (3,047) (Decrease) increase in short-term borrowings, net.................... 12,108 Other................................. (830) 166 (1) (1) Net Cash Provided by (used in) Financing Activities of Continuing Operations........................... 24,653 7,861 (1,225) (1) (1) Net cash (used in) provided by discontinued operations.............. Net increase (decrease) in cash and cash equivalents..................... Cash and cash equivalents at beginning of year.............................. Cash and cash equivalents at end of period............................... $ -- $ -- $ -- $ -- $ -- $ -- $-- $-- $ -- $ -- ELIMINATION AND NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------------- ------------- ------------ (DOLLARS IN MILLIONS) Net Cash Provided by (used in) Operating Activities of Continuing Operations........................... $ 9,079 $ 361 $ 11,665 INVESTING ACTIVITIES Capital expenditures and other additions............................ (10,760) (10,911) Investment distributions and sales.... 629 (1,384) 992 Investment contributions and purchases............................ (694) 7,360 (2,394) Net (acquisitions) dispositions of businesses, net of cash acquired/disposed.................... 7,286 (16,657) Other................................. (6,186) 7,216 (1,075) Net Cash (used in) Provided by Investing Activities of Continuing Operations........................... (9,725) 13,192 (30,045) FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..... 3,862 4,601 Proceeds from debt from AT&T.......... 4,595 (24,480) Retirement of long-term debt.......... (562) (2,118) Retirement of AT&T debt............... 6,490 Issuance of AT&T Wireless Group common shares............................... 10,314 Dividends paid on common stock........ (3,047) (Decrease) increase in short-term borrowings, net.................... 706 4,159 16,973 Other................................. (1,242) 917 (991) Net Cash Provided by (used in) Financing Activities of Continuing Operations........................... 7,359 (12,914) 25,732 Net cash (used in) provided by discontinued operations.............. (7,667) (639) (8,306) Net increase (decrease) in cash and cash equivalents..................... (954) (954) Cash and cash equivalents at beginning of year.............................. 1,018 1,018 Cash and cash equivalents at end of period............................... $ 64 $ -- $ 64
161 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999
GUARANTOR TCI FINANCING AT&T GUARANTOR --------------------------------- NON-GUARANTOR PARENT SUBSIDIARY TCI I II IV SUBSIDIARIES --------- -------------- --------- --------- --------- ------------- (DOLLARS IN MILLIONS) Revenue............................ $24,755 $ -- $-- $-- $-- $31,879 Operating Expenses Costs of services and products..... 1,536 10,707 Access and other connection........ 8,403 6,232 Selling, general and administrative................... 4,363 575 5,960 Depreciation and other amortization..................... 2,072 49 3,016 Amortization of goodwill, franchise costs and other purchased intangibles...................... 34 4 1,019 Net restructuring and other charges.......................... 18 326 631 Total operating expenses........... 16,426 954 27,565 Operating income (loss)............ 8,329 (954) 4,314 Other (expense) income............. 539 6 36 40 16 2,734 Interest expense (benefit)......... 3,186 342 36 40 16 634 (Loss) income from continuing operations before income taxes, minority interest, and (losses) earnings related to other equity investments...................... 5,682 (1,290) 6,414 (Benefit) provision for income taxes............................ 2,118 (363) 2,261 Minority interest income (expense)........................ (87) (39) Equity losses from Liberty Media Group............................ 2,022 Net (losses) earnings related to other equity investments......... 4,171 (1,271) (779) (Loss) income from continuing operations....................... 7,648 (4,220) 3,335 Income (losses) from discontinued operations (net of income taxes)........................... (458) Net income (loss).................. $ 7,648 $(4,220) $-- $-- $-- $ 2,877 ELIMINATION AND CONSOLIDATION CONSOLIDATED ADJUSTMENTS AT&T CORP. --------------- ------------ (DOLLARS IN MILLIONS) Revenue............................ $(1,661) $54,973 Operating Expenses Costs of services and products..... (1,230) 11,013 Access and other connection........ (196) 14,439 Selling, general and administrative................... (4) 10,894 Depreciation and other amortization..................... 5,137 Amortization of goodwill, franchise costs and other purchased intangibles...................... 1,057 Net restructuring and other charges.......................... 975 Total operating expenses........... (1,430) 43,515 Operating income (loss)............ (231) 11,458 Other (expense) income............. (2,545) 826 Interest expense (benefit)......... (2,751) 1,503 (Loss) income from continuing operations before income taxes, minority interest, and (losses) earnings related to other equity investments...................... (25) 10,781 (Benefit) provision for income taxes............................ 4,016 Minority interest income (expense)........................ (126) Equity losses from Liberty Media Group............................ 2,022 Net (losses) earnings related to other equity investments......... (2,877) (756) (Loss) income from continuing operations....................... (2,902) 3,861 Income (losses) from discontinued operations (net of income taxes)........................... 25 (433) Net income (loss).................. $(2,877) $ 3,428
162 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T CORP. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDING DECEMBER 31, 1999
GUARANTOR GUARANTOR TCI FINANCING AT&T SUBSIDIARY --------------------------------- NON-GUARANTOR PARENT TCI I II IV SUBSIDIARIES --------- ---------- --------- --------- --------- ------------- (DOLLARS IN MILLIONS) Net Cash Provided by (used in) Operating Activities of Continuing Operations......................... $ 2,672 $ (578) $-- $-- $-- $ 8,613 INVESTING ACTIVITIES Capital expenditures and other additions.......................... (1,733) (60) (9,797) Investment distributions and sales... 61 1,513 Investment contributions and purchases.......................... (5,473) (1,857) (2,364) Net (acquisitions) dispositions of businesses net of cash acquired/disposed.................. (6,405) 436 Other................................ (203) 103 (15,056) Net Cash (used in) Provided by Investing Activities of Continuing Operations......................... (13,753) (1,814) (25,268) FINANCING ACTIVITIES Proceeds from long-term debt issuances.......................... 8,396 Proceeds from debt from AT&T......... 5,866 5,365 Retirement of long-term debt......... (1,014) (1,365) 124 Retirement of AT&T debt.............. (2,109) Issuance of AT&T convertible preferred securities and warrants........................... 4,694 (56) Net acquisitions of treasury shares............................. (4,624) Dividends paid on common stock....... (2,685) (27) (Decrease) increase in short-term borrowings, net.................... 19,154 (1,207) Other................................ (13,215) 13,365 Net Cash (used in) Provided by Financing Activities of Continuing Operations......................... 10,706 2,392 17,564 Net cash provided by (used in) discontinued operations............ (2,649) Net increase (decrease) in cash and cash equivalents................... (375) (1,740) Cash and cash equivalents at beginning of year.................. 375 2,758 Cash and cash equivalents at end of period............................. $ -- $ -- $-- $-- $-- $ 1,018 ELIMINATION AND CONSOLIDATION CONSOLIDATED ADJUSTMENTS AT&T CORP. --------------- ------------ (DOLLARS IN MILLIONS) Net Cash Provided by (used in) Operating Activities of Continuing Operations......................... $ (198) $ 10,509 INVESTING ACTIVITIES Capital expenditures and other additions.......................... (11,590) Investment distributions and sales... 1,574 Investment contributions and purchases.......................... 1,857 (7,837) Net (acquisitions) dispositions of businesses net of cash acquired/disposed.................. (5,969) Other................................ 15,094 (62) Net Cash (used in) Provided by Investing Activities of Continuing Operations......................... 16,951 (23,884) FINANCING ACTIVITIES Proceeds from long-term debt issuances.......................... 8,396 Proceeds from debt from AT&T......... (11,231) Retirement of long-term debt......... (2,255) Retirement of AT&T debt.............. 2,109 Issuance of AT&T convertible preferred securities and warrants........................... 4,638 Net acquisitions of treasury shares............................. (4,624) Dividends paid on common stock....... (2,712) (Decrease) increase in short-term borrowings, net.................... (7,774) 10,173 Other................................ 88 238 Net Cash (used in) Provided by Financing Activities of Continuing Operations......................... (16,808) 13,854 Net cash provided by (used in) discontinued operations............ 55 (2,594) Net increase (decrease) in cash and cash equivalents................... (2,115) Cash and cash equivalents at beginning of year.................. 3,133 Cash and cash equivalents at end of period............................. $ -- $ 1,018
163 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 22. QUARTERLY INFORMATION (UNAUDITED)
FIRST SECOND THIRD(1) FOURTH ------- ------- -------- ------- 2001 Revenue................................................... $13,551 $13,326 $13,087 $12,586 Operating income(2)....................................... 814 1,364 1,365 211 (Loss) income from continuing operations before cumulative effect of accounting change(3).......................... (1,180) (2,176) (2,095) (1,391) (Loss) income from discontinued operations -- net of income taxes............................................ (68) 218 -- -- Net (loss) income before cumulative effect of accounting change.................................................. (1,248) (1,958) 11,408 (1,391) Net (loss) income(4)...................................... $ (344) $(1,958) $11,408 $(1,391) AT&T Common Stock Group: Earnings (loss) per share -- basic: Continuing operations before cumulative effect of accounting change.................................... $ (.17) $ (.10) $ (.69) $ (.39) Discontinued operations................................. (.02) .05 -- -- Total................................................... $ (.10) $ (.05) $ 3.13 $ (.39) Earnings (loss) per share -- diluted: Continuing operations before cumulative effect of accounting change.................................... $ (.17) $ (.10) $ (.69) $ (.39) Discontinued operations................................. (.02) .05 -- -- Total................................................... $ (.10) $ (.05) $ 3.13 $ (.39) Dividends declared........................................ $ .0375 $ .0375 $ .0375 $ .0375 AT&T Wireless Group:(5) (Loss) earnings from discontinued operations per share: Basic and diluted.................................... $ (.02) $ .08 -- -- Liberty Media Group:(3,6) (Loss) earnings per share: Basic and diluted.................................... $ (.06) $ (.82) $ .04 -- Stock price(7) AT&T common stock High.................................................... $ 19.53 $ 18.07 $ 21.46 $ 20.00 Low..................................................... 13.40 15.39 16.50 14.75 Quarter-end close....................................... 16.54 17.09 19.30 18.14 AT&T Wireless Group common stock(5) High.................................................... 27.30 21.10 19.92 -- Low..................................................... 17.06 15.29 12.52 -- Quarter-end close....................................... 19.18 16.35 -- -- Liberty Media Group Class A common stock(6) High.................................................... 17.25 18.04 17.85 -- Low..................................................... 11.88 11.50 14.50 -- Quarter-end close....................................... 14.00 17.49 -- -- Liberty Media Group Class B common stock(6) High.................................................... 18.69 18.75 18.35 -- Low..................................................... 14.20 12.50 12.00 -- Quarter-end close....................................... 15.00 18.15 -- --
164 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD(1) FOURTH ------- ------- -------- ------- 2000 Revenue................................................... $13,703 $13,744 $14,176 $13,910 Operating income (loss)(2)................................ 2,347 3,140 2,907 (4,166) Income (loss) from continuing operations before the cumulative effect of accounting change.................. 2,650 1,857 3,074 (3,448) Income (loss) from discontinued operations -- net of income taxes............................................ 33 177 (2) 328 Net income (loss)......................................... $ 2,683 $ 2,034 $ 3,072 $(3,120) AT&T Common Stock Group: Earnings (loss) per share -- basic: Continuing operations before the cumulative effect of accounting change.................................... $ .54 $ .49 $ .35 $ (.52) Discontinued operations................................. .01 .05 -- .07 Total................................................... $ .55 $ .54 $ .35 $ (.45) Earnings (loss) per share -- diluted: Continuing operations before the cumulative effect of accounting change.................................... $ .53 $ .48 $ .35 $ (.52) Discontinued operations................................. .01 .05 -- .07 Total................................................... $ .54 $ .53 $ .35 $ (.45) Dividends declared........................................ $ .22 $ .22 $ .22 $ .0375 AT&T Wireless Group:(5) Earnings (loss) from discontinued operations per share: Basic and diluted.................................... $ -- $ .06 $ (.01) $ .16 Liberty Media Group:(6) Earnings (loss) per share: Basic and diluted.................................... $ .37 $ .10 $ .68 $ (.57) Stock price(7) AT&T common stock High.................................................... $ 47.37 $ 45.67 $ 27.33 $ 23.30 Low..................................................... 34.41 24.27 21.16 12.81 Quarter-end close....................................... 43.73 24.71 22.52 13.40 AT&T Wireless Group common stock High.................................................... -- 36.00 29.56 24.94 Low..................................................... -- 23.56 20.50 16.38 Quarter-end close....................................... -- 27.88 20.88 17.31 Liberty Media Group Class A common stock High.................................................... 30.72 29.94 26.56 19.25 Low..................................................... 24.44 19.19 17.44 10.75 Quarter-end close....................................... 29.63 24.25 18.00 13.56 Liberty Media Group Class B common stock High.................................................... 36.56 32.69 32.63 20.63 Low..................................................... 27.00 22.13 18.75 12.75 Quarter-end close....................................... 32.81 32.50 18.75 18.75
- --------------- (1) Third quarter 2001 net income included a gain on disposition of discontinued operations of $13,503, or $3.82 per share. 165 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) Operating income (loss) included net restructuring and other charges of $808 in first quarter 2001, $287 in second quarter 2001, $399 in third quarter 2001, $1,036 in fourth quarter 2001, $773 in first quarter 2000, $24 in third quarter 2000 and $6,232 in fourth quarter 2000. (3) First quarter 2001 results have been restated to properly classify losses related to the implementation of SFAS No. 133. A loss of $1.6 billion pretax ($1.1 billion after-tax) was reclassified from other (expense) income to cumulative effect of accounting change. There was no impact to the total net loss or the loss per share recorded in the first quarter of 2001. (4) First quarter 2001 net income included cumulative effect of accounting change of $359 and $545, or $0.09 per share and $0.21 per share, for AT&T Common Stock Group and LMG, respectively, due to the adoption of SFAS No. 133. (5) No dividends had been declared on AT&T Wireless Group common stock. AT&T Wireless Group was split-off from AT&T on July 9, 2001. (6) No dividend had been declared on LMG common stock. LMG was split-off from AT&T on August 10, 2001. (7) Stock prices obtained from the New York Stock Exchange Composite Tape. AT&T Common Stock prices have been restated to reflect the split-off of AT&T Wireless. 23. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", which supercedes Accounting Principles Board (APB) opinion No. 16. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method. In addition, SFAS No. 141 establishes criteria for the recognition of intangible assets separately from goodwill. The adoption of SFAS No. 141 will not have a material effect on AT&T's results of operations, financial position or cash flows. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which supercedes APB opinion No. 17. Under SFAS No. 142, goodwill and indefinite-lived intangible assets will no longer be amortized, but rather will be tested for impairment upon adoption and at least annually thereafter. In addition, the amortization period of intangible assets with finite lives will no longer be limited to 40 years. SFAS No. 142 is effective for AT&T as of January 1, 2002. In connection with the adoption of this standard, AT&T's unamortized goodwill balance and excess basis related to equity method investments will no longer be amortized, but will continue to be tested for impairment. The goodwill balance as of December 31, 2001, was $24.7 billion, and the related amortization in 2001 was $0.9 billion. The excess basis balance as of December 31, 2001, was $8.8 billion with related amortization in 2001 of $0.2 billion. In addition, we have determined that our franchise costs are indefinite-lived assets, as defined in SFAS No. 142, and therefore will not be subject to amortization beginning in 2002. The balance of our franchise costs as of December 31, 2001, was $42.8 billion and the related amortization in 2001 was $1.2 billion. The adoption of SFAS No. 142 will have a significant impact on our future operating results due to the cessation of goodwill and franchise cost amortization. For 2001, the amortization of goodwill, excess basis and franchise costs had an approximate impact of $0.45 per share. In accordance with SFAS No. 142, goodwill was tested for impairment by comparing the fair value of our reporting units to their carrying values. As of January 1, 2002, the fair value of the reporting units' goodwill exceeded their fair value, and therefore no impairment loss will be recognized upon adoption. In accordance with SFAS No. 142, the franchise costs were tested for impairment as of January 1, 2002, by comparing the fair value to the carrying value (at market level). An impairment loss of $0.9 billion, net of taxes of $0.5 billion will be recognized as a change in accounting principle in the first quarter of 2002. 166 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard requires that obligations associated with the retirement of tangible long-lived assets be recorded as liabilities when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an asset retirement obligation, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, this liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. For AT&T, this means that the standard will be adopted on January 1, 2003. AT&T does not expect that the adoption of this statement will have a material impact on AT&T's results of operations, financial position or cash flows. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all long-lived assets, including discontinued operations, and consequently amends APB opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 also amends Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for AT&T as of January 1, 2002. The adoption of SFAS No. 144 will not have a material impact on AT&T's results of operations, financial position or cash flows. 24. SUBSEQUENT EVENTS In March 2002, AT&T Canada announced the formation of a committee of its board of directors to help AT&T Canada with issues they are facing in the foreseeable future. Such issues include a significant regulatory decision expected in the next month which could have a significant impact on the future of sustainable competition in Canada; the effect of AT&T satisfying its obligation to purchase the share of AT&T Canada it does not own; and the impact of these events on operating and financial results of AT&T Canada. In addition, the committee appointed financial advisors to evaluate various scenarios regarding issues, opportunities and alternatives for AT&T Canada. It is expected that the outcome of these evaluations will have a negative effect on the underlying value of AT&T Canada shares, which will result in AT&T recording up to $250 million of additional losses on its commitment to purchase the publicly owned shares of A&T Canada, excluding any impact of the floor price accretion (see Note 5). 167 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in independent accountants and no disagreements with independent accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the last two years. 168 PART III ITEMS 10 THROUGH 13. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT NOMINEES FOR ELECTION AS DIRECTORS C. MICHAEL ARMSTRONG AGE: 63 DIRECTOR SINCE: 1997 BUSINESS EXPERIENCE: Mr. Armstrong has been the Chairman and Chief Executive Officer of AT&T since 1997. He was formerly the Chairman and Chief Executive Officer of Hughes Electronics. OTHER DIRECTORSHIPS: Citigroup Inc. Chairman of U.S.-Japan Business Council and former Chairman of FCC Network Reliability and Interoperability Council. Member of the President's Export Council, the Council on Foreign Relations, the National Security Telecommunications Advisory Committee, the Defense Policy Advisory Committee on Trade, the Business Roundtable, and the Business Council. Director of National Cable Television Association (NCTA) and a member of its Executive Committee. Member of the supervisory board of the Thyssen-Bornemisza Group, Trustee of John Hopkins University, Chairman of the Board of Visitors of John Hopkins University School of Medicine, and member of the Advisory Board of the Yale School of Management. J. MICHAEL COOK AGE: 59 DIRECTOR SINCE: 2001 BUSINESS EXPERIENCE: Mr. Cook is the retired Chairman and Chief Executive Officer of Deloitte & Touche LLP, a professional services firm. He served as Chairman and Chief Executive Officer of Deloitte & Touche LLP from 1989 to 1999. He was also Chairman of the Deloitte & Touche Foundation and a member of the Board of Deloitte Touche Tohmatsu. OTHER DIRECTORSHIPS: International Flavors & Fragrances Inc., Rockwell Automation International, The Dow Chemical Company, and HCA. Trustee of the Fidelity Group of Mutual Funds. Member of the Advisory Board of the Securities Regulation Institute, Chairman Emeritus of the Board of Catalyst, a Director of the STAR Foundation (Society to Advance the Retarded and Handicapped), and Chairman of the Accountability Advisory Panel to the Comptroller General of the United States. Member of the Board of Overseers of the Columbia Business School and Member of the Advisory Board of the Graduate School of the University of Florida. KENNETH T. DERR AGE: 65 DIRECTOR SINCE: 1995 BUSINESS EXPERIENCE: Mr. Derr is the Retired Chairman of the Board of Chevron Corporation, an international oil company, where he was also Chairman and Chief Executive Officer until 1999. OTHER DIRECTORSHIPS: Citigroup Inc., Calpine Corp., and Halliburton Company. DAVID W. DORMAN AGE: 48 DIRECTOR SINCE: 2002 BUSINESS EXPERIENCE: Mr. Dorman has been President of AT&T since 2000. He is the former Chief Executive Officer of Concert, a former global venture created by AT&T and British Telecom. Mr. Dorman has also been Chairman, President, and CEO of PointCast, Executive Vice President of SBC, and Chairman, President, and CEO of Pacific Bell. Prior to that he was President of Sprint Business. OTHER DIRECTORSHIPS: Science Applications International Corporation (SAIC), Scientific-Atlanta Inc., and Sabre Holdings Corporation. Served as member of the President's Advisory Committee on High Performance Computing and Communications, Information Technology and the Next Generation Internet. 169 M. KATHRYN EICKHOFF AGE: 62 DIRECTOR SINCE: 1987 BUSINESS EXPERIENCE: Ms. Eickhoff has been President of Eickhoff Economics, Inc., an economic consulting firm, since 1987. She is a past Associate Director for Economic Policy for the U.S. Office of Management and Budget and the former Executive Vice President and Treasurer of Townsend-Greenspan & Co., Inc. OTHER DIRECTORSHIPS: Pharmacia Corporation and Tenneco Automotive Inc. GEORGE M. C. FISHER AGE: 61 DIRECTOR SINCE: 1997 BUSINESS EXPERIENCE: Mr. Fisher is the retired Chairman and CEO of Eastman Kodak Company, an imaging company. He served as Chairman of the Board, Eastman Kodak Company from January to December 2000. Before this, he held the Kodak positions of Chairman, President, and CEO (December 1993 to January 1997), and Chairman and CEO (January 1997 to January 2000). Mr. Fisher was also Chairman of the Board (1990-1993) and Chief Executive Officer (1988-1993) of Motorola, Inc. He is a former Chairman of the Boards of Directors of: the University of Illinois Foundation (1997-1999), the U.S.-China Business Council (1997-1999), and the U.S. Council on Competitiveness (1991-1993). OTHER DIRECTORSHIPS: Delta Airlines, Inc., Eli Lilly and Company, and General Motors Corporation. Member of the Business Council and the President's Advisory Committee for Trade Policy and Negotiations. Elected to the American Academy of Arts and Sciences and the National Academy of Engineers, the latter of which he is Chairman. AMOS B. HOSTETTER, JR. AGE: 65 DIRECTOR SINCE: 1999 BUSINESS EXPERIENCE: Mr. Hostetter is the Chairman of Pilot House Associates, a family investment company. He is the co-founder and former Chairman and Chief Executive Officer of Continental Cablevision, Inc. Mr. Hostetter is a former Chairman of the Board (1973-74) and Director (1968-1998) of the National Cable Television Association and is a founding member and past Chairman of the Cable-Satellite Public Affairs Network (C-SPAN). OTHER DIRECTORSHIPS: Member of C-SPAN's Board and Executive Committee. Chairman of the Board of Trustees of Amherst College, a Trustee of the Museum of Fine Arts, Boston and of WGBH FM/TV, the public broadcasting stations in Boston. SHIRLEY A. JACKSON, PH.D. AGE: 55 DIRECTOR SINCE: 2001 BUSINESS EXPERIENCE: Dr. Jackson is the President of Rensselaer Polytechnic Institute. Prior to becoming President of Rensselaer Polytechnic Institute in 1999, Dr. Jackson was Chairman of the U.S. Nuclear Regulatory Commission (1995-1999), held a position as a theoretical physicist at the former AT&T Bell Laboratories (1975-1991), and in academe as a professor of theoretical physics at Rutgers University (1991-1995). OTHER DIRECTORSHIPS: FedEx Corporation, Public Service Enterprise Group, Sealed Air Corporation, Marathon Oil Corporation, U.S. Steel Corp., Albany Molecular Research, Inc., Medtronic, Inc., and KeyCorp. Trustee of the Brookings Institution. Serves on the Executive Committee of the Council on Competitiveness, Council of the Government -- University-Industry Research Roundtable, U.S. Comptroller General's Advisory Committee for the Government Accounting Office (GAO), and Advisory Council for the Department of Energy National Nuclear Security Administration (NNSA). Elected to the National Academy of Engineering (NAE) in 2001. Fellow of the American Academy of Arts and Sciences and the American Physical Society. Life Member of the M.I.T. Corporation (Board of Trustees). 170 DONALD F. MCHENRY AGE: 65 DIRECTOR SINCE: 1986 BUSINESS EXPERIENCE: Mr. McHenry has been a Distinguished Professor in the Practice of Diplomacy, Georgetown University, since 1981. He has also been President of IRC Group LLC, international relations consultants, since 1981. OTHER DIRECTORSHIPS: Fleet Boston Corp. and its subsidiary, Fleet Bank, Coca-Cola Co., International Paper Co., and GlaxoSmithKline plc (U.K.). CHARLES H. NOSKI AGE: 49 DIRECTOR SINCE: 2002 BUSINESS EXPERIENCE: Mr. Noski has been Vice Chairman of the Board of AT&T Corp. since February 2002 and Chief Financial Officer of AT&T Corp. since 1999. Prior to joining AT&T, he was President and Chief Operating Officer of Hughes Electronics Corporation, a publicly-traded subsidiary of General Motors Corporation in the satellite and wireless communications business. Mr. Noski was a partner at Deloitte & Touche prior to joining Hughes. OTHER DIRECTORSHIPS: Air Products & Chemicals, Inc., Private Sector Council, and California State University Northridge Foundation. Member of American Institute of Certified Public Accountants. LOUIS A. SIMPSON AGE: 65 DIRECTOR SINCE: 2000 BUSINESS EXPERIENCE: Mr. Simpson has been President and Chief Executive Officer Capital Operations, GEICO Corporation, a national property and casualty insurance company, since 1993, and was its former Vice Chairman of the Board (1985-1993) and Senior Vice President and Chief Investment Officer (1979-1993). Prior to joining GEICO, he was President and Chief Executive Officer of Western Asset Management, a subsidiary of Western Bancorporation, a partner at Stein Roe and Farnham, and an instructor of Economics at Princeton University. OTHER DIRECTORSHIPS: Western Asset Funds, Inc., Pacific American Income Shares, Inc., Science Applications International Corporation (SAIC), and HNC Software. Member of the endowments committee of Ohio Wesleyan University, trustee for the Cate School, the University of California San Diego Foundation, the Urban Institute, and the Woodrow Wilson National Fellowship Foundation. He is also Chair of the Scripps Institution of Oceanography Council. MICHAEL I. SOVERN AGE: 70 DIRECTOR SINCE: 1984 BUSINESS EXPERIENCE: Mr. Sovern is Chairman of Sotheby's Holdings, Inc. He is President Emeritus and Chancellor Kent Professor of Law at Columbia University, where he was President from 1980 to 1993. Mr. Sovern is President and Director of Shubert Foundation and Director of Shubert Organization. OTHER DIRECTORSHIPS: Sequa Corp. and Sotheby's Holdings, Inc. Chairman of the Japan Society and Chairman of the American Academy in Rome. SANFORD I. WEILL AGE: 69 DIRECTOR SINCE: 1998 BUSINESS EXPERIENCE: Mr. Weill has been Chairman and Chief Executive Officer of Citigroup Inc., a financial services company, since October 1998. He is Chairman of the Board of Trustees of Carnegie Hall and Chairman of the Board of Overseers for Cornell University's Joan and Sanford I. Weill Medical College and Graduate School of Medical Sciences. Mr. Weill is a founder and Chairman of the National Academy Foundation. He formerly served as Chairman and Chief Executive Officer of Travelers Group and its 171 predecessor, Commercial Credit Company, President of American Express Company, and Chairman and Chief Executive Officer of the Fireman's Fund Insurance Company subsidiary. OTHER DIRECTORSHIPS: New York Presbyterian Hospital, Memorial Sloan-Kettering Cancer Center, United Technologies Corporation, and Federal Reserve Bank of New York. Member of the Business Council. EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 17, 2002)
BECAME AT&T NAME AGE EXECUTIVE OFFICER ON - ---- --- -------------------- C. Michael Armstrong*... 63 Chairman of the Board and Chief Executive Officer....................... 10-97 Betsy J. Bernard........ 47 Executive Vice President and President and CEO -- AT&T Consumer................ 04-01 James Cicconi........... 49 Executive Vice President -- Law & Government Affairs and General Counsel................................. 12-98 David W. Dorman**....... 48 President............................... 12-00 Mirian Graddick-Weir.... 47 Executive Vice President, Human Resources............................... 03-99 Frank Ianna............. 52 Executive Vice President and President, AT&T Network Services................... 03-97 Richard J. Martin....... 55 Executive Vice President, Public Relations and Employee Communication.... 11-97 Charles H. Noski**...... 49 Vice Chairman and Chief Financial Officer................................. 12-99 John C. Petrillo........ 52 Executive Vice President, Corporate Strategy and Business Development....... 01-96 William T. Schleyer..... 51 President and CEO -- AT&T Broadband..... 10-01
- --------------- * Chairman of the Board of Directors and Chairman of the Executive and Proxy Committees. ** Member of the Board of Directors. All of the above executive officers have held high level managerial positions with AT&T or its affiliates for more than the past five years, except Messrs. Armstrong, Cicconi, Dorman, Noski, and Schleyer and Ms. Bernard. Mr. Armstrong was Chairman and Chief Executive Officer of Hughes Electronics from 1993 until joining AT&T in October 1997. Prior to joining AT&T in April 2001, Ms. Bernard was Executive Vice President-National Mass Markets for Qwest Communications International from 2000 to 2001, Executive Vice President-Retail Markets for US West from 1998 to 2000, and President, CEO and Director of Avirnex Communications from 1997 to 1998. Prior to joining AT&T in September 1998 as Senior Vice President-Law and Government Affairs, Mr. Cicconi was a partner at the law firm of Akin, Gump, Strauss, Houer and Feld, L.L.P. from 1991 to 1998. Prior to joining AT&T in December 2000, Mr. Dorman was Chief Executive Officer of Concert, a global venture created by AT&T and BT, from 1999 to 2000; Chairman, President and CEO of PointCast, an Internet-based news and information service company, from 1998 to 1999; Executive Vice President of SBC Communications from 1996 to 1998; and Chief Executive Officer of Pacific Bell from 1994 to 1996. Prior to joining AT&T in December 1999, Mr. Noski was with Hughes Electronics serving as President and Chief Operating Officer and Director from 1997 to 1999, Vice Chairman and Chief Financial Officer from 1996 to 1997, and Sr. Vice President and Chief Financial Officer from 1992 to 1996. Prior to joining AT&T in November 2001, Mr. Schleyer was a principal in Pilot House Ventures from 2000 to 2001, and from 1996 to 1997 he served as President and Chief Operating Officer of MediaOne, the broadband services arm of US West Media. He also was President and Chief Operating Officer of Continental Cablevision, Inc. before the company's merger with US West in 1996. 172 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires AT&T's directors and executive officers, and persons who own more than 10% of a registered class of AT&T's equity securities, to file with the SEC and the NYSE, initial reports of ownership and reports of changes in beneficial ownership of such equity securities of AT&T. To AT&T's knowledge, based upon the reports filed and written representations that no other reports were required, during the fiscal year ended December 31, 2001, none of its directors and executive officers failed to file on a timely basis reports required by Section 16(a) with the following exception: Richard J. Martin, one report regarding one transaction. 173 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(2) LONG-TERM COMPENSATION(2) --------------------------------------- --------------------------------------------- AWARDS(4) --------------------------------------------- OTHER ANNUAL OPTIONS/SARS(#) NAMED OFFICERS AND COMPENSATION(3) RESTRICTED STOCK ----------------------- PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($) ($) AWARD(S)(5)($) AT&T(6) WIRELESS(7) - --------------------- ---- --------- --------- --------------- ---------------- --------- ----------- C. Michael Armstrong......... 2001 1,800,000 2,214,000 479,379 4,009,198(a) 1,098,442 0 Chairman and CEO, AT&T 2000 1,700,000 650,000 754,523 0 419,087 1,237,400 Corp. 1999 1,400,000 2,258,000 683,284 0 573,256 0 David W. Dorman(10).......... 2001 950,000 820,000 425,833 4,957,212(a) 677,636 0 President, AT&T Corp. 2000 239,167 591,800 39,613 11,241,663(b) 356,603 0 1999 476,473 700,000 46,062 0 0 0 Charles H. Noski............. 2001 787,500 700,000 356,566 1,781,605(a) 456,570 0 Vice Chairman & CFO, 2000 730,980 233,000 591,051 0 0 271,300 AT&T Corp. 1999 0 0 0 24,405,177(c) 1,402,750 0 Frank Ianna.................. 2001 700,000 575,000 194,575 7,036,607(a)(d) 470,742 0 Executive Vice President -- 2000 618,750 250,000 215,475 564,425(d) 199,047 244,100 and President -- AT&T 1999 497,250 612,900 185,414 3,897,863(d) 404,892 0 Network Services Betsy J. Bernard............. 2001 388,102 640,000 218,075 6,121,443(e) 1,359,501 0 Executive Vice President and 2000 0 0 0 0 0 0 President and CEO -- 1999 0 0 0 0 0 0 AT&T Consumer Services PAYOUTS ---------- LTIP ALL OTHER NAMED OFFICERS AND PAYOUTS(8) COMPENSATION(9) PRINCIPAL POSITION(1) ($) ($) - --------------------- ---------- --------------- C. Michael Armstrong......... 824,972 261,436 Chairman and CEO, AT&T 0 171,368 Corp. 0 275,100 David W. Dorman(10).......... 0 572,175 President, AT&T Corp. 0 708,200 0 500,000 Charles H. Noski............. 446,319 896,278 Vice Chairman & CFO, 0 6,131,593 AT&T Corp. 0 0 Frank Ianna.................. 308,781 1,639,842 Executive Vice President -- 0 80,074 and President -- AT&T 402,426 16,077 Network Services Betsy J. Bernard............. 0 3,310,543 Executive Vice President and 0 0 President and CEO -- 0 0 AT&T Consumer Services
174 - --------------- (1) Includes Chairman of the Board and Chief Executive Officer and the four other most highly compensated individuals who were executive officers of AT&T at the end of 2001, as measured by salary and bonus. (2) Compensation deferred at the election of Named Officers is included in the category (e.g., bonus, Long Term Incentive Program ("LTIP") payouts,) and year it would have otherwise been reported had it not been deferred. (3) Includes (a) payments of above-market interest on deferred compensation, (b) dividend equivalents paid with respect to long-term incentive compensation paid during the year, and (c) tax payment reimbursements. In addition, for Mr. Armstrong, includes in 2001, 2000, and 1999, $62,104, $55,364, and $54,146, respectively, for use of corporate aircraft and in 2001, $44,964 for financial consulting services. For Mr. Dorman, includes in 2001 $85,379 for use of corporate aircraft and $62,550 for financial consulting services. For Mr. Noski, includes in 2001 and 2000, $91,064 and $69,212, respectively, for use of corporate aircraft. For Ms. Bernard, includes in 2001 $32,993 for financial consulting services and $77,781 for relocation. (4) Share and per share amounts have been adjusted to reflect the Company's April 15, 1999, three-for-two stock split and the distribution of AT&T Wireless Services, Inc. ("AWS") common stock to holders of AT&T common stock in connection with the split-off of AWS from AT&T on July 9, 2001. Stock options awarded in 2000 include options exercisable for AT&T Wireless Group tracking stock that were cancelled on July 9, 2001, and replaced with stock options for AWS common stock. See note 7 below. (5) All outstanding restricted stock or restricted stock unit awards with respect to AT&T common stock were adjusted for the distribution of AWS common stock to holders of AT&T common stock in connection with the split-off of AWS from AT&T on July 9, 2001, to preserve the economic value of the awards immediately prior to the distribution and split-off. The amounts shown represent the dollar value on the date originally granted. (a) On March 15, 2001, Messrs. Armstrong, Dorman, Noski, and Ianna received a restricted stock unit award of 227,434; 281,213; 101,067; and 88,483 units, respectively. The value of these awards, as of the grant date, is reflected in the table. These units vest fully on March 15, 2004. Dividend equivalents on the units are paid in cash. (b) On December 1, 2000, Mr. Dorman was granted an award of 763,626 restricted shares. The value of this award, as of the grant date, is reflected in the table. These shares vest fully on April 1, 2002. Dividends on the shares are paid to Mr. Dorman in cash. (c) On December 10, 1999, the Committee granted Mr. Noski an award of 353,693 restricted shares and 127,309 restricted stock units to replace grants from Hughes Electronics Corporation ("Hughes") that were forfeited upon his termination from Hughes. The value of these awards, as of the closing price on the grant date, is reflected in the table. The vesting schedule for these grants mirrors that applicable to the original grants from Hughes. 178,040 of the restricted shares vested in 2000 and 164,007 vested on October 26, 2001. The remaining 11,646 restricted shares vest on October 17, 2002. 43,666 of the restricted stock units vested in 2000; 19,899 units on February 26, 2001; 10,279 units on April 7, 2001; and 13,489 units on May 1, 2001. Of the remaining 39,976 restricted stock units, 26,359 units vested on February 26, 2002, and 13,617 units will vest on April 7, 2002. Dividends on the restricted shares and dividend equivalents on the restricted units are paid to Mr. Noski in cash. (d) On January 29, 1999, Mr. Ianna received a special award of 86,231 restricted stock units that will vest in accordance with his employment agreement as described in Item 11, Employment Contracts and Termination of Employment Arrangements. On January 31, 2000, Mr. Ianna received a special award of 14,173 restricted stock units that will vest fully on January 31, 2003. On March 15, 2001, Mr. Ianna received a special award of 310,690 restricted shares that vest fully on December 31, 2002. The value of these awards, as of their original grant date, is reflected in the table. Dividend equivalents on the restricted stock units and dividends on the restricted shares are paid in cash to Mr. Ianna. 175 (e) On April 9, 2001, Ms. Bernard received special awards of 158,025 restricted stock units and 231,805 restricted shares. The value of these awards, as of the original grant date, is reflected in the table. The restricted stock units vest fully on April 9, 2004, and the restricted shares vest 77,268 on April 9, 2002, 77,268 on April 9, 2003, and 77,269 on April 9, 2004. Dividend equivalents on the restricted units and dividends on the restricted shares are paid in cash to Ms. Bernard. The aggregate number (and value) with respect to each of the Named Executive Officers at December 31, 2001, for outstanding restricted stock and restricted stock unit awards was: Mr. Armstrong 673,613 ($12,219,340); Mr. Dorman 1,044,839 ($18,953,379); Mr. Noski 152,689 ($2,769,778); Mr. Ianna 499,577 ($9,062,327); and Ms. Bernard 389,830 ($7,071,516). (6) All stock option awards granted with respect to AT&T common stock were adjusted for the impact of the distribution of AWS common stock to holders of AT&T common stock in connection with the split-off of AWS from AT&T on July 9, 2001. The share amounts shown represent the number of shares of AT&T common stock applicable to the awards following the distribution and split-off adjustments. Each outstanding stock option grant, exercisable for AT&T common stock granted prior to January 1, 2001, was adjusted into (i) an adjusted grant for AT&T common shares and (ii) a new stock option grant for AWS common shares awarded under the AT&T Wireless Services, Inc. Adjustment Plan adopted by AWS. The combined intrinsic value of the two grants immediately after the split-off equaled the intrinsic value of the outstanding grant for AT&T common shares immediately before the split-off. Each outstanding stock option grant, exercisable for AT&T common stock granted on or after January 1, 2001, but prior to July 9, 2001, was adjusted so that the intrinsic value of the grant immediately after the split-off equaled the intrinsic value of the grant immediately prior to the split-off. In all cases, the grant price to market price ratio determined for each grant prior to any adjustment was maintained in the post-split adjusted grants. (7) All stock option awards granted with respect to AT&T Wireless Group tracking stock awarded under the AT&T 1997 LTIP were cancelled and replaced in connection with the split-off of AWS from AT&T on July 9, 2001. The share amounts shown represent the number of shares of AT&T Wireless Group common stock applicable to the awards prior to the cancellation. Each outstanding grant was replaced with a new award under the AT&T Wireless Services, Inc. Adjustment Plan so that the intrinsic value of the grant immediately after the split-off equaled the intrinsic value of the grant immediately prior to the split-off. In all cases, the new awards were fully vested and non-forfeitable, and the grant price to market price ratio determined for each grant prior to cancellation was maintained in the replacement grants. The new awards are obligations of AWS and not of AT&T. (8) Includes distributions in 1999 to Mr. Ianna of stock units as to which the 3-year performance criteria, in recognition of the Company's restructuring and the difficulty of setting long-term financial targets while the restructuring was in progress, were deemed to have been met at the target level. Includes distributions in 2001 to Messrs. Armstrong, Noski, and Ianna of performance shares as to which a 3-year performance period ended December 31, 2000. Performance share cycles ending on December 31, 2001, and December 31, 2002, held by Messrs. Armstrong, Noski, and Ianna, and Ms. Bernard, and the performance share cycle ending on December 31, 2002, held by Mr. Dorman were adjusted in connection with the distribution and split-off of AWS from AT&T on July 9, 2001, to preserve the economic value of the awards immediately prior to the distribution and split-off. Each holder of such awards received an adjusted performance share award and a stock unit award under the AT&T 1997 LTIP. The new stock unit award will be distributed based on the value of AWS common stock upon the completion of the performance period of the original performance share award. (9) In 2001, includes (a) Company contributions to savings plans (Mr. Armstrong $6,800, Mr. Noski $4,634, Mr. Ianna $6,800, and Ms. Bernard $5,276); (b) dollar value of the benefit of premiums paid for universal life insurance policies (unrelated to term insurance coverage) calculated on an actuarial basis (Mr. Armstrong $188,611, Mr. Dorman $6,175, Mr. Noski $60,043, Mr. Ianna $58,250, and Ms. Bernard $3,662); (c) payments equal to lost Company Savings Plan matching contributions caused by IRS limitations (Mr. Armstrong $61,200, Mr. Noski $22,437, and Mr. Ianna $17,950); (d) payment of $500,000 to Mr. Dorman into a special deferral account as described in his employment agreement in 176 Item 11, Employment Contracts and Termination of Employment Arrangements; (e) payments equal to $66,000 to Mr. Dorman for living expenses as described in his employment agreement in Item 11, Employment Contracts and Termination of Employment Arrangements; (f) payments of $190,593 to Mr. Noski for living expenses and travel described in his employment agreement in Item 11, Employment Contracts and Termination of Employment Arrangements; (g) special payments of $518,570 and $100,000 to Mr. Noski to preserve forfeitures from his prior employer as described in his employment agreement in Item 11, Employment Contracts and Termination of Employment Arrangements, and for his contributions in 2001 to the Company's restructuring efforts, respectively; (h) payment of $1,000,000 to Mr. Ianna into a special deferral account as described in his employment agreement in Item 11, Employment Contracts and Termination of Employment Arrangements; (i) payment of $556,483 to Mr. Ianna as described in his employment agreement in Item 11, Employment Contracts and Termination of Employment Arrangements; (j) payment of $3,000,000 to Ms. Bernard into a special deferral account as described in her employment agreement in Item 11, Employment Contracts and Termination of Employment Arrangements; and (k) payment of $300,000 to Ms. Bernard for replacement of board fees as described in her employment agreement in Item 11, Employment Contracts and Termination of Employment Arrangements. In 2000, includes (a) Company contributions to savings plans (Mr. Armstrong $6,800, Mr. Ianna $6,800); (b) dollar value of the benefit of premiums paid for universal life insurance policies (unrelated to term insurance coverage) calculated on an actuarial basis (Mr. Armstrong $110,267, Mr. Noski $5,213, and Mr. Ianna $59,425); (c) payments equal to lost Company Savings Plan matching contributions caused by IRS limitations (Mr. Armstrong $49,601, Mr. Ianna $13,490); (d) payment of $500,000 to Mr. Dorman into a special deferral account as described in his employment agreement in Item 11, Employment Contracts and Termination of Employment Arrangements; (e) payment of $208,200 to Mr. Dorman as a guarantee for his 2000 bonus as described in his employment agreement in Item 11, Employment Contracts and Termination of Employment Arrangements; (f) living expenses, travel, and COBRA payments to Mr. Noski of $204,996; (g) special payments to Mr. Noski of $3,921,384 to preserve forfeitures from his prior employer; and (h) payment of a $2,000,000 signing bonus to Mr. Noski as described in Item 11, Employment Contracts and Termination of Employment Arrangements. In 1999, includes (a) Company contributions to savings plans (Mr. Armstrong $6,400, Mr. Ianna $5,917); (b) $219,099 dollar value of the benefit of premiums paid for split-dollar life insurance to Mr. Armstrong; (c) payments equal to lost Company Savings Plan matching contributions caused by IRS limitations (Mr. Armstrong $49,601, Mr. Ianna $10,160); and (d) payment of $500,000 to Mr. Dorman into a special deferral account as described in his employment agreement in Item 11, Employment Contracts and Termination of Employment Arrangements. (10) Mr. Dorman's salary and bonus for the years 1999 and 2000 reflect payments only for the time he was employed by AT&T. Mr. Dorman transferred from AT&T in 1999 to lead Concert, the joint effort of AT&T and British Telecom. Mr. Dorman returned to AT&T in 2000. 177 OPTION/SAR GRANTS IN 2001
INDIVIDUAL GRANTS IN AT&T -------------------------------------------------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS/ GRANT UNDERLYING SARS DATE OPTIONS/ GRANTED TO EXERCISE OR PRESENT SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE(5) NAME(1) GRANTED(2)(3) FISCAL YEAR ($/SHARE) DATE ($) - ------- ------------- ------------ ----------- ---------- ---------- C. Michael Armstrong............. 659,046 0.74% 17.3940 3/15/2011 $4,574,253 439,396 0.50% 16.8541 7/02/2011 $3,063,766 David W. Dorman.................. 406,570 0.46% 17.3940 3/15/2011 $2,821,883 271,066 0.31% 16.8541 7/02/2011 $1,890,055 Charles H. Noski................. 273,934 0.31% 17.3940 3/15/2011 $1,901,296 182,636 0.21% 16.8541 7/02/2011 $1,273,460 Frank Ianna...................... 282,437 0.32% 17.3940 3/15/2011 $1,960,315 188,305 0.21% 16.8541 7/02/2011 $1,312,990 Betsy J. Bernard................. 1,059,680(4) 1.20% 15.7595 4/09/2011 $5,032,000 222,782 0.25% 15.7595 4/09/2011 $1,057,566 77,039 0.09% 16.8541 7/02/2011 $ 537,166
- --------------- (1) Includes Chairman of the Board and Chief Executive Officer and the four other most highly compensated individuals who were executive officers of AT&T at the end of 2001, as measured by salary and bonus. (2) Share and per share amounts have been adjusted to reflect the adjustment to the number of shares in connection with the distribution and split-off of AT&T Wireless Services, Inc. on July 9, 2001, as described in footnotes 6 and 7 in the Summary Compensation Table. (3) Options granted for AT&T common stock become exercisable to the extent of one-fourth of the grant on the first, second, third, and fourth anniversaries of the grant date, respectively. (4) Options granted for AT&T common stock to Ms. Bernard, per her employment agreement, become exercisable to the extent of one-third of the grant on the first, second, and third anniversaries of the grant date, respectively. (5) The Black-Scholes option pricing model was chosen to estimate the Grant Date Present Value of the options in this table. The Company's use of this model should not be construed as an endorsement of its accuracy in valuing options. All stock option valuation models, including the Black-Scholes model, require a prediction about the future movement of the stock price. The following assumptions were made for purposes of calculating the Grant Date Present Value on the grants awarded on March 15, 2001, and on April 9, 2001: an option term of 6 years, volatility of 36.00%, dividend yield at 0.85%, and interest rate of 4.77%. The following assumptions were made for purposes of calculating the Grant Date Present Value on the grants awarded on July 2, 2001: an option term of 6 years, volatility of 37.00%, dividend yield at 0.85%, and interest rate of 5.16%. The actual value of the options in this table depends upon the actual performance of the Company's stock during the applicable period. 178 AGGREGATED OPTION/STOCK APPRECIATION RIGHTS ("SAR") EXERCISES IN 2001 AND YEAR-END VALUES AT&T CORP. COMMON STOCK AND AT&T WIRELESS GROUP TRACKING STOCK
EXERCISABLE/UNEXERCISABLE(2) EXERCISABLE/UNEXERCISABLE ----------------------------- --------------------------- NUMBER OF NUMBER OF $ VALUE OF $ VALUE OF NUMBER AT&T WIRELESS AT&T WIRELESS OF SHARES UNEXERCISED UNEXERCISED IN-THE-MONEY IN-THE-MONEY ACQUIRED $ VALUE OPTIONS/SARS OPTIONS/SARS OPTIONS/SARS OPTIONS/SARS NAME(1) ON EXERCISE REALIZED AT YEAR END AT YEAR END AT YEAR END AT YEAR END - ------- ----------- -------- ------------- ------------- ------------ ------------ C. Michael Armstrong..... 0 0 1,277,868 0 $ 0 $ 0 2,237,535 0 $1,056,667 $ 0 David W. Dorman.......... 0 0 89,151 0 $ 285,836 $ 0 945,088 0 $1,509,370 $ 0 Charles H. Noski......... 0 0 877,848 0 $ 0 $ 0 981,472 0 $ 439,207 $ 0 Frank Ianna.............. 0 0 415,685 0 $ 12,051 $ 0 1,000,426 0 $ 452,839 $ 0 Betsy J. Bernard......... 0 0 0 0 $ 0 $ 0 1,359,501 0 $3,151,965 $ 0
- --------------- (1) Includes Chairman of the Board and Chief Executive Officer and the four other most highly compensated individuals who were executive officers of AT&T at the end of 2001, as measured by salary and bonus. (2) Share and per share amounts have been adjusted to reflect the Company's April 15, 1999, three-for-two stock split and the distribution and split-off of AT&T Wireless Services, Inc. on July 9, 2001, as described in footnotes 6 and 7 in the Summary Compensation Table. LONG-TERM INCENTIVE PLANS -- AWARDS IN 2001
ESTIMATED FUTURE PAYOUTS UNDER PERFORMANCE NON-STOCK PRICE BASED PLANS NUMBER OF PERIOD UNTIL ----------------------------------------- PERFORMANCE MATURATION THRESHOLD TARGET MAXIMUM NAME(1) SHARES(2) OR PAYOUT (#) (#)(3) (#) - ------- ----------- ------------ --------- ------- ------- C. Michael Armstrong......... 278,563 2001-2003 69,641 278,563 557,126 David W. Dorman.............. 171,801 2001-2003 42,950 171,801 343,602 Charles H. Noski............. 115,770 2001-2003 28,943 115,770 231,540 Frank Ianna.................. 119,346 2001-2003 29,837 119,346 238,692 Betsy J. Bernard............. 48,878 2001-2003 12,220 48,878 97,756
- --------------- (1) Includes Chairman of the Board and Chief Executive Officer and the four other most highly compensated individuals who were executive officers of AT&T at the end of 2001, as measured by salary and bonus. (2) All Performance Share Awards from the 2001-2003 cycle, with respect to AT&T common stock, were adjusted for the impact of the split-off of AT&T Wireless Services, Inc. from AT&T Corp. on July 9, 2001, to preserve the economic value of the awards by multiplying the outstanding shares by the quotient of the AT&T closing stock value immediately prior to the split-off, divided by the AT&T opening stock value immediately after the split-off. (3) In January 2001, the Performance Share Awards listed in the table were made. If they remain Named Executive Officers at December 31, 2003, the payout value of these awards to Messrs. Armstrong, Dorman, Noski, and Ianna, and Ms. Bernard would be (i) 0.13% of the Company's net cash provided by operating activities for each year in the performance period, divided by the total number of Named Executive Officers receiving payouts for the period ending December 31, 2003, or (ii) a lesser amount, based on factors such as targets for the Company's earnings, return to equity, cash flow, revenue, or total shareholder return for the period. 179 SENIOR OFFICER SEVERANCE PLAN In 1997, the Company adopted the Senior Officer Separation Plan ("Severance Plan") for members of the Operations Team as constituted at that time and certain members of the Senior Management Team (a total of ten executives, two of whom remain with the Company). Under the Severance Plan, if covered executives (i) are terminated by the Company for other than "cause" (as defined in the Severance Plan) or (ii) self-initiate termination for "good reason" (as defined in the Severance Plan), they will be provided a severance payment equivalent to two times the sum of base salary plus target annual incentive in effect at termination. The severance amount payable may be deferred for up to five years with five annual payments thereafter and will be credited with interest based on the interest rate formula in effect for the Senior Management Incentive Award Deferral Plan on the Severance Plan effective date. In addition, covered executives who terminate under the terms of the Severance Plan will be entitled to certain other post-termination benefits that are generally made available from time to time to retired executive officers and senior managers. The Severance Plan was amended in 2001 to include certain additional senior officers. In addition the Severance Plan was amended to provide enhanced severance payments, as approved by the AT&T Board in October 2000, in the event of a Change in Control ("CIC"). In the event of a CIC, as such term is defined in the AT&T 1997 LTIP, the severance payment provided a covered executive terminated within two years following such CIC will be the sum of three times base salary plus three times target annual incentive plus three times performance share value at target. The amendments also provide protection in the form of a gross-up in the event payments are subject to excise tax under Sections 280G and 4999 of the IRS Code. PENSION PLANS The Company maintains the AT&T Management Pension Plan, a non-contributory pension plan that covers all management employees, including the Named Officers listed in the Summary Compensation Table. The normal retirement age under this plan is 65; however, retirement before age 65 can be elected under certain conditions. The AT&T Management Pension Plan was amended in 1997 to update the adjusted career average pay formula for computing pensions. Effective August 1, 1997, the adjusted career average pay formula was 1.6% of the average annual pay for the three years ending December 31, 1996, times the lesser of (a) 105% of the number of years of service prior to January 1, 1997, or (b) the number of years of service prior to January 1, 1997, plus one. Only the basic salary was taken into account in the formula used to compute pension amounts for the Named Officers and other senior managers under the adjusted career average pay formula. No service or compensation after December 31, 1996, was used to calculate an employee's normal retirement benefit under the adjusted career average pay formula. Effective January 1, 1998, the AT&T Management Pension Plan was further amended to convert the plan to a cash balance design. Under the new design, a hypothetical cash balance account is established for each participant for record-keeping purposes. Each year a participant's cash balance account is credited with (a) a pay credit based on the participant's age and eligible pay for that year, and (b) an interest credit based on the participant's account balance as of the end of the prior year. Effective January 1, 1998, an eligible participant's cash balance account received an initial credit based on a conversion benefit equal to the participant's normal retirement benefit under the adjusted career average pay formula described above multiplied by a conversion factor based on the participant's age as of December 31, 1996. The initial pay credit was made as of January 1, 1998, based on the participant's eligible pay for 1997, and the initial interest credit was made as of January 1, 1998, based on the conversion benefit. Only basic salary is considered eligible pay under the cash balance design for the Named Officers and other senior managers. Interest credits are calculated at the effective annual rate of 7% for calendar years 1997, 1998, 1999, and 2000. Under the cash balance design, a participant's benefit is determined by projecting interest credits to his or her cash balance account to age 65, converting the projected cash balance account to an annuity, and reducing that annuity for early commencement. A participant's benefit under the plan after conversion to the cash balance design will be no less than the benefit calculated under the career average pay formula as adjusted in 1997. 180 Federal laws place limitations on pensions that may be paid from the pension trust related to the AT&T Management Pension Plan. Pension amounts based on the AT&T Management Pension Plan formula that exceed the applicable limitations will be paid as an operating expense. The Company also maintains the AT&T Non-Qualified Pension Plan. Under the plan, annual pensions for Messrs. Armstrong, Dorman, Ianna, and Noski, and Ms. Bernard, and other senior managers are computed based on actual annual bonus awards under the Company's Short Term Incentive Plan. Pension benefits under this plan will commence at the same time as benefits under the AT&T Management Pension Plan. The annual pension amounts payable under this plan are equal to no less than the greater of the amounts computed under the Basic Formula or Alternate Formula that were amended in 1997 and are described below. BASIC FORMULA For the 3-year period ending December 31, 1996, 1.6% of the average of the actual annual bonus awards times the lesser of (a) 105% of the number of years of service prior to January 1, 1997, or (b) the number of years of service prior to January 1, 1997, plus one. ALTERNATE FORMULA The excess of (a) 1.7% of the adjusted career average pay over (b) 0.8% of the covered compensation base times the lesser of (i) 105% of the number of years of service prior to January 1, 1997, or (ii) the number of years of service prior to January 1, 1997, plus one, minus the benefit calculated under the AT&T Management Pension Plan formula (without regard to limitations imposed by the Internal Revenue Code). For purposes of this formula, adjusted career average pay is the average annual compensation for the 3-year period ending December 31, 1996, without regard to the limitations imposed by the Internal Revenue Code. The covered compensation base used in this formula is the average of the maximum wage amount for which an employee was liable for Social Security Tax for each year beginning with 1961 and ending with 1996. In 1996, the covered compensation base was $27,600. No service or compensation after December 31, 1996, is used to calculate an employee's normal retirement benefit under the Basic Formula or Alternate Formula. Effective January 1, 1998, the AT&T Non-Qualified Pension Plan was further amended to convert the plan to a cash balance pension design. Under the new design, a hypothetical cash balance account is established for each participant for record-keeping purposes. Each year a participant's cash balance account is credited with (a) an award credit based on the participant's age and short-term award paid in that year and (b) an interest credit based on the participant's account balance as of the end of the prior year. Effective January 1, 1998, an eligible participant's cash balance account received an initial credit based on a conversion benefit equal to the participant's normal retirement benefit under the Basic Formula described above multiplied by a conversion factor based on the participant's age as of December 31, 1996. The initial award credit was made as of January 1, 1998, based on the participant's short-term award paid in 1997, and the initial interest credit was made as of January 1, 1998, based on the conversion benefit. Interest credits are calculated at the effective annual rate of 7% for calendar years 1997, 1998, 1999, and 2000, and 5.5% for 2001. Under the cash balance design, a participant's benefit is determined by projecting interest credits to his or her cash balance account to age 65, converting the projected cash balance account to an annuity, and reducing that annuity for early commencement in the same manner as under the AT&T Management Pension Plan. Senior managers and certain other management employees who are hired at age 35 or over are covered by a supplemental AT&T Mid-Career Pension Plan. For qualified managers retiring with at least five years at a senior level, the plan provides additional credits at approximately one-half the rate in the AT&T Management Pension Plan. The number of credits is equal to the lesser of (1) actual years of net credited service at retirement, or (2) the employee's age at the time of hire minus 30. In addition, the AT&T Mid-Career Pension Plan was amended to provide that liability with respect to senior managers actively employed on January 1, 1998, be transferred to the AT&T Non-Qualified Pension Plan and converted to cash balance as described above. 181 Pension amounts under the AT&T Management Pension Plan formula, the AT&T Non-Qualified Pension Plan, or the AT&T Mid-Career Pension Plan are not subject to reductions for Social Security Benefits or other offset amounts. If Messrs. Armstrong, Dorman, Ianna, and Noski, and Ms. Bernard continue in the positions as previously stated and retire at the normal retirement age of 65, the estimated annual pension amount payable under the AT&T Management Pension Plan formula and the AT&T Non-Qualified Pension Plan would be $454,700, $1,548,500, $951,400, $999,100, and $973,600, respectively. Amounts shown are straight life annuity amounts not reduced by a joint and survivorship provision that is available to these officers. In 1997, the Company began purchasing annuity contracts to satisfy its unfunded obligations to retired senior managers under the AT&T Non-Qualified Pension Plan. In the event the Company purchases an annuity contract for any of the Named Executive Officers, the pension payments for such officer will vary from those set forth above. In such instance there would be a tax gross-up payment to the officer, and annuity benefits paid by the annuity provider will be reduced to offset the tax gross-up payment. The after-tax pension benefit will be the same as the after-tax benefit the participant would otherwise have received under the AT&T Non-Qualified Pension Plan. Receipt of the annuity is contingent on the signing of a 2-year non-competition agreement that, should competitive activity occur within the 2-year period, gives the Company the right to seek injunctive relief and to recapture any amounts already paid out under the annuity contract. In 1997, the Company also entered into a special individual non-qualified supplemental retirement arrangement with two executive officers including Mr. Ianna. Under this agreement, on November 1, 1997, a deferred account (hereinafter "Deferred Account") was credited with an initial balance of two times base pay. The Company shall credit interest to the Deferred Account as of the end of each calendar quarter at a rate equal to one-quarter of the average 30-year United States Treasury Bond rate in effect for the last previous quarter. Pursuant to the provisions of his employment/retention agreement described above, this Deferred Account became vested on February 1, 2001. The Deferred Account will be maintained as a bookkeeping account on the records of the Company and the named officers have no present ownership right or interest in the Deferred Account, or in any assets of the Company with respect thereto. As part of his employment agreement as described above, the Company entered into a supplemental pension arrangement with Mr. Armstrong in 1997. Pursuant to Mr. Armstrong's arrangement, if he continues in his position as previously stated and retires at the normal retirement age of 65, the estimated pension amount payable under the agreement that supplements the annual pension amount payable under the AT&T Management Pension Plan and the AT&T Non-Qualified Pension Plan would be $933,300. As part of his employment agreement as described above, the Company entered into a supplemental pension arrangement with Mr. Noski in 2000. Pursuant to Mr. Noski's arrangement, if he continues in his position as previously stated and retires at the normal retirement age of 65, the estimated pension amount payable under the agreement that supplements the annual pension amount payable under the AT&T Management Pension Plan and the AT&T Non-Qualified Pension Plan would be $308,600. As part of his employment agreement as described above, the Company entered into a supplemental pension arrangement with Mr. Dorman in 2000. Pursuant to Mr. Dorman's arrangement, if he continues in his position as previously stated and retires at the normal retirement age of 65, the estimated pension amount payable under the agreement that supplements the annual pension amount payable under the AT&T Management Pension Plan and the AT&T Non-Qualified Pension Plan would be $531,300. COMPENSATION OF DIRECTORS In 2001, directors who were not AT&T employees received an annual retainer of $90,000. AT&T common stock units with a then-current market value of $45,000 were deferred automatically and credited to a portion of a deferred compensation account, pursuant to AT&T's Deferred Compensation Plan for Non-Employee Directors. Pursuant to that same plan, the director had the option of deferring the remaining $45,000 in AT&T stock units, a deferred cash account, or cash in hand. The chairpersons of the Audit Committee, Compensation and Employee Benefits Committee, and Finance Committee each received an 182 additional annual retainer of $7,500. The chairperson of the Governance and Nominating Committee received an additional annual retainer of $5,000. No fees are paid for attendance at regularly scheduled AT&T Board and committee meetings. Directors received a fee of $1,500 for each special AT&T Board or committee meeting attended. In addition, non-employee directors received a stock option award to purchase 6,226 shares of AT&T common stock (adjusted for the special dividend of AT&T Wireless Services, Inc. common stock) at $15.7897. The options are exercisable in four equal annual installments commencing on the first anniversary of the grant date and expire after ten years. Directors may elect to defer the receipt of all or part of their cash retainer and other compensation into the AT&T common stock portion or the cash portion of the deferred compensation account. The AT&T common stock portion (the value of which is measured from time to time by the market value of AT&T common stock) is credited on each dividend payment date for AT&T common stock with a number of deferred shares of AT&T common stock equivalent in market value to the amount of the quarterly dividend on the shares then credited in the accounts. The cash portion of the deferred compensation account, representing amounts deferred prior to January 1, 2001, earns interest, compounded quarterly, at an annual rate equal to the average interest rate for 10-year United States Treasury Notes for the previous quarter, plus 5%. Thereafter, amounts deferred to the cash portion of the deferred compensation account earn interest, compounded quarterly, at an annual rate equal to the average interest rate for 10-year United States Treasury Notes for the previous quarter, plus 2%. Effective December 31, 1996, AT&T terminated its Pension Plan for Non-Employee Directors. The Pension Plan now covers only those non-employee directors who retired prior to December 31, 1996. Benefits accrued for then-active directors were valued and converted into a deferred annuity. AT&T also provides non-employee directors with travel accident insurance when on AT&T business. A non-employee director may also enroll in a Director's Universal Life Insurance Program sponsored by AT&T at no cost to the non-employee director. On June 1, 2001, this program replaced the former AT&T-sponsored life insurance program under which AT&T shared in the premium expense with the director. Existing life insurance policies for active non-employee directors under the former program were exchanged, in a tax-free exchange, for new universal life insurance policies under the new plan. AT&T recovered the portion of the life insurance premiums it contributed under the former program during the tax -free exchange. The life insurance benefit under the Director's Universal Life Insurance Program will continue after the non-employee director's retirement from the AT&T Board. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS (ALL EQUITY GRANTS AND CORRESPONDING SHARE PRICES DESCRIBED IN THIS SECTION HAVE BEEN ADJUSTED FOR THE APRIL 1999 THREE-FOR-TWO STOCK SPLIT AND THE JULY 2001 SPLIT-OFF OF AT&T WIRELESS SERVICES, INC., AS APPROPRIATE.) AT&T entered into an employment agreement with Mr. Armstrong dated October 17, 1997. The agreement provided for an initial base salary of $1,400,000 per year. It also provided for a guaranteed annual incentive award for the 1998 performance year of no less than 100% of his then base salary, and for 1998 and 1999 performance shares/stock units granted under the 1997 LTIP, a guaranteed grant value equivalent to no less than 100% of his base salary at the time of grant. Mr. Armstrong was eligible for annual stock option awards commencing in 1998 in accordance with the Committee-approved compensation structure for such years. To address certain forfeitures experienced when Mr. Armstrong left his previous employer, the Company paid a premium of $2,050,000 to purchase a split-dollar survivorship insurance policy insuring Mr. Armstrong and his spouse. Such policy will, upon the death of the last surviving insured, provide insurance proceeds equal to the sum of the face amount of the policy and the policy's cash value. An amount equal to the policy face amount shall be payable to Mr. Armstrong's beneficiaries or to a trust that may be established to own Mr. Armstrong's interest in such policy. The balance of the proceeds will be paid to the Company and, from its share of the death benefit, the Company will pay a Company-paid death benefit to Mr. Armstrong's beneficiaries equal to the death benefit received by the Company, minus the Company-paid premium. The 183 face amount of such split-dollar survivorship insurance policy will be determined in accordance with the underwriting requirements of the insurance company providing such coverage, based on the Company's premium payment of $2,050,000 and additional premium payments, if any, that Mr. Armstrong may become eligible for under any similar program adopted by the Company for its senior executives and in which Mr. Armstrong elects to participate. In accordance with his employment agreement, Mr. Armstrong was also granted AT&T restricted stock, AT&T restricted stock units, and AT&T stock options under the 1997 LTIP to replace similar grants forfeited from his prior employer and to provide strong incentives to create shareholder value for AT&T shareowners. Details of these grants follow: 1. Mr. Armstrong was granted 142,877 shares of AT&T restricted stock, of which 123,417 shares vested in 1998, 1999, and 2000. The remaining 19,460 shares vested as follows: 3,007 shares on May 1, 2001, and 16,453 shares on October 26, 2001. 2. Mr. Armstrong was also granted 446,179 AT&T restricted stock units that vest on October 1, 2003, assuming continued employment with a guarantee that, in the event the fair market value of the AT&T shares furnished to Mr. Armstrong on October 1, 2003, is less than $10,000,000, such shortfall will be made up in cash by the Company. In the event of (a) a Change in Control (as defined) on or before April 1, 2002, and a subsequent (within 3 years) Company-initiated termination for other than "cause" (as defined) or Constructive Termination Without Cause (as defined) or (b) Mr. Armstrong's death, special vesting rules apply. 3. Mr. Armstrong was granted an option to purchase, within ten years, 1,124,699 shares of AT&T common stock with a purchase price of $22.4125 per share. These options vest one-third each on October 17, 2000, 2001, and 2002, based on continued employment. As part of his employment agreement, the Company entered into a supplemental pension arrangement with Mr. Armstrong. Pursuant to such arrangement, Mr. Armstrong will receive an annual benefit (as defined in the employment agreement) commencing at his retirement at or after age 65. Such benefit will vest 20% per year on each of the first five anniversaries of his hire and will be payable in actuarially-reduced amounts for retirement and commencement prior to age 65. Pension benefits payable under this arrangement will be paid out of the Company's operating income and will be offset by (1) all amounts actually received by Mr. Armstrong under any other Company qualified or non-qualified retirement plan or arrangement, and (2) the greater of (a) $655,642 or (b) the actual pension benefits to be paid to Mr. Armstrong with respect to that year by his prior employers under their qualified and non-qualified defined benefit plans. In addition, Mr. Armstrong will be entitled to certain other post-retirement benefits that are generally made available from time to time to retired executive officers and service-pension-eligible senior managers. Mr. Armstrong's agreement provides for certain entitlements in the event of his termination from AT&T under specified circumstances. Pursuant to his agreement, in the event of Mr. Armstrong's death, his beneficiaries or estate will be entitled to his base salary through the end of his month of death, his target annual incentive award for the year of death, a lump sum payout at target for each open long-term incentive program performance cycle, and payment of survivor benefits under his supplemental pension arrangement which vests 100% at his death. All outstanding unvested stock options will vest and, together with already vested options, will be exercisable for the remainder of the original term of each grant; restrictions on the restricted stock granted as part of his agreement will lapse; and restricted stock units granted in his agreement will be payable in accordance with the schedule established in his Restricted Stock Unit Award Agreement (20% to 100% of units granted will be payable, depending on the date of death) in the event of his death prior to the vesting of such restricted stock units on October 1, 2003. Mr. Armstrong's agreement also provides that in the event his employment is terminated as a result of disability (as defined), he shall be entitled to receive disability benefits in accordance with the long-term disability program then in effect for senior managers. In addition, base salary, annual incentive, stock options, restricted stock, and restricted stock units shall be treated in the same manner as described above in the case of death. Treatment of long-term incentives will be as described above in the case of death, provided, however, 184 payment will be in accordance with the terms of the plan instead of a lump sum. Pension benefits under his supplemental pension arrangement will vest and will be offset by any Company-provided disability benefits. In the event of a termination for "cause" or in the event of a voluntary resignation, other than a termination due to death or disability or a Constructive Termination (as defined) without "cause" or retirement on October 31, 2003, Mr. Armstrong will forfeit all restricted stock and restricted stock units as to which restrictions have not lapsed, long-term incentives with respect to uncompleted performance cycles, outstanding stock options which are not exercisable, and any pension benefit not yet vested under his supplemental pension arrangement. He will receive base salary through his date of termination, and vested stock options shall remain exercisable for 90 days after termination or until the originally scheduled expiration date, if earlier. In the event of a Company-initiated termination for other than "cause" or in the event of a Constructive Termination without "cause," neither of which follow within three years of a Change in Control, Mr. Armstrong will be provided the following: base salary through the date of termination; a prorated annual incentive award at target for the year of termination; a 24-month continuation of monthly base salary or, at his option, the lump-sum present value of such payments (using the short-term Treasury bill rate for the month of termination); two times the target annual incentive award for the year of termination payable over 24 months or, at his option, the lump-sum present value of such payments (using the short-term Treasury bill rate for the month of termination); and payout at target for each open long-term incentive program performance cycle in accordance with the plan or in a lump sum as described above. In addition, all outstanding unvested stock options will vest and, together with already vested options, will be exercisable for the remainder of the original term of each grant; restrictions on the restricted stock granted as part of his agreement will lapse; and his supplemental pension benefit shall fully vest. For a period of 24 months following his termination or, if earlier, until he receives equivalent coverage and benefits from another employer, Mr. Armstrong will be entitled to continued participation in AT&T's benefit plans and programs. In the event of Mr. Armstrong's retirement as of October 31, 2003, he will be entitled to payment of his supplemental pension and will be treated in accordance with the plans, programs, and practices applicable to retired senior managers. Mr. Armstrong's agreement provides that in the event of a Change in Control, all amounts and benefits to which he is entitled but are not yet vested (except with respect to his restricted stock unit grant which is governed by the terms of the grant agreement) shall become fully vested. In addition, in the event of a Company-initiated termination or a Constructive Termination without "cause" following a Change in Control, he shall be entitled to the benefits described above in connection with a Company-initiated termination without "cause" or a Constructive Termination without "cause" not associated with a Change in Control provided, however: (1) the number of months associated with salary, annual incentive, and benefits continuation shall be 48 months, and such amounts will be payable as a lump sum as soon as practicable after his termination; and (2) restricted stock units granted in his agreement will be payable in accordance with the schedule established in his Restricted Stock Unit Award Agreement (25% to 100% of units granted will be payable, depending on date of termination). In the event the payments in this paragraph are determined to constitute a payment under Section 280G(b)(2) of the Internal Revenue Code and such payment is subject to an excise tax under Section 4999 of the Code, the Company will provide Mr. Armstrong with a tax gross-up payment to negate the excise tax. In the event of any termination described above, Mr. Armstrong or his estate shall also be entitled to the unpaid balance of any incentive awards for completed performance periods, any expense reimbursements due him, and other benefits in accordance with applicable plans and programs. AT&T entered into an employment agreement with Mr. Noski dated December 8, 1999. The agreement provided for an initial base salary of $750,000 per year. It also provided for a guaranteed annual incentive award for the 2000 performance year of no less than 100% of his then base salary and three separate performance shares/stock unit awards under the 1997 LTIP for 20,657, 20,287, and 28,188 for performance periods ended December 31, 1999, 2000, and 2001, respectively, with guaranteed distributions valued at no less than the corresponding amounts provided for by the long-term incentive plan of his previous employer. 185 Mr. Noski was also provided an option to purchase, within 10 years, 85,977 shares of AT&T common stock with a purchase price of $43.2915 per share and was granted 24,977 performance shares/stock units covering the 2000-2002 performance period in accordance with the Committee-approved compensation structure for 2000. The stock options vest in three equal annual installments, beginning December 10, 2002, based on continued employment. To address certain forfeitures experienced when Mr. Noski left his previous employer and to incent him to join the Company, the agreement provided for (i) a special lump sum cash payment of $1,561,250 payable within 30 days from hire and (ii) a signing bonus of $2,000,000, 50% paid within 30 days of hire and the remaining 50% paid after six months from his date of hire. In accordance with his employment agreement, Mr. Noski was also granted AT&T restricted stock, AT&T restricted stock units, and AT&T stock options under the 1997 LTIP to replace similar grants forfeited from his prior employer and to provide strong incentives to create value for AT&T shareholders. Details of these grants follow: 1. To offset certain vested stock option gains forfeited by Mr. Noski when he left his previous employer, the Company granted him 353,693 shares of AT&T restricted stock, of which 342,047 shares vested in 2000 and 2001. The remaining 11,646 shares vest on October 17, 2002. 2. Mr. Noski was also granted 127,309 AT&T restricted stock units, of which 87,333 vested in 2000 and 2001. Of the remaining 39,976 stock units, 26,359 vested on February 26, 2002, and 13,617 will vest on April 7, 2002, assuming continued employment. 3. Mr. Noski was granted an option to purchase, within ten years, 1,316,773 shares of AT&T common stock with a purchase price of $43.2915 per share. These options vest one-third each on December 10, 2000, 2001, and 2002, based on continued employment. As part of his employment agreement, Mr. Noski entered into a supplemental pension arrangement with the Company. Pursuant to such arrangement, Mr. Noski will receive an annual benefit (as defined in the employment agreement) commencing at his retirement at or after age 65. Such benefit will vest at age 57 and will be payable in actuarially-reduced amounts for retirement and commencement prior to age 65. Pension benefits payable under this arrangement will be paid out of the Company's operating income and will be offset by all amounts actually received by Mr. Noski under any other Company qualified and non-qualified retirement plan or arrangement and the actual pension benefits to be paid to Mr. Noski with respect to that year by his prior employer under its qualified and non-qualified defined benefit plans. In addition, Mr. Noski will be entitled to certain other post-retirement benefits that are made available from time to time to retired executive officers and service-pension-eligible senior managers. Mr. Noski's agreement provides for certain entitlements in the event of his termination from AT&T under specified circumstances. Pursuant to his agreement, in the event of Mr. Noski's termination resulting from death or disability, Mr. Noski, his beneficiaries, or estate will be entitled to his target annual incentive award for the year in which his death or disability resulted in his termination of employment (prorated for the total period of eligibility calculated as of his date of death or disability termination), the continuation of the vesting and distribution of actual payout for each open long-term incentive program performance share/stock unit cycle, and payment of survivor benefits under his supplemental pension arrangement based on the amount of the benefits accrued, but not vested, as of the date of termination for death or disability. All outstanding unvested stock options will continue to vest and, together with already vested options, will be exercisable for the remainder of the original term of each grant; all outstanding unvested restricted stock and restricted stock units will be payable in accordance with the schedule established in his Restricted Stock and Restricted Stock Unit Award Agreements. In the event of a termination for "cause" (as defined) or in the event of a voluntary resignation, other than a termination due to death or disability or a Good Reason termination (as defined) without "cause" or retirement based on satisfying the age and service requirements included as termination provisions under the plan, Mr. Noski will forfeit all restricted stock and restricted stock units as to which restrictions have not 186 lapsed, long-term incentives with respect to uncompleted performance cycles, outstanding stock options which are not exercisable, and any pension benefit not yet vested under his supplemental pension arrangement. He will receive base salary through his date of termination, and vested stock options shall remain exercisable for 90 days after termination or until the originally scheduled expiration date, if earlier. In the event Mr. Noski is precluded from exercising vested stock options within the 90 days due to a Company-prohibited trading period, an additional 30 days after the end of the prohibited period will be provided. In the event of a voluntary termination, Mr. Noski, to the extent not eligible for retiree medical benefits from the Company, will be eligible for coverage under the AT&T Separation Medical Plan offered to certain former senior managers and will be responsible for the annual premium for this coverage. In the event of a Company-initiated termination for other than "cause" or a Good Reason termination without "cause," Mr. Noski will be provided the following: base salary through the date of termination, a prorated annual incentive award at target for the year of termination, a lump sum payment equal to two times the annual base salary, and target annual incentive award for the year of termination payable. In addition, all outstanding unvested stock options will continue to vest and, together with already vested options, will be exercisable for the remainder of the original term of each grant, and all outstanding unvested restricted stock, restricted stock units, and performance share units will be payable in accordance with the schedules established in his Restricted Stock, Restricted Stock Unit, and Performance Share Unit Award Agreements. Mr. Noski, to the extent not eligible for retiree medical benefits from the Company, will be eligible for coverage under the AT&T Separation Medical Plan offered to certain former senior managers and will be responsible for a portion of the annual premium for this coverage. In February 2002, the AT&T Board authorized an addendum to Mr. Noski's original employment agreement dated December 8, 1999, that will detail special terms should he elect to leave AT&T during certain defined periods related to the separation of AT&T Broadband and its subsequent merger with Comcast. The addendum will supplement and, to the extent inconsistent with, will supersede, his original agreement. According to the terms of the addendum, Mr. Noski's salary will be increased to $900,000 effective March 1, 2002, his 2002 target bonus will be $1,125,000, and the target value of his 2002 long-term incentive award will be $10,000,000. If Mr. Noski terminates his employment on December 31, 2002, prior to the separation of AT&T Broadband and subsequent merger with Comcast, he will be eligible to receive his 2002 annual bonus. For equity granted prior to 2002, at such termination, Mr. Noski will be entitled to the continuation of the vesting and distribution of the actual payout for each performance share award; all outstanding unvested stock options will vest and, together with already vested options, will be exercisable for the remainder of the original term of each grant; and all outstanding unvested restricted stock and restricted stock units will vest. For equity granted in 2002, any stock options granted to Mr. Noski in 2002 will vest on his termination date and will remain exercisable for the remainder of the original term. His 2002 performance shares will be prorated as of his termination date to reflect the time worked in the 3-year performance cycle. Mr. Noski and his eligible dependents will be eligible for coverage under the AT&T Separation Medical Plan offered by the Company to certain former senior managers as described in his original employment agreement. In addition, he will be eligible to receive the supplemental pension commencing at age 57 in accordance with the terms and conditions set forth in his original employment agreement. In the event Mr. Noski terminates his employment upon the earlier of March 1, 2003, or at the time of the separation of AT&T Broadband and subsequent merger with Comcast, or at the time of the termination of the merger, he will be eligible to receive the terms and conditions outlined in the previous paragraph, subject to the following modifications. Stock options granted to Mr. Noski in 1999 will be cancelled and the supplemental pension set forth in his original employment agreement will be modified to commence at age 50 and will be equal to 40% of his final average pay. In the event of Mr. Noski's disability prior to a termination as described in the addendum, the special supplemental pension amount payable under the original employment agreement will be modified to commence at age 50 and the applicable percentage will be 40%. In the event of his death prior to a termination described in the addendum, the joint and survivor annuity payable at his death will be modified to equal 50% 187 multiplied by 40% of Mr. Noski's final average pay. All other terms and conditions relative to his death or disability will be in accordance with his employment agreement. The Company also established a $3,000,000 special deferral account earning interest quarterly equal to the 10-year United States Treasury Note rate plus 2%, and two-thirds of this account will vest on December 31, 2002, if he terminates employment on that date and if the separation of AT&T Broadband and subsequent merger with Comcast has not closed or terminated on or before that date. The remaining one-third of the account will be cancelled. If Mr. Noski does not terminate his employment on December 31, 2002, but rather on the earlier of March 1, 2003, or at the time of the separation of AT&T Broadband and subsequent merger with Comcast, or at the time of the termination of the merger, the entire account will vest at such termination of employment. In the event of Mr. Noski's death or disability prior to vesting, the balance in the special deferral account will vest. The payments described above at the specified termination dates are in lieu of any payments that might otherwise be payable as a result of Mr. Noski's termination. In the event Mr. Noski leaves the Company other than as described in the addendum, the terms and conditions of his original employment agreement will apply, except that in the event the Company terminates Mr. Noski's employment for other than "cause" or as a result of a Good Reason termination (both terms as defined in his original employment agreement) prior to March 1, 2003, he will receive the benefits associated with a March 1, 2003 termination under the addendum in lieu of the benefits under his employment agreement. In the event there is a mutual agreement between Mr. Noski and the Company for him to continue his employment after March 1, 2003, Mr. Noski will receive the benefits associated with a March 1, 2003 termination at a subsequent termination in lieu of any other payments that might otherwise be payable as a result of such a termination. Should Mr. Noski transfer to AT&T Broadband at or before the separation and subsequent merger with Comcast, the terms of the addendum will be cancelled except that the full amount of the special deferral account shall vest upon transfer. Also, in the event Mr. Noski terminates employment with the Company with entitlement to benefits under the addendum, and, within 12 months of his termination becomes employed by AT&T Comcast, all future payments under the supplemental pension will be cancelled. Mr. Noski and the Company are currently in the process of negotiating and finalizing the addendum, and the addendum, when completed, may contain additional terms and conditions relating to his employment. AT&T entered into an employment agreement with Mr. Dorman dated December 1, 2000, with a term ending December 31, 2002. The agreement is subject to automatic annual renewals after that date unless either the Company or Mr. Dorman provide written notice to terminate at least 60 days prior to the anniversary date. The agreement provided for an initial base salary of $950,000 per year. Mr. Dorman was also awarded 66,737 performance shares covering the 2000-2002 performance period, and options to purchase, within ten years, 356,603 shares of AT&T common stock with a purchase price of $14.9338, in accordance with the Compensation Committee-approved compensation structure for 2000. These options will vest in four equal annual installments, beginning on December 1, 2001. Mr. Dorman was also guaranteed long term incentive grants for 2001, as determined by the AT&T Board, valued at $9,500,000. In addition, a Special Retention Bonus of restricted stock units valued at $3,800,000 was granted to Mr. Dorman on March 15, 2001, which will vest on March 15, 2004. The agreement also provides that, should the Company issue a Consumer Services Group tracking stock, a grant will be made to Mr. Dorman that is consistent with the grants made to the CEO and other senior executives. In addition, the agreement also states that in the event AT&T Wireless or AT&T Broadband become independent companies, all equity granted to Mr. Dorman under this agreement will be apportioned among AT&T Corp., AT&T Wireless, and AT&T Broadband stock according to a plan which shall be developed and approved by the AT&T Board and applicable to Mr. Dorman and other Company executives. To address certain long-term incentive forfeitures and retention forfeitures experienced when Mr. Dorman left his previous employer and to incent him to join the Company, the agreement provided for (i) a special lump sum cash payment of $800,000 payable in March 2001 to replace a forfeited 2000 bonus from his former employer; (ii) in connection with a retention from his prior employer, additional payments to 188 a previously established special deferral account in the amount of $500,000 with interest credited effective April 1, 2000, and an additional $500,000 on April 1, 2001, with interest on the account paid at the rate of 10-year United States Treasury Notes plus 5% and 46,627 shares of AT&T restricted stock, all of which vest on April 1, 2002; and (iii) in connection with forfeited long-term incentives, a cash payment to be paid in April 2003 in the amount of $3,080,000 subject to continued employment through December 31, 2002, unless Mr. Dorman is no longer employed due to a Company-initiated termination without "cause" (as defined) or a self-initiated termination for Good Reason (as defined) and a grant of 715,999 shares of AT&T restricted stock vesting on April 1, 2002. Mr. Dorman's agreement provides for a special temporary living allowance to compensate him for temporary housing in New Jersey and related travel. These payments, which are grossed-up for tax purposes, began January 1, 2001, and will continue until the earlier of when Mr. Dorman moves his residence to New Jersey, December 21, 2002, or termination of his employment with the Company. In addition, his agreement provides that Mr. Dorman shall have authority to use Company aircraft, and to the extent this results in imputed income, the Company will provide him with a tax gross-up. As part of his employment agreement, Mr. Dorman entered into a supplemental pension arrangement with the Company. Pursuant to such arrangement, Mr. Dorman will receive an annual benefit (as defined) commencing at his retirement. Such benefit was vested at his hiring date and will be payable in stated reduced amounts for retirement and commencement prior to December 1, 2013. Pension benefits payable under this arrangement will be paid out of the Company's operating income and will be offset by all amounts actually received by Mr. Dorman under any other Company qualified and non-qualified retirement plan or arrangement, and the actual pension benefits to be paid to Mr. Dorman with respect to that year by his prior employers, Concert and British Telecom, under their qualified and non-qualified defined benefit plans. Mr. Dorman's agreement provides for certain entitlements in the event of his termination from AT&T under specified circumstances. Pursuant to his agreement, in the event of Mr. Dorman's termination resulting from death or disability, Mr. Dorman, his beneficiaries, or estate will be entitled to disability benefits in accordance with a disability program then in effect for senior executives of the Company, his target annual incentive award for the year in which his death or disability resulted in his termination of employment (prorated for the total period of eligibility calculated as of his date of death or disability termination), the vesting and payout at target for each open long-term incentive program performance share cycle prorated for the amount of time worked in the applicable 3-year cycle, payment of any unpaid cash hiring bonus, financial counseling including individual income tax preparation for one year, and payment of survivor benefits under his supplemental pension arrangement based on the amount of the benefits accrued and vested, as of the date of termination for death or disability. All outstanding unvested stock options will vest and, together with already vested options, will be exercisable in accordance with the terms of the grants applicable to death or disability, and all outstanding unvested restricted stock and restricted stock units will vest. In addition, Mr. Dorman's special deferral account will vest. In the event of a termination for "cause," Mr. Dorman shall receive no further compensation from the Company as of his termination date, and all stock options, performance shares, restricted shares, and restricted stock units, whether unvested or vested but not exercised, shall be cancelled. In the event of a voluntary resignation, other than a termination due to death or disability or a Good Reason termination without "cause" or retirement based on satisfying the age and service requirements included as termination provisions under the plan, Mr. Dorman will forfeit all restricted stock and restricted stock units as to which restrictions have not lapsed, long-term incentives with respect to uncompleted performance cycles, and outstanding stock options that are not exercisable. He will receive base salary through his date of termination and vested stock options shall remain exercisable for 90 days after termination or until the originally scheduled expiration date, if earlier. Mr. Dorman, to the extent not eligible for retiree medical benefits from the Company, and provided his voluntary resignation occurs after December 1, 2002, will be eligible for benefits under the then-applicable AT&T Separation Medical Plan offered to certain former senior managers under the terms and conditions of that plan and will be responsible for a portion of the annual premium for this coverage. His agreement also provides that, in the event of a self-initiated termination after 189 December 31, 2002, and if at the time of Mr. Dorman's resignation Mr. Armstrong is no longer the Chief Executive Officer of the Company and Mr. Dorman has not been named CEO, he will be entitled to accelerated vesting of stock options, restricted stock, restricted stock units, and his outstanding performance shares will continue to vest. In the event of a Company-initiated termination for other than "cause" or a Good Reason termination without "cause," Mr. Dorman will be provided the following under the terms of his agreement: base salary through the date of termination, a prorated annual incentive award at target for the year of termination, a severance payment equal to two times the annual base salary and target annual incentive award for the year of termination, the immediate vesting of the special deferral account, payment of benefits under his supplemental pension arrangement based on the amount of the benefits accrued, accelerated vesting of all outstanding unvested restricted shares and restricted stock units, performance shares and stock units will continue to vest, vested AT&T Wireless Services stock options will be exercisable for the remainder of their original term, payment of any unpaid hiring bonuses, and continuation of his Senior Manager Universal Life Insurance. Under the terms of the Senior Officer Separation Plan under which Mr. Dorman is a covered executive, he will be provided the following: deferral of his severance payment for up to five years with up to five annual installments thereafter, all outstanding unvested AT&T stock options will vest and, together with already vested options, will be exercisable for the remainder of the original term of each grant, financial counseling for two years, telephone reimbursement under the Senior Manager Telephone Reimbursement Program, transition counseling and, to the extent not eligible for retiree medical benefits from the Company, will be eligible for coverage under the AT&T Separation Medical Plan offered to certain former senior managers under the terms and conditions of that plan. Mr. Dorman's agreement provides that in the event of a Change in Control of the Company, severance payments to him shall be governed by the Change in Control provisions applicable to senior executives as approved by the AT&T Board on October 23, 2000. AT&T entered into an employment agreement with Ms. Bernard dated April 9, 2001. The agreement provided for an initial base salary of $600,000 per year. It also provided a targeted annual incentive award for the 2001 performance year of 100% of her then base salary with payout based on actual financial results and with no proration for her partial service in 2001. Ms. Bernard was also awarded 48,878 performance shares covering the 2001-2003 performance period, 158,025 restricted stock units vesting on April 9, 2004, and an option to purchase, within ten years, 115,558 shares of AT&T common stock with a purchase price of $15.7595 per share granted April 9, 2001, and 77,039 shares of AT&T common stock with a purchase price of $16.8541 per share granted July 2, 2001, in accordance with the Compensation Committee-approved compensation structure for 2001. These option grants vest one-quarter each year beginning on April 9, 2002, and July 2, 2002, respectively, based on continued employment. In accordance with her employment agreement, Ms. Bernard was also granted special one-time awards of AT&T restricted stock, AT&T stock options, and AT&T performance shares as follows: (i) an option to purchase, within ten years, up to 1,059,680 shares of AT&T common stock with a purchase price of $15.7595 per share, vesting one-third per year beginning on April 9, 2002, based on continued employment, (ii) an option to purchase, within ten years, 107,224 shares of AT&T common stock with a purchase price of $15.7595 per share, vesting one-quarter per year beginning on April 9, 2002, based on continued employment, (iii) a grant of 231,805 AT&T restricted shares vesting one-third per year beginning on April 9, 2002, based on continued employment, and (iv) two awards each consisting of 48,765 performance shares for the 1999-2001 and 2000-2002 performance periods, respectively. In the event that AT&T issues a tracking stock for AT&T Consumer Services Group and other executives are awarded stock options on such tracking stock, Ms. Bernard's agreement provides that she will be provided stock options consistent with those awarded to similarly situated executives. In connection with the split-off of AT&T Wireless and the separation of AT&T Broadband and subsequent merger with Comcast, Ms. Bernard's agreement provides that all equity granted under her employment agreement is to be treated in accordance with the AT&T Board-approved treatment of equity granted to other Company executives. 190 To address certain forfeitures experienced when Ms. Bernard left her previous employer and to incent her to join the Company, the agreement provided for (i) a special lump sum cash payment of $1,000,000 after one year of employment, (ii) a signing bonus of $300,000 within 30 days of her hire, and (iii) a special $3,000,000 deferral account earning interest quarterly equal to the 10-year United States Treasury Note rate plus 2%, vesting April 9, 2004, based on continued employment. The agreement also provides that when Ms. Bernard sells her second home she will receive a payment to mitigate certain costs associated with the sale. Ms. Bernard's agreement provides for certain entitlements in the event of her termination from AT&T under specified circumstances. Pursuant to her agreement, in the event of Ms. Bernard's termination resulting from death or disability, Ms. Bernard, her beneficiaries, or estate will be entitled to her target annual incentive award for the year in which her death or disability resulted in her termination of employment (prorated for the total period of eligibility calculated as of her date of death or disability termination), the vesting and distribution of target payout for each open long-term incentive program performance share cycle, prorated for time on the payroll during the performance period (for the 1999-2001 and 2000-2002 performance shares there is no proration for the period prior to date of hire), and vesting and payout of the special deferral account, and payment of any unpaid cash hiring bonuses. All outstanding unvested stock options vest and, together with already vested options, will be exercisable under the terms and conditions applicable to death or disability, as may be the case, all outstanding unvested restricted stock and restricted stock units will vest, and Ms. Bernard or her estate or beneficiaries, as may be applicable, will be provided financial counseling, plus a tax gross-up, for one year following death or disability. In the event of a termination for "cause" (as defined) or in the event of a voluntary resignation, other than a termination due to death or disability or a Good Reason termination (as defined) without "cause" or retirement based on satisfying the age and service requirements included as termination provisions under the plan, Ms. Bernard will forfeit all restricted stock and restricted stock units as to which restrictions have not lapsed, long-term incentives with respect to uncompleted performance cycles, outstanding stock options which are not exercisable, and any deferral amount not yet vested under her special deferral account. She will receive base salary through her date of termination, and in the case of voluntary resignation, vested stock options shall remain exercisable for 90 days after termination or until the originally scheduled expiration date, if earlier. Ms. Bernard, to the extent she voluntarily resigns after September 30, 2003, and to the extent she is not eligible for retiree medical benefits from the Company, will be eligible for coverage under the AT&T Separation Medical Plan offered to certain former senior managers under the terms and conditions of that plan. In the event of a Company-initiated termination for other than "cause" or a Good Reason termination without "cause," Ms. Bernard will be provided the following under the terms of her agreement: base salary through the date of termination, a prorated annual incentive award at target for the year of termination, a lump sum severance payment equal to two times the sum of annual base salary, and target annual incentive award for the year of termination. In addition, all outstanding unvested restricted stock units will vest, performance shares will continue to vest, her special deferral account will vest, and any unpaid hiring bonuses will be paid. Under the terms of the AT&T Senior Officer Separation Plan under which Ms. Bernard is a covered executive, she will be eligible to defer receipt of her severance payment for up to five years with up to five annual installments, her outstanding unvested restricted stock will vest, all outstanding unvested stock options will vest and, together with already vested options, will be exercisable for the remainder of the original term of each grant. Ms. Bernard will be provided continuation of her Senior Management Universal Life Insurance, financial counseling for two years, transition counseling, Senior Management Telephone Reimbursement and, to the extent not eligible for retiree medical benefits from the Company, will be eligible for coverage under the AT&T Separation Medical Plan offered to certain former senior managers under the terms and conditions of that plan. Her agreement also provides that, in the event of a self-initiated termination after September 30, 2003, at which time she is not the President and Chief Executive Officer of the AT&T Consumer Services Group with its own tracking stock, or of another publicly traded AT&T business unit, such termination will be treated as a Good Reason termination and she will be entitled to the benefits set forth in this paragraph. 191 Ms. Bernard's agreement provides that in the event of a Change in Control (as defined) of the Company, severance payments to her shall be governed by the Change in Control provisions applicable to senior executives approved by the AT&T Board on October 23, 2000. AT&T entered into an employment/retention agreement with Mr. Ianna dated December 1, 2000. The agreement provided for a base salary of $700,000 per year. It also provided a targeted annual incentive award for the 2001 performance year of 100% of his then base salary with payout based on actual financial results. Mr. Ianna was also provided a 2001 long-term incentive award with a grant value of $8,000,000 and a commitment that his 2002 long-term incentive award would have a grant value of no less than $8,000,000. A special retention restricted share grant with a value of $4,200,000 was granted March 15, 2001, vesting on December 31, 2002, based on continued employment. Prior to December 31, 2002, the grant would vest in the event of death, disability, Company-initiated termination for other than "cause" (as defined), or for Good Reason (as defined). Under the terms of his agreement, Mr. Ianna's special deferral account established on November 1, 1997, vested on February 1, 2001. In addition, as part of his retention, Mr. Ianna was provided a $1,000,000 special deferral account with annual interest at the 30-year United States Treasury Note rate plus 2%, compounded quarterly, that vests 50% on December 31, 2001, and 50% on December 31, 2002, contingent upon continued employment, and a special cash payment of $300,000 net after taxes payable in February 2001. In the event of a Company-initiated termination for other than "cause," Good Reason termination, or death or disability, any unvested portion of the special deferral account fully vests. The agreement also provided, with respect to his outstanding AT&T equity, the following: 1. 97,974 special options awarded in 2000 will vest under their original terms and conditions, provided, however, once vested they will remain exercisable for the full remaining term. 2. 325,413 special options and 86,231 restricted stock units granted in 1999 will vest on December 31, 2002, contingent upon continued employment, and stock options will remain exercisable for the full remaining term. Vesting of these special 1999 stock options and restricted stock units will accelerate upon death, disability, approved retirement prior to 65 by the Compensation and Benefits Committee of the AT&T Board, Company-initiated termination for other than "cause," or Good Reason termination. 3. All other stock options not referenced above that are outstanding as of December 31, 2000, including AT&T Wireless stock options, to the extent not otherwise vested by virtue of their terms and conditions, will vest upon retirement and remain exercisable for the full remaining term, provided such retirement is on or after December 31, 2002. 4. Restricted stock units granted in March 2001 as part of the 2001 annual long-term incentive award that are not vested upon retirement will vest upon retirement, provided such retirement is on or after December 31, 2002. AT&T BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation and Employee Benefits Committee ("Committee") is responsible for establishing, approving, and administering executive compensation policies and practices that govern the compensation paid to all senior managers of the Company, except that the AT&T Board (other than directors who are employees) is responsible for approving the compensation for the Named Executive Officers in the Summary Compensation Table based upon recommendations of the Committee. The Committee regularly reports to the AT&T Board and is comprised of five independent non-employee directors, none of whom are eligible to participate in any of the pay programs they administer. The Committee held seven meetings during 2001, including both regularly scheduled and special meetings. COMPENSATION PHILOSOPHY AND OBJECTIVES AT&T operates in an extremely competitive and rapidly changing industry. The AT&T Board believes that the compensation programs for executives should be designed to attract and retain executives who possess the high-quality skills and talent necessary to transform the business. The compensation philosophy seeks to provide a strong link between an executive's total earnings opportunity and the short-term and long-term 192 performance of the Company based on the achievement of pre-determined financial targets and operational goals relative to the Company's competitors, as well as to an individual's contributions. The core principles underlying the framework for the programs are: - Total compensation opportunities must be competitive -- the value will be based on comparable companies' pay opportunities and will be targeted at levels that will attract, motivate, and retain a highly skilled work force and enable us to compete with other premier employers for the best talent. - Pay must be performance-based -- a significant part of each executive's compensation is directly linked to accomplishing specific results that will create shareholder value in the short and long term. - A significant portion of the total compensation opportunity should be equity-based -- the Committee believes that an equity stake effectively aligns employee and shareholder interests and provides proper motivation for enhancing shareholder value. EXECUTIVE COMPENSATION COMPONENTS AND PRACTICES The Company's executive compensation program consists of three key components: (1) base salary; (2) short-term incentives, i.e., annual bonus; and (3) long-term incentives, i.e., performance shares, stock options, and restricted stock or stock units. The Committee relies on analysis from independent compensation consultants, published compensation studies, and proxy data to compare executive compensation to market data of similarly sized companies in the telecommunications industry, as well as other industries in which the Company competes for products, services, and talent to develop a competitive compensation program. This review covers a broader and more diverse set of companies than those identified as the Peer Group included in the Performance Graph in Item 11. The policies and practices for determining executive compensation and specifically that of the Chairman of the Board and Chief Executive Officer, Mr. Armstrong, are described below: (1) BASE SALARY The Committee establishes the salary ranges for each of the executive officer positions based upon the job responsibilities and scope, level of expertise and experience required, strategic impact of the position, overall business performance, and individual contributions, as well as competitive compensation of similarly positioned executives in comparable companies. Surveys conducted by external compensation consultants provide the market data utilized by the Committee annually as part of the determination of the executive compensation structure. Annual salary adjustments recognize sustained individual performance by the executive, while overall salary increase funding is sensitive to both market movement and Company performance. The Committee presents the salary recommendations for the Named Executive Officers to the non-employee directors for approval annually. These salary recommendations are based on the executive's contribution to the Company, experience, expertise, and relative position against competitive market rates. There are no individual performance matrices or pre-established weightings given to each factor. (2) ANNUAL INCENTIVES All executives are eligible to be considered for annual incentives. The annual bonus for executive officers is based on the Company's key financial and operational results as measured against targets for revenue, earnings (as measured by operational net income, earnings before interest and taxes, or other metric) and other qualitative measures of performance. Targets for these measures are established in advance and reviewed and approved by the Committee and the AT&T Board. The Committee also sets a minimum performance level that must be met before any awards can be paid. If that minimum level is not achieved, there will be no annual bonuses. The final award amount depends on the actual level of performance achieved in comparison to the targets; however, the Committee may choose to make adjustments to the targets or awards to eliminate the effect of certain unplanned events, accounting adjustments, or extraordinary items. 193 Adjustments, if any, are intended to ensure that award payments reflect the operating results of the Company and are not inflated or deflated artificially. For each of the five most highly compensated officers (the Named Executive Officers including the Chairman and Chief Executive Officer), the annual bonus amount is limited to (i) 0.4% of the Company's net cash provided by operating activities for the annual performance period, divided by the total number of Named Executive Officers with respect to such period, or (ii) a lesser amount based on factors including the Company's performance relative to pre-set financial, operational, and individual performance targets applicable to bonuses set for other executive officers. (3) LONG-TERM INCENTIVES Long-term incentives including stock options, long-term performance incentive awards, and restricted stock or restricted stock units provide a mechanism to reward executive officers for maximizing long-term shareholder value. Grants of stock options and performance shares are made annually under the AT&T 1997 Long Term Incentive Program (as amended, "1997 LTIP"). The size of these annual grants is based on competitive market grant levels for similar positions. The size of previous grants and the number of shares held by an executive generally are not considered in determining annual award levels. Stock option awards and performance share awards are based on creating incremental shareholder value or on the attainment of pre-determined financial targets over a 3-year performance cycle. Grants of restricted stock or restricted stock units are made on a selective basis for purposes of retention or reward for outstanding performance. In total, these awards represent a significant portion of the total compensation opportunity provided to executive officers. In Item 11, the Long-Term Incentive Plans-Awards in 2001 table and the Option/SAR Grants in 2001 table summarize option grants and other equity awards in fiscal year 2001 to the Named Executive Officers. Performance Shares: Performance shares, that are units equivalent in value to shares of AT&T Common Stock, are awarded annually based on surveys of competitive market grant levels for similar positions. The value of the payout to each Named Executive Officer for the performance period is limited to (i) 0.13% of the Company's net cash provided by operating activities for each year in the performance period, divided by the total number of Named Executive Officers receiving such payouts, or (ii) a lesser amount, based on factors that include targets for the Company's earnings and revenue established for performance shares for the 3-year performance period. The performance share award approved by the Committee for the 1998-2000 performance period, that paid out in 2001, was based on 3-year cumulative earnings per share and revenue results against pre-established targets and relative total shareholder return ("TSR"), as measured against S&P 500 peer group companies. Depending on the level of performance against the 3-year goals, performance share payouts can range between 0% and 200% of the target award, as shown in the Long-Term Incentive Plans-Awards in 2001 table in Item 11. No more than 100% of target can be awarded and paid out based on achievement of the Company's internal financial measures. Award payouts in excess of 100% but no greater than 200% of target can only be attained if AT&T's TSR ranks above the 75th percentile TSR when measured against the peer group. The performance shares are valued based upon the market price of the Company's common stock at the end of the performance period. Based on the Company's actual performance for the period covering 1998-2000, 91% of the performance shares were earned and distributed at a price of $24.175 for executive officers as reported in the Summary Compensation Table in Item 11. Stock Options: All executives are eligible to be considered for stock option awards granted annually. The size of the grant is determined by the Committee based on surveys of competitive grant levels for similar positions. Stock options are granted with an exercise price equal to or greater than the fair market value of AT&T common stock on the day of grant and become exercisable after the expiration of a period of time, typically between one and four years, and continue to be exercisable until ten years from the date granted. Such stock options provide incentive for the creation of shareholder value over the long term since the full benefit of the compensation package cannot be realized unless AT&T common stock appreciates during the term of the option. In 2001, the Committee awarded stock options on March 15, 2001, and July 2, 2001, as 194 part of a broader strategy to balance grants during the calendar year and enhance long-term incentive opportunities. Restricted Stock: Restricted stock and restricted stock unit awards are granted from time to time to executive officers, primarily for purposes of retention. Restricted stock is subject to forfeiture and may not be disposed of by the recipient until certain restrictions established by the Committee lapse. Generally, recipients of restricted stock or stock units are not required to provide consideration other than the rendering of services or the payment of any minimum amount required by law. As part of an extensive review of competitive total compensation levels, the Committee approved an enhanced long-term incentive and retention strategy for 2001 to recognize the need to stabilize the leadership team at a time of extreme volatility and uncertainty in the telecommunications sector and to acknowledge that the overall market decline significantly reduced the Company's holding power with respect to the Company's key executives. The Committee awarded restricted stock units to the Company's executives and the Named Executive Officers as reported in the Summary Compensation Table in Item 11. This special one-time grant was awarded as part of the increase to long-term incentive targets for 2001 and was based on the Committee's findings that suggested AT&T's target award levels were less than the desired competitive benchmark. The award is intended to motivate executives to deliver superior shareholder returns and vests 100% after three years. OWNERSHIP GUIDELINES Stock ownership guidelines for executives were established in 1998 to more closely align their interests with those of the shareholders. The guidelines provide that within a 5-year time period executives should attain an investment interest in AT&T stock or stock units of one to five times their base salary, depending upon the executive's position and scope of responsibilities. The Committee has and will review the guidelines periodically as we restructure the company, and intends to make certain adjustments for the separation of AT&T Broadband and subsequent merger with Comcast or other transactions resulting in an equity restructuring. DEDUCTIBILITY CAP ON EXECUTIVE COMPENSATION Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies, such as AT&T, for compensation in excess of $1 million paid to the corporation's Chief Executive Officer and four other most highly compensated executive officers. Section 162(m) provides that qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. Elements of compensation under the annual bonus and long-term incentive plans qualify for exemption from the annual limit on tax deductibility under Section 162(m) of the Internal Revenue Code. In addition, the Company has a salary and incentive award deferral plan that permits compensation deferred under the plan to be exempt from the limit on tax deductibility. COMPENSATION FOR THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER During 2001, the Company's most highly compensated officer was C. Michael Armstrong, Chairman and Chief Executive Officer. Mr. Armstrong's 2001 performance was reviewed by the Committee, discussed by the non-employee directors, and reviewed with the AT&T Board. The Committee's recommendations to the AT&T Board concerning the annual cash component (base salary and annual bonus) of Mr. Armstrong's compensation and the AT&T Board's approval of the annual component and his long-term component (performance shares, restricted stock, and stock options) were based on the considerations discussed below. Base Salary: Mr. Armstrong's base salary is established based on competitive market rates for a chief executive with his experience and record of accomplishment. As specified in Mr. Armstrong's employment agreement, the Committee reviews Mr. Armstrong's salary annually in comparison with the salaries of chief executive officers of other Fortune 20 companies, industry competitors, and selected other large market-capitalized companies during its annual compensation survey and review process. Mr. Armstrong's salary was not increased in 2001 based on the competitive review by the AT&T Board and the Committee. 195 Annual Bonus: The Company and Committee continue to establish aggressive performance targets for annual bonuses. Based on the Company's achievement of certain performance against targeted financial measures described above, and the level of achievement on certain operational objectives including the management of a significant restructuring plan for the Company, the AT&T Board authorized a total annual bonus for Mr. Armstrong of $2,148,000. This amount, 82% of his target annual bonus, reflects performance above threshold but below target. The Committee considered Mr. Armstrong's stewardship in the significant accomplishment of leading the Company through a complex bidding process, a protracted auction and due diligence process involving three potential entities considering a business combination with AT&T Broadband, and finally the AT&T Comcast merger agreement. In addition, other factors such as the significant reduction of AT&T's net debt by nearly $22 billion in 2001, the success in splitting off the AT&T Wireless Services business, winding down the global joint venture with British Telecommunications plc, and navigating the Company through a complex series of restructuring transactions intended to deliver maximum shareholder value over the long term were taken into account when assessing Mr. Armstrong's overall performance. Also, despite an extremely weak telecommunications industry, volatile financial markets, and a declining economy, Mr. Armstrong's leadership continued to prove instrumental as the Company executed its vision of continuing to transform itself into a preeminent communications leader. Long-Term Incentives: In January 2001, the AT&T Board increased Mr. Armstrong's long-term incentive target to better align his total compensation with comparable executives at premier companies. As a result, during 2001 the AT&T Board granted Mr. Armstrong options to acquire 1,098,442 shares of AT&T common stock that become exercisable in equal annual installments in 2002, 2003, 2004, and 2005. The AT&T Board granted the options effective March 15, 2001, and July 2, 2001, for 659,046 and 439,396 shares, respectively. The Committee also granted Mr. Armstrong 278,563 performance shares for the 2001-2003 cycle as described in the previous Long-Term Incentives section above. The 1998-2000 performance cycle, which concluded at year-end 2000, paid out at 91% in 2001 based on 3-year cumulative financial measures discussed in the Performance Shares section of this report. Mr. Armstrong's distribution (34,125 shares of the 37,500 shares awarded) was valued at $824,972 as indicated in the Summary Compensation Table in Item 11, 100% of which he previously elected to defer under the Company's deferral plan. The distribution amount represents 57% of the original target value of the award at the time of grant. The AT&T Board also granted Mr. Armstrong a special, one-time award of 227,434 restricted stock units of AT&T common stock in 2001, consistent with the compensation strategy for all other executives of the Company. This award will vest 100% on March 15, 2004. The Compensation and Employee Benefits Committee George M.C. Fisher, Chairman Kenneth T. Derr Amos B. Hostetter, Jr. Louis A. Simpson Michael I. Sovern 196 AT&T COMMON STOCK FIVE-YEAR PERFORMANCE COMPARISON The graph below provides an indicator of cumulative total shareholder returns for AT&T common stock compared with the S&P 500 Stock Index and a Peer Group(1). The Peer Group excludes the Regional Bell Operating companies since local telephone service is a more major part of their businesses than of AT&T's business. Performance Graph
DEC-96 DEC-97 DEC-98 DEC-99 DEC-00 DEC-01 ------------ ------------ ------------ ------------ ------------ ------------ AT&T common stock 100 154 194 198 69 93 S&P 500 100 133 171 208 189 166 Peer Group 100 139 265 394 203 151
EXPLANATION The graph assumes $100 invested on December 31, 1996, in AT&T common stock, the S&P 500 Index, and Peer Group common stock with the reinvestment of all dividends, including the Company's distribution to shareholders of NCR common stock on December 31, 1996, and AT&T Wireless common stock on July 9, 2001(2). For the purpose of this chart, the NCR and AT&T Wireless distributions are treated as nontaxable cash dividends that would have been converted into additional AT&T shares at the close of business for NCR on December 31, 1996, and at the close of business for AT&T Wireless on July 9, 2001. The number of shares of AT&T common stock outstanding and per share data have been adjusted to reflect the three-for-two stock split paid on April 15, 1999. - --------------- (1.) The Peer Group is composed of companies worldwide that compete against AT&T in its industry segments of telecommunications and cable television services. The returns of each company have been weighted according to their respective stock market capitalization for purposes of arriving at a peer group average. The Peer Group is comprised of the following companies: ALLTEL Corporation; British Telecommunications plc (American Depository Receipt -- "ADR"); Cable & Wireless plc (ADR); Cablevision Systems Corporation, Class A; Comcast Corporation, Class A Special; Cox Communications, Inc., Class A; Sprint FON Group; Vodafone Group Plc (ADR); and WorldCom, Inc. (formerly MCI WorldCom, Inc.). (2.) Data Source: S&P Computstat 197 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OWNERSHIP OF VOTING SECURITIES IN EXCESS OF FIVE PERCENT BY BENEFICIAL OWNERS The Company does not know of any person or entity that beneficially owns more than 5% of its outstanding common stock. STOCK OWNERSHIP OF MANAGEMENT AND DIRECTORS The following table sets forth information concerning the beneficial ownership of AT&T common stock as of March 1, 2002, for (a) each current director elected to the AT&T Board in 2001 and each nominee for election as a director in 2002; (b) each of the officers named in the Summary Compensation Table herein ("Named Executive Officers") not listed as a director; and (c) directors and executive officers as a group. No director or executive officer owns any AT&T preferred shares. Except as otherwise noted, the nominee or family members had sole voting and investment power with respect to such securities.
NUMBER OF SHARES --------------------------------------------------- BENEFICIALLY DEFERRAL PERCENT OF NAME OWNED PLANS(1) TOTAL CLASS - ---- ------------ -------- ---------- ---------- (a) C. Michael Armstrong(2)................ 1,946,529(3) 90,907 2,037,436 * J. Michael Cook........................ 3,000 4,527 7,527 * Kenneth T. Derr(4)..................... 5,450 20,995 26,445 * David W. Dorman........................ 955,995(5) 0 955,995 * M. Kathryn Eickhoff(6)................. 8,500 12,618 21,118 * George M. C. Fisher.................... 15,132 23,571 38,703 * Amos B. Hostetter, Jr. ................ 53,562,657(7) 13,147 53,575,804 1.51% Shirley A. Jackson..................... 391 4,633 5,024 * Donald F. McHenry...................... 4,887 17,985 22,872 * Charles H. Noski(8).................... 1,243,086(9) 202,665 1,445,751 * Louis A. Simpson....................... 144,869(10) 10,735 155,604 * Michael I. Sovern...................... 2,300 19,180 21,480 * Sanford I. Weill....................... 75,000 6,964 81,964 * (b) Betsy J. Bernard....................... 657,919(11) 0 657,919 * Frank Ianna............................ 1,032,170(12) 12,304 1,044,473 * (c) Directors and Executive Officers as a group................................ 61,729,388(13) 541,900 62,271,288 1.74%
- --------------- * Less than one percent (1) Share units held in deferred compensation accounts that do not constitute beneficially owned securities. (2) Also beneficially owns 10,000 shares of At Home Corporation Series A common stock. (3) Includes beneficial ownership of 1,697,362 shares that may be acquired within 60 days pursuant to stock options awarded under employee incentive compensation plans. (4) Also beneficially owns 3,735 shares of Comcast Corporation common stock. (5) Includes beneficial ownership of 190,794 shares that may be acquired within 60 days pursuant to stock options awarded under employee incentive compensation plans. (6) Includes 2,000 shares of AT&T common stock held by a trust, as to which Ms. Eickhoff has disclaimed beneficial ownership. Also beneficially owns 500 shares of At Home Corporation Series A common stock. 198 (7) Includes 9,720,740 shares of AT&T common stock as to which Mr. Hostetter has disclaimed beneficial ownership. (8) Also beneficially owns 86 shares of Comcast Corporation common stock held in a family trust. (9) Includes beneficial ownership of 946,332 shares that may be acquired within 60 days pursuant to stock options awarded under employee incentive compensation plans and 285,108 shares that are held in family and other trusts. (10) Includes beneficial ownership of 62,631 shares that may be acquired within 60 days pursuant to an existing MediaOne Group, Inc. stock option that was converted into a fully vested option for AT&T common stock expiring on June 16, 2008, at an exercise price of $18.9446. (See section entitled "Simpson Transactions" under "Certain Relationships and Related Transactions.") (11) Includes beneficial ownership of 408,922 shares that may be acquired within 60 days pursuant to stock options awarded under employee incentive compensation plans. (12) Includes beneficial ownership of 695,512 shares that may be acquired within 60 days pursuant to stock options awarded under employee incentive compensation plans. (13) Includes beneficial ownership of 5,491,532 shares that may be acquired within 60 days pursuant to stock options awarded under employee incentive compensation plans. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS INDEBTEDNESS OF MANAGEMENT On March 19, 1999, AT&T loaned the amount of $2,000,000 to Mr. Dorman, who was subsequently elected President of AT&T on December 1, 2000. This loan was made for the purpose of permitting Mr. Dorman to repay loans made to him by a previous employer. Repayment of this loan was demanded and made in full in January 2001, and a new loan for the same purpose and the same amount was made by AT&T to Mr. Dorman in its place effective January 2, 2001. The new loan is to be repaid by the earliest of April 1, 2002, Mr. Dorman's termination of employment, or upon his death. AT&T made additional loans to Mr. Dorman in the amounts of $3,790,520.99 on December 28, 2000, and $1,240,339.73 on April 13, 2001. The purpose of these loans was to provide funds for Mr. Dorman to pay federal withholding taxes resulting from his election under Section 83(b) of the Internal Revenue Code to include in his 2000 taxable wage base the fair market value of 715,999 restricted shares of AT&T common stock that were granted to Mr. Dorman at the time of his election as AT&T President. These loans are to be repaid by the earliest of December 31, 2002, Mr. Dorman's termination of employment, or upon his death. Interest on the above loans has been forgiven by AT&T. The forgiven interest, at the applicable federal short-term rate established by the IRS under Section 1274(d) of the IRC in effect for each month that there is an outstanding balance on each loan, results in imputed income to Mr. Dorman. Mr. Dorman is responsible for the payment of any income taxes resulting from all such imputed income. HOSTETTER TRANSACTIONS The Company, Meteor Acquisition Inc., and MediaOne Group, Inc. ("MediaOne") entered into an Agreement and Plan of Merger dated May 6, 1999. Amos B. Hostetter, Jr., a significant shareholder of MediaOne, assisted AT&T in negotiating an agreement, to the extent permitted by his shareholder agreement with MediaOne. On July 21, 1999, Mr. Hostetter was elected to serve on the AT&T Board. The merger was consummated on June 15, 2000. Upon completion of the distribution of merger consideration by AT&T, Mr. Hostetter received 39,770,261 shares of AT&T common stock and a cash payment of $1,734,800,958.13. Mr. Hostetter also received 9,720,740 shares of AT&T common stock and a cash payment of $424,024,097.34 through a charitable foundation which he disclaims beneficial ownership. Mr. Hostetter, indirectly through investment companies, holds greater than 10% attributable ownership interests in four private companies that may derive a significant percentage of their revenues from AT&T in 199 2002. These four companies, Emperative, Inc., Navic Networks, Inc., Stargus, Inc., and Ucentric Systems, Inc., may individually derive greater than 5% of their 2002 revenues from AT&T. SIMPSON TRANSACTIONS The Company, Meteor Acquisition Inc., and MediaOne Group, Inc. ("MediaOne") entered into an Agreement and Plan of Merger dated May 6, 1999. The merger was consummated on June 15, 2000. Upon completion of the distribution of merger consideration by AT&T, Mr. Simpson received 32,238 shares of AT&T common stock and a cash payment of $1,406,160. In addition, an existing MediaOne stock option held by Mr. Simpson was converted into a fully vested option expiring on June 16, 2008, to purchase 62,631 shares of AT&T common stock at an exercise price of $18.9446. On July 19, 2000, Mr. Simpson was elected to serve on the AT&T Board. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) Documents filed as a part of the report: (1) The following consolidated financial statements are included in Part II, Item 8:
PAGES ----- Report of Management................................... 90 Report of Independent Accountants...................... 91 Statements: Consolidated Statements of Income...................... 92 Consolidated Balance Sheets............................ 93 Consolidated Statements of Changes in Shareowners' Equity................................................ 94 Consolidated Statements of Cash Flows.................. 96 Notes to Consolidated Financial Statements............. 97
(2) Financial Statement Schedule: Report of Independent Accountants...................... 207 Schedule: II -- Valuation and Qualifying Accounts................ 208
All other schedules are omitted because they are not applicable, not required or the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits: Exhibits identified in parentheses below, on file with the Securities and Exchange Commission ("SEC"), are incorporated herein by reference as exhibits hereto. (3)a Restated Certificate of Incorporation of the registrant filed January 10, 1989, Certificate of Correction of the registrant filed June 8, 1989, Certificate of Change of the registrant filed March 18, 1992, Certificate of Amendment of the registrant filed June 1, 1992, Certificate of Amendment of the registrant filed April 20, 1994, Certificate of Amendment of the registrant filed June 8, 1998, Certificate of Amendment of the registrant filed March 9, 1999, Certificate of Amendment of the registrant filed April 12, 2000,Certificate of Amendment of the registrant filed June 2, 2000, Certificate of Amendment of the registrant filed on June 15, 2000, Certificate of Amendment of the registrant filed on January 19, 2001, Certificate of Amendment of the registrant filed on June 6, 2001 and Certificate of Amendment of the registrant filed on June 20, 2001.
200 (3)b By-Laws of the registrant, as amended January 25, 2001 (Exhibit (3)b to Form 10-K for 2000, File No. 1-1105). (4) No instrument which defines the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Form of Separation and Distribution Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (incorporated by reference to Exhibit (10)(i)1 to Form 10-K for 1996, File No. 1-1105). (10)(i)2 Form of Distribution Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (incorporated by reference to Exhibit (10)(i)2 to Form 10-K for 1996, File No. 1-1105). (10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (incorporated by reference to Exhibit (10)(i)3 to Form 10-K for 1996, File No. 1-1105). (10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (incorporated by reference to Exhibit (10)(i)4 to Form 10-K for 1996, File No. 1-1105). (10)(i)5 Form of Employee Benefits Agreement, dated as of November 20, 1996, between AT&T Corp. and NCR Corporation (incorporated by reference to Exhibit (10)(i)5 to Form 10-K for 1996, File No. 1-1105). (10)(i)6 Separation and Distribution Agreement by and between AT&T Corp. and AT&T Wireless Services, Inc., dated as of June 4, 2001 (incorporated by reference to Exhibit 10.1 to the AT&T Wireless Services, Inc. Registration Statement on Form S-1/A (Commission file No. 333-59174), filed June 21, 2001). (10)(i)7 Amended and Restated Tax Sharing Agreement by and between AT&T Corp. and AT&T Wireless Services, Inc., dated as of June 4, 2001 (incorporated by reference to Exhibit 10.2 to the AT&T Wireless Services, Inc. Registration Statement on Form S-1/A (Commission file No. 333-59174), filed June 21, 2001). (10)(i)8 Employee Benefits Agreement by and between AT&T Corp. and AT&T Wireless Services, Inc., dated as of June 7, 2001 (incorporated by reference to Exhibit 10.3 to the AT&T Wireless Services, Inc. Registration Statement on Form S-1/A (Commission file No. 333-59174), filed June 21, 2001). (10)(i)9 Brand License Agreement by and between AT&T Corp. and AT&T Wireless Services, Inc., dated as of June 4, 2001 (incorporated by reference to Exhibit 10.4 to the AT&T Wireless Services, Inc. Registration Statement on Form S-1/A (Commission file No. 333-59174), filed June 11, 2001). (10)(i)10 Intellectual Property Agreement by and between AT&T Corp. and AT&T Wireless Services, Inc., effective as of July 9, 2001 (incorporated by reference to Exhibit 10.6 to the AT&T Wireless Services, Inc. Registration Statement on Form S-1/A (Commission file No. 333-59174), filed June 11, 2001). (10)(i)11 Inter-Group Agreement dated as of March 9, 1999, between AT&T Corp. and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of Liberty Media Corporation (File No. 333-86491) as filed on September 3, 1999). (10)(i)12 Intercompany Agreement dated as of March 9, 1999, between Liberty and AT&T Corp. (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-4 of Liberty Media Corporation (File No. 333-86491) as filed on September 3, 1999).
201 (10)(i)13 Tax Sharing Agreement dated as of March 9, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-4 of Liberty Media Corporation (File No. 333-86491) as filed on September 3, 1999). (10)(i)14 First Amendment to Tax Sharing Agreement dated as of May 28, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-4 of Liberty Media Corporation (File No. 333-86491) as filed on September 3, 1999). (10)(i)15 Second Amendment to Tax Sharing Agreement dated as of September 24, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc., and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)16 Third Amendment to Tax Sharing Agreement dated as of October 20, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)17 Fourth Amendment to Tax Sharing Agreement dated as of October 28, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)18 Fifth Amendment to Tax Sharing Agreement dated as of December 6, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)19 Sixth Amendment to Tax Sharing Agreement dated as of December 10, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)20 Seventh Amendment to Tax Sharing Agreement dated as of December 30, 1999, by and among AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)21 Eighth Amendment to Tax Sharing Agreement dated as of July 25, 2000, by and among AT&T Corp., Liberty Media Corporation, AT&T Broadband LLC, Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-55998) as filed on February 21, 2001).
202 (10)(i)22 Instrument dated January 14, 2000, adding The Associated Group, Inc. as a party to the Tax Sharing Agreement dated as of March 9, 1999, as amended, among The Associated Group, Inc., AT&T Corp., Liberty Media Corporation, Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity listed on the signature pages thereof (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)23 First Supplement to Inter-Group Agreement dated as of May 28, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)24 Second Supplement to Inter-Group Agreement dated as of September 24, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)25 Third Supplement to Inter-Group Agreement dated as of October 20, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)26 Fourth Supplement to Inter-Group Agreement dated as of December 6, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.17 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)27 Fifth Supplement to Inter-Group Agreement dated as of December 10, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.18 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)28 Sixth Supplement to Inter-Group Agreement dated as of December 30, 1999, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999). (10)(i)29 Seventh Supplement to Inter-Group Agreement dated as of July 25, 2000, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.21 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-55998) as filed on February 21, 2001). (10)(i)30 Instrument dated January 14, 2000, adding The Associated Group, Inc. as a party to the Inter-Group Agreement dated as of March 9, 1999, as supplemented, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.20 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-93917) as filed on December 30, 1999).
203 (10)(i)31 Eighth Supplement to Inter-Group Agreement dated as of November 20, 2000, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-66034) as filed on July 27, 2001). (10)(i)32 Ninth Supplement to Inter-Group Agreement dated as of June 14, 2001, between and among AT&T Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC, AGI LLC, Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI, Inc., on the other hand (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No. 333-66034) as filed on July 27, 2001). (10)(i)33 Agreement and Plan of Merger dated as of December 19, 2001 among AT&T Corp., AT&T Broadband Corp., Comcast Corporation, AT&T Broadband Acquisition Corp., Comcast Acquisition Corp. and AT&T Comcast Corporation (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2001). (10)(i)34 Separation and Distribution Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp. (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2001). (10)(i)35 Support Agreement dated as of December 19, 2001 among AT&T Corp., Comcast Corporation, AT&T Comcast Corporation, Sural LLC and Brian L. Roberts (incorporated by reference to Exhibit 2.3 to the Registration Statement on Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2001). (10)(i)36 Tax Sharing Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp. (incorporated by reference to Exhibit 2.4 to the Registration Statement on Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2001). (10)(i)37 Employee Benefits Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp. (10)(i)38 Amended and Restated 364-Day Competitive Advance and Revolving Credit Facility Agreement, dated as of December 14, 2001, among AT&T Corp., the Lenders party thereto, CITIBANK, N.A., CREDIT SUISSE FIRST BOSTON and GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative Agents, and CITIBANK, N.A., as Paying Agent. (10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (Exhibit (10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17, 1997 (Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as amended March 3, 1998 (Exhibit (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor Protection Plan, as amended and restated effective January 1, 1995 (Exhibit (10)(iii)(A)4 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated December 29, 1994 (Exhibit (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993 (Exhibit (10)(iii)(A)6 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as amended March 2, 1998 (Exhibit (10)(iii)(A)1 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident Insurance (Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105). (10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996 (Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105).
204 (10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (Exhibit (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as amended January 21, 1998 (Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No. 1-1105). (10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1, 1988 (Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File No. 1-1105) including AT&T Mid-Career Pension Plan, as amended and restated July 1, 1999 (Exhibit (10)(iii)(A)12 to Form 10-K for 1999, File No. 1-1105). (10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended through March 14, 2000 (Exhibit (10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105). (10)(iii)(A)14 Form of Indemnification Contract for Officers and Directors (Exhibit (10)(iii)(A)6 to Form SE, dated March 25, 1987, File No. 1-1105). (10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised February 20, 1989 (Exhibit (10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)16 AT&T Corp. Senior Management Universal Life Insurance Program effective October 1, 1999 (Exhibit (3)b to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)17 Form of AT&T Benefits Protection Trust Agreement as amended and restated as of November 1993, including the first amendment thereto dated December 23, 1997 (Exhibit (10)(iii)(A)17 to Form 10-K for 1999, File No. 1-1105). (10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9, 1997, as amended October 30, 1997 (Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna dated October 30, 1997 (Exhibit (10)(iii)(A)19 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)20 Form of Pension Agreement between AT&T Corp. and John C. Petrillo dated October 30, 1997 (Exhibit (10)(iii)(A)21 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)21 Form of Employment Agreement between AT&T Corp. and Betsy J. Bernard dated April 6, 2001. (10)(iii)(A)22 Form of Employment Agreement between AT&T Corp. and C. Michael Armstrong dated October 17, 1997 (Exhibit (10)(iii)(A)23 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)23 Form of Employment Agreement between AT&T Corp. and William T. Schleyer dated November 6, 2001. (10)(iii)(A)24 Liberty Media 401(K) Savings Plan (Incorporation herein by reference to Exhibit 99.1 to Post-Effective Amendment No. 2 on Form S-8 to the Registration Statement on Form S-4 of AT&T Corp. (Commission File No. 333-70279) filed March 10, 1999). (10)(iii)(A)25 AT&T Corp. Directors' Universal Life Insurance Program effective June 1, 2000 (Exhibit (10)(iii)(A)25 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)26 AT&T Corp. Senior Management Universal Life Insurance Program for Former Executives effective October 1, 1999 (Exhibit (10)(iii)(A)26 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)27 Form of Employment Agreement between AT&T Corp. and Charles H. Noski dated December 8, 1999 (Exhibit (10)(iii)(A)27 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)28 Form of Special Deferral Agreement between AT&T Corp. and Charles H. Noski dated January 26, 2001 (Exhibit (10)(iii)(A)28 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)29 Form of Special Deferral Agreement between AT&T Corp. and Frank Ianna dated January 16, 2001 (Exhibit (10)(iii)(A)29 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)30 Form of Loan Agreement between AT&T Corp. and David Dorman dated December 21, 2000 (Exhibit (10)(iii)(A)30 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)31 Form of Loan Agreement between AT&T Corp. and David Dorman dated December 21, 2000 (Exhibit (10)(iii)(A)31 to Form 10-K for 2000, File No. 1-1105).
205 (10)(iii)(A)32 AT&T Corp. board resolutions adopting change in control provision to various plans effective October 23, 2000 (Exhibit (10)(iii)(A)32 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)33 Form of Loan Agreement between AT&T Corp. and David Dorman dated April 13, 2001. (10)(iii)(A)34 Form of Special Deferral Agreement between AT&T Corp. and Charles H. Noski dated January 16, 2002. (10)(iii)(A)35 Form of Employment Agreement between AT&T Corp. and David Dorman dated May 18, 2001. (12) Computation of Ratio of Earnings to Fixed Charges. (21) List of subsidiaries of AT&T. (23)a Consent of PricewaterhouseCoopers, LLP. (23)b Consent of KPMG, LLP. (24) Powers of Attorney executed by officers and directors who signed this report. (99) Liberty Media Corporation Financials
AT&T will furnish, without charge, to a shareholder upon request a copy of the annual report to shareholders and the proxy statement, portions of which are incorporated herein by reference thereto. AT&T will furnish any other exhibit at cost. (b) Reports on Form 8-K: During the fourth quarter 2001, Form 8-K dated October 15, 2001 was filed pursuant to Item 5 (Other Events and Item 7 (Financial Statements and Exhibits) on October 23, 2001 and Form 8-K dated December 19, 2001 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on December 21, 2001. 206 REPORT OF INDEPENDENT ACCOUNTANTS ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareowners of AT&T Corp.: Our audits of the consolidated financial statements referred to in our report dated March 25, 2002 appearing in the 2001 Annual Report to Shareholders of AT&T Corp. (which report and consolidated financial statements are included in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP New York, New York March 25, 2002 207 SCHEDULE II -- SHEET 1 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(A) PERIOD - ----------- ---------- ---------- ------------- ---------- Year 2001 Allowances for doubtful accounts(b)............. $1,241 $1,130 $1,486 $ 885 Deferred tax asset valuation allowance(c)....... $ 779 $ 16 $ 738 $ 57 Year 2000 Allowances for doubtful accounts(b)............. $1,204 $1,080 $1,043 $1,241 Deferred tax asset valuation allowance(c)....... $ 223 $ 824 $ 268 $ 779 Year 1999 Allowances for doubtful accounts(b)............. $1,032 $1,216 $1,044 $1,204 Deferred tax asset valuation allowance(c)....... $ 268 $ 124 $ 169 $ 223
- --------------- (a) For allowances for doubtful accounts, this column includes amounts written off as uncollectible and in 2001, the deconsolidation of At Home Corporation (Excite@Home), net of recoveries. (b) Includes allowances for doubtful accounts on long-term receivables of $58, $56, and $53 at December 31, 2001, 2000, and 1999, respectively (included in other assets in the Consolidated Balance Sheets). (c) The decrease in the deferred tax asset valuation allowance in 2001 was primarily due to the deconsolidation of Excite@Home which is shown within the deductions column. The increase in the deferred tax asset valuation allowance in 2000 was primarily due to the consolidation of Excite@Home and the merger with MediaOne Group, Inc. The increase in 1999 was primarily due to the merger with Tele-Communications, Inc. These increases are shown within the charged to costs and expenses column. 208 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ MARILYN J. WASSER ------------------------------------ M. J. Wasser Vice President -- Law and Secretary March 29, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- Principal Executive Officers: * Chairman of the Board and March 29, 2002 ----------------------------------------- Chief Executive Officer C. Michael Armstrong Principal Financial Officer: * Senior Executive Vice President March 29, 2002 ----------------------------------------- and Chief Financial Officer Charles H. Noski Principal Accounting Officer: * Vice President and Controller March 29, 2002 ----------------------------------------- Nicholas S. Cyprus * Director March 29, 2002 ----------------------------------------- J. Michael Cook * Director March 29, 2002 ----------------------------------------- Kenneth T. Derr * Director March 29, 2002 ----------------------------------------- David Dorman * Director March 29, 2002 ----------------------------------------- M. Kathryn Eickhoff * Director March 29, 2002 ----------------------------------------- George M. C. Fisher * Director March 29, 2002 ----------------------------------------- Amos B. Hostetter, Jr.
209
SIGNATURE TITLE DATE --------- ----- ---- * Director March 29, 2002 ----------------------------------------- Shirley A. Jackson * Director March 29, 2002 ----------------------------------------- Donald F. McHenry * Director March 29, 2002 ----------------------------------------- Charles H. Noski * Director March 29, 2002 ----------------------------------------- Louis A. Simpson * Director March 29, 2002 ----------------------------------------- Michael I. Sovern * Director March 29, 2002 ----------------------------------------- Sanford I. Weill By: /s/ MARILYN J. WASSER ----------------------------------------- M. J. Wasser (attorney-in-fact)*
210 EX-3.A 3 e56632ex3-a.txt RESTATED CERTIFICATE OF INCORPORATION Exhibit (3)a AT&T CORP. ---------- RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY FILED JANUARY 10, 1989 ---------- WITH AMENDMENTS DATED JUNE 8, 1989, MARCH 18, 1992, JUNE 1, 1992, APRIL 20, 1994, JUNE 8, 1998, MARCH 9, 1999, APRIL 12, 2000, JUNE 2, 2000, JUNE 15, 2000, JANUARY 19, 2001, JUNE 6, 2001 AND JUNE 20, 2001 RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and the Secretary, respectively, of American Telephone and Telegraph Company, do hereby certify as follows: 1. The name of the corporation is "American Telephone and Telegraph Company." 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of New York on March 3, 1885. 3. The text of the Certificate of Incorporation (1) is hereby amended pursuant to authority vested in the Board of Directors by the Certificate of Incorporation of the corporation, as heretofore amended, and in accordance with Section 502 of the Business Corporation Law to delete in its entirety Article EIGHTH thereof stating the number, designation, relative rights, preferences, and limitations pertaining to four series of preferred shares, all of which shares have been redeemed by the corporation, and renumber the articles subsequent thereto sequentially following Article SEVENTH; and (2) as so amended and as amended heretofore is hereby restated to read as herein set forth in full: "We do hereby associate ourselves together for the purpose of constructing, buying, owning, leasing, or otherwise obtaining, lines of electric telegraph partly within and party beyond the limits of the State of New York, and of equipping, using, operating, or otherwise maintaining, the same; and of becoming a body politic and corporate under and by virtue of the provisions of an act of the Legislature of the State of New York entitled `An Act to provide for the incorporation and regulation of telegraph companies,' passed April 12, 1848, and the various acts amendatory thereof or supplemental thereto; and of having and exercising all and every of the powers, privileges, franchises and immunities in and by said acts conferred. And in pursuance of the requirements of the various acts aforesaid, and for the purposes above set forth, we do hereby declare and certify as follows, "FIRST. The name assumed to distinguish such association and to be used in its dealings, and by which it may sue and be sued, is the American Telephone and Telegraph Company. "SECOND. The general route of the lines of telegraph of said association will be from a point or points in the city of New York along all rail roads, bridges, highways and other practicable, suitable and convenient ways or courses, leading thence to the cities of Albany, Boston, and the intermediate cities, towns and places, also from a point or points in and through the city of New York, and thence through and across the Hudson and East rivers and the bay and harbor of New York, to Jersey City, Long Island City and Brooklyn, and along all rail roads, bridges, highways and other practicable, suitable and convenient ways and courses to the cities of Philadelphia, Baltimore, Washington, Richmond, Charleston, Mobile and New Orleans, and to all intermediate cities, towns and places; and in like manner to the cities of Buffalo, Pittsburgh, Cleveland, Cincinnati, Louisville, Memphis, Indianapolis, Chicago, Saint Louis, Kansas City, Keokuk, Des Moines, Detroit, Milwaukee, Saint Paul, Minneapolis, Omaha, Cheyenne, Denver, Salt Lake City, San Francisco and Portland, and to all intermediate cities, towns and places, and also along all rail roads, bridges, highways and other practicable, suitable and convenient ways and courses as may be necessary or proper for the purpose of connecting with each other one or more points in said city of New York, and in each of the cities, towns and places hereinabove specifically or generally designated. "And it is further declared and certified that the general route of the lines of this association, in addition to those hereinbefore described or designated, will connect one or more points in each and every city, town or place in the State of New York with one or more points in each and every other city, town or place in said State, and in each and every other of the United States, and in Canada and Mexico, and each and every of said cities, towns and places is to be connected with each and every other city, town or place in said States and Countries, and also by cable and other appropriate means with the rest of the known world as may hereafter become necessary or desirable in conducting the business of this association. "THIRD. The aggregate number of shares which the corporation is authorized to issue is 1,600,000,000 shares, consisting of 1,500,000,000 common shares having a par value of $1 pre share and 100,000,000 preferred shares having a par value of $1 per share. "The preferred shares may be issued from time to time in one or more series. All preferred shares of all series shall rank equally and be identical in all respects except that the Board of Directors is authorized to fix the number of shares in each series, the designation thereof and, subject to the provisions of this Article Third, the relative rights, preferences and limitations of each series and the variations in such rights, preferences and limitations as between series and specifically is authorized to fix with respect to each series: "(a) the dividend rate on the shares of such series and the date or dates from which dividends shall be cumulative; "(b) the times when, the prices at which, and all other terms and conditions upon which, shares of such series shall be redeemable; "(c) the amounts which the holders of shares of such series shall be entitled to receive upon the liquidation, dissolution or winding up of the corporation, which amounts may vary depending on whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates; "(d) whether or not the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund and, if so, the extent to and manner n which such purchase, retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or for other corporate purposes and the terms and provisions relative to the operation of the said fund or funds; "(e) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or series and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same; "(f) the restrictions, if any, upon the payment of dividends or making of other distributions on, and upon the purchase or other acquisition of, common shares; "(g) the restrictions, if any, upon the creation of indebtedness, and the restrictions, if any, upon the issue of any additional shares ranking on a parity with or prior to the shares of such series in addition to the restrictions provided for in this Article Third; "(h) the voting powers, if any, of the shares of such series in addition to the voting powers provided for in this Article Third; and "(i) such other rights, preferences and limitations as shall not be inconsistent with this Article Third. "All shares of any particular series shall rank equally and be identical in all respects except that shares of any one series issued at different times may differ as to the date from which dividends shall be cumulative. "Dividends on preferred shares of each series shall be cumulative from the date or dates fixed with respect to such series and shall be paid or declared or set apart for payment for all past dividend periods and for the current dividend period before any dividends (other than dividends payable in common shares) shall be declared or paid or set apart for payment on common shares. Whenever, at any time, full cumulative dividends for all past dividend periods and for the current dividend period shall have been paid or declared and set apart for payment on all then outstanding preferred shares and all requirements with respect to any purchase, retirement or sinking fund or funds for all series of preferred shares shall have been complied with, the Board of Directors may declare dividends on the common shares and the preferred shares shall not be entitled to share therein. "Upon any liquidation, dissolution or winding up of the corporation, the holders of preferred shares of each series shall be entitled to receive the amounts to which such holders are entitled as fixed with respect to such series, including all dividends accumulated to the date of final distribution, before any payment or distribution of assets of the corporation shall be made to or set apart for the holders of common shares and after such payments shall have been made in full to the holders of preferred shares, the holders of common shares shall be entitled to receive any and all assets remaining to be paid or distributed to shareholders and the holders of preferred shares shall not be entitled to share therein. For the purposes of this paragraph, the voluntary sale, conveyance, lease, exchange or transfer of all or substantially all the property or assets of the corporation or a consolidation or merger of the corporation with one or more other corporations (whether or not the corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. "The aggregate amount which all preferred shares outstanding at any time shall be entitled to receive on involuntary liquidation, dissolution or winding up shall not exceed $8,000,000,000. "So long as any preferred shares are outstanding, the corporation will not (a) without the affirmative vote or consent of the holders of at least 66-2/3% of all the preferred shares at the time outstanding, (i) authorize shares of stock ranking prior to the preferred shares, or (ii) change any provision of this Article Third so as to affect adversely the preferred shares; (b) without the affirmative vote or consent of the holders of at least 66-2/3% of any series of preferred shares at the time outstanding, change any of the provisions of such series so as to affect adversely the shares of such series; (c) without the affirmative vote or consent of the holders of at least a majority of all the preferred shares at the time outstanding, (i) increase the authorized number of preferred shares or (ii) authorize shares of any other class of stock ranking on a parity with the preferred shares. "Whenever, at any time or times, dividends payable on preferred shares shall be in default in an aggregate amount equivalent to six full quarterly dividends on any series of preferred shares at the time outstanding, the number of directors then constituting the Board of Directors of the corporation shall ipso facto be increased by two, and the outstanding preferred shares shall, in addition to any other voting rights, have the exclusive right, voting separately as a class and without regard to series, to elect two directors of the corporation to fill such newly created directorships and such right shall continue until such time as all dividends accumulated on all preferred shares to the latest dividend payment date shall have been paid or declared and set apart for payment. "No holder of preferred shares of any series, irrespective of any voting or other rights of shares of such series, shall have, as such holder, any preemptive right to purchase any other shares of the corporation or any securities convertible into or entitling the holder to purchase such other shares. "If in any case the amounts payable with respect to any requirements to retire preferred shares are not paid in full in the case of all series with respect to which such requirements exist, the number of shares to be retired in each series shall be in proportion to the respective amounts which would be payable on account of such requirements if all amounts payable were paid in full. "FOURTH. The number of directors shall be as provided for in the By-Laws. "FIFTH. The duration of the corporation shall be perpetual. "SIXTH. The office of the corporation is located in the Borough of Manhattan, City and County of New York, State of New York. "SEVENTH. The Secretary of State of the State of New York is designated as agent of the corporation upon whom process against it may be served. The post office address to which the Secretary of State shall mail a copy of any process served upon him as agent of the corporation is American Telephone and Telegraph Company, 550 Madison Avenue, New York, New York 10022. "EIGHTH. No holder of common shares shall have, as such holder, any preemptive right to purchase any shares or other securities of the corporation. "NINTH. No director shall be personally liable to the Corporation or any of its shareholders for damages for any breach of duty as a director; provided, however, that the foregoing provision shall not eliminate or limit (i) the liability of a director if a judgment or other final adjudication adverse to him or her establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or that his or her acts violated Section 719 of the New York Business Corporation Law; or (ii) the liability of a director for any act or omission prior to the adoption of this Article NINTH by the shareholders of the Corporation. 4. The manner in which this restatement of the Certificate of Incorporation was authorized was by a resolution of the Board of Directors of the corporation. In Witness Whereof, we have signed and verified this Restated Certificate of Incorporation of American Telephone and Telegraph Company this 9th day of January 1989. /s/ S. L. Prendergast -------------------------------- By: S. L. Prendergast Corporate Vice President and Treasurer /s/ R. E. Scannell --------------------------------------- By: R. E. Scannell Corporate Vice President - Law and Secretary State of New York ss.: County of New York R. E. Scannell, being duly sworn, deposes and says that he is the Corporate Vice President - Law and Secretary of American Telephone and Telegraph Company, that he signed the foregoing Certificate as Corporate Vice President - Law and Secretary of such corporation, that he knows the contents thereof, and that the statements therein contained are true. /s/ R. E. Scannell --------------------------------------- By: R. E. Scannell Corporate Vice President - Law and Secretary Subscribed and sworn to before me this 9th day of January 1989. Janet M. Kirpan Notary Public Janet M. Kirpan Notary Public, State of New York No. 31-4624682 Qualified in New York County Commission expires March 30, 1990 CERTIFICATE OF CORRECTION OF THE RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 105 OF THE BUSINESS CORPORATION LAW We, the undersigned, Robert E. Scannell and B. Ward White, being respectively the Corporate Vice President - Law and Secretary and the Assistant Secretary of American Telephone and Telegraph Company for the purpose of correcting the date appearing in the citation to `An Act to provide for the incorporation and regulation of telegraph companies,' passed April 12, 1848 (stated correctly as 1948) which appears on the face of the Restated Certificate of Incorporation of American Telephone and Telegraph Company under Section 807 of the Business Corporation Law hereby certify: 1. The name of the corporation is American Telephone and Telegraph Company. 2. The Restated Certificate of Incorporation of American Telephone and Telegraph Company under Section 807 of the Business Corporation Law was filed by the Department of State on January 10, 1989. 3. The last paragraph of the first page of the certificate is corrected to read as follows: "We do hereby associate ourselves together for the purpose of constructing, buying, owning, leasing, or otherwise obtaining, lines of electric telegraph partly within and partly beyond the limits of the State of New York, and of equipping, using, operating, or otherwise maintaining, the same; and of becoming a body politic and corporate under and by virtue of the provisions of an act of the Legislature of the State of New York entitled `An Act to provide for the incorporation and regulation of telegraph companies.' passed April 12, 1848, and the various acts amendatory thereof or supplemental thereto; and of having and exercising all and every of the powers, privileges, franchises and immunities in and by said acts conferred. And in pursuance of the requirements of the various acts aforesaid, and for the purposes above set forth, we do hereby declare and certify as follows, IN WITNESS WHEREOF, we have signed and verified this certificate on the 31st day of May, 1989 and we affirm the statements contained herein as true under penalties of perjury. AMERICAN TELEPHONE AND TELEGRAPH COMPANY /s/ Robert E. Scannell -------------------------------------- By: Robert E. Scannell Corporate Vice President - Law and Secretary /s/ B. Ward White ----------------------- By: B. Ward White Assistant Secretary CERTIFICATE OF CHANGE OF THE RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 805-A OF THE BUSINESS CORPORATION LAW 1. The name of the corporation is "American Telephone and Telegraph Company." 2. The Certificate of Incorporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. The change in the Certificate of Incorporation effected by this Certificate of Change is as follows: To change the post office address to which the Secretary of State of the State of New York shall mail a copy of any process against the corporation served upon said Secretary of State. 4. To accomplish the foregoing change, Article SEVENTH of the Certificate of Incorporation, relating to service of process, is hereby stricken out in its entirety, and the following new Article SEVENTH is substituted in lieu thereof: "SEVENTH. The Secretary of State of the State of New York is designated as agent of the corporation upon whom process against it may be served. The post office address to which the Secretary of State shall mail a copy of any process served upon him as agent of the corporation is American Telephone and Telegraph Company, 32 Avenue of the Americas, New York, New York, 10013. 5. The manner in which this Certificate of Change was authorized was by resolution of the Board of Directors of the corporation. IN WITNESS WHEREOF, we have signed and verified this Certificate of Change of American Telephone and Telegraph Company this 16th day of March 1992. /s/ S. L. Prendergast -------------------------- By: S. L. Prendergast Corporate Vice President and Treasurer /s/ R. E. Scannell ------------------------------------ By: R. E. Scannell Vice President - Law and Secretary State of New York ss.: County of New York R. E. Scannell, being duly sworn, deposes and says that he is the Vice President - Law and Secretary of American Telephone and Telegraph Company, that he signed the foregoing Certificate as Vice President - Law and Secretary of such corporation, that he knows the contents thereof, and that the statements therein contained are true. /s/ R. E. Scannell ------------------------------------ By: R. E. Scannell Vice President - Law and Secretary Subscribed and sworn to before me this 16th day of March 1992. Janet M. Kirpan Notary Public Janet M. Kirpan Notary Public, State of New York No. 31-4624682 Qualified in New York County Commission expires March 30, 1994 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and Secretary, respectively, of American Telephone and Telegraph Company, do hereby certify as follows: 1. The name of the corporation is "American Telephone and Telegraph Company." 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. Said Certificate of Incorporation is amended to increase the authorized number of common shares of the capital stock of the corporation having a par value of $1 from 1,500,000,000 to 2,000,000,000 shares. 4. To effect the foregoing, the first paragraph of Article THIRD of said Certificate of Incorporation, relating to the aggregate number of shares the corporation is authorized to issue, the par value thereof, and the classes into which the shares are divided is hereby stricken out in its entirety, and the following new first paragraph of Article THIRD is substituted in lieu thereof: "THIRD. The aggregate number of shares which the corporation is authorized to issue is 2,100,000,000 shares, consisting of 2,000,000,000 common shares having a par value of $1 per share and 100,000,000 preferred shares having a par value of $1 per share. 5. The manner in which the foregoing amendment of said Certificate of Incorporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have signed and verified this Certificate of Amendment of said Certificate of Incorporation of American Telephone and Telegraph Company this 13th day of May, 1992. /s/ S. L. Prendergast ------------------------------ By: S. L. Prendergast Vice President and Treasurer /s/ R. E. Scannell ------------------------------------ By: R. E. Scannell Vice President - Law and Secretary Certificate of Amendment of the Certificate of Incorporation of American Telephone and Telegraph Company Under Section 805 of the Business Corporation Law We, the undersigned, being a Vice President and an Assistant Secretary respectively, of American Telephone and Telegraph Company, do hereby certify as follows: FIRST: The name of the corporation is American Telephone and Telegraph Company. SECOND: The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885. THIRD: The Certificate of Incorporation of the corporation is hereby amended by changing the name of the corporation to AT&T Corp. FOURTH: To accomplish the foregoing amendment, Article FIRST of the Certificate of Incorporation of the corporation is amended to read as follows: "FIRST. The name of the corporation is AT&T Corp." FIFTH: The manner in which the foregoing amendment of said Certificate of Incorporation of the corporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have subscribed this document on April 20, 1994 and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. /s/ Jim G. Kilpatric ----------------------------------- By: Jim G. Kilpatric Senior Vice President - Law /s/ Robert A. Maynes ----------------------------------- By: Robert A. Maynes Assistant Secretary CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF AT&T CORP. UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and Assistant Secretary, respectively, of AT&T Corp., do hereby certify as follows: 1. The name of the corporation is AT&T Corp. The name under which the Corporation was formed is American Telephone and Telegraph Company. 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. Said Certificate of Incorporation is amended to increase the authorized number of common shares of the capital stock of the corporation having a par value of $1 from 2,000,000,000 shares to 6,000,000,000 shares. 4. To effect the foregoing, the first paragraph of Article THIRD of said Certificate of Incorporation, relating to the aggregate number of shares the corporation is authorized to issue, the par value thereof, and the classes into which the shares are divided is hereby stricken out in its entirety, and the following new first paragraph of Article THIRD is substituted in lieu thereof: "THIRD. The aggregate number of shares which the corporation is authorized to issue is 6,100,000,000 shares, consisting of 6,000,000,000 common shares having a par value of $1 per share and 100,000,000 preferred shares having a par value of $1 per share. 5. The manner in which the foregoing amendment of said Certificate of Incorporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have signed this Certificate of Amendment of said Certificate of Incorporation of AT&T Corp. this 22th day of May, 1998 and we affirm the statements contained therein as true under penalties of perjury. /s/ Marilyn J. Wasser ----------------------------- M. J. Wasser Vice President-Law and Secretary /s/ Robert A. Maynes ----------------------------- R. A. Maynes Assistant Secretary Certificate of Amendment of the Certificate of Incorporation Under Section 805 of the Business Corporation Law We, the undersigned, being a Vice President and an Assistant Secretary respectively, of AT&T Corp., do hereby certify as follows: FIRST: The name of the corporation is AT&T Corp. SECOND: The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885 under the name American Telephone and Telegraph Company. THIRD: (a) The Certificate of Incorporation of the corporation is hereby amended to create two new classes of common stock, Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, each having the number, designation, relative rights, preferences, and limitations as set forth herein. (b) To effect the foregoing, Article THIRD is hereby amended and restated in its entirety as follows: ARTICLE THIRD CAPITAL STOCK PART A -- AUTHORIZED SHARES The aggregate number of shares which the corporation is authorized to issue is eight billion eight hundred fifty million (8,850,000,000) shares, consisting of one hundred million (100,000,000) preferred shares having a par value of $1.00 per share ("Preferred Stock") and eight billion seven hundred fifty million (8,750,000,000) common shares, of which six billion (6,000,000,000) common shares shall be Common Stock having a par value of $1.00 per share ("Common Stock"), two billion five hundred million (2,500,000,000) common shares shall be Class A Liberty Media Group Common Stock having a par value of $1.00 per share ("Class A Liberty Media Group Common Stock") and two hundred fifty million (250,000,000) common shares shall be Class B Liberty Media Group Common Stock having a par value of $1.00 per share ("Class B Liberty Media Group Common Stock"). The Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock are collectively referred to herein as the "Liberty Media Group Common Stock". The authorized shares of Class B Liberty Media Group Common Stock will only be issued (i) pursuant to the Agreement and Plan of Restructuring and Merger, dated June 23, 1998 (the "Merger Agreement"), among Tele-Communications, Inc., Italy Merger Corp. and the corporation, (ii) upon conversion, exercise or exchange of Pre-Merger Convertible Securities, (iii) in a subdivision (by stock split or otherwise) of outstanding shares of Class B Liberty Media Group Common Stock, or (iv) as a stock dividend or share distribution (as defined in paragraph 4 of Part B of this Article Third). PART B -- COMMON STOCK AND LIBERTY GROUP COMMON STOCK Each share of Common Stock, each share of Class A Liberty Media Group Common Stock and each share of Class B Liberty Media Group Common Stock shall, except as otherwise provided in this Article Third, be identical in all respects and shall have equal rights, powers and privileges. VOTING RIGHTS. Holders of Common Stock shall be entitled to one vote for each share of such stock held, holders of Class A Liberty Media Group Common Stock shall be entitled to one-tenth of a vote for each share of such stock held, and holders of Class B Liberty Media Group Common Stock shall be entitled to one vote for each share of such stock held, on all matters presented to such shareholders. Except as may otherwise be required by the laws of the State of New York or, with respect to additional or special voting rights (which may include, without limitation, rights of any such holders of any such class or series to elect one or more directors voting separately as a class) of any class or series of Preferred Stock or any other class of common shares, in the Certificate of Incorporation of the corporation as the same may be amended from time to time (this "Certificate") (including the terms of any class or series of Preferred Stock and any resolution or resolutions providing for the establishment of such class or series pursuant to authority vested in the Board of Directors by this Certificate and the terms of any other class of common shares), the holders of shares of Common Stock, the holders of shares of each other class of common shares, if any, entitled to vote thereon, the holders of shares of Class A Liberty Media Group Common Stock and the holders of shares of Class B Liberty Media Group Common Stock, and the holders of shares of each class or series of Preferred Stock, if any, entitled to vote thereon, shall vote as one class with respect to all matters to be voted on by shareholders of the corporation, and no separate vote or consent of the holders of shares of Common Stock, the holders of shares of Class A Liberty Media Group Common Stock, the holders of shares of Class B Liberty Media Group Common Stock or the holders of shares of any such class of common shares or any such class or series of Preferred Stock shall be required for the approval of any such matter, except that: any amendment, alteration or repeal of any of the provisions of this Certificate which would (x) increase or decrease the aggregate number of authorized shares of Liberty Media Group Common Stock, (y) increase or decrease the par value of the shares of Liberty Media Group Common Stock or (z) alter or change the powers, preferences, privileges or special rights of the shares of Liberty Media Group Common Stock so as to affect them adversely shall require the approval of both (A) the holders of a majority of the combined voting power of the shares of Common Stock, Liberty Media Group Common Stock and any other class of common shares entitled to vote with respect to such matter and any class or series of Preferred Stock entitled to vote with respect to such matter then outstanding, voting together as a single class, and (B) the holders of a majority of the combined voting power of the shares of Liberty Media Group Common Stock, voting separately as a class (without any vote of the holders of the Common Stock, any other class of common shares or any class or series of Preferred Stock of the corporation); a Covered Disposition shall require, in addition to any other approval that may be required pursuant to law or this Certificate, the approval of the holders of a majority of the combined voting power of the shares of Liberty Media Group Common Stock, voting separately as a class; and any merger, consolidation, combination, binding share exchange, reclassification, reorganization or other transaction in or pursuant to which the Liberty Media Group Common Stock is converted, reclassified or changed into or otherwise exchanged for any consideration (other than a conversion described in paragraph 2 of this Part B of this Article Third or a redemption described in paragraph 5 of this part B of this Article Third) shall be subject to approval by both (x) the holders of a majority of the combined voting power of the shares of Common Stock, Liberty Media Group Common Stock, any other class of common shares entitled to vote with respect to such matter and any class or series of Preferred Stock entitled to vote with respect to such matter then outstanding, voting together as a single class, and (y) the holders of a majority of the combined voting power of the shares of Liberty Media Group Common Stock then outstanding, voting separately as a class (without any vote of the holders of the Common Stock, any other class of common shares or any class or series of Preferred Stock of the corporation), unless each of the following requirements is met (in which event the approval set forth in subclause (y) of this clause (iii) shall not be required): (A) the consideration into which the Liberty Media Group Common Stock is converted, reclassified or changed or for which it is exchanged in such transaction includes shares of a class of the common stock of the surviving, resulting or acquiring corporation in such transaction or of the corporation, if applicable, (it being understood that if the Common Stock will be converted in such transaction into any class or series of common shares of any Person, then the term "acquiring corporation" shall mean such Person if such Person directly or indirectly owns the assets comprising the Liberty Media Group after giving effect to such transaction), (B) such class of common stock is intended to reflect the separate performance of the businesses, assets and liabilities comprising the Liberty Media Group (as it existed prior to such transaction and no other material businesses, assets or liabilities) and has powers, preferences, privileges and special rights equivalent to those of the shares of Liberty Media Group Common Stock, (C) such businesses, assets and liabilities comprising the Liberty Media Group are owned directly or indirectly by the issuer of the shares of such class of common stock and if prior to such transaction all of the businesses, assets and liabilities comprising the Liberty Media Group were held, directly or indirectly, by one or more Qualifying Subsidiaries of the corporation (or by Subsidiaries that are not held directly by the corporation but would be Qualifying Subsidiaries if they were held directly by the corporation) that hold no other material assets or liabilities, then immediately following such transaction, such businesses, assets and liabilities comprising the Liberty Media Group are owned, directly or indirectly, by one or more Qualifying Subsidiaries of the issuer of the shares of such class of common stock (or by Subsidiaries of such issuer that are not held directly by such issuer but would be Qualifying Subsidiaries if they were held directly by such issuer) that hold no other material assets or liabilities, and (D) the shares of such class of common stock immediately after such transaction are held only by Persons that were holders of shares of Liberty Media Group Common Stock (or Convertible Securities that were convertible into or exercisable or exchangeable for Liberty Media Group Common Stock) immediately prior to such transaction. If the corporation shall in any manner subdivide (by stock split or otherwise) or combine (by reverse stock split or otherwise) the outstanding shares of Common Stock or Liberty Media Group Common Stock, or pay a stock dividend in shares of any class to holders of that class or shall otherwise effect a share distribution (as defined in paragraph 4 of this Part B of this Article Third) of Common Stock or Liberty Media Group Common Stock, the per share voting rights specified in paragraph 1(a) of this Part B of this Article Third of Liberty Media Group Common Stock relative to Common Stock shall be appropriately adjusted so as to avoid any dilution in the aggregate voting rights of any class. CONVERSION RIGHTS OF LIBERTY MEDIA GROUP COMMON STOCK. Each share of Class B Liberty Media Group Common Stock shall be convertible, at the option of the holder thereof, into one share of Class A Liberty Media Group Common Stock. Any such conversion may be effected by any holder of Class B Liberty Media Group Common Stock by surrendering such holder's certificate or certificates for the Class B Liberty Media Group Common Stock to be converted, duly endorsed, at the office of the corporation or any transfer agent for the Class B Liberty Media Group Common Stock, together with a written notice to the corporation at such office that such holder elects to convert all or a specified number of shares of Class B Liberty Media Group Common Stock represented by such certificate and stating the name or names in which such holder desires the certificate or certificates for Class A Liberty Media Group Common Stock to be issued. If so required by the corporation, any certificate for shares surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the corporation, duly executed by the holder of such shares or the duly authorized representative of such holder. Promptly thereafter, the corporation shall issue and deliver to such holder or such holder's nominee or nominees, a certificate or certificates for the number of shares of Class A Liberty Media Group Common Stock to which such holder shall be entitled as herein provided. Such conversion shall be deemed to have been made at the close of business on the date of receipt by the corporation or any such transfer agent of the certificate or certificates, notice and, if required, instruments of transfer referred to above, and the person or persons entitled to receive the Class A Liberty Media Group Common Stock issuable on such conversion shall be treated for all purposes as the record holder or holders of such Class A Liberty Media Group Common Stock on that date. A number of shares of Class A Liberty Media Group Common Stock equal to the number of shares of Class B Liberty Media Group Common Stock outstanding from time to time shall be set aside and reserved for issuance upon conversion of shares of Class B Liberty Media Group Common Stock. Shares of Class A Liberty Media Group Common Stock shall not be convertible into shares of Class B Liberty Media Group Common Stock. DIVIDENDS. Dividends on Common Stock. Dividends on the Common Stock may be declared and paid only to the extent of (i) the assets of the corporation legally available therefor minus (ii) the Liberty Media Group Available Dividend Amount (such amount, the "Common Stock Available Dividend Amount"). Dividends on Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. Dividends on the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock may be declared and paid only out of the lesser of (i) assets of the corporation legally available therefor and (ii) the Liberty Media Group Available Dividend Amount. Subject to paragraph 4 of this Part B of this Article Third, whenever a dividend is paid to the holders of Class A Liberty Media Group Common Stock, the corporation shall also pay to the holders of Class B Liberty Media Group Common Stock a dividend per share equal to the dividend per share paid to the holders of Class A Liberty Media Group Common Stock, and whenever a dividend is paid to the holders of Class B Liberty Media Group Common Stock, the corporation shall also pay to the holders of Class A Liberty Media Group Common Stock a dividend per share equal to the dividend per share paid to the holders of Class B Liberty Media Group Common Stock. Discrimination Between or Among Classes of Common Shares. The Board of Directors, subject to the provisions of paragraphs 3(a) and 3(b) of this Part B of this Article Third, shall have the sole authority and discretion to declare and pay dividends on (i) the Common Stock, (ii) any other class of common shares or (iii) the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, in equal or unequal amounts (including declaring and paying no dividends on the Liberty Media Group Common Stock while declaring and paying dividends on the Common Stock or any other class of common shares and declaring and paying no dividends on the Common Stock or any other class of common shares while declaring and paying dividends on the Liberty Media Group Common Stock), notwithstanding the relationship between the Common Stock Available Dividend Amount and the Liberty Media Group Available Dividend Amount, the respective amounts of prior dividends declared on, or the liquidation rights of, the Common Stock, any other class of common shares or the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, or any other factor. Share Distributions. The corporation may declare and pay a distribution consisting of shares of Common Stock, Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or any other securities of the corporation or any other Person (hereinafter sometimes called a "share distribution") to holders of the Common Stock, Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock only in accordance with the provisions of this paragraph 4 of this Part B of this Article Third. Distributions on Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. If at any time a share distribution is to be made with respect to the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, such share distribution may be declared and paid only as follows (or as permitted by paragraph 5 of this Part B of this Article Third with respect to the redemptions and other distributions referred to therein): a share distribution consisting of shares of Class A Liberty Media Group Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock) to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, on an equal per share basis; or consisting of shares of Class A Liberty Media Group Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock) to holders of Class A Liberty Media Group Common Stock and, on an equal per share basis, shares of Class B Liberty Media Group Common Stock (or like Convertible Securities convertible into or exercisable or exchangeable for shares of Class B Liberty Media Group Common Stock) to holders of Class B Liberty Media Group Common Stock; a share distribution consisting of shares of Common Stock or any other class of common shares of the corporation (other than Liberty Media Group Common Stock), or Convertible Securities convertible into or exercisable or exchangeable for shares of Common Stock or any other class of common shares of the corporation (other than Liberty Media Group Common Stock), to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, on an equal per share basis; a share distribution consisting of any class or series of securities of the corporation or any other Person other than Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock, Common Stock or any other class of common shares of the corporation (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or Common Stock or any other class of common shares of the corporation), (x) if a single class or series of securities is to be distributed, on the basis of a distribution of identical securities, on an equal per share basis, to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and (y) if more than one class or series of securities is to be distributed, then, if and to the extent practicable, in accordance with the following provisions of this clause (y) and, otherwise, in accordance with clause (x) above: on the basis of a distribution of one class or series of securities to holders of Class A Liberty Media Group Common Stock and another class or series of securities to holders of Class B Liberty Media Group Common Stock, provided that the securities so distributed (and, if the distribution consists of Convertible Securities, the securities into which such Convertible Securities are convertible or for which they are exercisable or exchangeable) do not differ in any respect other than their relative voting rights and related differences in designation, conversion, redemption and share distribution provisions, with holders of shares of Class B Liberty Media Group Common Stock receiving the class or series having the higher relative voting rights (without regard to whether such rights differ to a greater or lesser extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock), provided that if the securities so distributed constitute capital stock of a Subsidiary of the corporation, such rights shall not differ to a greater extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, and provided in each case that such distribution is otherwise made on an equal per share basis. 1. The corporation shall not reclassify, subdivide or combine the Class A Liberty Media Group Common Stock without reclassifying, subdividing or combining the Class B Liberty Media Group Common Stock, on an equal per share basis, and the corporation shall not reclassify, subdivide or combine the Class B Liberty Media Group Common Stock without reclassifying, subdividing or combining the Class A Liberty Media Group Common Stock, on an equal per share basis. The corporation shall not effect a share distribution to the holders of Liberty Media Group Common Stock of any class or series of securities of a Subsidiary of the corporation or any other Person unless such share distribution is tax-free to the holders of Liberty Media Group Common Stock (except with respect to cash received by such holders in lieu of fractional shares). Distributions on Common Stock. The corporation shall not declare and pay a share distribution with respect to the Common Stock or any other class of common shares (other than the Liberty Media Group Common Stock) consisting of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock, any class or series of Preferred Stock attributed to the Liberty Media Group or securities of any Person included in the Liberty Media Group (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock, any such class or series of Preferred Stock or securities of any such Person). Except as set forth in the immediately preceding sentence, the corporation may declare and pay a share distribution to holders of Common Stock or any other class of common shares (other than Liberty Media Group Common Stock) consisting of any securities of the corporation, any Subsidiary of the corporation, or any other Person, including without limitation a share distribution consisting of shares of any class or series of Preferred Stock or shares of Common Stock or any other class of common shares (other than Liberty Media Group Common Stock) (or Convertible Securities convertible into or exercisable or exchangeable for shares of any class or series of Preferred Stock or shares of Common Stock or any other class of common shares (other than Liberty Media Group Common Stock)). Redemption and Other Provisions Relating to the Liberty Media Group Common Stock. Redemption in Exchange for Stock of Qualifying Subsidiaries. At any time at which all of the assets and liabilities included in the Liberty Media Group are held directly or indirectly by one or more Qualifying Subsidiaries of the corporation that hold no other material assets or liabilities (the "Liberty Media Group Subsidiaries"), the Board of Directors may, subject to the availability of assets of the corporation legally available therefor, redeem, on a pro rata basis, all of the outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for an aggregate number of outstanding fully paid and nonassessable shares of common stock of a Liberty Media Group Subsidiary that is the beneficial owner of all other Liberty Media Group Subsidiaries (or, if applicable, of each Liberty Media Group Subsidiary that is not a Subsidiary of one or more other Liberty Media Group Subsidiaries) equal to the number of outstanding shares of common stock of such Liberty Media Group Subsidiary (or Liberty Media Group Subsidiaries, as the case may be) held by the corporation; provided that no such redemption pursuant to this paragraph 5(a) of this Part B of this Article Third may occur unless the redemption is tax-free to the holders of Liberty Media Group Common Stock (except with respect to cash received by such holders in lieu of fractional shares). Any such redemption shall occur on a Redemption Date set forth in a notice to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities) pursuant to paragraph 5(d)(v) of this Part B of this Article Third. In effecting such a redemption, the corporation shall (i) if and to the extent practicable, redeem shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for shares of separate classes or series of common stock of each Liberty Media Group Subsidiary with relative voting rights and related differences in designation, conversion, redemption and share distribution provisions not greater than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, with holders of shares of Class B Liberty Media Group Common Stock receiving the class or series having the higher relative voting rights, and (ii) to the extent redemption in accordance with clause (i) above is not practicable, redeem shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for shares of a single class of common stock of each Liberty Media Group Subsidiary without distinction between the shares distributed to the holders of the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. Mandatory Dividend or Redemption in Case of Disposition of Liberty Media Group Assets. In the event of the Disposition, in one transaction or a series of related transactions, by the corporation and its subsidiaries of all or substantially all of the properties and assets of the Liberty Media Group to one or more Persons or groups (other than (w) in connection with the Disposition by the corporation of all of the corporation's properties and assets in one transaction or a series of related transactions in connection with the liquidation, dissolution or winding up of the corporation within the meaning of paragraph 6 of this Part B of this Article Third, (x) a dividend, other distribution or redemption in accordance with any provision of paragraph 3, paragraph 4, paragraph 5(a) or paragraph 6 of this Part B of this Article Third, (y) to any Person or group which the Liberty Media Group, directly or indirectly, after giving effect to the Disposition, controls and which is included in the Liberty Media Group or (z) in connection with a Related Business Transaction), the corporation shall, on or prior to the 85th Trading Day following the consummation of such Disposition, either: subject to paragraph 3(b) of this Part B of this Article Third, declare and pay a dividend in cash and/or in securities or other property (determined as provided below) to the holders of the outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock equally on a share for share basis (subject to the last sentence of this paragraph 5(b) of this Part B of this Article Third), in an aggregate amount equal to the Liberty Media Group Net Proceeds of such Disposition (provided that if such Disposition involves all (not merely substantially all) of the properties and assets of the Liberty Media Group, then the aggregate amount of such dividend shall equal the product of the Liberty Media Group Full Dilution Fraction and the Liberty Media Group Net Proceeds of such Disposition and the difference between the aggregate amount of such dividend and such Liberty Media Group Net Proceeds shall be reserved by the corporation for payment or delivery to holders of Pre-Merger Convertible Securities on conversion, exercise or exchange thereof); or provided that there are assets of the corporation legally available therefor and to the extent the Liberty Media Group Available Dividend Amount would have been sufficient to pay a dividend in lieu thereof pursuant to clause (i) of this paragraph 5(b) of this Part B of this Article Third, then: if such Disposition involves all (not merely substantially all) of the properties and assets of the Liberty Media Group, redeem all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for cash and/or securities or other property (determined as provided below) in an aggregate amount equal to the product of the Liberty Media Group Full Dilution Fraction and the Liberty Media Group Net Proceeds, such aggregate amount to be allocated (subject to the last sentence of this paragraph 5(b) of this Part B of this Article Third) to shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in the ratio of the number of shares of each such series outstanding (so that the amount of consideration paid for the redemption of each share of Class A Liberty Media Group Common Stock and each share of Class B Liberty Media Group Common Stock is the same); or if such Disposition involves substantially all (but not all) of the properties and assets of the Liberty Media Group, apply an aggregate amount of cash and/or securities or other property (determined as provided below) equal to the Liberty Media Group Net Proceeds to the redemption of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, such aggregate amount to be allocated (subject to the last sentence of this paragraph 5(b) of this Part B of this Article Third) to shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in the ratio of the number of shares of each such series outstanding, and the number of shares of each such series to be redeemed to equal the lesser of (x) the whole number nearest the number determined by dividing the aggregate amount so allocated to the redemption of such series by the average Market Value of one share of Class A Liberty Media Group Common Stock during the ten-Trading Day period beginning on the 16th Trading Day following the consummation of such Disposition and (y) the number of shares of such series outstanding (so that the amount of consideration paid for the redemption of each share of Class A Liberty Media Group Common Stock and each share of Class B Liberty Media Group Common Stock is the same); such redemption to be effected in accordance with the applicable provisions of paragraph 5(d) of this Part B of this Article Third; For purposes of this paragraph 5(b): (x) as of any date, "substantially all of the properties and assets of the Liberty Media Group" shall mean a portion of such properties and assets that represents at least 80% of the then-current market value (as determined by the Board of Directors) of the properties and assets of the Liberty Media Group as of such date; (y) in the case of a Disposition of properties and assets in a series of related transactions, such Disposition shall not be deemed to have been consummated until the consummation of the last of such transactions; and (z) the corporation shall pay the dividend or redemption price referred to in clause (i) or (ii) of this paragraph 5(b) of this Part B of this Article Third in the same form as the proceeds of the Disposition were received. If the dividend or redemption price is paid in the form of securities of an issuer other than the corporation, the corporation shall (1) if more than one class or series of securities is to be distributed, if and to the extent practicable, pay the dividend or redemption price in the form of separate classes or series of securities, with one class or series of such securities to holders of Class A Liberty Media Group Common Stock and another class or series of securities to holders of Class B Liberty Media Group Common Stock, provided that such securities (and, if such securities are convertible into or exercisable or exchangeable for shares of another class or series of securities, the securities so issuable upon such conversion, exercise or exchange) do not differ in any respect other than their relative voting rights and related differences in designation, conversion, redemption and share distribution provisions, with holders of shares of Class B Liberty Media Group Common Stock receiving the class or series having the higher relative voting rights (without regard to whether such rights differ to a greater or lesser extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock), provided that if such securities constitute capital stock of a Subsidiary of the corporation, such rights shall not differ to a greater extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, and otherwise such securities shall be distributed on an equal per share basis, and (2) otherwise pay the dividend or redemption price in the form of a single class of securities without distinction between the shares received by the holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. Certain Provisions Respecting Convertible Securities. Unless the provisions of any class or series of Pre-Merger Convertible Securities provide specifically to the contrary, after any Redemption Date on which all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock were redeemed, any share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that is issued on conversion, exercise or exchange of any Pre-Merger Convertible Securities shall, immediately upon issuance pursuant to such conversion, exercise or exchange and without any notice or any other action on the part of the corporation or its Board of Directors or the holder of such share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, be redeemed in exchange for the kind and amount of shares of capital stock, cash and/or other securities or property that a holder of such Pre-Merger Convertible Securities would have been entitled to receive pursuant to the terms of such securities had such terms provided that the conversion, exercise or exchange privilege in effect immediately prior to any such redemption of all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock would be adjusted so that the holder of any such Pre-Merger Convertible Securities thereafter surrendered for conversion, exercise or exchange would be entitled to receive the kind and amount of shares of capital stock, cash and/or other securities or property such holder would have received as a result of such redemption had such securities been converted, exercised or exchanged immediately prior thereto. Unless the provisions of any class or series of Convertible Securities (other than Pre-Merger Convertible Securities) which are or become convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock provide specifically to the contrary, after any Redemption Date on which all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock were redeemed, any share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that is issued on conversion, exercise or exchange of any such Convertible Securities shall, immediately upon issuance pursuant to such conversion, exercise or exchange and without any notice or any other action on the part of the corporation or its Board of Directors or the holder of such share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, be redeemed in exchange for, to the extent assets of the corporation are legally available therefor, the amount of $.01 per share in cash. General. Not later than the 10th Trading Day following the consummation of a Disposition referred to in paragraph 5(b) of this Part B of this Article Third, the corporation shall announce publicly by press release (A) the Liberty Media Group Net Proceeds of such Disposition, (B) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, (C) the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Merger Convertible Securities), and (D) if the Disposition is of all (not merely substantially all) of the properties and assets of the Liberty Media Group, the Liberty Media Group Full Dilution Fraction as of a recent date preceding the date of such notice. Not earlier than the 26th Trading Day and not later than the 30th Trading Day following the consummation of such Disposition, the corporation shall announce publicly by press release which of the actions specified in clauses (i) or (ii) of paragraph 5(b) of this Part B of this Article Third it has irrevocably determined to take. If the corporation determines to pay a dividend pursuant to clause (i) of paragraph 5(b) of this Part B of this Article Third, the corporation shall, not later than the 30th Trading Day following the consummation of such Disposition, cause to be given to each holder of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) the record date for determining holders entitled to receive such dividend, which shall be not earlier than the 40th Trading Day and not later than the 50th Trading Day following the consummation of such Disposition, (B) the anticipated payment date of such dividend (which shall not be more than 85 Trading Days following the consummation of such Disposition), (C) the kind of shares of capital stock, cash and/or other securities or property to be distributed in respect of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, (D) the Liberty Media Group Net Proceeds of such Disposition, (E) if the Disposition is of all (not merely substantially all) the properties and assets of the Liberty Media Group, the Liberty Media Group Full Dilution Fraction as of a recent date preceding the date of such notice, (F) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof, (G) in the case of a notice to holders of Convertible Securities (other than Pre-Merger Convertible Securities, in the case of a Disposition of all (not merely substantially all) the properties and assets of the Liberty Media Group), a statement to the effect that holders of such Convertible Securities shall be entitled to receive such dividend only if they appropriately convert, exercise or exchange such Convertible Securities prior to the record date referred to in clause (A) of this sentence, and (H) if the Disposition is of all (not merely substantially all) the properties and assets of the Liberty Media Group, in the case of a notice to holders of Pre-Merger Convertible Securities, a statement to the effect that the holders of such Pre-Merger Convertible Securities shall be entitled to receive such dividend (without interest) upon conversion, exercise or exchange of such Pre-Merger Convertible Securities. Such notice shall be sent by first-class mail, postage prepaid, at such holder's address as the same appears on the transfer books of the corporation. If the corporation determines to undertake a redemption of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock following a Disposition of all (not merely substantially all) of the properties and assets of the Liberty Media Group pursuant to clause (ii) (A) of paragraph 5(b) of this Part B of this Article Third, the corporation shall cause to be given to each holder of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) a statement that all shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on the Redemption Date shall be redeemed, (B) the Redemption Date (which shall not be more than 85 Trading Days following the consummation of such Disposition), (C) the kind of shares of capital stock, cash and/or other securities or property to be paid as a redemption price in respect of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on the Redemption Date, (D) the Liberty Media Group Net Proceeds of such Disposition, (E) the Liberty Media Group Full Dilution Fraction as of a recent date preceding the date of such notice, (F) the place or places where certificates for shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation waives such requirement), are to be surrendered for delivery of certificates for shares of such capital stock, cash and/or other securities or property, (G) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Merger Convertible Securities), and (H) in the case of a notice to holders of Convertible Securities (other than Pre-Merger Convertible Securities), a statement to the effect that holders of such Convertible Securities shall be entitled to participate in such redemption only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the Redemption Date referred to in clause (B) of this sentence and a statement as to what, if anything, such holders shall be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, paragraph 5(c) of this Part B of this Article Third if such holders convert, exercise or exchange such Convertible Securities following such Redemption Date. Such notice shall be sent by first-class mail, postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days prior to the Redemption Date, at such holder's address as the same appears on the transfer books of the corporation. If the corporation determines to undertake a redemption of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock following a Disposition of substantially all (but not all) of the properties and assets of the Liberty Media Group pursuant to clause (ii)(B) of paragraph 5(b) of Part B of this Article Third, the corporation shall, not later than the 30th Trading Day following the consummation of such Disposition, cause to be given to each holder of record of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) a date not earlier than the 40th Trading Day and not later than the 50th Trading Day following the consummation of such Disposition which shall be the date on which shares of the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock then outstanding shall be selected for redemption, (B) the anticipated Redemption Date (which shall not be more than 85 Trading Days following the consummation of such Disposition), (C) the kind of shares of capital stock, cash and/or other securities or property to be paid as a redemption price in respect of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock selected for redemption, (D) the Liberty Media Group Net Proceeds of such Disposition, (E) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion or exercise prices thereof, and (F) in the case of a notice to holders of Convertible Securities, a statement to the effect that holders of such Convertible Securities shall be entitled to participate in such selection for redemption only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the date referred to in clause (A) of this sentence and a statement as to what, if anything, such holders shall be entitled to receive pursuant to the terms of such Convertible Securities if such holders convert, exercise or exchange such Convertible Securities following such date. Promptly following the date referred to in clause (A) of the preceding sentence, but not earlier than the 40th Trading Day and not later than the 50th Trading Day following the consummation of such Disposition, the corporation shall cause to be given to each holder of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be so redeemed, a notice setting forth (A) the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock held by such holder to be redeemed, (B) a statement that such shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock shall be redeemed, (C) the Redemption Date (which shall not be more than 85 Trading Days following the consummation of such Disposition), (D) the kind and per share amount of shares of capital stock, cash and/or other securities or property to be received by such holder with respect to each share of such Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be redeemed, including details as to the calculation thereof, and (E) the place or places where certificates for shares of such Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation waives such requirement), are to be surrendered for delivery of certificates for shares of such capital stock, cash and/or other securities or property. The notices referred to in this clause (iv) shall be sent by first- class mail, postage prepaid, at such holder's address as the same appears on the transfer books of the corporation. The outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be redeemed shall be redeemed by the corporation pro rata among the holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock or by such other method as may be determined by the Board of Directors to be equitable. If the corporation determines to redeem shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock pursuant to paragraph 5(a) of this Part B of this Article Third, the corporation shall promptly cause to be given to each holder of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for such notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) a statement that all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock shall be redeemed in exchange for shares of common stock of the Liberty Media Group Subsidiaries, (B) the Redemption Date, (C) the place or places where certificates for shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation shall waive such requirement), are to be surrendered for delivery of certificates for shares of common stock of the Liberty Media Group Subsidiaries, (D) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Merger Convertible Securities) and (E) in the case of a notice to holders of Convertible Securities (other than Pre-Merger Convertible Securities), a statement to the effect that holders of such Convertible Securities shall be entitled to participate in such redemption only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the Redemption Date referred to in clause (B) of this sentence and a statement as to what, if anything, such holders shall be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, paragraph 5(c) of this Part B of this Article Third if such holders convert, exercise or exchange such Convertible Securities following the Redemption Date. Such notice shall be sent by first-class mail, postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days prior to the Redemption Date, at such holder's address as the same appears on the transfer books of the corporation. Neither the failure to mail any notice required by this paragraph 5(d) to any particular holder of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or of Convertible Securities nor any defect therein shall affect the sufficiency thereof with respect to any other holder of outstanding shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock or of Convertible Securities, or the validity of any redemption. The corporation shall not be required to issue or deliver fractional shares of any class of capital stock or any fractional securities to any holder of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock upon any redemption, dividend or other distribution pursuant to this paragraph 5. In connection with the determination of the number of shares of any class of capital stock that shall be issuable or the amount of securities that shall be deliverable to any holder of record upon any such redemption, dividend or other distribution (including any fractions of shares or securities), the corporation may aggregate the number of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock held at the relevant time by such holder of record. If the number of shares of any class of capital stock or the amount of securities remaining to be issued or delivered to any holder of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock is a fraction, the corporation shall, if such fraction is not issued or delivered to such holder, pay a cash adjustment in respect of such fraction in an amount equal to the fair market value of such fraction on the fifth Trading Day prior to the date such payment is to be made (without interest). For purposes of the preceding sentence, "fair market value" of any fraction shall be (A) in the case of any fraction of a share of capital stock of the corporation, the product of such fraction and the Market Value of one share of such capital stock and (B) in the case of any other fractional security, such value as is determined by the Board of Directors. No adjustments in respect of dividends shall be made upon the redemption of any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock; provided, however, that if the Redemption Date with respect to the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock shall be subsequent to the record date for the payment of a dividend or other distribution thereon or with respect thereto, the holders of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock at the close of business on such record date shall be entitled to receive the dividend or other distribution payable on or with respect to such shares on the date set for payment of such dividend or other distribution, notwithstanding the redemption of such shares or the corporation's default in payment of the dividend or distribution due on such date. Before any holder of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock shall be entitled to receive certificates representing shares of any kind of capital stock or cash and/or securities or other property to be received by such holder with respect to shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock pursuant to this paragraph 5 of this Part B of this Article Third, such holder shall surrender at such place as the corporation shall specify certificates for such shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation shall waive such requirement). The corporation shall as soon as practicable after such surrender of certificates representing shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock deliver to the person for whose account shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock were so surrendered, or to the nominee or nominees of such person, certificates representing the number of whole shares of the kind of capital stock or cash and/or securities or other property to which such person shall be entitled as aforesaid, together with any payment for fractional securities contemplated by paragraph 5(d)(vii) of this Part B of this Article Third. If less than all of the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock represented by any one certificate are to be redeemed, the corporation shall issue and deliver a new certificate for the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock not redeemed. The corporation shall not be required to register a transfer of any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock selected or called for redemption. From and after any applicable Redemption Date, all rights of a holder of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that were redeemed shall cease except for the right, upon surrender of the certificates representing shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, to receive certificates representing shares of the kind and amount of capital stock or cash and/or securities or other property for which such shares were redeemed, together with any payment for fractional securities contemplated by paragraph 5(d)(vii) of this Part B of this Article Third and such holder shall have no other or further rights in respect of the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock so redeemed, including, but not limited to, any rights with respect to any cash, securities or other properties which are reserved or otherwise designated by the corporation as being held for the satisfaction of the corporation's obligations to pay or deliver any cash, securities or other property upon the conversion, exercise or exchange of any Convertible Securities that were convertible into or exercisable or exchangeable for Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock and outstanding as of the date of such redemption. No holder of a certificate that, immediately prior to the applicable Redemption Date for the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, represented shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock shall be entitled to receive any dividend or other distribution with respect to shares of any kind of capital stock into or in exchange for which the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock was redeemed until surrender of such holder's certificate for a certificate or certificates representing shares of such kind of capital stock. Upon such surrender, there shall be paid to the holder the amount of any dividends or other distributions (without interest) which theretofore became payable with respect to a record date after the Redemption Date but that were not paid by reason of the foregoing, with respect to the number of whole shares of the kind of capital stock represented by the certificate or certificates issued upon such surrender. From and after a Redemption Date for any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, the corporation shall, however, be entitled to treat the certificates for shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that have not yet been surrendered for redemption as evidencing the ownership of the number of whole shares of the kind or kinds of capital stock for which the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock represented by such certificates shall have been redeemed, notwithstanding the failure to surrender such certificates. The corporation shall pay any and all documentary, stamp or similar issue or transfer taxes that may be payable in respect of the issue or delivery of any shares of capital stock and/or other securities on redemption of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock pursuant to this Part B of this Article Third. The corporation shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of any shares of capital stock in a name other than that in which the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock so redeemed were registered and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the corporation the amount of any such tax, or has established to the satisfaction of the corporation that such tax has been paid. LIQUIDATION. In the event of a liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the corporation and subject to the prior payment in full of the preferential amounts to which any class or series of Preferred Stock is entitled, (a) the holders of the shares of Common Stock and (on the basis that may be set forth in this Certificate with respect to any such shares) the holders of any other class of common shares (other than the Liberty Media Group Common Stock) shall share in the aggregate in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of X/Z for the 20-Trading Day period ending on the Trading Day prior to the date of the public announcement of such liquidation, dissolution or winding up, and (b) the holders of the shares of Class A Liberty Media Group Common Stock and the holders of the shares of Class B Liberty Media Group Common Stock shall share equally, on a share for share basis, in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of Y/Z for such 20-Trading Day period, where X is the aggregate Market Capitalization of the Common Stock and any other class of common shares (other than the Liberty Media Group Common Stock), Y is the aggregate Market Capitalization of the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, and Z is the aggregate Market Capitalization of the Common Stock, any other class of common shares (other than the Liberty Media Group Common Stock), the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock. Neither the consolidation or merger of the corporation with or into any other corporation or corporations nor the sale, transfer or lease of all or substantially all of the assets of the corporation shall itself be deemed to be a liquidation, dissolution or winding up of the corporation within the meaning of this paragraph 6 of this Part B of this Article Third. Notwithstanding the foregoing, any transaction or series of related transactions which results in all of the assets and liabilities included in the Liberty Media Group being held by one or more Liberty Media Group Subsidiaries, and the distribution of such Liberty Media Group Subsidiaries (and no other material assets or liabilities) to the holders of the outstanding Liberty Media Group Common Stock shall not constitute a voluntary or involuntary liquidation, dissolution or winding up of the corporation for purposes of this paragraph 6 of this Part B of this Article Third, but shall be subject to paragraph 5(a) of this Part B of this Article Third. DETERMINATIONS BY THE BOARD OF DIRECTORS. Any determinations made by the Board of Directors under any provision in this Part B of this Article Third shall be final and binding on all shareholders of the corporation, except as may otherwise be required by law. The corporation shall prepare a statement of any such determination by the Board of Directors respecting the fair market value of any properties, assets or securities and shall file such statement with the Secretary of the corporation. RELATIONSHIP BETWEEN THE LIBERTY MEDIA GROUP AND THE COMMON STOCK GROUP. In furtherance and not in limitation of the provisions of Article Ninth, neither the Liberty Media Group on the one hand, nor the Common Stock Group on the other hand, shall have any duty, responsibility or obligation to refrain from (and none of the directors or officers of the corporation, the Liberty Media Group or the Common Stock Group shall have any duty, responsibility or obligation to cause the Liberty Media Group or the Common Stock Group to refrain from) (i) engaging in the same or similar activities or lines of business as any member of the other Group, (ii) doing business with any potential or actual supplier or customer of any member of any other Group or (iii) engaging in, or refraining from, any other activities whatsoever relating to any of the potential or actual suppliers or customers of any member of the other Group. In furtherance and not in limitation of the provisions of Article Ninth, neither the Liberty Media Group on the one hand, nor the Common Stock Group on the other hand, shall have any duty, responsibility or obligation (and none of the directors or officers of the corporation, the Liberty Media Group or the Common Stock Group shall have any duty, responsibility or obligation to cause the Liberty Media Group or the Common Stock Group) (i) to communicate or offer any business or other corporate opportunity to any other Person (including any business or other corporate opportunity which may arise which either Group may be financially able to undertake, and which is, from its nature, in the line of more than one Group's business and is of practical advantage to more than one Group), (ii) to provide financial support to the other Group (or any member thereof) or (iii) otherwise to assist the other Group. In furtherance and not in limitation of the provisions of Article Ninth, no director or officer of the corporation shall be liable to the corporation or any holder of any securities of the corporation in respect of any failure or alleged failure of such officer or director to offer to (or to cause the Liberty Media Group or the Common Stock Group to offer to) either Group any corporate opportunity of any kind or nature that is pursued by the other Group. Nothing in this paragraph 8 of this Part B of this Article Third shall prevent any members of the Liberty Media Group from entering into written agreements with the Common Stock Group to define or restrict any aspect of the relationship between the Groups. CERTAIN DEFINITIONS. Unless the context otherwise requires, the terms defined in this Part B of this Article Third shall have, for all purposes of this Part B of this Article Third, the meanings herein specified: "Common Stock Group" shall mean, as of any date, the interest of the corporation or any of its subsidiaries in all of the businesses in which the corporation or any of its subsidiaries (or any of their predecessors or successors) is or has been engaged, directly or indirectly, and the respective assets and liabilities of the corporation or any of its subsidiaries, other than any businesses, assets or liabilities of the Liberty Media Group. "Convertible Securities" shall mean any securities of the corporation (other than the Liberty Media Group Common Stock) or any Subsidiary thereof that are convertible into, exchangeable for or evidence the right to purchase any shares of Common Stock or of any series of Liberty Media Group Common Stock, whether upon conversion, exercise, exchange, pursuant to antidilution provisions of such securities or otherwise. "Covered Disposition" shall mean (x) any direct or indirect sale, transfer or conveyance by the corporation of any of its equity interest in Liberty Media Corporation or any Covered Entity or (y) any grant of any pledge or other security interest in the equity interest of the corporation in Liberty Media Corporation or any Covered Entity; provided, however, that the foregoing shall not apply to (i) any issuance or sale by the corporation of its own securities, (ii) any issuance or sale by Liberty Media Corporation of its own securities or any sale, transfer or conveyance by Liberty Media Corporation or any other Person included in the Liberty Media Group of any securities of any Person included in the Liberty Media Group, (iii) with respect to any Covered Entity, any transaction duly authorized by the board of directors of such Covered Entity, or (iv) any merger, consolidation, exchange of shares or other business combination transaction involving the corporation in which the corporation (or its successors) continues immediately following such transaction to hold the same direct or indirect interest in the business, assets and liabilities comprising the Liberty Media Group that it held immediately prior to such transaction (other than as a result of any action by any Person included in the Liberty Media Group). If a contribution of assets of Liberty Media Corporation to Liberty Media Group LLC occurs (other than the initial contribution made on formation thereof), then from and after the date of such contribution all references in the preceding sentence of this definition of Covered Disposition to Liberty Media Corporation shall be deemed to refer to Liberty Media Group LLC. "Covered Entity" shall mean, as of any date of determination, each of the following Persons (and any successor to such Person, by merger, consolidation, sale of all or substantially all of its assets or otherwise, whether or not in connection with a Related Business Transaction) unless all of the Corporation's equity interest in such Person or all of the assets of such Person are held by (i) Liberty Media Corporation, if such date of determination is prior to the contribution of assets of Liberty Media Corporation to Liberty Media Group LLC (other than the initial contribution made on formation thereof) or (ii) Liberty Media Group LLC, if such date of determination is after the contribution referred to in clause (i): Tele-Communications International, Inc., TCI Wireless Holdings, Inc., TCIP, Inc., Silver Spur Land and Cattle Co., and TCI Interactive, Inc. "Disposition" shall mean the sale, transfer, assignment or other disposition (whether by merger, consolidation, sale or contribution of assets or stock or otherwise) by the corporation (or its successors) or any of its Subsidiaries of properties or assets. Disposition shall not include a merger, consolidation, exchange of shares or other business combination transaction involving the corporation in which the corporation (or its successors) continues immediately following such transaction to hold the same direct and indirect interest in the business, assets and liabilities comprising the Liberty Media Group that it held immediately prior to such transaction (other than as a result of any action by any Person included in the Liberty Media Group). "Group" shall mean either the Common Stock Group or the Liberty Media Group. "Liberty Media Group" shall mean, as of any date that any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock have been issued and continue to be outstanding, each of the following, without duplication: (a) the proceeds of any issuances or sales of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or any Convertible Securities that are convertible into or exercisable or exchangeable for Liberty Media Group Common Stock or of any Preferred Stock that is attributed to the Liberty Media Group; (b) the interest of the corporation or any of its subsidiaries in the Associated Group, Inc., a Delaware corporation, and the proceeds of any disposition thereof; (c) the interest of the Corporation or any of its subsidiaries in each Covered Entity or any subsidiary of a Covered Entity and their respective properties and assets (including, without limitation, the Sprint PCS Investment) and the proceeds of any disposition thereof; and (d) the interest of the corporation or of any of its subsidiaries in Liberty Media Corporation or any of its subsidiaries (including any successor thereto by merger, consolidation or sale of all or substantially all of its assets, whether or not in connection with a Related Business Transaction) and their respective properties and assets and the proceeds of any disposition thereof; provided, however, that if a contribution of assets of Liberty Media Corporation to Liberty Media Group LLC occurs (other than the initial contribution made on formation thereof), then from and after the date of such contribution, the Liberty Media Group shall mean, as of any date that any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock continue to be outstanding, in addition to the assets referred to in clauses (a), (b) and (c) above and in clause (e) below, the interest of the corporation or any of its subsidiaries in (i) the Retained Business and (ii) Liberty Media Group LLC or any of its subsidiaries (including any successor thereto by merger, consolidation or sale of all or substantially all of its assets, whether or not in connection with a Related Business Transaction) and their respective properties and assets and the proceeds of any disposition thereof; and (e) the interest of the corporation in all dividends and distributions from Liberty Media Group LLC to Liberty Media Corporation or any of its subsidiaries (including any such successor) or from Liberty Media Corporation (or any such successor) to its shareholders or from any Covered Entity to its shareholders. For purposes hereof, "Retained Businesses" means the businesses, assets and liabilities of Liberty Media Corporation immediately following the contribution referred to in the preceding sentence (or, if there is more than one such contribution after the initial contribution made on formation, then the first of such contributions). "Liberty Media Group Available Dividend Amount," as of any date, shall mean the excess of (i) the amount by which the total assets of the Liberty Media Group exceed the total liabilities of the Liberty Media Group as of such date over (ii) the sum of (A) the par value of all issued shares of Liberty Media Group Common Stock and each class or series of Preferred Stock attributed to the Liberty Media Group, (B) the amount of the consideration received for any shares of Preferred Stock attributed to the Liberty Media Group without par value that have been issued, except such part of the consideration therefor as may have been allocated to surplus in a manner permitted by law, and (C) any amount not included in clauses (A) and (B) that the corporation (by appropriate action of its Board of Directors) has transferred to stated capital specifically in respect of Liberty Media Group Common Stock, minus (D) all reductions from such sums set forth in clauses (A), (B) and (C) as have been effected in a manner permitted by law; provided, however, that in the event that the law governing the corporation changes from that governing the corporation on the date of the adoption of the Amendment to this Certificate pursuant to which the Liberty Media Group Common Stock was authorized (whether because of amendment of the applicable law or because of a change in the jurisdiction of incorporation of the corporation through merger or otherwise), the Liberty Media Group Available Dividend Amount shall mean that amount of dividends, as determined by the Board of Directors, that could be paid by a corporation (governed under such applicable law) having the assets and liabilities of the Liberty Media Group, an amount of outstanding common stock (and having an aggregate par value) equal to the amount (and aggregate par value) of the outstanding Liberty Media Group Common Stock and of each class or series of Preferred Stock attributed to the Liberty Media Group and having an amount of earnings or loss or other relevant corporate attributes as reasonably determined by the Board of Directors in light of all factors deemed relevant by the Board. "Liberty Media Group Full Dilution Fraction" shall mean, as of any date, a fraction the numerator of which is the aggregate number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on such date and the denominator of which is the sum of (a) such aggregate number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on such date and (b) the aggregate number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock issuable, determined as of such date, upon conversion, exercise or exchange of Pre-Merger Convertible Securities. "Liberty Media Group LLC" shall mean Liberty Media Group LLC, a Delaware limited liability company, of which Liberty Media Corporation and Liberty Management LLC are the members, and any successor thereto (by merger, consolidation, sale of all or substantially all of its assets or otherwise, whether or not in connection with a Related Business Transaction). "Liberty Media Group Net Proceeds" shall mean, as of any date, with respect to any Disposition of any of the properties and assets of the Liberty Media Group, an amount, if any, equal to the gross proceeds of such Disposition after any payment of, or reasonable provision for, (a) any taxes payable by the corporation in respect of such Disposition or in respect of any resulting dividend or redemption pursuant to clause (i) or (ii), respectively, of paragraph 5(b) of this Part B of this Article Third (or which would have been payable but for the utilization of tax benefits attributable to the Common Stock Group) reduced by any offset to such liability of the Liberty Media Group allowed pursuant to the Tax Sharing Agreement entered into pursuant to the Merger Agreement, (b) any transaction costs borne by the Common Stock Group in connection with such Disposition, including, without limitation, any legal, investment banking and accounting fees and expenses borne by the Common Stock Group in connection with such Disposition, (c) any liabilities and other obligations (contingent or otherwise) of the Liberty Media Group borne by the Common Stock Group in connection with such Disposition, including, without limitation, any indemnity or guarantee obligations incurred by the Common Stock Group in connection with the Disposition or any liabilities assumed by the Common Stock Group for future purchase price adjustments, and (d) any preferential amounts, accumulated and unpaid dividends and other obligations (other than with respect to Pre-Merger Convertible Securities) in respect of Preferred Stock attributed to the Liberty Media Group; provided, however, that the net amount determined in accordance with the foregoing provisions of this sentence shall, without duplication, be increased by the net amount, if any, payable by the Common Stock Group to the Liberty Media Group, or decreased by the net amount, if any, payable by the Liberty Media Group to the Common Stock Group, pursuant to the Tax Sharing Agreement referred to above, as applicable, as a result of the deconsolidation of the properties and assets of the Liberty Media Group disposed of in such Disposition. For purposes of this definition, any properties and assets of the Liberty Media Group remaining after such Disposition shall constitute "reasonable provision" for such amount of taxes, costs and liabilities (contingent or otherwise) as can be supported by such properties and assets. To the extent the proceeds of any Disposition include any securities or other property other than cash, the Board of Directors shall determine the value of such securities or property. "Liberty Media Corporation" shall mean Liberty Media Corporation, a Delaware corporation, and any successor thereto (by merger, consolidation, sale of all or substantially all of its assets or otherwise, whether or not in connection with a Related Business Transaction). "Market Capitalization" of any class or series of capital stock of the corporation on any Trading Day shall mean the product of (i) the Market Value of one share of such class or series on such Trading Day and (ii) the number of shares of such class or series outstanding on such Trading Day. "Market Value" of any class or series of capital stock of the corporation on any day shall mean the average of the high and low reported sales prices regular way of a share of such class or series on such day (if such day is a Trading Day, and if such day is not a Trading Day, on the Trading Day immediately preceding such day) or in case no such reported sale takes place on such Trading Day the average of the reported closing bid and asked prices regular way of a share of such class or series on such Trading Day, in either case on the New York Stock Exchange or, if the shares of such class or series are not quoted on the New York Stock Exchange on such Trading Day, on the Nasdaq National Market, or if the shares of such class or series are not quoted on the Nasdaq National Market on such Trading Day, the average of the closing bid and asked prices of a share of such class or series in the over-the-counter market on such Trading Day as furnished by any New York Stock Exchange member firm selected from time to time by the corporation, or if such closing bid and asked prices are not made available by any such New York Stock Exchange member firm on such Trading Day (including without limitation because such securities are not publicly held), the market value of a share of such class or series as determined by the Board of Directors; provided that for purposes of determining the ratios set forth in paragraph 6 of this Part B of this Article Third, (a) the "Market Value" of any share of Common Stock or of any class of Liberty Media Group Common Stock on any day prior to the "ex" date or any similar date for any dividend or distribution paid or to be paid with respect to the Common Stock or such class of Liberty Media Group Common Stock, as applicable, shall be reduced by the fair market value of the per share amount of such dividend or distribution as determined by the Board of Directors and (b) the "Market Value" of any share of Common Stock or of any class of Liberty Media Group Common Stock on any day prior to (i) the effective date of any subdivision (by stock split or otherwise) or combination (by reverse stock split or otherwise) of outstanding shares of Common Stock or of such class of Liberty Media Group Common Stock, as applicable, or (ii) the "ex" date or any similar date for any dividend or distribution with respect to the Common Stock or any such class of Liberty Media Group Common Stock in shares of the Common Stock or such class of Liberty Media Group Common Stock, as applicable, shall be appropriately adjusted to reflect such subdivision, combination, dividend or distribution. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof, or other entity, whether acting in an individual, fiduciary or other capacity. "Pre-Merger Convertible Securities" shall mean Convertible Securities that were outstanding immediately following the Effective Time (as such term is defined in the Merger Agreement) and were, at such date convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock. "Qualifying Subsidiary" of a Person shall mean a Subsidiary of such Person in which such Person's ownership and voting interest is sufficient to satisfy the ownership and voting requirements of the Internal Revenue Code and the regulations thereunder for a distribution of such Person's interest in such Subsidiary to the holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be tax free to such holders. "Redemption Date" shall mean any date fixed for a redemption or purchase of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock as set forth in a notice to holders of such series pursuant to this Certificate. "Related Business Transaction" shall mean any Disposition of all or substantially all of the properties and assets of the Liberty Media Group in which the corporation receives as proceeds of such Disposition primarily equity securities (including, without limitation, capital stock, convertible securities, partnership or limited partnership interests, limited liability company membership interests and other types of equity securities, without regard to the voting power or contractual or other management or governance rights related to such equity securities) of the purchaser or acquiror of such assets and properties of the Liberty Media Group, any entity which succeeds (by merger, formation of a joint venture enterprise or otherwise) to such assets and properties of the Liberty Media Group, or a third party issuer, which purchaser, acquiror or other issuer is engaged or proposes to engage primarily in one or more businesses similar or complementary to the businesses conducted by the Liberty Media Group prior to such Disposition, as determined in good faith by the Board of Directors, and upon consummation of such transaction is included in the Liberty Media Group. "Sprint PCS Investment" shall mean the common equity securities (and securities convertible into or exercisable or exchangeable for such common equity securities) of Sprint Corporation acquired by Tele-Communications, Inc. ("TCI") and its affiliates pursuant to that certain Restructuring and Merger Agreement, dated as of May 26, 1998, among TCI, Sprint Corporation, Comcast Corporation and Cox Communications, Inc. (the "PCS Restructuring Agreement") (as well as any indebtedness of Sprint Corporation or any of its affiliates to TCI or any of its affiliates remaining following the consummation of the transactions contemplated by the PCS Restructuring Agreement). "Subsidiary" shall mean, with respect to any Person, any corporation, limited liability company or partnership 50% or more of whose outstanding voting securities or membership or partnership interests, as the case may be, are directly or indirectly owned by such Person. "Trading Day" shall mean each weekday other than any day on which any relevant class or series of capital stock of the corporation is not traded on the New York Stock Exchange or the Nasdaq National Market or in the over-the-counter market. PART C -- PREFERRED STOCK The Preferred Stock may be issued from time to time in one or more series. All shares of Preferred Stock of all series shall rank equally and be identical in all respects except that the Board of Directors is authorized to fix the number of shares in each series, the designation thereof and, subject to the provisions of this Article Third, the relative rights, preferences and limitations of each series and the variations in such rights, preferences and limitations as between series and specifically is authorized to fix with respect to each series: the dividend rate on the shares of such series and the date or dates from which dividends shall be cumulative; the times when, the prices at which, and all other terms and conditions upon which, shares of such series shall be redeemable; the amounts which the holders of shares of such series shall be entitled to receive upon the liquidation, dissolution or winding up of the corporation, which amounts may vary depending on whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates; whether or not the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund and, if so, the extent to and manner in which such purchase, retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or for other corporate purposes and the terms and provisions relative to the operation of the said fund or funds; whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or series or for any class of common shares and, if so, the price of prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same; the restrictions, if any, upon the payment of dividends or making of other distributions on, and upon the purchase or other acquisition of, common shares; the restrictions, if any, upon the creation of indebtedness, and the restrictions, if any, upon the issue of any additional shares ranking on a parity with or prior to the shares of such series in addition to the restrictions provided for in this Article Third; the voting powers, if any, of the shares of such series in addition to the voting powers provided for in this Article Third; and such other rights, preferences and limitations as shall not be inconsistent with this Article Third. All shares of any particular series shall rank equally and be identical in all respects except that shares of any one series issued at different times may differ as to the date from which dividends shall be cumulative. Dividends on shares of Preferred Stock of each series shall be cumulative from the date or dates fixed with respect to such series and shall be paid or declared or set apart for payment for all past dividend periods and for the current dividend period before any dividends (other than dividends payable in common shares) shall be declared or paid or set apart for payment on common shares. Whenever, at any time, full cumulative dividends for all past dividend periods and for the current dividend period shall have been paid or declared and set apart for payment on all then outstanding shares of Preferred Stock and all requirements with respect to any purchase, retirement or sinking fund or funds for all series of Preferred Stock shall have been complied with, the Board of Directors may declare dividends on the common shares and the shares of Preferred Stock shall not be entitled to share therein. Upon any liquidation, dissolution or winding up of the corporation, the holders of shares of Preferred Stock of such series shall be entitled to receive the amounts to which such holders are entitled as fixed with respect to such series, including all dividends accumulated to the date of final distribution, before any payment or distribution of assets of the corporation shall be made to or set apart for the holders of common shares and after such payments shall have been made in full to the holders of shares of Preferred Stock, the holders of common shares shall be entitled to receive any and all assets remaining to be paid or distributed to shareholders and the holders of shares of Preferred Stock shall not be entitled to share therein. For the purposes of this paragraph, the voluntary sale, conveyance, lease, exchange or transfer of all or substantially all the property or assets of the corporation or a consolidation or merger of the corporation with one or more other corporations (whether or not the corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. The aggregate amount which all shares of Preferred Stock outstanding at any time shall be entitled to receive on involuntary liquidation, dissolution or winding up shall not exceed $8,000,000,000. So long as any shares of Preferred Stock are outstanding, the corporation will not (a) without the affirmative vote or consent of the holders of at least 6/6% 2/3% of all the shares of Preferred Stock at the time outstanding, (i) authorize shares of stock ranking prior to the shares of Preferred Stock, or (ii) change any provision of this Article Third so to affect adversely the shares of Preferred Stock; (b) without the affirmative vote or consent of the holders of at least 66 2/3% of any series of Preferred Stock at the time outstanding, change any of the provisions of such series so as to affect adversely the shares of such series; (c) without the affirmative vote or consent of the holders of at least a majority of all the shares of Preferred Stock at the time outstanding, (i) increase the authorized number of shares of Preferred Stock or (ii) increase the authorized number of shares of any class of stock ranking on a parity with the Preferred Stock. Whenever, at any time or times, dividends payable on shares of Preferred Stock shall be in default in an aggregate amount equivalent to six full quarterly dividends on any series of Preferred Stock at the time outstanding, the number of directors then constituting the Board of Directors of the corporation shall ipso facto be increased by two, and the outstanding shares of Preferred Stock shall, in addition to any other voting rights, have the exclusive right, voting separately as a class and without regard to series, to elect two directors of the corporation to fill such newly created directorships and such right shall continue until such time as all dividends accumulated on all shares of Preferred Stock to the latest dividend payment date shall have been paid or declared and set apart for payment. No holder of shares of Preferred Stock of any series, irrespective of any voting or other right of shares of such series, shall have, as such holder, any preemptive right to purchase any other shares of the corporation or any securities convertible into or entitling the holder to purchase such other shares. If in any case the amounts payable with respect to any requirements to retire shares of Preferred Stock are not paid in full in the case of all series with respect to which such requirements exist, the number of shares to be retired in each series shall be in proportion to the respective amounts which would be payable on account of such requirements if all amounts payable were paid in full. **** FOURTH: The manner in which the foregoing amendment of said Certificate of Incorporation of the corporation was authorized was by the vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have subscribed this document on March 9, 1999 and do hereby affirm, under the penalties of perjury, that the statements contained herein have been examined by us and are true and correct. By: /s/ Marilyn J. Wasser --------------------------------- Name: Marilyn J. Wasser Title: Vice President By: /s/ Robert S. Feit --------------------------------- Name: Robert S. Feit Title: Assistant Secretary CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION UNDER SECTION 805 OF THE NEW YORK STATE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and an Assistant Secretary respectively, of AT&T Corp., do hereby certify as follows: FIRST: The name of the corporation is AT&T Corp. SECOND: The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885 under the name American Telephone and Telegraph Company. THIRD: (a) The Certificate of Incorporation of the corporation is hereby amended to create one new class of common stock, AT&T Wireless Group common stock, having the number, designation, relative rights, preferences, and limitations as set forth herein. (b) To effect the foregoing, Article THIRD is hereby amended as set forth below: PART A OF ARTICLE THIRD IS HEREBY AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS: PART A - AUTHORIZED SHARES The aggregate number of shares which the corporation is authorized to issue is fourteen billion eight hundred fifty million (14,850,000,000) shares, consisting of one hundred million (100,000,000) preferred shares having a par value of $1.00 per share ("Preferred Stock") and fourteen billion seven hundred fifty million (14,750,000,000) common shares, of which six billion (6,000,000,000) common shares shall be Common Stock having a par value of $1.00 per share ("Common Stock"), two billion five hundred million (2,500,000,000) common shares shall be Class A Liberty Media Group Common Stock having a par value of $1.00 per share ("Class A Liberty Media Group Common Stock"), two hundred fifty million (250,000,000) common shares shall be Class B Liberty Media Group Common Stock having a par value of $1.00 per share ("Class B Liberty Media Group Common Stock") and six billion (6,000,000,000) common shares shall be Wireless Group Common Stock having a par value of $1.00 per share ("Wireless Group Common Stock"). The Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock are collectively referred to herein as the "Liberty Media Group Common Stock". The authorized shares of Class B Liberty Media Group Common Stock will only be issued (i) pursuant to the Agreement and Plan of Restructuring and Merger, dated June 23, 1998 (the "Merger Agreement"), among Tele-Communications, Inc., Italy Merger Corp. and the corporation, (ii) upon conversion, exercise or exchange of Pre-Merger Convertible Securities (as defined in paragraph 9 of Part B of this Article Third), (iii) in a subdivision (by stock split or otherwise) of outstanding shares of Class B Liberty Media Group Common Stock, or (iv) as a stock dividend or share distribution (as defined in paragraph 4 of Part B of this Article Third). Part B of Article THIRD shall remain unchanged. Part C of Article THIRD is hereby redesignated as Part D of Article THIRD and shall otherwise remain unchanged, and a new Part C shall be added to Article THIRD, so that Part C of Article THIRD shall read in its entirety as follows: PART C - WIRELESS GROUP COMMON STOCK 1. Voting Rights. (a) Subject to the following two sentences and to paragraph 1(c) of this Part C of this Article Third, holders of Wireless Group Common Stock shall be entitled to a number of votes or fraction of a vote for each share of such stock held (calculated to the nearest 1/10), on all matters presented to such shareholders, the numerator of which shall be the price per share of Wireless Group Common Stock used in the initial public offering of Wireless Group Common Stock and the denominator of which shall be the average daily Market Value of a share of Common Stock during the 10-Trading Day period ending on the 20th Trading Day prior to the effective date of the registration statement for such initial public offering. In the event that AT&T Wireless Group tracking stock is first distributed without an initial public offering, holders of Wireless Group Common Stock shall be entitled to a number of votes or fraction of a vote for each share of such stock held (calculated to the nearest 1/10), on all matters presented to such shareholders, the numerator of which shall be the average daily Market Value of a share of Wireless Group Common Stock during the 10-Trading Day period beginning on the 20th Trading Day following such initial distribution and the denominator of which shall be the average daily Market Value of a share of Common Stock during the 10-Trading Day period beginning on the 20th Trading Day following such initial distribution. Notwithstanding the foregoing, if the fraction resulting from the applicable formula set forth in the preceding two sentences is greater than 0.8 and less than 1.2, holders of Wireless Group Common Stock shall be entitled to one vote for each share of such stock held, and if the fraction resulting from the applicable formula set forth in the preceding two sentences is greater than 0.4 and less than 0.6, holders of Wireless Group Common Stock shall be entitled to one-half of a vote for each share of such stock held, in each case on all matters presented to such shareholders. (b) Except as may otherwise be required by the laws of the State of New York or, with respect to additional or special voting rights (which may include, without limitation, rights of any such holders of any such class or series to elect one or more directors voting separately as a class) of any class or series of Preferred Stock or any other class of common shares, in this Certificate of Incorporation of the corporation, as the same may be amended from time to time (this "Certificate") (including the terms of the Liberty Media Group Common Stock, any class or series of Preferred Stock and any resolution or resolutions providing for the establishment of such class or series pursuant to authority vested in the Board of Directors by this Certificate and the terms of any other class of common shares), the holders of shares of Common Stock, the holders of shares of Wireless Group Common Stock, the holders of shares of Class A Liberty Media Group Common Stock, the holders of shares of Class B Liberty Media Group Common Stock, the holders of shares of each other class of common shares, if any, entitled to vote thereon, and the holders of shares of each class or series of Preferred Stock, if any, entitled to vote thereon, shall vote as one class with respect to all matters to be voted on by shareholders of the corporation, and no separate vote or consent of the holders of shares of Common Stock, the holders of shares of Wireless Group Common Stock, the holders of shares of Class A Liberty Media Group Common Stock, the holders of shares of Class B Liberty Media Group Common Stock or the holders of shares of any such class of common shares or any such class or series of Preferred Stock shall be required for the approval of any such matter, except, in the case of Liberty Media Group Common Stock, under the circumstances described in paragraph 1(b) of Part B of this Article Third. (c) If the corporation shall in any manner subdivide (by stock split or otherwise) or combine (by reverse stock split or otherwise) the outstanding shares of Common Stock, Wireless Group Common Stock or Liberty Media Group Common Stock, or pay a stock dividend in shares of any class to holders of that class or shall otherwise effect a share distribution (as defined in paragraph 3 of this Part C of this Article Third) of Common Stock, Wireless Group Common Stock or Liberty Media Group Common Stock, the per share voting rights of Common Stock and Liberty Media Group Common Stock specified in paragraph 1(a) of Part B of this Article Third and/or the per share voting rights of Wireless Group Common Stock specified in paragraph 1(a) of this Part C of this Article Third shall be appropriately adjusted so as to avoid any dilution in the aggregate voting rights of any one class relative to the other classes. 2. Dividends. (a) DIVIDENDS ON COMMON STOCK. Dividends on Common Stock may be declared and paid only to the extent of (i) the assets of the corporation legally available therefor minus (ii) the sum of (A) the Liberty Media Group Available Dividend Amount (as defined in paragraph 9 of Part B of this Article Third), and (B) the Wireless Group Available Dividend Amount (such amount available for the payment of dividends on Common Stock is referred to in this Part C of this Article Third as the "Common Stock Available Dividend Amount(W)"). (b) DIVIDENDS ON WIRELESS GROUP COMMON STOCK. Dividends on Wireless Group Common Stock may be declared and paid only out of the lesser of (i) the excess, if any, of (A) the assets of the corporation legally available therefor, over (B) the Liberty Media Group Available Dividend Amount, and (ii) the Wireless Group Available Dividend Amount. Concurrently with the payment of any dividend on shares of Wireless Group Common Stock, at the election of the Board of Directors, either (x) the Common Stock Group(W) shall receive from the Wireless Group an aggregate payment of the same kind of cash and/or property that is the subject of such dividend, which payment shall be equal to the excess, if any, of (i) the quotient obtained by dividing (A) the aggregate amount of such dividend, as determined by the Board of Directors, by (B) the Wireless Group Allocation Fraction, over (ii) the aggregate amount of such dividend, as so determined, or (y) the Wireless Group Allocation Fraction will be adjusted as described in paragraph 9 of this Part C of this Article Third. The payment to be made to the Common Stock Group(W) pursuant to the preceding sentence may, at the discretion of the Board of Directors, be reflected by an allocation or by a direct transfer of cash or other property. (c) DISCRIMINATION BETWEEN OR AMONG CLASSES OF COMMON SHARES. The Board of Directors, subject to the provisions of paragraphs 2(a) and 2(b) of this Part C of this Article Third and paragraph 3(b) of Part B of this Article Third, shall have the sole authority and discretion to declare and pay dividends (or to refrain from declaring or paying the same) exclusively to the holders of Common Stock, exclusively to the holders of Wireless Group Common Stock, exclusively to the holders of Liberty Media Group Common Stock, exclusively to the holders of any other class of common shares or to the holders of any two or more of such classes in equal or unequal amounts, notwithstanding the relationship between the Common Stock Available Dividend Amount(W), the Wireless Group Available Dividend Amount and the Liberty Media Group Available Dividend Amount, the respective amounts of prior dividends declared on, or the liquidation rights of, Common Stock, Wireless Group Common Stock, Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, or any other factor. 3. Share Distributions. Subject to the provisions of paragraph 4 of Part B of this Article Third, the corporation may declare and pay a distribution consisting of shares of Common Stock, Wireless Group Common Stock or any other securities of the corporation or any other Person (hereinafter sometimes called a "share distribution") to holders of Common Stock or Wireless Group Common Stock only in accordance with this paragraph 3 of this Part C of this Article Third. (a) DISTRIBUTIONS ON COMMON STOCK OR WIRELESS GROUP COMMON STOCK. Except as set forth in paragraph 4 of Part B of this Article Third, the corporation may declare and pay a share distribution to holders of Common Stock, Wireless Group Common Stock or any other class of common shares (other than Liberty Media Group Common Stock) consisting of any securities of the corporation, any Subsidiary of the corporation, or any other Person, including, without limitation, a share distribution consisting of shares of any class or series of Preferred Stock or shares of Common Stock, Wireless Group Common Stock or any other class of common shares (other than Liberty Media Group Common Stock) (or Convertible Securities convertible into or exercisable or exchangeable for shares of any class or series of Preferred Stock or shares of Common Stock, Wireless Group Common Stock or any other class of common shares (other than Liberty Media Group Common Stock)). Concurrently with the making of any share distribution with respect to Wireless Group Common Stock, at the election of the Board of Directors, either (x) the Common Stock Group(W) shall receive from the Wireless Group an aggregate payment of the same kind of property that is the subject of such distribution, which payment shall be equal to the excess, if any, of (i) the quotient obtained by dividing (A) the aggregate amount of such distribution, as determined by the Board of Directors, by (B) the Wireless Group Allocation Fraction, over (ii) the aggregate amount of such dividend, as so determined, or (y) the Wireless Group Allocation Fraction shall be adjusted as described in paragraph 9 of this Part C of this Article Third. Any payment to be made to the Common Stock Group(W) pursuant to the preceding sentence may, at the discretion of the Board of Directors, be reflected by an allocation or by a direct transfer of cash or other property. (b) DISCRIMINATION BETWEEN OR AMONG CLASSES OF COMMON SHARES. The Board of Directors, subject to the foregoing provisions of this paragraph 3 of this Part C of this Article Third and the provisions of paragraph 4 of Part B of this Article Third, shall have the sole authority and discretion to declare and pay (or to refrain from declaring or paying) share distributions exclusively to holders of Common Stock, exclusively to holders of Wireless Group Common Stock, exclusively to holders of Liberty Media Group Common Stock, exclusively to the holders of any other class of common shares or to holders of any two or more of such classes in equal or unequal amounts, notwithstanding the relationship between the Common Stock Available Dividend Amount(W), the Wireless Group Available Dividend Amount and the Liberty Media Group Available Dividend Amount, the respective amounts of prior share distributions declared on, or the liquidation rights of, Common Stock, Wireless Group Common Stock, Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock or any other factor. 4. Exchange of Wireless Group Common Stock. (a) EXCHANGE AT OPTION OF BOARD OF DIRECTORS. At any time following either the occurrence of a Tax Event or the second anniversary of the date of initial issuance of any shares of Wireless Group Common Stock (the "Initial Issuance Date"), the Board of Directors, in its sole discretion, may, at any time, effect a recapitalization of the corporation (a "Board Required Exchange") by declaring that all of the outstanding shares of Wireless Group Common Stock shall be exchanged for fully paid and nonassessable shares of Common Stock in accordance with the Exchange Rate. In addition, at any time following the Initial Issuance Date, so long as all of the assets and liabilities included in the Wireless Group are held, directly or indirectly, by one or more Qualifying Subsidiaries of the corporation (which shall not include any Subsidiary that is a part of the Liberty Media Group as defined in paragraph 9 of Part B of this Article Third) that hold no other material assets or liabilities (the "Wireless Group Subsidiaries"), the Board of Directors may, subject to the availability of assets of the corporation legally available therefor, effect a Board Required Exchange by exchanging, on a pro rata basis, all of the outstanding shares of Wireless Group Common Stock in exchange for an aggregate number of outstanding fully paid and nonassessable shares of common stock of such Wireless Group Subsidiary or Subsidiaries at the applicable Exchange Rate, provided that no such exchange may occur unless the exchange is tax free to the holders of Wireless Group Common Stock (except with respect to any cash received by such holders in lieu of fractional shares). For purposes of this paragraph 4 of this Part C of this Article Third, the term "Exchange Shares" shall mean the shares of Common Stock or shares of the one or more Wireless Group Subsidiaries, as the case may be, into which shares of Wireless Group Common Stock may be exchanged pursuant to a Board Required Exchange. (b) EXCHANGE IN CONNECTION WITH CERTAIN SIGNIFICANT TRANSACTIONS. In the event of a Disposition other than a Wireless Group Related Business Transaction by the corporation in a transaction or series of related transactions of all or substantially all of the properties and assets (as defined below) of the Wireless Group to any Person(s) or group(s) of which the corporation is not a majority owner (whether by merger, consolidation, sale of assets or stock, liquidation, dissolution, winding up or otherwise) (a "Significant Transaction"), effective upon the consummation of such sale, transfer, assignment or other disposition and automatically without any action on the part of the corporation or the Board of Directors or on the part of the holders of shares of Wireless Group Common Stock, the corporation shall be recapitalized (a "Significant Transaction Exchange") by exchanging all outstanding shares of Wireless Group Common Stock for, at the sole discretion of the Board of Directors, either (i) fully paid and nonassessable shares of Common Stock at the Exchange Rate or (ii) other consideration, as described in paragraph 4(c) of this Part C of this Article Third. Notwithstanding the preceding sentence, the corporation shall be under no obligation to effect a Significant Transaction Exchange that it might otherwise be required to effect pursuant to such sentence (and the Exchange Rate shall not apply) if (i) the underlying Significant Transaction is conditioned upon the affirmative vote of a majority of the holders of Wireless Group Common Stock, voting as a separate class, (ii) in connection with a spin-off or similar disposition of the corporation's entire interest in the Wireless Group to the holders of Wireless Group Common Stock, including any such disposition that is made in connection with a Board Required Exchange, or (iii) in connection with the liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary. (c) ALTERNATE CONSIDERATION IN CONNECTION WITH SIGNIFICANT TRANSACTION EXCHANGE. In connection with any Significant Transaction Exchange, the corporation may, at the sole discretion of the Board of Directors, (i) in lieu of issuing shares of Common Stock in exchange for shares of Wireless Group Common Stock, either (x) subject to the limitations described in paragraph 2(b) of this Part C of this Article Third and to the other provisions described in this paragraph 4(c) of this Part C of this Article Third, declare and pay a dividend in cash and/or in securities or other property (determined as provided below) to holders of the outstanding shares of Wireless Group Common Stock equally on a share for share basis in an aggregate amount equal to the Wireless Group Net Proceeds of such Significant Transaction; or (y) provided that there are assets of the corporation legally available therefor and to the extent the Wireless Group Available Dividend Amount would have been sufficient to pay a dividend in lieu thereof as described in clause (x) of this paragraph 4(c) of this Part C of this Article Third, then (A) if such Significant Transaction involves the Disposition of all (not merely substantially all) of the properties and assets of the Wireless Group, redeem all outstanding shares of Wireless Group Common Stock in exchange for cash and/or securities or other property (determined as provided below) in an aggregate amount equal to the Wireless Group Net Proceeds; or (B) if such Significant Transaction involves the Disposition of substantially all (but not all) of the properties and assets of the Wireless Group, apply an aggregate amount of cash and/or securities or other property (determined as provided below) equal to the Wireless Group Net Proceeds to the redemption of outstanding shares of Wireless Group Common Stock, the number of shares to be redeemed to equal the lesser of (1) the whole number nearest the number determined by dividing the aggregate amount so allocated to the redemption of Wireless Group Common Stock by the average Market Value of one share of Wireless Group Common Stock during the 10-Trading Day period beginning on the 15th Trading Day following the consummation of such Disposition, and (2) the number of shares of Wireless Group Common Stock outstanding, and (ii) in lieu of issuing solely shares of Common Stock in exchange for shares of Wireless Group Common Stock, subject to the limitations described in paragraph 2(b) of this Part C of this Article Third and to the other provisions described in paragraph 4(c) of this Part C of this Article Third, combine the issuance of shares of Common Stock in exchange for shares of Wireless Group Common Stock with the payment of a dividend on or the redemption of shares of Wireless Group Common Stock for cash and/or other securities or other property as described below. In the event that the Board of Directors elects the option described in (ii) of the preceding paragraph, the outstanding shares of Wireless Group Common Stock exchanged for fully paid and nonassessable shares of Common Stock shall be exchanged at the Exchange Rate and a dividend shall be paid on all the remaining shares of Wireless Group Common Stock equally on a share for share basis, or some or all of the remaining outstanding shares of Wireless Group Common Stock shall be exchanged for cash and/or other securities or other property, as follows. The aggregate amount of such dividend, in the case of a dividend, or the portion of the Wireless Group Net Proceeds to be applied to such an exchange, in the case of an exchange, shall equal (A) an amount equal to the total Wireless Group Net Proceeds multiplied by (B) one minus a fraction, the numerator of which shall be the number of shares of Wireless Group Common Stock exchanged for shares of Common Stock and the denominator of which shall be the total number of outstanding shares of Wireless Group Common Stock. In the event of an exchange, if the Significant Transaction involves the Disposition of all (not merely substantially all) of the properties and assets of the Wireless Group, then all remaining outstanding shares of Wireless Group Common Stock will be redeemed in exchange for cash and/or securities or other property in an aggregate amount equal to the portion of the Wireless Group Net Proceeds to be applied to the exchange. If the Significant Transaction involves the Disposition of substantially all (but not all) of the properties and assets of the Wireless Group, then the portion of the Wireless Group Net Proceeds to be applied to the exchange will be used to redeem a number of shares equal to the lesser of (1) the whole number nearest the number determined by dividing the aggregate amount so allocated to the redemption of Wireless Group Common Stock by the average Market Value of one share of Wireless Group Common Stock during the 10-Trading Day period beginning on the 15th Trading Day following consummation of the Disposition, and (2) the number of shares of Wireless Group Common Stock outstanding. For purposes of this paragraph 4 of this Part C of this Article Third, in the case of a Significant Transaction involving a Disposition of properties and assets in a series of related transactions, such Disposition shall not be deemed to have been consummated until the consummation of the last of such transactions. Any exchange described in this paragraph 4 of this Part C of this Article Third shall be effected in accordance with the applicable provisions set forth in paragraph 5 of this Part C of this Article Third. In the event that, at the time of any Significant Transaction, there are outstanding any Convertible Securities convertible into or exercisable for shares of Wireless Group Common Stock that would give the holders rights to receive any dividend or exchange consideration related to the Significant Transaction upon exercise, conversion or otherwise, or would adjust as a result of such dividend or exchange to give the holder equivalent economic rights, then the shares of Wireless Group Common Stock underlying such Convertible Securities will be taken into account for purposes of determining the terms of any dividend payment or exchange effected in lieu of a Significant Transaction Exchange. (d) PAYMENT TO COMMON STOCK GROUP(W). Concurrently with the payment of any dividend referred to in paragraph 4(c) of this Part C of this Article Third, at the election of the Board of Directors, either (A) the Common Stock Group(W) shall receive from the Wireless Group an aggregate payment of the same kind of property that is the subject of such dividend, which payment shall be equal to the excess of (i) the quotient obtained by dividing (x) the aggregate amount of such dividend, as determined by the Board of Directors, by (y) the Wireless Group Allocation Fraction, over (ii) the aggregate amount of such dividend, as so determined, or (B) the Wireless Group Allocation Fraction will be adjusted as described in paragraph 9 of this Part C of this Article Third. Any payment to be made to the Common Stock Group(W) pursuant to the preceding sentence may, at the discretion of the Board of Directors, be reflected by an allocation or by a direct transfer of cash or other property. (e) EXCHANGE RATE. For purposes of this paragraph 4 of this Part C of this Article Third, the term "Exchange Rate" shall mean the number of Exchange Shares for which each share of Wireless Group Common Stock shall be exchangeable pursuant to a Board Required Exchange or a Significant Transaction Exchange, determined as follows. If the shares of Wireless Group Common Stock are to be exchanged for shares of Common Stock, each share of Wireless Group Common Stock shall be exchangeable for such number of shares of Common Stock (calculated to the nearest 1/10,000), subject to paragraph 5 below, equal to 110% of the ratio of the Average Market Price Per Share of such Wireless Group Common Stock to the Average Market Price Per Share of Common Stock. For purposes of computing the Exchange Rate, the "Average Market Price Per Share" of Common Stock or Wireless Group Common Stock, as the case may be, shall mean (i) in the case of a Board Required Exchange, the average of the daily Market Value per share for such Common Stock or Wireless Group Common Stock for the 40 consecutive Trading Days ending on the 15th Trading Day prior to the date an Exchange Notice is mailed, or (ii) in the case of a Significant Transaction Exchange, the average of the daily Market Value per share for such Common Stock or Wireless Group Common Stock for the 10 consecutive Trading Days beginning on the 15th Trading Day following consummation of the Significant Transaction. If the shares of Wireless Group Common Stock are to be exchanged for shares of one or more Wireless Group Subsidiaries, such shares of Wireless Group Common Stock shall be exchanged, on a pro rata basis, for an aggregate number of outstanding fully paid and nonassessable shares of common stock of each such Wireless Group Subsidiary equal to the number of outstanding shares of common stock of such Subsidiary held by the corporation multiplied by the Wireless Group Allocation Fraction and, if the Board of Directors so determines, the remaining shares of such Subsidiary shall be distributed on a pro rata basis to the holders of shares of Common Stock (or shares of Common Stock shall be exchanged for such remaining shares of such Subsidiary); provided that no such distribution (or mandatory exchange) may occur unless the distribution (or mandatory exchange) is tax free to the holders of Common Stock (except with respect to any cash received by such holders in lieu of fractional shares). If at the time of such an exchange for shares of one or more Wireless Group Subsidiaries, there are outstanding any Convertible Securities convertible into or exercisable for shares of Wireless Group Common Stock that would become exercisable or convertible for shares of one or more Wireless Group Subsidiaries as a result of such exchange, and the obligation to issue such shares under such options, warrants, convertible securities or similar rights is not assumed or otherwise provided for by one or more Wireless Group Subsidiaries, then the shares of Wireless Group Common Stock underlying such Convertible Securities will be taken into account for purposes of determining the Exchange Rate for such exchange. For purposes of this Paragraph 4 of this Part C of this Article Third, "substantially all of the properties and assets" of the Wireless Group as of any date shall mean a portion of such properties and assets that represents at least 80% of the Fair Value of the properties and assets attributed to the Wireless Group as of such date. 5. Certain Procedures Relating to Exchanges. (a) The Board of Directors may, in its sole discretion, elect to issue fractional Exchange Shares in connection with an exchange or to make a cash payment in lieu of fractional shares, as described below. If the Board of Directors elects not to issue fractional Exchange Shares, then no such fractional shares shall be issued in connection with the exchange of shares of Wireless Group Common Stock into Exchange Shares, and, in lieu thereof, each holder of Wireless Group Common Stock who would otherwise be entitled to a fractional interest of an Exchange Share shall, upon surrender of such holder's certificate or certificates representing shares of Wireless Group Common Stock, receive a cash payment (without interest) (the "Fractional Payment") equal to (i) in the case of an exchange for shares of Common Stock, the product resulting from multiplying (A) the fraction of a share of Common Stock to which such holder would otherwise have been entitled by (B) the Average Market Price Per Share of Common Stock on the Exchange Date, or (ii) in the case of an exchange for shares of one or more Wireless Group Subsidiaries, such value as is determined by the Board of Directors. (b) No adjustments in respect of dividends shall be made upon the exchange of any shares of Wireless Group Common Stock; provided, however, that, if the Exchange Date with respect to Wireless Group Common Stock shall be subsequent to the record date for the payment of a dividend or other distribution thereon or with respect thereto but prior to the payment or distribution thereof, the registered holders of such shares at the close of business on such record date shall be entitled to receive the dividend or other distribution payable on such shares on the date set for payment of such dividend or other distribution, notwithstanding the exchange of such shares or the corporation's default in payment of the dividend or distribution due on such date. (c) At such time or times as the corporation exercises its right to cause a Board Required Exchange, and at the time of any Significant Transaction Exchange, the corporation shall give notice of such exchange to the holders of Wireless Group Common Stock whose shares are to be exchanged, by mailing by first-class mail a notice of such exchange (an "Exchange Notice"), in the case of an exchange at the discretion of the Board of Directors, not less than 30 nor more than 60 days prior to the date fixed for such exchange (the "Exchange Date"), and, in the case of any other required exchange, as soon as practicable before or after the Exchange Date, in either case, to their last addresses as they appear upon the corporation's books. Each such Exchange Notice shall specify the Exchange Date and the Exchange Rate applicable to such exchange, and shall state that issuance of certificates representing the applicable type of Exchange Shares to be received upon exchange of shares of Wireless Group Common Stock shall be upon surrender of certificates representing such shares of Wireless Group Common Stock. (d) Before any holder of shares of Wireless Group Common Stock shall be entitled to receive certificates representing such Exchange Shares, such holder must surrender, at such office as the corporation shall specify, certificates for such shares of Wireless Group Common Stock duly endorsed to the corporation or in blank or accompanied by proper instruments of transfer to the Corporation or in blank, unless the corporation shall waive such requirement. The corporation shall, as soon as practicable after such surrender of certificates representing such shares of Wireless Group Common Stock, issue and deliver, at the office of the transfer agent representing Exchange Shares, to the holder for whose account such shares of Wireless Group Common Stock were so surrendered, or to such holder's nominee or nominees, certificates representing the number of Exchange Shares to which such holder shall be entitled, together with the Fractional Payment, if any. (e) From and after any Exchange Date, all rights of a holder of shares of Wireless Group Common Stock shall cease except for the right, upon surrender of the certificates representing such shares of Wireless Group Common Stock, to receive certificates representing Exchange Shares together with a Fractional Payment, if any, as described in paragraphs 5(a) and 5(d) of this Part C of this Article Third and rights to dividends as described in paragraph 5(b) of this Part C of this Article Third. No holder of a certificate that immediately prior to the applicable Exchange Date represented shares of Wireless Group Common Stock shall be entitled to receive any dividend or other distribution with respect to Exchange Shares until surrender of such holder's certificate for a certificate or certificates representing Exchange Shares. Upon surrender, the holder shall receive the amount of any dividends or other distributions (without interest) that were payable with respect to a record date after the Exchange Date, but that were not paid by reason of the foregoing with respect to the number of Exchange Shares represented by the certificate or certificates issued upon such surrender. From and after an Exchange Date applicable to Wireless Group Common Stock, the corporation shall, however, be entitled to treat certificates for Wireless Group Common Stock that have not yet been surrendered for exchange as evidencing the ownership of the number of Exchange Shares for which the shares of Wireless Group Common Stock represented by such certificates have been exchanged, notwithstanding the failure to surrender such certificates. (f) If any certificate for Exchange Shares is to be issued in a name other than that in which the certificate representing shares of Wireless Group Common Stock surrendered in exchange therefor is registered, it shall be a condition of such issuance that the person requesting the issuance pays any transfer or other taxes required by reason of the issuance of certificates for such Exchange Shares in a name other than that of the record holder of the certificate surrendered, or establishes, to the satisfaction of the corporation or its agent, that such tax has been paid or is not applicable. Under no circumstances shall the corporation be liable to a holder of shares of Wireless Group Common Stock for any Exchange Shares or dividends or distributions thereon delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) At the time an Exchange Notice is delivered with respect to any shares of Wireless Group Common Stock, or at the time of the Exchange Date, if earlier, the corporation shall have reserved and kept available, solely for the purpose of issuance upon exchange of the outstanding shares of Wireless Group Common Stock, such number of Exchange Shares as shall be issuable upon the exchange of the number of shares of Wireless Group Common Stock specified or to be specified in the applicable Exchange Notice, provided that the corporation shall not under any circumstances be precluded from satisfying its obligation in respect of the exchange of the outstanding shares of Wireless Group Common Stock by delivery of purchased Exchange Shares that are held in the treasury of the corporation. 6. Liquidation. In the event of a liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the corporation and subject to the prior payment in full of the preferential amounts to which any class or series of Preferred Stock is entitled, (a) as provided in paragraph 6 of Part B of this Article Third, the holders of the shares of Class A Liberty Media Group Common Stock and the holders of the shares of Class B Liberty Media Group Common Stock shall share equally, on a share for share basis, in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of Y/Z for the 20-Trading Day period ending on the Trading Day prior to the date of the public announcement of such liquidation, dissolution or winding up, (b) the holders of the shares of Common Stock shall share in the aggregate in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of X/Z for such 20-Trading Day period, (c) the holders of the shares of Wireless Group Common Stock shall share in the aggregate in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of W/Z for such 20-Trading Day period, and (d) if applicable, the holders of the shares of any other class of common shares of the corporation (other than Common Stock, Wireless Group Common Stock or Liberty Media Group Common Stock), on the basis that may be set forth in this Certificate with respect to any such shares, shall share in the aggregate in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of V/Z for such 20-Trading Day period, where Y is the aggregate Market Capitalization of the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, X is the aggregate Market Capitalization of the Common Stock, W is the aggregate Market Capitalization of the Wireless Group Common Stock, V is the aggregate Market Capitalization, if applicable, of any other class of common shares (other than Common Stock, Liberty Media Group Common Stock and Wireless Group Common Stock), and Z is the aggregate Market Capitalization of (i) the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, (ii) the Common Stock, (iii) the Wireless Group Common Stock and (iv) any other class of common shares of the corporation (other than Common Stock, Liberty Media Group Common Stock and Wireless Group Common Stock). Neither the consolidation or merger of the corporation with or into any other corporation or corporations nor the sale, transfer or lease of all or substantially all of the assets of the corporation shall itself be deemed to be a liquidation, dissolution or winding up of the corporation within the meaning of this paragraph 6 of this Part C of this Article Third. Notwithstanding the foregoing, any transaction or series of related transactions that results in all of the assets and liabilities included in the Wireless Group being held by one or more Wireless Group Subsidiaries, and the distribution of some or all of the shares of such Wireless Group Subsidiaries (and no other material assets or liabilities) to the holders of the outstanding Wireless Group Common Stock shall not constitute a voluntary or involuntary liquidation, dissolution or winding up of the corporation for purposes of this paragraph 6 of this Part C of this Article Third, but shall be subject to paragraph 4 of this Part C of this Article Third. Notwithstanding the foregoing, any transaction or series of related transactions that results in all of the assets and liabilities included in the Liberty Media Group being held by one or more Liberty Media Group Subsidiaries (as defined in paragraph 5(a) of Part B of this Article Third), and the distribution of such Liberty Media Group Subsidiaries (and no other material assets or liabilities) to the holders of the outstanding Liberty Media Group Common Stock shall not constitute a voluntary or involuntary liquidation, dissolution or winding up of the corporation for purposes of this paragraph 6 of this Part C of this Article Third, but shall be subject to paragraph 5(a) of Part B of this Article Third. 7. Determinations by the Board of Directors. Any determinations made by the Board of Directors under any provision of this Part C of this Article Third shall be final and binding on all shareholders of the corporation, except as may otherwise be required by law. The corporation shall prepare a statement of any determination by the Board of Directors, respecting the fair market value of any properties, assets or securities, and shall file such statement with the Secretary of the corporation. 8. Adjustment of the Wireless Group Allocation Fraction. (a) The denominator of the Wireless Group Allocation Fraction shall be adjusted from time to time as deemed appropriate by the Board of Directors (i) to reflect subdivisions (by stock split or otherwise) and combinations (by reverse stock split or otherwise) of Wireless Group Common Stock and stock dividends payable in shares of Wireless Group Common Stock, (ii) to reflect the fair market value of contributions or allocations by the corporation of cash or property or other assets or liabilities from the Common Stock Group(W) to the Wireless Group (or vice versa), or of cash or property or other assets or liabilities of the Common Stock Group(W) to, or for the benefit of, employees of the Wireless Group in connection with employee benefit plans or arrangements of the corporation or any of its subsidiaries (or vice versa), (iii) to reflect the number of shares of capital stock of the corporation contributed to, or for the benefit of, employees of the Wireless Group in connection with benefit plans or arrangements of the corporation or any of its Subsidiaries, (iv) to reflect repurchases by the corporation of shares of Wireless Group Common Stock for the account of the Wireless Group, (v) to reflect issuances of Wireless Group Common Stock for the account of the Wireless Group, (vi) to reflect dividends or other distributions to holders of the Wireless Group Common Stock to the extent no payment is made to the Common Stock Group(W), and (vii) under such other circumstances as the Board of Directors determines appropriate to reflect the economic substance of any other event or circumstance, provided that, in each case, the adjustment shall be made in a manner that is fair and equitable to holders of Common Stock and Wireless Group Common Stock (and intended to reflect the relative deemed economic ownership interest, if any, of the Common Stock Group(W) in the Wireless Group). Any adjustment made by the Board of Directors pursuant to the preceding sentence shall, subject to the foregoing, be at the sole discretion of the Board of Directors, and all such determinations shall be final and binding on all shareholders of the corporation. For purposes of this paragraph 8 of this Part C of this Article Third, the consideration paid by the Common Stock Group(W) to acquire any assets or other property or contributed or allocated to the Wireless Group shall be presumed to be the "fair market value" as of its acquisition. (b) Without duplication of any adjustment pursuant to paragraph 8(a) of this Part C of this Article Third, in the event that the corporation shall issue shares of Wireless Group Common Stock for the account of the Wireless Group, then the denominator of the Wireless Group Allocation Fraction shall be increased by the number of shares of Wireless Group Common Stock so issued. (c) Without duplication of any adjustment pursuant to paragraph 8(a) of this Part C of this Article Third, if, in connection with any share issuance described in paragraph 8(b) of this Part C of this Article Third, or otherwise, the corporation contributes or allocates cash or other property or assets from the Common Stock Group(W) to the Wireless Group, the denominator of the Wireless Group Allocation Fraction shall be increased (or further increased) by an amount obtained by dividing (i) the fair market value of such cash, property or assets (as determined by the Board of Directors) by (ii) the net per share offering price of the Wireless Group Common Stock. 9. Certain Definitions. Unless the context otherwise requires, the terms defined in this paragraph 9 of this Part C of this Article Third shall have, for all purposes of this Part C of this Article Third, the meanings herein specified: "Common Stock Group(W)" shall mean, as of any date, the interest of the corporation in all of the businesses in which the corporation is or has been engaged, directly or indirectly (either itself or through direct or indirect subsidiaries, affiliates, joint ventures or other investments or any of their predecessors or successors), and the respective assets and liabilities of the corporation therein, other than (a) the Wireless Group Allocated Portion of the Wireless Group, and (b) any businesses, assets or liabilities of the Liberty Media Group. "Convertible Securities" shall mean any securities of the corporation (other than Liberty Media Group Common Stock) or any Subsidiary of the corporation that are convertible into, exchangeable for or evidence the right to purchase any shares of Common Stock, Wireless Group Common Stock or of any class of Liberty Media Group Common Stock, whether upon conversion, exercise or exchange, or pursuant to anti-dilution provisions of such securities or otherwise. "Disposition" shall mean the sale, transfer, assignment or other disposition (whether by merger, consolidation, sale or contribution of assets or stock, or otherwise) by the corporation (or its successors) or any of its Subsidiaries or properties or assets. Disposition shall not include a merger, consolidation, exchange of shares or other business combination transaction involving the corporation in which the corporation (or its successors) continues, immediately following such transaction, to hold the same, direct and indirect, interest in the business, assets and liabilities comprising the Wireless Group that it held immediately prior to such transaction (other than as a result of any action by any Person included in the Wireless Group). "Fair Value" shall mean, in the case of equity securities or debt securities of a class that has previously been publicly traded for a period of at least three months, the Market Value thereof (if such Market Value, as so defined, can be determined) or, in the case of an equity security or debt security that has not been publicly traded for at least such period, means the fair value per share of stock or per other unit of such other security, on a fully distributed basis, as determined by an independent investment banking firm experienced in the valuation of securities selected in good faith by the Board of Directors; provided, however, that, in the case of property other than securities, the "Fair Value" thereof shall be determined in good faith by the Board of Directors based upon such appraisals or valuation reports of such independent experts as the Board of Directors shall in good faith determine to be appropriate in accordance with good business practice. Any such determination of Fair Value shall be described in a statement filed with the records of the actions of the Board of Directors. "Group" shall mean the Common Stock Group(W), the Liberty Media Group or the Wireless Group. "Initial Issuance Date" shall mean the date of first issuance of any shares of Wireless Group Common Stock. "Market Capitalization" of any class or series of capital stock of the corporation on any Trading Day shall mean the product of (a) the Market Value of one share of such class or series on such Trading Day and (b) the number of shares of such class or series outstanding on such Trading Day. "Market Value" of any class or series of capital stock of the corporation on any day shall mean the average of the high and low reported sales prices regular way of a share of such class or series on such day (if such day is a Trading Day, and, if such day is not a Trading Day, on the Trading Day immediately preceding such day), or, in case no such reported sale takes place on such Trading Day, the average of the reported closing bid and asked prices regular way of a share of such class or series on such Trading Day, in either case, on the New York Stock Exchange or, if the shares of such class or series are not quoted on the New York Stock Exchange on such Trading Day, on the Nasdaq National Market, or, if the shares of such class or series are not quoted on the Nasdaq National Market on such Trading Day, the average of the closing bid and asked prices of a share of such class or series in the over-the-counter market on such Trading Day as furnished by any New York Stock Exchange member firm selected from time to time by the corporation, or, if such closing bid and asked prices are not made available by any such New York Stock Exchange member firm on such Trading Day (including, without limitation, because such securities are not publicly held), the market value of a share of such class or series as determined by the Board of Directors; provided that, for purposes of determining the ratios set forth in paragraph 6 of this Part C of this Article Third, (a) the "Market Value" of any share of Common Stock, Wireless Group Common Stock or of any class of Liberty Media Group Common Stock on any day prior to the "ex" date or any similar date for any dividend or distribution paid or to be paid with respect to Common Stock, Wireless Group Common Stock or such class of Liberty Media Group Common Stock, as applicable, shall be reduced by the fair market value of the per share amount of such dividend or distribution as determined by the Board of Directors, and (b) the "Market Value" of any share of Common Stock, any share of Wireless Group Common Stock or of any class of Liberty Media Group Common Stock on any day prior to (i) the effective date of any subdivision (by stock split or otherwise) or combination (by reverse stock split or otherwise) of outstanding shares of Common Stock, Wireless Group Common Stock or of such class of Liberty Media Group Common Stock, as applicable, or (ii) the "ex" date or any similar date for any dividend or distribution with respect to the Common Stock, Wireless Group Common Stock or any such class of Liberty Media Group Common Stock in shares of Common Stock, Wireless Group Common Stock or such class of Liberty Media Group Common Stock, as applicable, shall be appropriately adjusted to reflect such subdivision, combination, dividend or distribution. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof, or other entity, whether acting in an individual, fiduciary or other capacity. "Qualifying Subsidiary" of a Person shall mean a Subsidiary of such Person in which such Person's ownership and voting interest is sufficient to satisfy the ownership and voting requirements of the Internal Revenue Code of 1986, as amended, and the regulations thereunder, for a distribution of such Person's interest in such Subsidiary to the holders of Wireless Group Common Stock and, in the event that the Wireless Group Allocation Fraction is less than one, the holders of Common Stock (or any such securities into which the Wireless Group Common Stock or the Common Stock may have been converted, reclassified or changed or for which they may have been exchanged), as the case may be, to be tax free to such holders. "Subsidiary" shall mean, with respect to any Person, any corporation, limited liability company or partnership 50% or more of whose outstanding voting securities or membership or partnership interests, as the case may be, are, directly or indirectly, owned by such Person. "Trading Day" shall mean each weekday other than any day on which any relevant class or series of capital stock of the corporation is not available for trading on the New York Stock Exchange or the Nasdaq National Market or in the over-the-counter market. "Tax Event" shall mean receipt by the corporation of an opinion of tax counsel of the corporation's choice, to the effect that, as a result of any amendment to, clarification of, or change (including a prospective change) in, the laws (or any interpretation or application of the laws) of the United States or any political subdivision or taxing authority thereof or therein (including enactment of any legislation and the publication of any judicial or regulatory decision, determination or pronouncement) which amendment, clarification or change is effective, announced, released, promulgated or issued on or after the date of initial issuance of the Wireless Group Common Stock, regardless of whether such amendment, clarification or change is issued to or in connection with a proceeding involving the corporation, the Common Stock Group(W) or the Wireless Group and whether or not subject to appeal, there is more than an insubstantial risk that: (i) for tax purposes, any issuance of Wireless Group Common Stock would be treated as a sale or other taxable disposition by the corporation or any of its Subsidiaries of any of the assets, operations or relevant subsidiaries to which the Wireless Group Common Stock relates, (ii) the existence of the Wireless Group Common Stock would subject the corporation, its Subsidiaries or affiliates, or any of their respective successors or shareholders to the imposition of tax or to other adverse tax consequences, or (iii) for tax purposes, either Common Stock or Wireless Group Common Stock is not or, at any time in the future, will not be treated solely as common stock of the corporation. "Wireless Group" shall mean, as of any date that any shares of Wireless Group Common Stock have been issued and continue to be outstanding, without duplication, the direct or indirect interest of the corporation (either itself or through direct or indirect subsidiaries, affiliates, joint ventures or other investments, or any of their predecessors or successors) (a) in all of the businesses, assets and liabilities reflected in the financial statements of the Wireless Group dated September 30, 1999, publicly filed by the corporation, including any successor to the Wireless Group by merger, consolidation or sale of all or substantially all of its assets (whether or not in connection with a Wireless Group Related Business Transaction), (b) the other assets and liabilities (contingent or otherwise) of the corporation and its Subsidiaries primarily related to the businesses, assets and liabilities described in clause (a) and all net income and net losses arising in respect thereof after such date, (c) all assets, liabilities and businesses acquired by the Wireless Group or acquired by the corporation or any of its Subsidiaries for the account of, or contributed, allocated or otherwise transferred to, the Wireless Group (including the net proceeds of any new issuance for the account of the Wireless Group of any new shares of Wireless Group Common Stock or Convertible Securities), in each case, after the date of such financial statements and as determined by the Board of Directors in accordance with the provisions of paragraph 8 of this Part C of this Article Third, and (d) the proceeds of any Disposition of any of the foregoing; provided, however, that the Wireless Group shall not include (a) any assets, liabilities or businesses disposed of after the date of such financial statements or (b) any assets, liabilities or businesses allocated to the Common Stock Group(W) or otherwise distributed or otherwise transferred from the Wireless Group, whether to the Common Stock Group(W), to holders of shares of Wireless Group Common Stock or otherwise, in each case after the date of such financial statements and as determined by the Board of Directors in accordance with the provisions of paragraph 9 of this Part C of this Article Third. The Wireless Group shall not include any business, assets or liabilities of the Liberty Media Group. "Wireless Group Allocated Portion" shall mean, with respect to the Wireless Group as a whole, or any dividend, distribution, payment, consideration or other amount or allocation requiring apportionment between the holders of Wireless Group Common Stock (other than the corporation and its Subsidiaries), on the one hand, and the Common Stock Group(W), on the other hand, the following: (a) in the case of the Wireless Group as a whole, the proportion of such Group represented by the Wireless Group Allocation Fraction, and (b) in the case of any other amount or allocation, the product of (i) such amount or allocation and (ii) the Wireless Group Allocation Fraction. "Wireless Group Allocation Fraction" shall mean, as of any date of determination, a fraction, the numerator of which shall be the number of shares of Wireless Group Common Stock outstanding on such date and the denominator of which shall be a number initially determined by the Board of Directors, in its sole discretion, prior to the Initial Issuance Date, subject to adjustment from time to time as described in paragraph 9 of this Part C of this Article Third, provided that such fraction shall in no event be greater than one. If the holders of any securities of the corporation or any other Person that are convertible into or exercisable or exchangeable for shares of Wireless Group Common Stock are entitled to participate in any dividend or other distribution with respect to the Wireless Group Common Stock, such shares so issuable upon such conversion, exercise or exchange shall be taken into account in calculating the Wireless Group Allocation Fraction and any amount payable to the Common Stock Group(W) in such manner as the Board of Directors determines to be appropriate. "Wireless Group Available Dividend Amount" shall mean, as of any date, the Wireless Group Allocated Portion of the excess of (a) the amount by which the total assets of the Wireless Group exceed the total liabilities of the Wireless Group as of such date over (b) the sum of (i) the par value of all issued shares of Wireless Group Common Stock and each class or series of Preferred Stock attributed to the Wireless Group, (ii) the amount of the consideration received for any shares of Preferred Stock attributed to the Wireless Group without par value that have been issued, except such part of the consideration therefor as may have been allocated to surplus in a manner permitted by law, and (iii) any amount not included in subclauses (i) and (ii) above that the corporation (by appropriate action of the Board of Directors) has transferred to stated capital specifically in respect of Wireless Group Common Stock, minus (c) all reductions from such sums set forth in clauses (i), (ii) and (iii) above as have been effected in a manner permitted by law; provided, however, that, in the event that the law governing the corporation changes from that governing the corporation on the date the adoption of the Amendment to this Certificate pursuant to which the Wireless Group Common Stock was authorized (whether because of amendment of the applicable law or because of a change in the jurisdiction of incorporation of the corporation through merger or otherwise), the Wireless Group Available Dividend Amount shall mean the amount of dividends, as determined by the Board of Directors, that could be paid by a corporation (governed under such applicable law) having the assets and liabilities of the Wireless Group, an amount of outstanding common stock (and having an aggregate par value) equal to the amount (and aggregate par value) of the outstanding Wireless Group Common Stock and of each class or series of Preferred Stock attributed to the Wireless Group and having an amount of earnings or loss or other relevant corporate attributes as reasonably determined by the Board of Directors in light of all factors deemed relevant by the Board of Directors. "Wireless Group Net Proceeds" shall mean, as of any date, with respect to any Disposition of any of the properties and assets of the Wireless Group, an amount, if any, equal to the Wireless Group Allocated Portion of the gross proceeds of such Disposition after any payment of, or reasonable provision for, (a) any taxes payable by the corporation or any other member of the Common Stock Group in respect of such Disposition or in respect of any mandatory dividend or redemption resulting from such Disposition (or that would have been payable but for the utilization of tax benefits attributable to the Common Stock Group(W) or the Liberty Media Group), (b) any transaction costs borne by the Common Stock Group(W) in connection with such Disposition, including, without limitation, any legal, investment banking and accounting fees and expenses borne by the Common Stock Group(W) in connection with such Disposition, (c) any liabilities and other obligations (contingent or otherwise) of the Wireless Group borne by the Common Stock Group(W) in connection with such Disposition, including, without limitation, any indemnity or guarantee obligations incurred by the Common Stock Group(W) in connection with the Disposition or any liabilities assumed by the Common Stock Group(W) for future purchase price adjustments, and (d) any preferential amounts, accumulated and unpaid dividends and other obligations in respect of Preferred Stock attributed to the Wireless Group. To the extent the proceeds of any Disposition include any securities or other property other than cash, the Board of Directors shall determine the value of such securities or property; provided that the value of any marketable securities included in such proceeds shall be the average of the daily Market Value of such securities for the 10 consecutive Trading Days beginning on the 15th Trading Day following consummation of the Disposition. "Wireless Group Related Business Transaction" shall mean any Disposition of all or substantially all the properties and assets attributed to the Wireless Group in a transaction or series of related transactions that results in the corporation or one or more of its Subsidiaries receiving in consideration of such properties and assets primarily equity securities (including, without limitation, capital stock, debt securities convertible into or exchangeable for equity securities or interests in a general or limited partnership or limited liability company, without regard to the voting power or other management or governance rights associated therewith) of any entity that (a) acquires such properties or assets or succeeds (by merger, formation of a joint venture or otherwise) to the business conducted with such properties or assets or controls such acquiror or successor, and (b) which the Board of Directors determines is primarily engaged or proposes to engage primarily in one or more businesses similar or complementary to the businesses conducted by the Wireless Group prior to such Disposition. FOURTH: (a) The Certificate of Incorporation of the corporation is hereby amended to modify the purposes for which the corporation is formed. (b) To effect the foregoing, Article SECOND is hereby amended to read in its entirety as set forth below: SECOND: The purposes for which the corporation is formed are to engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law of the State of New York, provided that the corporation is not formed to engage in any act or activity which requires the consent or approval of any New York state official, department, board, agency or other body, without such consent or approval first being obtained. FIFTH: The manner in which the foregoing amendment of said Certificate of Incorporation of the corporation was authorized was by the vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of our board of directors. IN WITNESS WHEREOF, we have subscribed this document on March 31, 2000 and do hereby affirm, under the penalties of perjury, that the statements contained herein have been examined by us and are true and correct. By /s/ Marilyn J. Wasser --------------------- Name: Marilyn J. Wasser Title: Vice President By /s/ Robert S. Feit --------------------- Name: Robert S. Feit Title: Assistant Secretary CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF AT&T CORP. UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and Assistant Secretary, respectively, of AT&T Corp., do hereby certify as follows: 1. The name of the corporation is AT&T Corp. The name under which the Corporation was formed is American Telephone and Telegraph Company. 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. Said Certificate of Incorporation is amended to increase the authorized number of common shares of the capital stock of the corporation having a par value of $1 from 14,750,000,000 shares to 16,400,000,000 shares, by increasing the Class A Liberty Media Group Common Stock (as defined below) by 1,500,000,000 and by increasing the Class B Liberty Media Common Stock (as defined below) by 150,000,000. 4. To effect the foregoing, the first paragraph of Article THIRD of said Certificate of Incorporation, relating to the aggregate number of shares of the corporation is authorized to issue, the par value thereof, and the classes into which the shares are divided is hereby stricken out in its entirety, and the following new first paragraph of Article THIRD is substituted in lieu thereof: "The aggregate number of shares which the corporation is authorized to issue is sixteen billion five hundred (16,500,000,000) shares, consisting of one hundred million (100,000,000) preferred shared having a par value of $1.00 per share ("Preferred Stock") and sixteen billion four hundred million (16,400,000,000) common shares, of which six billion (6,000,000,000) common shares shall be Common Stock having a par value of $1.00 per share ("Common Stock"), four billion (4,000,000,000) common shares shall be Class A Liberty Media Group Common Stock having a par value of $1.00 per share ("Class A Liberty Media Group Common Stock"), four hundred million (400,000,000) common shares shall be Class B Liberty Media Group Common Stock having a par value of $1.00 per share ("Class B Liberty Media Group Common Stock"), and six billion (6,000,000,000) common shares shall be Wireless Group Common Stock having a par value of $1.00 per share ("Wireless Group Common Stock"). The Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock are collectively referred to herein as the "Liberty Media Group Common Stock". 5. The manner in which the foregoing amendment of said Certificate of Incorporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have signed this Certificate of Amendment of said Certificate of Incorporation of AT&T Corp. this 30th of May, 2000 and we affirm the statements contained herein as true under penalties of perjury. /s/ Marilyn J. Wasser ----------------------------- Marilyn J. Wasser Vice President and Secretary /s/ Robert A. Feit ----------------------------- Robert A. Feit Assistant Secretary Certificate of Amendment of the Certificate of Incorporation Under Section 805 of the Business Corporation Law We, the undersigned, being a Vice President and an Assistant Secretary, respectively, of AT&T Corp., do hereby certify as follows: FIRST: The name of the corporation is AT&T Corp. SECOND: The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885 under the name American Telephone and Telegraph Company. THIRD: The Certificate of Incorporation of the corporation is hereby amended pursuant to authority vested in the Board of Directors by the Certificate of Incorporation of the corporation, as heretofore amended, and in accordance with Section 502 of the Business Corporation Law, by the addition of the following provision stating the number, designation, relative rights, preferences, and limitations of a series of preferred stock designated as Series E Convertible Preferred Stock: CERTIFICATE OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF SERIES E CONVERTIBLE PREFERRED STOCK Pursuant to the authority expressly granted to and vested in the Board of Directors of the corporation by the provisions of Part D of Article Third of the Certificate of Incorporation of the corporation (the "Certificate of Incorporation"), and Section 502 of the Business Corporation Law of the State of New York, such Board of Directors hereby creates, from the authorized shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock"), of the corporation authorized to be issued pursuant to the Certificate of Incorporation, a series of Preferred Stock, and hereby fixes the designations, relative rights, preferences and limitations of the shares of such series as follows: The series of Preferred Stock hereby established shall consist of 1 million (1,000,000) shares designated as Series E Convertible Preferred Stock. The preferences, relative rights and limitations of such series shall be as follows: 1. Definitions. Unless otherwise defined herein, terms used herein shall have the meanings assigned to them in Section 9 of Part B of Article Third of the Certificate of Incorporation and the following terms shall have the indicated meanings: 1.1 "Board of Directors" shall mean the Board of Directors of the corporation or, with respect to any action to be taken by the Board of Directors, any committee of the Board of Directors duly authorized to take such action. 1.2 "Capital Stock" shall mean any and all shares of corporate stock of a Person (however designated and whether representing rights to vote, rights to participate in dividends or distributions upon liquidation or otherwise with respect to the corporation, or any division or subsidiary thereof, or any joint venture, partnership, corporation or other entity). 1.3 "Certificate" shall mean the certificate of the designations, relative rights, preferences and limitations of Series E Convertible Preferred Stock filed with respect to this resolution with the Secretary of State of the State of New York pursuant to Section 502 of the Business Corporation Law of the State of New York. 1.4 "Closing Price" shall mean the last reported sale price of the Common Stock (or such other class or series of common stock into which shares of this Series are then convertible), regular way, as shown on the Composite Tape of the NYSE, or, in case no such sale takes place on such day, the average of the closing bid and asked prices on the NYSE, or, if the Common Stock (or such other class or series of common stock) is not listed or admitted to trading on the NYSE, on the principal national securities exchange on which such stock is listed or admitted to trading, or, if it is not listed or admitted to trading on any national securities exchange, the last reported sale price of the Common Stock (or such other class or series of common stock), or, in case no such sale takes place on such day, the average of the closing bid and asked prices, in either case as reported by Nasdaq. 1.5 "Common Stock" shall mean the Common Stock, par value $1.00 per share, of the corporation or any other class of stock resulting from (a) successive changes or reclassifications of such stock consisting solely of changes in par value, or from par value to no par value or (b) a subdivision or combination, and in any such case including any shares thereof authorized after the date of the Certificate, together with any associated rights to purchase other securities of the corporation which are at the time represented by the certificates representing such shares. 1.6 "Conversion Date" shall have the meaning set forth in Section 3.5 hereof. 1.7 "Conversion Price" shall have the meaning set forth in Section 3.1(a)(ii) hereof. 1.8 "Conversion Rate" shall have the meaning set forth in Section 3.1(a)(ii) hereof. 1.9 "Converting Holder" shall have the meaning set forth in Section 3.5 hereof. 1.10 "Current Market Price" on any applicable record date or Redemption Date referred to in Section 3 or Section 4 shall mean the average of the daily Closing Prices per share of Common Stock (or such other class or series of common stock into which shares of this Series are then convertible) for the ten (10) consecutive Trading Days ending on the third (3rd) Trading Day immediately preceding such record date, Conversion Date or Redemption Date. 1.11 "Dividend Payment Date" shall have the meaning set forth in Section 2.1 hereof. 1.12 "Effective Time" shall mean the effective time of the Merger. 1.13 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 1.14 "Junior Stock" shall mean the Common Stock, the Class A Liberty Media Group Common Stock, par value $1.00 per share, of the corporation, the Class B Liberty Media Group Common Stock, par value $1.00 per share, of the corporation, the Wireless Group Common Stock, par value $1.00 per share, of the corporation and the shares of any other class or series of stock of the corporation which, by the terms of the Certificate of Incorporation or of the instrument by which the Board of Directors, acting pursuant to authority granted in the Certificate of Incorporation, shall fix the relative rights, preferences and limitations thereof, shall be junior to the Series E Stock in respect of the right to receive dividends or to participate in any distribution of assets other than by way of dividends. 1.15 "Liquidation Value" shall have the meaning set forth in Section 6.2 hereof. 1.16 "MediaOne" shall mean MediaOne Group, Inc., a Delaware corporation. 1.17 "MediaOne Common Stock" shall mean the common stock, par value $0.01 per share, of MediaOne. 1.18 "MediaOne Series E Stock" shall mean the series of preferred stock, par value $1.00 per share, of MediaOne designated as the Series E Convertible Preferred Stock. 1.19 "Merger" shall mean the merger of MediaOne with and into Meteor Acquisition Inc., a Delaware corporation, pursuant to the terms of the Merger Agreement. 1.20 "Merger Agreement" shall mean the Agreement and Plan of Merger, dated as of May 6, 1999, by and among the corporation, Meteor Acquisition Inc., a Delaware corporation, and MediaOne. 1.21 "Nasdaq" shall mean the Nasdaq National Market. 1.22 "NYSE" shall mean the New York Stock Exchange, Inc. 1.23 "Parity Stock" shall mean the shares of any other class or series of stock of the corporation (other than Junior Stock) which, by the terms of the Certificate of Incorporation or of the instrument by which the Board of Directors, acting pursuant to authority granted in the Certificate of Incorporation, shall fix the preferences, relative rights and limitations thereof, shall, in the event that the stated dividends thereon are not paid in full, be entitled to share ratably with the Series E Stock in the payment of dividends, including accumulations, if any, in accordance with the sums which would be payable on such shares if all dividends were declared and paid in full, or shall, in the event that the amounts payable thereon on liquidation are not paid in full, be entitled to share ratably with the Series E Stock in any distribution of assets other than by way of dividends in accordance with the sums which would be payable in such distribution if all sums payable were discharged in full; provided, however, that the term "Parity Stock" shall be deemed to refer (a) in Section 6 hereof, to any stock which is Parity Stock in respect of the distribution of assets; and (b) in Sections 5.1 and 5.2 hereof, to any stock which is Parity Stock in respect of either dividend rights or the distribution of assets and which, pursuant to the Certificate of Incorporation or any instrument in which the Board of Directors, acting pursuant to authority granted in the Certificate of Incorporation, shall so designate, is entitled to vote with the holders of Series E Stock. 1.24 "Prorated Merger Consideration" shall have the meaning set forth in Section 3.1(a)(iii) hereof. 1.25 "Person" shall mean an individual, corporation, limited liability company, partnership, joint venture, association, trust, unincorporated organization or other entity. 1.26 "Preferred Stock" shall mean the class of Preferred Stock, par value $1.00 per share, of the corporation authorized at the date of the Certificate, including any shares thereof authorized after the date of the Certificate. 1.27 "Record Date" shall have the meaning set forth in Section 2.1 hereof. 1.28 "Redemption Date" shall mean the date on which the corporation shall effect the redemption of all or any part of the outstanding shares of Series E Stock pursuant to Section 4.1 hereof. 1.29 "Redemption Price" for each share of Series E Stock called for redemption shall be equal to the sum of (a) the Liquidation Value plus (b) an amount equal to the accrued and unpaid dividends on such share of Series E Stock to the Redemption Date. 1.30 "Redemption Rescission Event" shall mean the occurrence of (a) any general suspension of trading in, or limitation on prices for, securities on the principal national securities exchange on which shares of Common Stock (or such other class or series of common stock into which shares of this Series are then convertible) are registered and listed for trading (or, if shares of Common Stock (or such other class or series of common stock) are not registered and listed for trading on any such exchange, in the over-the-counter market) for more than six-and-one-half (6 1/2) consecutive trading hours, (b) any decline in either the Dow Jones Industrial Average or the Standard & Poor's Index of 500 Industrial Companies (or any successor index published by Dow Jones & Company, Inc. or Standard & Poor's corporation) by either (i) an amount in excess of 10 percent, measured from the close of business on any Trading Day to the close of business on the next succeeding Trading Day during the period commencing on the Trading Day preceding the day notice of any redemption of shares of this Series is given (or, if such notice is given after the close of business on a Trading Day, commencing on such Trading Day) and ending at the Redemption Date or (ii) an amount in excess of 15 percent (or, if the time and date fixed for redemption is more than 15 days following the date on which notice of redemption is given, 20 percent), measured from the close of business on the Trading Day preceding the day notice of such redemption is given (or, if such notice is given after the close of business on a Trading Day, from such Trading Day) to the close of business on any Trading Day on or prior to the Redemption Date, (c) a declaration of a banking moratorium or any suspension of payments in respect of banks by Federal or state authorities in the United States or (d) the commencement of a war or armed hostilities or other national or international calamity directly or indirectly involving the United States which in the reasonable judgment of the corporation could have a material adverse effect on the market for the Common Stock (or such other class or series of common stock into which shares of this Series are then convertible). 1.31 "Rescission Date" shall have the meaning set forth in Section 4.5 hereof. 1.32 "Senior Stock" shall mean the shares of any class or series of stock of the corporation which, by the terms of the Certificate of Incorporation or of the instrument by which the Board of Directors, acting pursuant to authority granted in the Certificate of Incorporation, shall fix the preferences, relative rights and limitations thereof, shall be senior to the Series E Stock in respect of the right to receive dividends or to participate in any distribution of assets other than by way of dividends. 1.33 "Series E Stock" and "this Series" shall mean the series of Preferred Stock authorized and designated as the Series E Convertible Preferred Stock, including any shares thereof authorized and designated after the date of the Certificate. 1.34 "Surrendered Shares" shall have the meaning set forth in Section 3.5 hereof. 1.35 "Trading Day" shall mean, so long as the Common Stock (or such other class or series of common stock into which shares of this Series are then convertible) is listed or admitted to trading on the NYSE, a day on which the NYSE is open for the transaction of business, or, if the Common Stock (or such other class or series of common stock) is not listed or admitted to trading on the NYSE, a day on which the principal national securities exchange on which the Common Stock (or such other class or series of common stock) is listed is open for the transaction of business, or, if the Common Stock (or such other class or series of common stock) is not so listed or admitted for trading on any national securities exchange, a day on which Nasdaq is open for the transaction of business. 2. Dividends. 2.1 The holders of the outstanding shares of Series E Stock shall be entitled to receive dividends, as and when declared by the Board of Directors out of funds legally available therefor. Each dividend shall be at the annual rate equal to 6.342 percent per share of Series E Stock (which is equivalent to $0.79 quarterly and $3.17 annually per share). All dividends shall be payable in cash on or about the first day of February, May, August and November in each year, beginning on the first such date following the Effective Time, as fixed by the Board of Directors, or such other dates as are fixed by the Board of Directors (each a "Dividend Payment Date"), to the holders of record of Series E Stock at the close of business on or about the 15th day of the month next preceding such first day of February, May, August and November, as the case may be, as fixed by the Board of Directors, or such other dates as are fixed by the Board of Directors (each a "Record Date"). Such dividends shall accrue on each share cumulatively on a daily basis, whether or not there are unrestricted funds legally available for the payment of such dividends and whether or not earned or declared, from and after the last payment of dividends on the MediaOne Series E Stock prior to the Effective Time and any such dividends that become payable for any partial dividend period shall be computed on the basis of the actual days elapsed in such period. All dividends that accrue in accordance with the foregoing provisions shall be cumulative from and after the last payment of dividends on the MediaOne Series E Stock prior to the Effective Time. The per share dividend amount payable to each holder of record of Series E Stock on any Dividend Payment Date shall be rounded to the nearest cent. The dividend rate per share of this Series shall be appropriately adjusted from time to time to reflect any split or combination of the shares of this Series. 2.2 Except as hereinafter provided in this Section 2.2 and except for redemptions by the corporation pursuant to Sections 4.1(b)(i) or 4.1(b)(iii), unless all dividends on the outstanding shares of Series E Stock and any Parity Stock that shall have accrued through any prior Dividend Payment Date shall have been paid in full, or declared and funds set apart for payment thereof, no dividend or other distribution (payable other than in shares of Junior Stock) shall be paid to the holders of Junior Stock or Parity Stock, and no shares of Series E Stock, Parity Stock or Junior Stock shall be purchased, redeemed or otherwise acquired by the corporation or any of its subsidiaries (except by conversion into or exchange for Junior Stock), nor shall any monies or any other properties be paid or made available for a purchase, redemption or sinking fund for the purchase or redemption of any Series E Stock, Junior Stock or Parity Stock. When dividends are not paid in full upon the shares of this Series and any Parity Stock, all dividends declared upon shares of this Series and all Parity Stock shall be declared pro rata so that the amount of dividends declared per share on this Series and all such Parity Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of this Series and all such Parity Stock bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on this Series which may be in arrears. 3. Conversion Rights. 3.1 (a)(i) Subject to Section 3.1(b), each holder of a share of this Series shall have the right, at any time after receipt of a notice of redemption given by the corporation pursuant to Section 4.3 with respect to a redemption pursuant to Section 4.1(a), to convert such share into the amount and form of consideration set forth in subparagraph (ii) or subparagraph (iii) of this Section 3.1(a), in accordance with the election made pursuant to subparagraph (iv) of this Section 3.1(a). (ii) If an election has been made or deemed to have been made pursuant to subparagraph (iv) of this Section 3.1(a) to have this subparagraph (ii) apply, then each holder of a share of this Series shall have a right, under the circumstances specified in subparagraph (i) of this Section 3.1(a), to convert such share into a number of shares of Common Stock (or such other class or series of common stock into which shares of this Series are then convertible) equal to the quotient of (a) the product of (i) the Liquidation Value per share of the Series E Stock multiplied by (ii) 0.95, divided by (b) the Current Market Price, subject to adjustment as provided in this Section 3 (such rate, if applicable and as so adjusted from time to time, is herein called the "Conversion Rate"; and the "Conversion Price" at any time shall mean the Redemption Price per share divided by the Conversion Rate in effect at such time (rounded to the nearest one hundredth of a cent)). (iii) If an election has been made pursuant to subparagraph (iv) of this Section 3.1(a) to have this subparagraph (iii) apply, then each holder of a share of this Series shall have a right, under the circumstances specified in subparagraph (i) of this Section 3.1(a), to convert such share into the Prorated Merger Consideration. The "Prorated Merger Consideration" shall mean the consideration that would have been received in the Merger by a holder of the number of shares of MediaOne Common Stock that would have been issuable in respect of one share of MediaOne Series E Stock had such share of MediaOne Series E Stock been converted immediately prior to the Effective Time in accordance with the formula set forth in Section 3.1(a) of the MediaOne Series E Stock, and assuming an election were made with respect to such MediaOne Common Stock in connection with the Merger in accordance with the election made or deemed to have been made pursuant to subparagraph (iv) of this Section 3.1(a) and that the proration provisions of the Merger Agreement, if applicable, were applied to such election. (iv) The record holder of the largest number of shares of Series E Stock shall be entitled to make an election, in writing to the Secretary of the corporation prior to the Election Deadline (as defined in the Merger Agreement), to have either the provisions of subparagraph (ii) of this Section 3.1(a) or the provisions of subparagraph (iii) of this Section 3.1(a) apply thereafter. If no election is timely made, an election will be deemed to have been made to have the provisions of subparagraph (ii), and not subparagraph (iii), of this Section 3.1(a) apply. In the event of an election to have the provisions of subparagraph (iii) of this Section 3.1(a) apply, the record holder of the largest number of shares of Series E Stock shall also be entitled to elect, in the same writing, to have the provisions of subparagraph (iii) apply on the basis of a Cash Election, a Stock Election or a Standard Election (as such terms are defined in the Merger Agreement) with respect to MediaOne Stock in connection with the Merger. In the event of an election to have the provisions of subparagraph (iii) of this Section 3.1(a) apply, if no election is made with respect to the assumption of a Cash Election, a Stock Election or a Standard Election, an election will be deemed to have been made to assume a Standard Election for purposes of the provisions of subparagraph (iii) of this Section 3.1(a). (b) The right of a holder of a share of this Series called for redemption pursuant to Sections 4.1(a) to convert such share into Common Stock (or such other consideration into which shares of this Series are then convertible) pursuant to Section 3.1(a) shall terminate at the close of business on the Redemption Date unless the corporation defaults in the payment of the Redemption Price or, in the case of a redemption pursuant to Section 4.1(a), the corporation exercises its right to rescind such redemption pursuant to Section 4.5, in which case such right of conversion shall not terminate at the close of business on such date. 3.2 If any shares of this Series are surrendered for conversion subsequent to the Record Date preceding a Dividend Payment Date but on or prior to such Dividend Payment Date (except shares called for redemption on a Redemption Date between such Record Date and Dividend Payment Date and with respect to which such redemption has not been rescinded), the registered holder of such shares at the close of business on such Record Date shall be entitled to receive the dividend, if any, payable on such shares on such Dividend Payment Date notwithstanding the conversion thereof. Except as provided in this Section 3.2, no adjustments in respect of payments of dividends on shares surrendered for conversion or any dividend on the Common Stock issued upon conversion shall be made upon the conversion of any shares of this Series. 3.3 The corporation may, but shall not be required to, in connection with any conversion of shares of this Series, issue a fraction of a share of Common Stock, and if the corporation shall determine not to issue any such fraction, the corporation shall, subject to Section 3.6(c), make a cash payment (rounded to the nearest cent) equal to such fraction multiplied by the Closing Price of the Common Stock on the last Trading Day prior to the date of conversion. 3.4 Any holder of shares of this Series electing to convert such shares into Common Stock (or other consideration) pursuant to Section 3.1(a) shall surrender the certificate or certificates for such shares at the office of the transfer agent or agents therefor (or at such other place in the United States as the corporation may designate by notice to the holders of shares of this Series) during regular business hours, duly endorsed to the corporation or in blank, or accompanied by instruments of transfer to the corporation or in blank, or in form satisfactory to the corporation, and shall give written notice to the corporation at such office that such holder elects to convert such shares of this Series. The corporation shall, as soon as practicable and in any event within five Trading Days (subject to Section 3.6(c)) after such surrender of certificates for shares of this Series, accompanied by the written notice above prescribed, issue and deliver at such office to the holder for whose account such shares were surrendered, or to his nominee, (a) certificates representing the number of shares of Common Stock (or such other consideration) to which such holder is entitled upon such conversion and (b) if less than the full number of shares of this Series represented by such certificate or certificates is being converted, a new certificate of like tenor representing the shares of this Series not converted. 3.5 Conversion shall be deemed to have been made immediately prior to the close of business as of the date that certificates for the shares of this Series to be converted, and the written notice prescribed in Section 3.4, are received by the transfer agent or agents for this Series (such date being referred to herein as the "Conversion Date"). The Person entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such Common Stock (or other consideration) as of the close of business on the Conversion Date and such conversion shall be at the Conversion Rate in effect on such date or the Prorated Merger Consideration, as the case may be. Notwithstanding anything to the contrary contained herein, in the event the corporation shall have rescinded a redemption of shares of this Series pursuant to Section 4.5, any holder of shares of this Series that shall have surrendered shares of this Series for conversion following the day on which notice of the redemption shall have been given but prior to the later of (a) the close of business on the Trading Day next succeeding the date on which public announcement of the rescission of such redemption shall have been made and (b) the date which is three Trading Days following the mailing of the notice of rescission required by Section 4.5 (a "Converting Holder") may rescind the conversion of such shares surrendered for conversion by (i) properly completing a form prescribed by the corporation and mailed to holders of shares of this Series (including Converting Holders) with the corporation's notice of rescission, which form shall provide for the certification by any Converting Holder rescinding a conversion on behalf of any beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of shares of this Series that the beneficial ownership (within the meaning of such Rule) of such shares shall not have changed from the date on which such shares were surrendered for conversion to the date of such certification and (ii) delivering such form to the corporation no later than the close of business on that date which is fifteen (15) Trading Days following the date of the mailing of the corporation's notice of rescission. The delivery of such form by a Converting Holder shall be accompanied by (A) any certificates representing shares of Common Stock issued to such Converting Holder upon a conversion of shares of this Series that shall be rescinded by the proper delivery of such form (the "Surrendered Shares"), (B) any securities, evidences of indebtedness or assets (other than cash) distributed by the corporation to such Converting Holder by reason of such Converting Holder's being a record holder of the Surrendered Shares and (C) payment in New York Clearing House funds or other funds acceptable to the corporation of an amount equal to the sum of (I) any cash such Converting Holder may have received in lieu of the issuance of fractional shares upon conversion and (II) any cash paid or payable by the corporation to such Converting Holder by reason of such Converting Holder being a record holder of the Surrendered Shares. Upon receipt by the corporation of any such form properly completed by a Converting Holder and any certificates, securities, evidences of indebtedness, assets or cash payments required to be returned or made by such Converting Holder to the corporation as set forth above, the corporation shall instruct the transfer agent or agents for shares of Common Stock and shares of this Series to cancel any certificates representing the Surrendered Shares (which Surrendered Shares shall be deposited in the treasury of the corporation) and reissue certificates representing shares of this Series to such Converting Holder (which shares of this Series shall, notwithstanding their surrender for conversion, be deemed to have been outstanding at all times). The corporation shall, as promptly as practicable, and in no event more than five (5) Trading Days, following the receipt of any such properly completed form and any such certificates, securities, evidences of indebtedness, assets or cash payments required to be so returned or made, pay to the Converting Holder or as otherwise directed by such Converting Holder any dividend or other payment made on such shares of this Series Stock during the period from the time such shares shall have been surrendered for conversion to the rescission of such conversion. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of any form submitted to the corporation to rescind the conversion of shares of this Series, including questions as to the proper completion or execution of any such form or any certification contained therein, shall be resolved by the corporation, whose good faith determination shall be final and binding. The corporation shall not be required to deliver certificates for shares of Common Stock while the stock transfer books for such stock or for this Series are duly closed for any purpose (but not for a period in excess of two Trading Days) or during any period commencing at a Redemption Rescission Event and ending at either (1) the time and date at which the corporation's right of rescission shall expire pursuant to Section 4.5 if the corporation shall not have exercised such right or (2) the close of business on that day which is fifteen (15) Trading Days following the date of the mailing of a notice of rescission pursuant to Section 4.5 if the corporation shall have exercised such right of rescission, but certificates for shares of Common Stock shall be delivered as soon as practicable after the opening of such books or the expiration of such period. 3.6 The Conversion Rate shall be adjusted from time to time as follows for events occurring after the Effective Time: (a) The corporation shall be entitled to make such increases in the Conversion Rate as shall be determined by the Board of Directors to be necessary in order that any dividend or distribution in Common Stock, any subdivision, reclassification or combination of shares of Common Stock or any issuance of rights or warrant to purchase shares of Common Stock, shall not be taxable to the holders of Common Stock for United States Federal income tax purposes. (b) To the extent permitted by applicable law, the corporation may from time to time increase the Conversion Rate by any amount for any period of time if the period is at least 20 Trading Days, the increase is irrevocable during such period and the Board of Directors shall have made a determination that such increase would be in the best interests of the corporation, which determination shall be conclusive. (c) In any case in which an adjustment to the Conversion Rate pursuant to this Section 3.6 is to be made effective as of or immediately following a record date, the corporation may elect to defer (but only for five (5) Trading Days following the occurrence of the event which necessitates the filing of the statement referred to in Section 3.9(a)) issuing to the holder of any shares of this Series converted after such record date (i) the shares of Common Stock and other capital stock of the corporation issuable upon such conversion over and above the shares of Common Stock and other capital stock of the corporation issuable upon such conversion on the basis of the Conversion Rate prior to adjustment and (ii) paying to such holder any amount in cash in lieu of any fraction thereof pursuant to Section 3.3; provided, however, that the corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (d) Subject to Section 3.6(a) hereof, no adjustment shall be made pursuant to this Section 3.6 with respect to any share of Series E Stock that is converted prior to the time such adjustment otherwise would be made. 3.7 In case of (a) any consolidation or merger to which the corporation is a party, other than a merger or consolidation in which the corporation is the surviving or continuing corporation and which does not result in any reclassification of, or change (other than a change in par value or from par value to no par value or from no par value to par value, or as a result of a subdivision or combination) in, outstanding shares of Common Stock (or such other class or series of common stock into which shares of this Series are then convertible) or (b) any sale or conveyance of all or substantially all of the property and assets of the corporation, then lawful provision shall be made as part of the terms of such transaction whereby the holder of each share of Series E Stock which is not converted into the right to receive stock or other securities and property in connection with such transaction shall have the right thereafter, during the period such share shall be convertible, to convert such share into the kind and amount of shares of stock or other securities and property receivable upon such consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock (or such other class or series of common stock or other consideration into which shares of this Series are then convertible) into which such shares of this Series could have been converted immediately prior to such consolidation, merger, sale or conveyance (assuming that shares of this Series were then convertible pursuant to Section 3.1), subject to adjustment which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3. If holders of Common Stock (or such other class or series of common stock or other consideration into which shares of this Series are then convertible) are entitled to elect the kind or amount of securities or other property receivable upon such consolidation, merger, sale or conveyance, all adjustments made pursuant to this Section 3.7 shall be based upon (i) the election, if any, made in writing to the Secretary of the corporation by the record holder of the largest number of shares of Series E Stock prior to the earlier of (A) the last date on which a holder of Common Stock (or such other class or series of common stock) may make such an election and (B) the date which is five (5) Trading Days prior to the record date for determining the holders of Common Stock (or such other class or series of common stock) entitled to participate in the transaction (or if no such record date is established, the effective date of such transaction) or (ii) if no such election is timely made, an assumption that each holder of Shares of this Series failed to exercise such rights of election (provided that if the kind or amount of securities or other property receivable upon such consolidation, merger, sale or conveyance is not the same for each nonelecting share, then the kind and amount of securities or other property receivable upon such consolidation, merger, sale or conveyance for each nonelecting share shall be deemed to be the kind and amount so receivable per share by a plurality of the nonelecting shares). Concurrently with the mailing to holders of Common Stock (or such other class or series of common stock) of any document pursuant to which such holders may make an election regarding the kind or amount of securities or other property that will be receivable by such holder in any transaction described in clause (a) or (b) of the first sentence of this Section 3.7, the corporation shall mail a copy thereof to the holders of shares of the Series E Stock. The corporation shall not enter into any of the transactions referred to in clauses (a) or (b) of the first sentence of this Section 3.7 unless, prior to the consummation thereof, effective provision shall be made in a certificate or articles of incorporation or other constituent document or written instrument of the corporation or the entity surviving the consolidation or merger, if other than the corporation, or the entity acquiring the corporation's assets, unless, in either case, such entity is a direct or indirect subsidiary of another entity, in which case such provision shall be made in the certificate or articles of incorporation or other constituent document or written instrument of such other entity (any such entity or other entity being the "Surviving Entity") so as to assume the obligation to deliver to each holder of shares of Series E Stock such stock or other securities and property and otherwise give effect to the provisions set forth in this Section 3.7. The provisions of this Section 3.7 shall apply similarly to successive consolidations, mergers, sales or conveyances. 3.8 After the date, if any, on which all outstanding shares of Common Stock (or such other class or series of common stock or other consideration into which shares of this Series are then convertible) are converted into or exchanged for shares of another class or series of common stock of the corporation, each share of this Series shall thereafter be convertible into or exchangeable, if Section 3.1(a)(ii) applies, for the number of shares of such other class or series of common stock receivable upon such conversion or exchange equal to the quotient of (a) $50 divided by (b) the product of (i) 0.95 multiplied by (ii) the Current Market Price for such other class or series of common stock. From and after any such conversion or exchange, Conversion Rate adjustments as nearly equivalent as may be practicable to the adjustments pursuant to Sections 3.6 and 3.7 which, prior to such exchange, were made in respect of Common Stock (or such other class or series of common stock into which shares of this Series are then convertible) shall instead be made pursuant to such Sections 3.6 and 3.7 in respect of shares of such other class or series of common stock. If Section 3.1(a)(iii) applies, an adjustment will be made instead to substitute for any shares of Common Stock otherwise issuable on conversion, the shares of such other class or series of common stock into which such shares of Common Stock have been converted or exchanged. 3.9 (a) Whenever the Conversion Rate is adjusted or other adjustment is made as provided in this Section 3, the corporation (or, in the case of Section 3.7, the corporation or the Surviving Entity, as the case may be) shall forthwith place on file with its transfer agent or agents for this Series a statement signed by a duly authorized officer of the corporation or the Surviving Entity, as the case may be, stating the adjusted Conversion Rate or other adjustment determined as provided herein. Such statements shall set forth in reasonable detail such facts as shall be necessary to show the reason for and the manner of computing such adjustment. Promptly after the adjustment of the Conversion Rate or other adjustment, the corporation or the Surviving Entity, as the case may be, shall mail a notice thereof to each holder of shares of this Series. Whenever the Conversion Rate is increased pursuant to Section 3.6(b), such notice shall be mailed to each holder of shares of this Series as promptly as possible after the corporation shall have determined to effect such increase and, in any event, at least 15 Trading Days prior to the date such increased Conversion Rate takes effect, and such notice shall state such increased Conversion Rate and the period during which it will be in effect. Where appropriate, the notice required by this Section 3.9(a) may be given in advance and included as part of the notice required pursuant to Section 3.9(b) or 3.9(c). Subject to the provisions of Section 3.9(c), if: (i) the corporation takes any action that would require an adjustment of the Conversion Rate or other adjustment pursuant to Sections 3.6 through 3.8; (ii) there shall be any consolidation or merger to which the corporation is a party and for which approval of any stockholders of the corporation is required, or the sale or transfer of all or substantially all of the assets of the corporation; or (iii) there shall occur the voluntary or involuntary liquidation, dissolution or winding up of the corporation, then the corporation shall, as promptly as possible, but at least 10 Trading Days prior to the record date or other date set for definitive action if there shall be no record date, cause notice to be filed with the transfer agent or agents for this Series and given to each record holder of outstanding shares of this Series stating the action or event for which such notice is being given and the record date for and the anticipated effective date of such action or event. Failure to give or receive such notice or any defect therein shall not affect the legality or validity of the related transaction. 3.10 There shall be no adjustment of the Conversion Rate or other adjustment in case of the issuance of any stock of the corporation in a reorganization, acquisition or other similar transaction except as specifically set forth in this Section 3. If any action or transaction would require adjustment of any Conversion Rate established hereunder or other adjustment pursuant to more than one paragraph of this Section 3, only the adjustment which would result in the largest increase of such Conversion Rate or other adjustment shall be made. 3.11 The corporation shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued stock, for the purpose of effecting the conversion of the shares of this Series, such number of its duly authorized shares of Common Stock (or, if applicable, any other shares of Capital Stock of the corporation) as shall from time to time be sufficient to effect the conversion of all outstanding shares of this Series into such Common Stock (or such other shares of Capital Stock) at any time; provided, however, that nothing contained herein shall preclude the corporation from satisfying its obligations in respect of the conversion of the shares by delivery of purchased shares of Common Stock (or such other shares of Capital Stock) that are held in the treasury of the corporation. All shares of Common Stock (or such other shares of Capital Stock of the corporation) which shall be deliverable upon conversion of the shares of this Series shall be duly and validly issued, fully paid and nonassessable. For purposes of this Section 3, the number of shares of Common Stock or any other class or series of common stock of the corporation at any time outstanding shall not include any shares of Common Stock or such other class or series of common stock then owned or held by or for the account of corporation or any subsidiary of the corporation. 3.12 If any shares of Common Stock (or such other class or series of common stock into which shares of this Series are then convertible) which would be issuable upon conversion of shares of this Series hereunder require registration with or approval of any governmental authority before such shares may be issued upon conversion, the corporation will in good faith and as expeditiously as possible cause such shares to be duly registered or approved, as the case may be. The corporation will endeavor to list the shares of (or depositary shares representing fractional interests in) Common Stock (or such other class or series of common stock into which shares of this Series are then convertible) required to be delivered upon conversion of shares of this Series prior to such delivery upon the principal national securities exchange upon which the outstanding Common Stock (or such other class or series of common stock) is listed at the time of such delivery. 3.13 The corporation shall pay any and all issue, stamp, documentation, transfer or other taxes that may be payable in respect of any issue or delivery of shares of Common Stock (or such other class or series of common stock into which shares of this Series are then convertible) on conversion of shares of this Series pursuant hereto. The corporation shall not, however, be required to pay any tax which is payable in respect of any transfer involved in the issue or delivery of Common Stock (or such other class or series of common stock) in a name other than that in which the shares of this Series so converted were registered, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the corporation the amount of such tax, or has established, to the satisfaction of the corporation, that such tax has been paid. 4. Redemption. 4.1 (a) The corporation may, at its sole option, subject to Section 2.2 hereof, from time to time on and after June 30, 2002, redeem, out of funds legally available therefor, all or any part of the outstanding shares of this Series at the Redemption Price. (b) (i) On August 1, 2007 and each anniversary of such date thereafter through the ninth (9th) anniversary of such date, the corporation shall redeem at the Redemption Price, out of funds legally available therefor, 49,704 shares of the Series E Stock or such lesser number of shares of Series E Stock as shall then remain outstanding. (ii) On August 1, 2007 and each anniversary of such date thereafter through the ninth (9th) anniversary of such date, the corporation may, at its sole option, subject to Section 2.2 hereof, redeem at the Redemption Price, out of funds legally available therefor, 49,704 shares of the Series E Stock or such lesser number of shares of Series E Stock as shall then remain outstanding. (iii) The corporation shall, on June 30, 2017, redeem at the Redemption Price, out of funds legally available therefor, all of the outstanding shares of the Series E Stock. 4.2 In the event that fewer than all of the outstanding shares of this Series are to be redeemed pursuant to Section 4.1, the aggregate number of shares of this Series held by each holder which will be redeemed shall be determined by the corporation by lot or pro rata or by any other method as may be determined by the Board of Directors in its sole discretion to be equitable, and the certificate of the corporation's Secretary or an Assistant Secretary filed with the transfer agent or transfer agents for this Series in respect of such determination by the Board of Directors shall be conclusive. 4.3 If the corporation determines to redeem shares of this Series pursuant to Section 4.1, the corporation shall, not later than the 15th Trading Day nor earlier than the 60th Trading Day prior to the Redemption Date, cause notice to be filed with the transfer agent or agents for this Series and to be given to each record holder of the shares to be redeemed, setting forth: (i) the Redemption Date; (ii) in the case of a redemption pursuant to Section 4.1(b)(iii), that all shares of this Series outstanding on the Redemption Date shall be redeemed by the corporation; (iii) in the case of a redemption pursuant to Section 4.1(a), 4.1(b)(i) or 4.1(b)(ii), the total number of shares of this Series to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the aggregate number of such shares which will be redeemed; (iv) the Redemption Price (v) in the case of a redemption pursuant to Section 4.1(a), that shares of this Series called for redemption may be converted at any time prior to the Redemption Date (unless the corporation (A) shall default in payment of the Redemption Price or (B) shall exercise its right to rescind such redemption pursuant to Section 4.5, in which case such right of conversion shall not terminate at such time and date); (vi) in the case of a redemption pursuant to Section 4.1(a), a description of the manner in which the Conversion Price will be determined in accordance with the Certificate; (vii) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; and (viii) that dividends on the shares to be redeemed will cease to accrue on the Redemption Date. Promptly, following the Redemption Date, the corporation shall cause notice to be filed with the transfer agent or agents for this Series and to be given to each record holder of the shares to be redeemed setting forth the percentage of such holder's shares which the corporation has elected to redeem. 4.4 If notice of redemption shall have been given by the corporation as provided in Section 4.3, from and after the Redemption Date, dividends on the shares of this Series so called for redemption shall cease to accrue, such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the corporation with respect to shares so called for redemption (except, the right to receive from the corporation the Redemption Price without interest) shall cease (including any right to receive dividends otherwise payable on any Dividend Payment Date that would have occurred after the Redemption Date), unless (a) the corporation defaults in the payment of the Redemption Price, or (b) in the case of a redemption pursuant to Section 4.1(a), the corporation exercises its right to rescind such redemption pursuant to Section 4.5, in which case such rights shall not terminate at the close of business on such date. On or before the Redemption Date, the corporation shall deposit with a bank or trust company doing business in New York, as paying agent, money sufficient to pay the Redemption Price on the Redemption Date, in trust, with irrevocable instructions that such money be applied to the redemption of shares of this Series so called for redemption. Any money so deposited with any such paying agent which shall not be required for such redemption because of the exercise of any right of conversion, rescission or otherwise shall be returned to the corporation forthwith. Upon surrender (in accordance with the notice of redemption) of the certificate or certificates for any shares of this Series to be so redeemed (properly endorsed or assigned for transfer, if the corporation shall so require and the notice of redemption shall so state), such shares shall be redeemed by the corporation at the Redemption Price (unless, in the case of a redemption pursuant to Section 4.1(a), the corporation shall have exercised its right to rescind such redemption pursuant to Section 4.5). In case fewer than all the shares represented by any such certificate are to be redeemed, a new certificate shall be issued representing the unredeemed shares (or fractions thereof as provided in Section 7.4), without cost to the holder thereof. Subject to applicable escheat laws, any moneys so set aside by the corporation and unclaimed at the end of two (2) years from the Redemption Date shall revert to the general funds of the corporation, after which reversion the holders of such shares so called for redemption shall look only to the corporation for the payment of the Redemption Price, without interest. Any interest accrued on any funds so deposited shall be paid to the corporation from time to time upon request of the corporation. 4.5 If notice of redemption pursuant to Section 4.1(a) shall have been given by the corporation pursuant to Section 4.3, in the event that a Redemption Rescission Event shall occur following the date of such notice but at or prior to the Redemption Date, the corporation may, at its sole option, at any time prior to the earlier of (a) the close of business on that day which is five (5) Trading Days following such Redemption Rescission Event and (b) the Redemption Date, rescind such redemption by making a public announcement of such rescission (the date on which such public announcement shall have been made being hereinafter referred to as the "Rescission Date"). The corporation shall be deemed to have made such announcement if it shall issue a release to the Dow Jones News Service and Reuters Information Services or any successor news wire service. From and after the making of such announcement, the corporation shall have no obligation to effect such redemption or to pay the Redemption Price therefor and all rights of holders of shares of this Series shall be restored as if notice of redemption had not been given. The corporation shall give notice of any such rescission by first-class mail, postage prepaid, mailed as promptly as practicable, but in no event later than the close of business on that date which is five (5) Trading Days following the Rescission Date to each record holder of shares of this Series at the close of business on the Rescission Date and to any other Person or entity that was a record holder of shares of this Series and that shall have surrendered shares of this Series for conversion following the giving of notice of the subsequently rescinded redemption. Each notice of rescission shall (i) state that such redemption has been rescinded, (ii) state that any Converting Holder shall be entitled to rescind the conversion of shares of this Series surrendered for conversion following the day on which notice of such redemption was given but on or prior to the later of (A) the close of business on the Trading Day next succeeding the date on which public announcement of the rescission of such redemption shall have been made and (B) the date which is three (3) Trading Days following the mailing of the corporation's notice of rescission, (iii) be accompanied by a form prescribed by the corporation to be used by any Converting Holder rescinding the conversion of shares so surrendered for conversion (and instructions for the completion and delivery of such form, including instructions with respect to payments that may be required to accompany such delivery in accordance with Section 3.5) and (iv) state that such form must be properly completed and received by the corporation no later than the close of business on a date that shall be fifteen (15) Trading Days following the date of the mailing of such notice of rescission. 5. Voting. The shares of this Series shall have no voting rights except as required by law or as set forth below. 5.1 So long as any shares of this Series remain outstanding, unless a greater percentage shall then be required by law, the corporation shall not, without the affirmative vote at a meeting or the written consent with or without a meeting of the holders of shares of this Series representing at least a majority of the shares of this Series then outstanding (a) authorize any Senior Stock or reclassify any Junior Stock or Parity Stock as Senior Stock, or (b) amend, alter or repeal any of the provisions of the Certificate or the Certificate of Incorporation, so as in any such case to materially and adversely affect the voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of the shares of this Series; provided, however, that an amendment which effects a split of this Series or which effects a combination of the shares of this Series into a fewer number of Shares shall not be deemed to have any such material adverse effect. 5.2 No vote or consent of holders of shares of this Series shall be required for (a) the creation of any indebtedness of any kind of the corporation, (b) the authorization or issuance of any class of Junior Stock (including any class or series of common stock of the corporation) or Parity Stock, (c) the authorization, designation or issuance of additional shares of Series E Stock or (iv) subject to Section 5.1(a), the authorization or issuance of any other shares of Preferred Stock. 6. Liquidation Rights. 6.1 Upon the dissolution, liquidation or winding up of the corporation, whether voluntary or involuntary, the holders of the shares of this Series shall be entitled to receive out of the assets of the corporation available for distribution to stockholders, in preference to the holders of, and before any payment of distribution shall be made on, Junior Stock, the Liquidation Value in effect at such time, plus an amount equal to all accrued and unpaid dividends to the date of final distribution. 6.2 The Liquidation Value shall initially be equal to $50 per share of Series E Stock. The Liquidation Value shall be subject to adjustment from time to time to appropriately give effect to any split or combination of the shares of this Series. 6.3 Neither the sale, exchange or other conveyance (for cash, shares of stock, securities or other consideration) of all or substantially all the property and assets of the corporation nor the merger or consolidation of the corporation into or with any other corporation, or the merger or consolidation of any other corporation into or with the corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 6. 6.4 After the payment to the holders of the shares of this Series of full preferential amounts provided for in this Section 6, the holders of this Series as such shall have no right or claim to any of the remaining assets of the corporation. 6.5 In the event the assets of the corporation available for distribution to the holders of shares of this Series upon any dissolution, liquidation or winding up of the corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 6.1, no such distribution shall be made on account of any shares of any Parity Stock upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the shares of this Series, ratably, in proportion to the full distributable amounts for which holders of all Parity Stock are entitled upon such dissolution, liquidation or winding up. 7. Other Provisions. 7.1 All notices from the corporation to the holders shall be given by first class mail, postage prepaid, to the holders of shares of this Series at their last address as it shall appear on the stock register. With respect to any notice to a holder of shares of this Series required to be provided hereunder, neither failure to mail such notice, nor any defect therein or in the mailing thereof, shall affect the sufficiency of the notice or the validity of the proceedings referred to in such notice or affect the legality or validity of any distribution, right, warrant, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up, or the vote upon any such action. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the holder receives the notice. 7.2 All notices and other communications from a holder of shares of this Series shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to the corporation at the following address (or at such other address as the corporation shall specify in a notice pursuant to Section 7.1): AT&T Corp., 295 North Maple Avenue, Basking Ridge, NJ 07920, Attention: Corporate Secretary. 7.3 Any shares of this Series which have been converted, redeemed, exchanged or otherwise acquired by the corporation shall, after such conversion, redemption, exchange or acquisition, as the case may be, be retired and promptly canceled and the corporation shall take all appropriate action to cause such shares to obtain the status of authorized but unissued shares of Preferred Stock, without designation as to series, until such shares are once more designated as part of a particular series by the Board of Directors. The corporation may cause a certificate setting forth a resolution adopted by the Board of Directors that none of the authorized shares of this Series are outstanding to be filed with the Secretary of State of the State of New York. When such certificate becomes effective, all references to Series E Stock shall be eliminated from the Certificate of Incorporation and the shares of Preferred Stock designated hereby as Series E Stock shall have the status of authorized and unissued shares of Preferred Stock and may be reissued as part of any new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors. 7.4 The shares of this Series shall be issuable in whole shares or in any fraction of a whole share or any integral multiple of such fraction. 7.5 The corporation shall, to the fullest extent permitted by law, be entitled to recognize the exclusive right of a Person registered on its records as the holder of shares of this Series, and such record holder shall be deemed the holder of such shares for all purposes. 7.6 All notice periods referred to in the Certificate shall commence on the date of the mailing of the applicable notice. 7.7 Subject to applicable law, any determinations made in the exercise of the good faith business judgment of the Board of Directors under any provision of the Certificate shall be final and binding on all stockholders of the corporation, including the holders of shares of this Series. 7.8 Certificates for shares of this Series shall bear such legends as the corporation shall from time to time deem appropriate. * * * * * IN WITNESS WHEREOF, we have subscribed this document on June 15, 2000 and do hereby affirm under the penalties of perjury, that the statements contained herein have been examined by us and are true and correct. By: /s/ Marilyn J. Wasser ------------------------------- Name: Marilyn J. Wasser Title: Vice President By: ------------------------------- Name: Robert S. Feit Title: Assistant Secretary CERTIFICATE OF AMENDMENT of the CERTIFICATE OF INCORPORATION of AT&T CORP. Under Section 805 of the Business Corporation Law Pursuant to the provisions of Section 805 of the BUSINESS CORPORATION LAW, the undersigned, being the Senior Vice President and Secretary of AT&T CORP., a New York corporation (the "corporation"), hereby certify that: I. The name of the corporation is AT&T Corp. II. The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885 under the name American Telephone and Telegraph Company. A Certificate of Amendment of the Certificate of Incorporation was filed in the office of the Secretary of State of the State of New York on April 20, 1994, changing the name of the corporation to AT&T Corp. III. The Certificate of Incorporation of the corporation is hereby amended pursuant to authority vested in the Board of Directors by the Certificate of Incorporation of the corporation, as heretofore amended, and in accordance with Section 502 of the Business Corporation Law, by the addition of the following provision, stating the number, designation, relative rights, preferences and limitations of a series of the corporation's authorized preferred stock designated as Wireless Group Preferred Tracking Stock. 1. Number and Designation. 1,500,000 shares of the Preferred Stock of the corporation shall constitute a series designated as "Wireless Group Preferred Tracking Stock" (the "New Tracking Stock"). 2. Definitions. Unless the context otherwise requires, when used in this Amendment the following terms shall have the meaning indicated. "Accrual Period" means, with respect to any calculation of the Cost of Carry with respect to any shares of New Tracking Stock, the number of days from the date of initial issuance of such shares of New Tracking Stock to but not including the Redemption Date. "Amendment" means this Certificate of Amendment of the Certificate. "AT&T Wireless" means AT&T Wireless Services, Inc., a Delaware corporation and a wholly-owned subsidiary of the corporation. "AT&T Wireless Common Stock" means the common stock, par value $0.01 per share, of AT&T Wireless as of and following the Spin-off. "Board of Directors" means the Board of Directors of the corporation. "Certificate" means the corporation's Restated Certificate of Incorporation as filed by the Department of State on January 10, 1989, as amended. "Class A Liberty Media Group Common Stock" means the Class A Liberty Media Group Common Stock, par value $1.00 per share, of the corporation. "Class B Liberty Media Group Common Stock" means the Class B Liberty Media Group Common Stock, par value $1.00 per share, of the corporation. "Common Stock" means the Common Stock, par value $1.00 per share, of the corporation. "Common Stock Group(W)" shall have the meaning set forth in Article Third, Part C, paragraph 9 of the Certificate as in effect on the date of this Amendment. "corporation" shall have the meaning set forth in the preamble to this Amendment. "Cost of Carry" shall mean the applicable interest rate set forth on the table below for the following time periods (expressed in days, based on a 360-day year of twelve 30-day months, except for periods of twelve (12) months or less which will be expressed in actual days of 365 based on a 360-day year according to the money market convention).
Accrual Period Cost of Carry - -------------- ------------- 90 days or less 6.477% 180 days 6.348% 360 days 6.336% 540 days 6.563% 720 days 6.475% 1,080 days 6.499% 1,440 days 6.673% 1,800 days 6.647% 2,160 days 6.758% 2,520 days or more 6.819%
The interest rate that will apply to any Accrual Period between any two points in the foregoing table will be an interpolated rate, which interpolated rate will apply to the entire Accrual Period. As an example only: using the rate 6.475% for 720 days and the rate 6.499% for 1,080 days, then (i) the rate for 900 days (half way between the two points) would be 6.487% (half way between the two rates); (ii) the rate for 810 days (one quarter of the way between the two points) would be 6.481% (one quarter of the way between the two rates); and (iii) the rate for 990 days (three quarters of the way between the two points) would be 6.493% (three quarters of the way between the two rates). The applicable interest rate will be compounded over the applicable Accrual Period based on a semi-annual bond equivalent yield using a 360-day year of twelve 30-day months, except for periods of 12 months or less which will be expressed in actual days of 365 based on a 360-day year according to the money market convention. "Draft Separation Agreements" means the drafts of the agreements (and/or term sheets with respect to such agreements) relating to the Spin-off and the separation of the Wireless Group from the corporation and the schedules related thereto, in the forms annexed to the Letter Agreement. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder. "Investor Agreement" means the Investor Agreement, dated as of December 20, 2000, by and among the corporation, AT&T Wireless and NTT DoCoMo, Inc. "Letter Agreement" means the Letter Agreement, dated as of November 30, 2000, by and among the corporation, AT&T Wireless and NTT DoCoMo, Inc., together with the term sheet attached thereto and the annexes to such term sheet. "Liberty Media Group Common Stock" means, collectively, the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock. "Liquidation Junior Securities" means the Common Stock, the Wireless Group Common Stock, the Class A Liberty Media Group Common Stock, the Class B Liberty Media Group Common Stock and each other class of capital stock of the corporation currently existing or created after the date of this Amendment the terms of which do not expressly provide that it ranks senior to, or on a parity with, the New Tracking Stock as to distribution upon involuntary liquidation, winding-up or dissolution. "Liquidation Parity Securities" means each other class of capital stock of the corporation created after the date of this Amendment the terms of which expressly provide that such class will rank pari passu to the New Tracking Stock as to distribution upon involuntary liquidation, winding-up or dissolution of the corporation. "Liquidation Senior Securities" means each other class of capital stock of the corporation created after the date of this Amendment the terms of which expressly provide that such class will rank senior to the New Tracking Stock as to distribution upon involuntary liquidation, winding-up or dissolution of the corporation. "Market Value" shall have the meaning set forth in Article Third, Part C, paragraph 9 of the Certificate as in effect on the date of this Amendment; provided that the proviso thereto applicable to shares of Common Stock, Wireless Group Common Stock and any class of Liberty Media Group Common Stock shall also be applicable to shares of New Tracking Stock. "New Tracking Stock" shall have the meaning set forth in paragraph 1 of this Amendment. "New Tracking Stock Tax Event" means receipt by the corporation of an opinion of tax counsel of the corporation's choice, to the effect that, as a result of any amendment to, clarification of, or change (including a prospective change) in, the laws (or any interpretation or application of the laws) of the United States or any political subdivision or taxing authority thereof or therein (including enactment of any legislation and the publication of any judicial or regulatory decision, determination or pronouncement) which amendment, clarification or change is effective, announced, released, promulgated or issued on or after the date of initial issuance of the New Tracking Stock, regardless of whether such amendment, clarification or change is issued to or in connection with a proceeding involving the corporation, the Common Stock Group(W) or the Wireless Group and whether or not subject to appeal, there is more than an insubstantial risk that: (i) for tax purposes, any issuance of New Tracking Stock would be treated as a sale or other taxable disposition by the corporation or any of its Subsidiaries of any of the assets, operations or relevant subsidiaries to which the New Tracking Stock relates, (ii) the existence of the New Tracking Stock would subject the corporation, its Subsidiaries or affiliates, or any of their respective successors or shareholders to the imposition of tax or to other adverse tax consequences, or (iii) for tax purposes, either Common Stock or New Tracking Stock is not or, at any time in the future, will not be treated solely as capital stock of the corporation. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof, or other entity, whether acting in an individual, fiduciary or other capacity. "Preferred Stock" means the preferred stock, par value $1.00 per share, of the corporation. "Redemption Date" shall have the meaning set forth in paragraph 5(c). "Securities Purchase Agreement" means the Securities Purchase Agreement, dated as of December 20, 2000, by and among the corporation, AT&T Wireless and NTT DoCoMo, Inc.. "Spin-off" shall mean the spin-off of AT&T Wireless in accordance with the Draft Separation Agreements, as amended or revised to the extent not prohibited by the Investor Agreement. "Subsidiary" means, with respect to any Person, any corporation, limited liability company or partnership 50% or more of whose outstanding voting securities or membership or partnership interests, as the case may be, are, directly or indirectly, owned by such Person. "Tax Event" shall have the meaning set forth in Article Third, Part C, paragraph 9 of the Certificate as in effect on the date of this Amendment. "Wireless Group" shall have the meaning set forth in Article Third, Part C, paragraph 9 of the Certificate as in effect on the date of this Amendment. "Wireless Group Common Stock" means the Wireless Group Common Stock, par value $1.00 per share, of the corporation. 3. Voting Rights. (a) Holders of New Tracking Stock shall be entitled to two hundred and fifty (250) votes per share of New Tracking Stock, subject to adjustment as set forth in paragraph 3(b) below. Except as may otherwise be required in this Amendment or in the Certificate (including the terms of any class of series of Preferred Stock and any resolution or resolutions providing for the establishment of such class or series pursuant to authority vested in the Board of Directors by the Certificate) or by the laws of the State of New York, the holders of shares of Common Stock, the holders of shares of New Tracking Stock, the holders of shares of Wireless Group Common Stock, the holders of shares of Class A Liberty Media Group Common Stock, the holders of shares of Class B Liberty Media Group Common Stock, the holders of shares of each other class of common shares, if any, entitled to vote thereon, and the holders of shares of each other class or series of Preferred Stock, if any, entitled to vote thereon, shall vote as one class with respect to all matters to be voted on by shareholders of the corporation, and no separate vote or consent of the holders of shares of Common Stock, the holders of shares of New Tracking Stock, the holders of shares of Wireless Group Common Stock, the holders of shares of Class A Liberty Media Group Common Stock, the holders of shares of Class B Liberty Media Group Common Stock or the holders of shares of any such class of common shares or any such class or series of Preferred Stock shall be required for the approval of any such matter. (b) If the corporation shall in any manner subdivide (by stock split or otherwise) or combine (by reverse stock split or otherwise) the outstanding shares of Common Stock, Liberty Media Group Common Stock or Wireless Group Common Stock, or pay a stock dividend in shares of any class to holders of that class or shall otherwise effect a share distribution (as defined in Article Third, Part C, paragraph 3 of the Certificate) of Common Stock, New Tracking Stock, Wireless Group Common Stock or Liberty Media Group Common Stock, the per share voting rights of the New Tracking Stock shall be appropriately adjusted so as to avoid any dilution in the aggregate voting rights of any one class relative to the other classes. 4. Dividends; Share Distributions. (a) The holders of the New Tracking Stock shall be entitled to receive dividends when, as and if declared by the Board of Directors out of funds of the corporation legally available thereof. So long as any share of New Tracking Stock remains outstanding, no dividend shall be paid or declared and no distribution shall be made on any share of Wireless Group Common Stock, unless dividends shall have first been (or simultaneously shall be) paid to or declared and set aside for payment on all outstanding shares of New Tracking Stock in an aggregate amount equal to the product of (i) the per share dividends declared and to be paid on the Wireless Group Common Stock and (ii) the number of shares of Wireless Group Common Stock into which all outstanding shares of New Tracking Stock are convertible immediately prior to the record date of such dividend. So long as any share of New Tracking Stock remains outstanding, no share distribution shall be paid or declared and no share distribution shall be made on any share of Wireless Group Common Stock, unless a share distribution shall have first have been (or simultaneously shall be) paid to or declared and set aside for payment on all outstanding shares of New Tracking Stock in an aggregate amount equal to the product of (i) the per share amount declared and to be paid on the Wireless Group Common Stock and (ii) the number of shares of Wireless Group Common Stock into which the New Tracking Stock is convertible immediately prior to the record date of such share distribution. (b) Concurrently with the payment of any dividend on shares of New Tracking Stock at any time when there are no shares of Wireless Group Common Stock outstanding, at the election of the Board of Directors, either (x) the Common Stock Group(W) shall receive from the Wireless Group an aggregate payment of the same kind of cash and/or property that is the subject of such dividend, which payment shall be equal to the excess, if any, of (i) the quotient obtained by dividing (A) the aggregate amount of such dividend, as determined by the Board of Directors, by (B) the Wireless Group Allocation Fraction, over (ii) the aggregate amount of such dividend, as so determined, or (y) the Wireless Group Allocation Fraction will be adjusted as described in paragraph 8 of Article Third, Part C of the Certificate. Any payment to be made to the Common Stock Group(W) pursuant to the preceding sentence may, at the discretion of the Board of Directors, be reflected by an allocation or by a direct transfer of cash or other property. (c) Concurrently with the making of any share distribution with respect to the New Tracking Stock at any time when there are no shares of Wireless Group Common Stock outstanding, at the election of the Board of Directors, either (x) the Common Stock Group(W) shall receive from the Wireless Group an aggregate payment of the same kind of property that is the subject of such distribution, which payment shall be equal to the excess, if any, of (i) the quotient obtained by dividing (A) the aggregate amount of such distribution, as determined by the Board of Directors, by (B) the Wireless Group Allocation Fraction, over (ii) the aggregate amount of such dividend, as so determined, or (y) the Wireless Group Allocation Fraction shall be adjusted as described in paragraph 8 of Article Third, Part C of the Certificate. Any payment to be made to the Common Stock Group(W) pursuant to the preceding sentence may, at the discretion of the Board of Directors, be reflected by an allocation or by a direct transfer of cash or other property. 5. Redemption of New Tracking Stock. (a) The corporation shall have the right to redeem all (but not less than all) outstanding shares of New Tracking Stock if (i) there has occurred a Tax Event prior to the Spin-off in which the adverse tax consequences with respect to the Wireless Group Common Stock giving rise to such Tax Event also give rise to a New Tracking Stock Tax Event and (ii) the corporation previously or simultaneously redeems all outstanding shares of Wireless Group Common Stock in accordance with the terms of the Certificate. In such event, the redemption price per share of New Tracking Stock payable by the corporation upon such redemption shall be equal to the sum of (w) $11,750, (x) interest on $11,750 at a rate equal to the applicable Cost of Carry from the date of initial issuance of such share of New Tracking Stock to but not including the Redemption Date, (y) additional interest on $11,750 at a rate of 3% per annum from the date of initial issuance of such share of New Tracking Stock to but not including the Redemption Date and (z) all declared but unpaid dividends thereon from the date of initial issuance of such share of New Tracking Stock to but not including the Redemption Date. (b) The corporation shall have the right to redeem all (but not less than all) outstanding shares of New Tracking Stock if (i) the corporation has failed to effect the Spin-off on or prior to April 26, 2002, (ii) the corporation delivers an officer's certificate to the holders of the New Tracking Stock to the effect that the Board of Directors has determined to abandon the Spin-off and the corporation has no intention at the time of such redemption of the New Tracking Stock to sell or otherwise dispose of the Wireless Group and (iii) the corporation concurrently redeems all outstanding shares of the Wireless Group Common Stock. In such event, the redemption price per share of New Tracking Stock payable by the corporation upon such redemption shall be equal to the sum of (w) $11,750, (x) interest on $11,750 at a rate equal to the applicable Cost of Carry from the date of initial issuance of such share of New Tracking Stock to but not including the Redemption Date, (y) additional interest on $11,750 at a rate of 3% per annum from the date of initial issuance of such share of New Tracking Stock to but not including the Redemption Date and (z) all declared but unpaid dividends thereon from the date of initial issuance of such share of New Tracking Stock to but not including the Redemption Date. (c) At such time or times as the corporation exercises its right to cause a redemption pursuant to this paragraph 5, the corporation shall give notice of such redemption to all holders of New Tracking Stock by mailing by first-class mail a notice of such redemption (a "Redemption Notice"), not less than thirty (30) nor more than sixty (60) days prior to the date fixed for such redemption (the "Redemption Date"), to their last addresses as they appear upon the corporation's books and by simultaneously faxing such notice to such holders to the fax numbers for such holders as they appear upon the corporation's records. Each such Redemption Notice shall specify the Redemption Date and the per share redemption price applicable to such redemption, and shall state that the redemption price shall be paid upon surrender of the certificates representing such shares of New Tracking Stock. (d) Before any holder of shares of New Tracking Stock shall be entitled to receive the redemption price with respect to its shares of New Tracking Stock, such holder must surrender, at such office as the corporation shall specify, the certificates for such shares of New Tracking Stock duly endorsed to the corporation or in blank or accompanied by proper instruments of transfer to the corporation or in blank, unless the corporation shall waive such requirement. The corporation shall, as soon as practicable after such surrender of certificates representing such shares of New Tracking Stock, pay to the holder for whose account such shares of New Tracking Stock were so surrendered, or to such holder's nominee or nominees, the redemption price specified by paragraph 5(a) or paragraph 5(b), as applicable. (e) No adjustments in respect of dividends shall be made upon the redemption of any shares of New Tracking Stock; provided, however, that, if the Redemption Date with respect to New Tracking Stock shall be subsequent to the record date for the payment of a dividend or other distribution thereon or with respect thereto but prior to the payment or distribution thereof, the registered holders of such shares at the close of business on such record date shall be entitled to receive the dividend or other distribution payable on such shares on the date set for payment of such dividend or other distribution, notwithstanding the redemption of such shares or the corporation's default in payment of the dividend or distribution due on such date. (f) From and after any Redemption Date, all rights of a holder of shares of New Tracking Stock shall cease except for the right, upon surrender of the certificates representing such shares of New Tracking Stock, to receive the redemption price with respect thereto. (g) If any redemption price to be paid pursuant to this paragraph 5 is to be paid to a Person other than that in which the certificate representing shares of New Tracking Stock are surrendered in exchange therefor is registered, it shall be a condition to the making of such payment that the Person requesting such payment pays any transfer or other taxes required by reason of the payment for such shares being made to a person other than the record holder of the certificate surrendered, or establishes, to the satisfaction of the corporation or its agent, that such tax has been paid or is not applicable. 6. Liquidation. (a) In the event of any involuntary liquidation, winding-up or dissolution of the corporation (an "Involuntary Liquidation"), after payment or provision for payment of the debts and other liabilities of the corporation and subject to the prior payment in full of the preferential amounts to which any class or series of Liquidation Senior Securities is entitled, the holders of shares of New Tracking Stock shall be entitled to receive for each share of New Tracking Stock, before any payment or distribution of the assets of the corporation (whether capital or surplus) shall be made to or set apart for the holders of Liquidation Junior Securities, an aggregate amount in cash equal to $3.65 billion. Such amount shall be distributed ratably among the shares of New Tracking Stock outstanding immediately prior to such Involuntary Liquidation. If, upon any such Involuntary Liquidation, the assets of the corporation, or proceeds thereof, shall be insufficient to pay in full the amount set forth in the preceding sentence and all other preferential liquidation payments with respect to Liquidation Parity Securities, then such assets, or proceeds thereof, shall be distributed among the shares of New Tracking Stock and all such other Liquidation Parity Securities ratably in accordance with the respective amounts that would be payable on such shares of New Tracking Stock and any such other Liquidation Parity Securities if all amounts payable thereon were paid in full. After the payment set forth in the first sentence of this paragraph 6(a) shall have been made in full to the holders of the New Tracking Stock, and subject to the prior payment in full of the preferential amounts to which any class or series of Preferred Stock is entitled, the remaining assets of the corporation available for distribution shall be distributed among the holders of the New Tracking Stock and the holders of the Common Stock, the holders of the Class A Liberty Media Group Common Stock, the holders of the Class B Liberty Media Group Common Stock and the holders of the Wireless Group Common Stock, with each holder of New Tracking Stock deemed to hold and to have converted such holder's shares of New Tracking Stock into that number of shares of Wireless Group Common Stock into which the number of shares of New Tracking Stock held by such holder as of the date of the Involuntary Liquidation was convertible for all intents and purposes as if such shares had been converted to Wireless Group Common Stock as of the date of such Involuntary Liquidation, in each case in accordance with the liquidation provisions set forth in Article Third, Part C, paragraph 6 of the Certificate, it being understood that in such event the Market Capitalization of the Wireless Group Common Stock shall be determined by including in the number of outstanding shares of Wireless Group Common Stock such shares deemed issued with respect to such conversion; provided that any amounts payable with respect to a share of New Tracking Stock pursuant to this sentence shall be reduced by the amount paid with respect to such share in the first sentence of this paragraph 6(a). (b) In the event of any liquidation, winding-up or dissolution of the corporation other than an Involuntary Liquidation as provided in paragraph 6(a), effective as of immediately prior to the time of such liquidation, winding-up or dissolution, without any action on the part of the corporation or any holder of New Tracking Stock, each share of New Tracking Stock shall be automatically converted into a number of shares of Wireless Group Common Stock at the then applicable Conversion Rate, and the certificates representing shares of New Tracking Stock held by such holder immediately prior to such conversion shall thereafter, without any surrender of such certificates, represent shares of Wireless Group Common Stock. After payment or provision for payment of the debts and liabilities of the corporation and subject to the prior payment in full of the preferential amounts to which any class or series of Preferred Stock is entitled, the assets of the corporation available for distribution shall be distributed among the holders of the Common Stock, the holders of the Class A Liberty Media Group Common Stock, the holders of the Class B Liberty Media Group Common Stock and the holders of the Wireless Group Common Stock (including the Wireless Group Common Stock issued on conversion of the New Tracking Stock as provided in the immediately preceding sentence), with each holder of New Tracking Stock (as of immediately prior to such liquidation, winding-up or dissolution) receiving in the distribution the amount to which such holder is entitled by virtue of such holder's ownership of shares of Wireless Group Common Stock into which such New Tracking Stock was converted as contemplated by the immediately preceding sentence, in each case in accordance with the liquidation provisions set forth in Article Third, Part C, paragraph 6 of the Certificate. (c) Neither the consolidation or merger of the corporation with or into any other corporation or corporations nor the sale, transfer or lease of all or substantially all the assets of the corporation itself shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding-up of the corporation within the meaning of this paragraph 6. Any transaction or series of related transactions that results in all of the assets and liabilities included in the Wireless Group being held by one or more Wireless Group Subsidiaries, and the distribution of some or all of the shares of such Wireless Group Subsidiaries (and no other material assets or liabilities) to the holders of the outstanding Wireless Group Common Stock shall not constitute a voluntary or involuntary liquidation, dissolution or winding up of the corporation for purposes of this Amendment but shall be subject to paragraph 4 of Part C of Article Third of the Certificate and, in the case of the Spin-off, to paragraph 8 of this Amendment. Any transaction or series of related transactions that results in all of the assets and liabilities included in the Liberty Media Group being held by one or more Liberty Media Group Subsidiaries (as defined in paragraph 5(a) of Part B of Article Third of the Certificate), and the distribution of such Liberty Media Group Subsidiaries (and no other material assets or liabilities) to the holders of the outstanding Liberty Media Group Common Stock shall not constitute a voluntary or involuntary liquidation, dissolution or winding up of the corporation for purposes of this Amendment, but shall be subject to paragraph 5(a) of Part B of Article Third of the Certificate. 7. Conversion. (a) Prior to the Spin-off, and subject to the provisions of this paragraph 7, the New Tracking Stock shall be convertible at the election of the holders thereof, at any time into fully paid and non-assessable shares of Wireless Group Common Stock; provided that such conversion is in respect to all (and not less than all) shares of New Tracking Stock. In the event of such conversion, each outstanding share of New Tracking Stock shall be convertible into five hundred (500) shares of Wireless Group Common Stock (the "Conversion Rate") as of the date of the conversion subject to adjustment from time to time pursuant to paragraph 7(e). (b) (i) In order to exercise the conversion privilege, all holder(s) of the shares of New Tracking Stock to be converted shall surrender the certificate(s) representing such shares at the principal executive offices of the corporation, with a written notice of election to convert completed and signed. Unless the shares issuable on conversion are to be issued in the same name as the name in which such shares of New Tracking Stock are registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the corporation, duly executed by the holder or the holder's duly authorized attorney, and an amount sufficient to pay any transfer or similar tax. (ii) As promptly as practicable after the surrender by the holder(s) of all certificates for shares of New Preferred Stock as aforesaid, the corporation shall issue and shall deliver to such holder(s), or on the holder's or holders' written order to the holder's or holders' transferee(s), a certificate or certificates for the whole number of shares of Wireless Group Common Stock issuable upon the conversion of such shares in accordance with the provisions of this paragraph 7. (iii) Each conversion of shares of New Tracking Stock pursuant to this paragraph 7 shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for shares of New Tracking Stock shall have been surrendered and such notice received by the corporation as aforesaid, and the person in whose name or names any certificate or certificates for shares of Wireless Group Common Stock shall be issuable upon such conversion shall be deemed to have become the holder of record of the shares of Wireless Group Common Stock represented thereby at such time on such date and such conversion shall be into a number of shares of Wireless Group Common Stock in respect of the shares of New Tracking Stock being converted as determined in accordance with this paragraph 7 at such time on such date. All shares of Wireless Group Common Stock delivered upon conversion of the New Tracking Stock will upon delivery be duly and validly issued and fully paid and non-assessable, free of all liens and charges created by acts or omissions of the corporation and not subject to any preemptive rights. Upon the surrender of certificates representing the shares of New Tracking Stock to be converted, the shares to be so converted shall no longer be deemed to be outstanding and all rights of a holder with respect to such shares surrendered for conversion shall immediately terminate except the right to receive the Wireless Group Common Stock and other amounts payable pursuant to this paragraph 7. (c) (i) The corporation covenants, notwithstanding any prior redemption or exchange of all outstanding shares of Wireless Group Common Stock, (y) that for so long as any shares of New Tracking Stock are outstanding or issuable upon conversion or exchange of other securities outstanding, it will at all times reserve and keep available, free from preemptive rights, such number of its authorized but unissued shares of Wireless Group Common Stock as shall be required for the purpose of effecting conversions of the New Tracking Stock and (z) that for so long as any shares of New Tracking Stock are outstanding or issuable upon conversion or exchange of other securities outstanding, the provisions of Article Third, Part C governing the terms of Wireless Group Common Stock shall remain fully operable and in effect. (ii) Prior to the delivery of any securities which the corporation shall be obligated to deliver upon conversion of the New Tracking Stock, the corporation shall comply with all applicable federal and state laws and regulations which require action to be taken by the corporation. (d) The corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Wireless Group Common Stock on conversion of the New Tracking Stock pursuant hereto; provided that the corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Wireless Group Common Stock in a name other than that of the holder of the New Tracking Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the corporation the amount of any such tax or has established, to the satisfaction of the corporation, that such tax has been paid. (e) (i) In case the corporation shall at any time after the date of initial issuance of the New Tracking Stock (A) declare a dividend or make a distribution on Wireless Group Common Stock payable in Wireless Group Common Stock, (B) subdivide or split the outstanding Wireless Group Common Stock, (C) combine or reclassify the outstanding Wireless Group Common Stock into a smaller number of shares, (D) issue any shares of its capital stock in a reclassification of Wireless Group Common Stock (including any such reclassification in connection with a consolidation or merger in which the corporation is the continuing corporation), or (E) consolidate with, or merge with or into, any other person, the Conversion Rate in effect at the time of the record date for such dividend or distribution or on the effective date of such subdivision, split, combination, consolidation, merger or reclassification shall be adjusted so that the conversion of the New Tracking Stock after such time shall entitle the holder to receive the aggregate number of shares of Wireless Group Common Stock or other securities of the corporation (or other securities into which such shares of Wireless Group Common Stock have been converted, exchanged, combined, consolidated, merged or reclassified pursuant to clause 7(e)(i)(C), 7(e)(i)(D) or 7(e)(i)(E) above) which, if the New Tracking Stock had been converted immediately prior to such time, such holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, distribution, subdivision, split, combination, consolidation, merger or reclassification. Such adjustment shall be made successively whenever an event listed above shall occur. (ii) In the event that, at any time as a result of the provisions of this paragraph 7(e), a holder of New Tracking Stock upon subsequent conversion shall become entitled to receive any shares of capital stock of the corporation other than Wireless Group Common Stock, the number of such other shares so receivable upon conversion of New Tracking Stock shall thereafter be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions contained in this Amendment. (g) All adjustments pursuant to this paragraph 7 shall be notified to the holders of the New Tracking Stock and such notice shall be accompanied by a schedule of computations of the adjustments; such notice shall be simultaneously faxed to such holders to the fax numbers for such holders as they appear upon the corporation's records. 8. Exchange in Connection with Spin-off. (a) If any holder of New Tracking Stock shall not have converted such holder's shares of New Tracking Stock into shares of Wireless Group Common Stock prior to the record date set by the Board of Directors for the Spin-off, effective as of immediately prior to the effective time of the Spin-off, without any action on the part of the corporation, AT&T Wireless or such holder, each share of such holder's New Tracking Stock shall be automatically converted (and to have been converted as of such record date) into a number of shares of Wireless Group Common Stock at the Conversion Rate and each such share of Wireless Group Common Stock into which the New Tracking Stock has been converted shall be exchanged at the effective time of the Spin-off for the number of shares of AT&T Wireless Common Stock issuable with respect to one share of Wireless Group Common Stock pursuant to the Spin-off. For the avoidance of doubt, the Spin-off shall be effected by the corporation as a Board Required Exchange (as defined in the Certificate) pursuant to Article Third, Part C, paragraphs 4 and 5 of the Certificate and, in that regard, the shares of AT&T Wireless Common Stock to be issued upon consummation of the Spin-off shall be deemed "Exchange Shares" thereunder. (b) No adjustments in respect of dividends shall be made upon the exchange of any shares of New Tracking Stock; provided, however, that, if the date of consummation of the Spin-off shall be subsequent to the record date for the payment of a dividend or other distribution on the New Tracking Stock or with respect thereto but prior to the payment or distribution thereof, the registered holders of such shares of New Tracking Stock at the close of business on such record date shall be entitled to receive the dividend or other distribution payable on such shares on the date set for payment of such dividend or other distribution, notwithstanding the conversion and exchange of such shares or the corporation's default in payment of the dividend or distribution due on such date. (c) The corporation shall give notice of the Spin-off to all holders of New Tracking Stock, by mailing by first-class mail a notice of such exchange (an "Exchange Notice"), not less than thirty (30) nor more than sixty (60) days prior to the date fixed for such exchange (the "Exchange Date") to their last addresses as they appear upon the corporation's books and by simultaneously faxing such notice to such holders to the fax numbers for such holders as they appear upon the corporation's records. Each such Exchange Notice shall specify the Exchange Date and the Exchange Rate (as defined in the Certificate) applicable to such exchange, and shall state that issuance of certificates representing AT&T Wireless Common Stock to be received upon conversion and exchange of shares of New Tracking Stock shall be upon surrender of certificates representing such shares of New Tracking Stock. (d) Before any holder of shares of New Tracking Stock shall be entitled to receive certificates representing such shares of AT&T Wireless Common Stock, such holder must surrender, at such office as the corporation shall specify, certificates for such shares of New Tracking Stock duly endorsed to the corporation or in blank or accompanied by proper instruments of transfer to the corporation or in blank, unless the corporation shall waive such requirement; no certificates representing the shares of Wireless Group Common Stock into which the New Tracking Stock is converted immediately prior to the exchange for shares of AT&T Wireless Common Stock shall be issued and, accordingly, no surrender of such certificates shall be required in connection with the exchange for shares of AT&T Wireless Common Stock upon consummation of the Spin-off. The corporation shall, as soon as practicable after such surrender of certificates representing such shares of New Tracking Stock, issue and deliver, at the office of the transfer agent representing shares of AT&T Wireless Common Stock, to the holder for whose account such shares of New Tracking Stock were so surrendered, or to such holder's nominee or nominees, certificates representing the number of shares of AT&T Wireless Common Stock to which such holder shall be entitled. (e) From and after the consummation of the Spin-off, all rights of a holder of shares of New Tracking Stock immediately prior to the conversion and exchange contemplated by this paragraph 8 shall cease except for the right, upon surrender of the certificates representing such shares of New Tracking Stock, to receive certificates representing shares of AT&T Wireless Common Stock and together with the rights to dividends as described in paragraph 8(c). No holder of a certificate that immediately prior to the consummation of the Spin-off represented shares of New Tracking Stock shall be entitled to receive any dividend or other distribution with respect to shares of AT&T Wireless Common Stock until surrender of such holder's certificate for a certificate or certificates representing shares of AT&T Wireless Common Stock. Upon surrender, the holder shall receive the amount of any dividends or other distributions (without interest) that were payable with respect to a record date after the date of consummation of the Spin-off, but that were not paid by reason of the foregoing with respect to the number of shares of AT&T Wireless Common Stock represented by the certificate or certificates issued upon such surrender. From and after the date of consummation of the Spin-off, the corporation shall, however, be entitled to treat certificates for New Tracking Stock that have not yet been surrendered for conversion and exchange as evidencing the ownership of the number of shares of AT&T Wireless Common Stock for which the shares of New Tracking Stock represented by such certificates have been converted and exchanged pursuant to this paragraph 8, notwithstanding the failure to surrender such certificates. (f) If any certificate for shares of AT&T Wireless Common Stock is to be issued in a name other than that in which the certificate representing shares of New Tracking Stock surrendered in exchange therefor is registered, it shall be a condition of such issuance that the person requesting the issuance pays any transfer or other taxes required by reason of the issuance of certificates for such shares of AT&T Wireless Common Stock in a name other than that of the record holder of the certificate surrendered, or establishes, to the satisfaction of the corporation or its agent, that such tax has been paid or is not applicable. Under no circumstances shall the corporation be liable to a holder of shares of New Tracking Stock for any shares of AT&T Wireless Common Stock or dividends or distributions thereon delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) In the event the Spin-off is to be effected by spinning off an entity other than AT&T Wireless, all references in this Amendment to AT&T Wireless shall be deemed to refer to such other entity and all references in this Amendment to AT&T Wireless Common Stock shall be deemed to refer to the publicly traded common stock of such other entity outstanding as of and following the Spin-off. For purposes of this paragraph 8, any spin-off meeting the definition of Spin-off as set forth in paragraph 1 shall be deemed to be the Spin-off, regardless of when such spin-off is consummated. IV. The amendments of the Certificate of Incorporation effected by this Certificate were authorized by action of the Board of Directors of the corporation pursuant to Section 502 of the Business Corporation Law. IN WITNESS WHEREOF, we have made and subscribed this Certificate this 19th day of January, 2001. By: C. Michael Armstrong ----------------------- Name: C. Michael Armstrong Title: Chairman and Chief Executive Officer [Corporate Seal] CERTIFICATE OF AMENDMENT of the CERTIFICATE OF INCORPORATION of AT&T CORP. Under Section 805 of the Business Corporation Law We, the undersigned, being a Vice President and an Assistant Secretary, respectively, of AT&T Corp., do hereby certify as follows: FIRST: The name of the corporation is AT&T Corp. SECOND: The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885 under the name American Telephone and Telegraph Company. A Certificate of Amendment of the Certificate of Incorporation was filed in the office of the Secretary of State of the State of New York on April 20, 1994, changing the name of the corporation to AT&T Corp. THIRD: (a) The Certificate of Incorporation of the corporation is hereby amended to set the required vote for shareholder approval of a merger or consolidation of the corporation, a sale, lease, exchange or other disposition of all or substantially all the assets of the corporation, or a dissolution of the corporation, at a majority of the votes of all outstanding shares of the corporation entitled to vote thereon. (b) To effect the foregoing, a new Article TENTH is hereby added to the Certificate of Incorporation, reading in its entirety as set forth below: TENTH. (a) The required vote for authorization by shareholders of a merger or consolidation of the corporation, pursuant to Section 903 of the Business Corporation Law, shall be a majority of the votes of the shares of the corporation entitled to vote thereon. Such vote shall be in addition to any class vote that may be required by Section 903 of the Business Corporation Law. (b) The required vote for approval by shareholders of a sale, lease, exchange or other disposition of all or substantially all the assets of the corporation, pursuant to Section 909 of the Business Corporation Law, shall be a majority of the votes, of all outstanding shares of the corporation entitled to vote thereon. (c) The required vote for authorization by shareholders of a dissolution of the corporation, pursuant to Section 1001 of the Business Corporation Law, shall be a majority of the votes of all outstanding shares of the corporation entitled to vote thereon. FOURTH: The manner in which the foregoing amendment of said Certificate of Incorporation of the corporation was authorized was by the vote of the holders of a majority of the votes of all outstanding shares entitled to vote thereon at a meeting of shareholders, subsequent to the approval of the foregoing amendment by the unanimous written consent of the board of directors of the corporation. IN WITNESS WHEREOF, we have subscribed this document on May 25, 2001, and do hereby affirm, under penalties of perjury, that the statements contained herein have been examined by us and are true and correct. By: /s/ Marilyn J. Wasser --------------------------- Name: Marilyn J. Wasser Title: Vice President By: /s/ Robert S. Feit ---------------------------- Name: Robert S. Feit Title: Assistant Secretary [Corporate Seal] CERTIFICATE OF AMENDMENT of the CERTIFICATE OF INCORPORATION of AT&T CORP. Under Section 805 of the Business Corporation Law Pursuant to the provisions of Section 805 of the BUSINESS CORPORATION LAW, the undersigned, being the Vice President-Law and Secretary of AT&T CORP., a New York corporation (the "corporation"), hereby certify that: I. The name of the corporation is AT&T Corp. II. The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885 under the name American Telephone and Telegraph Company. A Certificate of Amendment of the Certificate of Incorporation was filed in the office of the Secretary of State of the State of New York on April 20, 1994, changing the name of the corporation to AT&T Corp. III. The Certificate of Incorporation of the corporation is hereby amended pursuant to authority vested in the Board of Directors by the Certificate of Incorporation of the corporation, as heretofore amended, and in accordance with Section 502 of the Business Corporation Law, by the addition of the following provision, stating the number, designation, relative rights, preferences and limitations of a series of the corporation's authorized preferred shares designated as Subsidiary Exchangeable Preferred Stock. Number and Designation. 2,000,000 shares of the Preferred Stock of the corporation shall constitute a series designated as "Subsidiary Exchangeable Preferred Stock" (the "Subsidiary Preferred Stock"). Dividends and Distributions. (i) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Subsidiary Preferred Stock with respect to dividends, the holders of shares of Subsidiary Preferred Stock, in preference to the holders of Common Stock (as defined in Article THIRD of the Certificate of Incorporation) of the corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Subsidiary Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of: (a) $1 or (b) subject to the provision for adjustment set forth in paragraph (A)(ii) below, (1) 1000 times the aggregate per share amount of all cash dividends, and (2) 1000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions (including dividends or other distributions of common shares other than Common Stock), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Subsidiary Preferred Stock provided however that in lieu of any dividends payable in shares of Common Stock or payable as a result of a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), the adjustments set forth in this Certificate of Designations shall be made. (ii) In the event the corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Subsidiary Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding paragraph (A)(i) shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. The corporation shall declare a dividend or distribution on the Subsidiary Preferred Stock as provided in paragraph (A)(i) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Subsidiary Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. Dividends shall begin to accrue and be cumulative on outstanding shares of Subsidiary Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Subsidiary Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Subsidiary Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Subsidiary Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be the same date as that fixed for the determination of holders of Common Stock entitled to receive payment of the corresponding dividend or distribution, or if there is no corresponding dividend or distribution on the Common Stock, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Voting Rights. The holders of shares of Subsidiary Preferred Stock shall have the following voting rights: Subject to the provision for adjustment hereinafter set forth, each share of Subsidiary Preferred Stock shall entitle the holder thereof to 1000 votes on all matters submitted to a vote of the stockholders of the corporation. In the event the corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Subsidiary Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Subsidiary Preferred Stock and the holders of shares of Common Stock and any other capital stock of the corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the corporation. Except as set forth herein, or as otherwise provided by law, holders of Subsidiary Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Certain Restrictions. Whenever quarterly dividends or other dividends or distributions payable on the Subsidiary Preferred Stock as provided in Section 2 are in arrears (which for purposes of clarification shall not include any failure to make any payment as a result of a waiver by the holders thereof), thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Subsidiary Preferred Stock outstanding shall have been paid in full, the corporation shall not: declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Subsidiary Preferred Stock; declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Subsidiary Preferred Stock, except dividends paid ratably on the Subsidiary Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Subsidiary Preferred Stock, provided that the corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Subsidiary Preferred Stock; or redeem or purchase or otherwise acquire for consideration any shares of Subsidiary Preferred Stock, or any shares of stock ranking on a parity with the Subsidiary Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. The corporation shall not permit any subsidiary of the corporation to purchase or otherwise acquire for consideration any shares of stock of the corporation unless the corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Liquidation, Dissolution or Winding Up. Subject to the provisions of the Certificate of Incorporation (including limitations on distributions to Preferred Stock), upon any liquidation, dissolution or winding up of the corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Subsidiary Preferred Stock unless, prior thereto, the holders of shares of Subsidiary Preferred Stock shall have received $1000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Subsidiary Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, provided, further, that on involuntary liquidation, dissolution or winding up of the corporation, the aggregate amount that all shares of Subsidiary Preferred Stock shall be entitled to receive (prior to shares of stock ranking junior to it) shall be no greater than $500,000,000, with holders of Subsidiary Preferred Stock entitled to any shortfall or any amount otherwise payable on a pro rata basis with holders of Common Stock or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Subsidiary Preferred Stock, except distributions made ratably on the Subsidiary Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Subsidiary Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Consolidation, Merger, etc. In case the corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Subsidiary Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Subsidiary Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Redemption. At any time, the Board of Directors may redeem shares of Subsidiary Preferred Stock for Common Stock at a ratio of 1000 shares of Common Stock per share of Subsidiary Preferred Stock. In the event the corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of shares of Common Stock set forth in the preceding sentence with respect to the redemption of shares of Subsidiary Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. At any time following the first issuance of a class or series of common stock of the corporation intended to represent the financial performance of the corporation's broadband business ("Broadband Group Common Stock"), the Board of Directors may redeem shares of Subsidiary Preferred Stock for Broadband Group Common Stock at a ratio to be determined by the Board of Directors based on the fair market values of Broadband Group Common Stock and Subsidiary Preferred Stock, as determined by the Board of Directors. All such determinations shall be in the sole discretion of the Board of Directors, and all such determinations shall be final and binding. Any redemption pursuant to this Section 7 shall be pursuant to notice and other procedures as determined by the Board of Directors. Rank. The Subsidiary Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the corporation's Preferred Stock. Amendment. The Certificate of Incorporation of the corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Subsidiary Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Subsidiary Preferred Stock, voting together as a single class. IV. The amendments of the Certificate of Incorporation effected by this Certificate were authorized by action of the Board of Directors of the corporation pursuant to Section 502 of the Business Corporation Law. IN WITNESS WHEREOF, we have made and subscribed this Certificate this 20th day of June, 2001. By: /s/ Marilyn.J.Wasser ---------------------------- Name: Marilyn. J. Wasser Title: Vice President - Law and Secretary By: /s/ Michael Berg ----------------------------- Name: Michael Berg Title: Assistant Secretary [Corporate Seal] EX-10.I.37 4 e56632ex10-i_37.txt EMPLOYEE BENEFITS AGREEMENT Exhibit (10)(i)37 EMPLOYEE BENEFITS AGREEMENT BY AND BETWEEN AT&T CORP. AND AT&T BROADBAND CORP. DATED AS OF DECEMBER 19, 2001 TABLE OF CONTENTS ARTICLE I DEFINITIONS................................................... 1 1.1 Affiliate..................................................... 1 1.2 Agreement..................................................... 1 1.3 Ancillary Agreements.......................................... 1 1.4 Approved Leave of Absence..................................... 1 1.5 AT&T.......................................................... 1 1.6 AT&T Broadband Common Stock................................... 1 1.7 AT&T Closing Stock Value...................................... 1 1.8 AT&T Common Stock............................................. 2 1.9 AT&T Deferral Plan............................................ 2 1.10 AT&T Deferral Plan Participant................................ 2 1.11 AT&T Directors' Deferral Plan................................. 2 1.12 AT&T Employee................................................. 2 1.13 AT&T Entity................................................... 2 1.14 AT&T Executive................................................ 2 1.15 AT&T Executive Benefit Plans.................................. 2 1.16 AT&T Force Management Program................................. 2 1.17 AT&T Labor Agreement.......................................... 2 1.18 AT&T Long Term Incentive Plan................................. 3 1.19 AT&T Opening Stock Value...................................... 3 1.20 AT&T Participant.............................................. 3 1.21 AT&T Pension Plans............................................ 3 1.22 AT&T Post-Retirement Welfare Benefits Plan.................... 3 1.23 AT&T Savings Plans............................................ 3 1.24 AT&T Toll Discount Program.................................... 4 1.25 AT&TMPP....................................................... 4 1.26 AT&TPP........................................................ 4 1.27 Auditing Party................................................ 4 1.28 Award......................................................... 4 1.29 Benefit Plan.................................................. 4 1.30 Broadband Adjustment Plan..................................... 4 1.31 Broadband Common Stock Value.................................. 4 1.32 Broadband Employee............................................ 5 1.33 Broadband Entities............................................ 5 1.34 Broadband Long Term Savings Plans............................. 5 1.35 Broadband Participant......................................... 5 1.36 Broadband Pension Plans....................................... 6 1.37 Broadband Severance Plan...................................... 6 1.38 Broadband Transferees......................................... 6 1.39 Close of the Distribution Date................................ 6 1.40 COBRA......................................................... 6 1.41 Code.......................................................... 6 1.42 Communications Services Entities.............................. 6 1.43 Distribution.................................................. 6
-i- 1.44 Distribution Date............................................. 6 1.45 Distribution Ratio............................................ 6 1.46 Distribution Year............................................. 6 1.47 EBLIP......................................................... 7 1.48 ERISA......................................................... 7 1.49 Former Employee............................................... 7 1.50 Health and Welfare Plans...................................... 7 1.51 HIPAA......................................................... 7 1.52 Immediately after the Distribution Date....................... 7 1.53 Individual Agreement.......................................... 7 1.54 Individual Deferral Agreement................................. 8 1.55 Intrinsic Value............................................... 8 1.56 Merger Agreement.............................................. 8 1.57 Liabilities................................................... 8 1.58 Nasdaq........................................................ 8 1.59 Non-parties................................................... 8 1.60 NYSE.......................................................... 8 1.61 Option........................................................ 8 1.62 Participating Company......................................... 8 1.63 Person........................................................ 9 1.64 Senior Manager................................................ 9 1.65 Separation and Distribution Agreement......................... 9 1.66 Separation Transactions....................................... 9 1.67 SMULIP........................................................ 9 1.68 Subsidiaries.................................................. 9 1.69 SVULIP........................................................ 9 1.70 Tax Sharing Agreement......................................... 9 1.71 Transition Period............................................. 9 1.72 U.S........................................................... 9 ARTICLE II GENERAL PRINCIPLES............................................ 9 2.1 Employment of Broadband Transferees........................... 9 2.2 Employment of Broadband Employees............................. 9 2.3 Employment of Broadband Transferees on Leave Status........... 10 2.4 Assumption and Retention of Liabilities; Related Assets....... 10 2.5 Broadband Participation in AT&T Benefit Plans................. 11 2.6 AT&T Participation in Broadband Benefit Plans................. 11 2.7 Terms of Participation by Broadband Transferees in Broadband Benefit Plans ................................................ 11 2.8 Service Recognition........................................... 12 2.9 Approval by AT&T as Sole Shareholder.......................... 12 2.10 AT&T Labor Agreements......................................... 12 2.11 Change in Control Benefits.................................... 13 ARTICLE III DEFINED CONTRIBUTION AND DEFINED BENEFIT PLANS................ 13 3.1 Savings Plans................................................. 13 (a) Broadband Long Term Savings Plan Trust.................. 13
-ii- (b) AT&T Savings Plans and Trust............................ 14 (c) Assumption of Liabilities and Transfer of Accounts...... 14 (d) Vesting................................................. 14 (e) Exchange of Data; Account Transfer...................... 14 (f) "Lost" Company Match.................................... 15 3.2 AT&T Pension Plans............................................ 15 (a) Retention of AT&T Pension Plans......................... 15 (b) Vesting................................................. 15 (c) Commencement of Pension................................. 15 (d) Bridging................................................ 16 (e) Conversions to Cash Balance............................. 16 3.3 Broadband Pension Plans....................................... 16 (a) Assumption of Broadband Pension Plans................... 16 (b) Vesting................................................. 16 (c) Bridging................................................ 16 (d) Commencement of Pension................................. 17 ARTICLE IV HEALTH AND WELFARE PLANS...................................... 17 4.1 Assumption of Health and Welfare Plan Liabilities............. 17 (a) General................................................. 17 (b) Certain Specific Claims................................. 17 4.2 Health and Welfare Plan Transitional Coverage Rules........... 18 (a) General................................................. 18 (b) Broadband Transferees and Broadband Benefit Plans....... 18 (c) AT&T Employees and AT&T Benefit Plans; Broadband Employees and Broadband Benefit Plans .................. 19 4.3 HCRA/CECRA Post-Distribution Transitional Rules............... 19 (a) AT&T Health Care Reimbursement Account Plan; Broadband Transferees .................................. 19 (b) AT&T Child/Elder Care Reimbursement Account Plan; Broadband Transferees .................................. 19 4.4 Workers' Compensation Liabilities............................. 20 4.5 Payroll Taxes and Reporting of Compensation................... 20 4.6 AT&T Post-Retirement Welfare Benefits Plan.................... 21 (a) Retention of AT&T Post-Retirement Welfare Benefits Plan. 21 (b) Assumption of Broadband Post-Retirement Medical Plans... 21 (c) Eligibility of Broadband Employees; Rule of 65.......... 21 4.7 COBRA and HIPAA Compliance.................................... 22 4.8 Long-Term Care; Direct Pay Arrangements....................... 22 4.9 Severance Benefits............................................ 22 ARTICLE V EXECUTIVE BENEFITS AND OTHER BENEFITS......................... 23 5.1 Individual Agreements - Assumption of Liabilities and Consents ................................................. 23 5.2 AT&T Short Term Incentive Plan and AT&T Bonus Plan Award...... 24 5.3 AT&T Long Term Incentive Plans................................ 24 (a) AT&T Options Held by Current Employees.................. 25
-iii- (b) AT&T Options Held by Former Employees................... 25 (c) Miscellaneous Option Terms.............................. 26 (d) Vesting and Exercisability of Options................... 28 (e) Restricted Shares....................................... 29 (f) Restricted Stock Units.................................. 30 (g) Performance Shares...................................... 31 (h) Partial Interests in Shares or Stock Units.............. 33 (i) Incentive Stock Options; Foreign Grants/Awards.......... 33 (j) Individual Enforcement.................................. 33 5.4 AT&T Employee Stock Purchase Plan............................. 33 5.5 Savings Clause................................................ 34 5.6 Registration Requirements..................................... 34 5.7 Non-Competition Guidelines.................................... 34 (a) AT&T Non-Competition Guideline.......................... 34 (b) Broadband Non-Competition Guideline..................... 35 (c) Confidentiality and Proprietary Information............. 36 5.8 Deferral Plans and Individual Deferral Agreements............. 36 5.9 AT&T Non-Qualified Pension Plans and Arrangements............. 36 5.10 Broadband Non-Qualified Pension Plans and Arrangements........ 37 5.11 Life Insurance Programs....................................... 37 (a) AT&T Senior Management Universal Life Insurance Program................................................. 37 (b) AT&T Executive Basic Life Insurance Program............. 37 (c) AT&T Estate Enhancement Program......................... 38 (d) AT&T Supplemental Variable Universal Life Insurance Program ...................................... 38 5.12 Financial Counseling.......................................... 38 5.13 Toll Discount Program......................................... 39 5.14 Relocation Plan............................................... 39 5.15 Senior Manager Car Allowance.................................. 39 5.16 Taxable Fringe Benefits....................................... 39 5.17 Separation Plans.............................................. 40 ARTICLE VI GENERAL AND ADMINISTRATIVE.................................... 40 6.1 Payment of Liabilities........................................ 40 6.2 Sharing of Participant Information............................ 40 6.3 Best Efforts/Cooperation...................................... 41 6.4 Non-Termination of Employment; No Third-Party Beneficiaries... 41 6.5 Audit Rights With Respect to Information Provided............. 42 6.6 Fiduciary Matters............................................. 42 6.7 Collective Bargaining......................................... 43 6.8 Consent of Third Parties...................................... 43 ARTICLE VII MISCELLANEOUS................................................. 43 7.1 Effect If Distribution Does Not Occur......................... 43 7.2 Relationship of Parties....................................... 43 7.3 Affiliates.................................................... 43
-iv- 7.4 Notices....................................................... 43 7.5 Incorporation of Separation and Distribution Agreement Provisions ................................................... 44 7.6 Governing Law................................................. 45 7.7 References.................................................... 45
SIGNATURES OF THE PARTIES SCHEDULE 1.17 AT&T Labor Agreements SCHEDULE 1.29 Broadband Benefit Plans SCHEDULE 1.38 List of Broadband Transferees SCHEDULE 4.9 Severance Multiples SCHEDULE 5.1(b) Broadband Individual Agreements SCHEDULE 5.10 Broadband Non-Qualified Pension Arrangements EXHIBIT 5.7(a) Broadband People Movement Guidelines -v- EMPLOYEE BENEFITS AGREEMENT This EMPLOYEE BENEFITS AGREEMENT, dated as of December 19, 2001, is by and between AT&T Corp., a New York corporation ("AT&T"), and AT&T Broadband Corp., a Delaware corporation ("AT&T Broadband"). Capitalized terms used herein (other than the formal names of AT&T Benefit Plans and Broadband Benefit Plans and related trusts of AT&T and AT&T Broadband) and not otherwise defined shall have the respective meanings assigned to them in Article I or assigned to them in the Separation and Distribution Agreement (as defined below), as applicable. WHEREAS, the Board of Directors of AT&T has determined that it is in the best interests of AT&T and its shareholders to separate AT&T Broadband from AT&T's existing businesses and provide for it to be an independent business; WHEREAS, in furtherance of the foregoing, AT&T and AT&T Broadband have entered into a Separation and Distribution Agreement, dated as of even date herewith (the "Separation and Distribution Agreement"), and other specific agreements that will govern certain matters relating to the Separation Transactions and the relationship of AT&T, AT&T Broadband and their respective Subsidiaries following the Distribution Date; and WHEREAS, pursuant to the Separation and Distribution Agreement, AT&T and AT&T Broadband have agreed to enter into this Agreement allocating assets, Liabilities and responsibilities with respect to certain employee compensation and benefit plans and programs between and among them. NOW, THEREFORE, the parties, intending to be legally bound, agree as follows: DEFINITIONS For purposes of this Agreement, the following terms shall have the following meanings: Affiliate has the meaning given that term in the Separation and Distribution Agreement. Agreement means this Employee Benefits Agreement, including all the Schedules hereto. Ancillary Agreements has the meaning given that term in the Separation and Distribution Agreement. Approved Leave of Absence means an absence from active service (i) due to an individual's inability to perform his or her regular job duties by reason of illness or injury and resulting in eligibility to receive benefits pursuant to the terms of the AT&T Short Term Disability Plan, or (ii) pursuant to an approved leave policy with a guaranteed right of reinstatement. AT&T is defined in the preamble to this Agreement. AT&T Broadband Common Stock means the AT&T Broadband Common Stock as defined in the Separation and Distribution Agreement. AT&T Closing Stock Value means the closing per-share price of the AT&T Common Stock trading "regular way with due bills" as listed on the NYSE as of 4:00 P.M., Eastern Standard Time or Eastern Daylight Time (whichever shall then be in effect) on the Distribution Date; provided, however, that if the Distribution occurs at a time when the NYSE is open for trading, AT&T Closing Stock Value shall mean the price at which AT&T Common Stock trading "regular way with due bills" last trades immediately before the Distribution; provided further, that if the Distribution occurs prior to the first trade of AT&T Common Stock on the Distribution Date, the AT&T Closing Stock Value shall mean the price at which AT&T Common Stock trading "regular way with due bills" last trades on the trading day immediately preceding the Distribution Date. AT&T Common Stock has the meaning set forth in the Separation and Distribution Agreement. AT&T Deferral Plan means the AT&T Senior Management Incentive Award Deferral Plan in effect as of the time relevant to the applicable provision of this Agreement. AT&T Deferral Plan Participant means any individual who has an account balance in the AT&T Deferral Plan as of the Distribution Date. AT&T Directors' Deferral Plan means the AT&T Deferred Compensation Plan for Non-Employee Directors, as amended from time to time. AT&T Employee means any individual who, immediately prior to the Close of the Distribution Date, is (a) either actively employed by, or then on Approved Leave of Absence from, any AT&T Entity, other than a Broadband Entity or (b) designated by mutual written agreement of AT&T and AT&T Broadband as an AT&T Employee. AT&T Entity means AT&T, a Broadband Entity or a Communications Services Entity. AT&T Executive means an AT&T Employee (other than a Broadband Entity), at salary grade level "E" or above (or comparable positions), who immediately before the Close of the Distribution Date is eligible to participate in or receive a benefit under any AT&T Executive Benefit Plan. AT&T Executive Benefit Plans means the executive benefit and nonqualified plans, programs, and arrangements (exclusive of Individual Agreements) established, sponsored, maintained, or agreed upon, by any AT&T Entity (other than a Broadband Entity) for the benefit of employees and former employees of any AT&T Entity (other than a Broadband Entity) before the Close of the Distribution Date. AT&T Force Management Program means the AT&T Separation Plan, the AT&T Senior Management Separation Plan, the AT&T Special Executive Separation Plan and the AT&T Senior Officer Separation Plan in effect as of the time relevant to the applicable provision of this Agreement. AT&T Labor Agreement shall mean each labor agreement and collective bargaining agreement, other than any such agreement to which any -2- Broadband Entity is a party. The AT&T Labor Agreements are listed on Schedule 0. AT&T Long Term Incentive Plan means any of the AT&T 1987 Long Term Incentive Program, the AT&T 1997 Long Term Incentive Program and such other stock-based incentive plans assumed by AT&T by reason of merger, acquisition or otherwise, including incentive plans of Lin Broadcasting Corporation, McCaw Cellular Communications, Inc., Teleport Communications Group, Inc., ACC Corp., U S WEST, Inc., U S WEST Media Group, Inc., MediaOne Group Inc. and Tele-Communications Inc. and any other incentive plan identified in writing by AT&T before the Close of the Distribution Date, all as in effect as of the time relevant to the applicable provisions of this Agreement. AT&T Opening Stock Value means the opening per-share price of AT&T Common Stock as listed on the NYSE as of the opening of trading on the first trading day following the Distribution Date; provided, however, that if the Distribution occurs at a time when the NYSE is open for trading, AT&T Opening Stock Value shall mean the price at which AT&T Common Stock trades as of the moment immediately after the Distribution; and provided further, that if the Distribution occurs prior to opening of trading on the NYSE on the Distribution Date, the AT&T Opening Stock Value shall mean the price at which AT&T Common Stock first trades on the Distribution Date. AT&T Participant means any individual other than a Broadband Participant who holds an award under any AT&T Long Term Incentive Plan. AT&T Pension Plans means the AT&TMPP, the AT&TPP, the AT&T Excess Benefit and Compensation Plan, and the AT&T Non-Qualified Pension Plan in effect as of the time relevant to the applicable provision of this Agreement. AT&T Post-Retirement Welfare Benefits Plan means the Health and Welfare Plan of AT&T providing medical expense benefits for retirees, dental expense benefits for retirees, life insurance benefits for retirees (provided, that in the case of the life insurance plans, the applicable AT&T Employee, Broadband Employee or Broadband Transferee was enrolled for coverage as an active employee under the corresponding active-employee life insurance plans at the time of his or her termination of employment) and the AT&T Toll Discount Program. For purposes of this Agreement, the EBLIP, the SMULIP, the SVULIP, the AT&T Corp. Estate Enhancement Program (including the AT&T Corp. Alternative Death Benefit Program and the AT&T Corp. Special Death Benefit Program) and any other plans, programs or arrangements not expressly identified in this Section 1.23 shall not be considered part of the AT&T Post-Retirement Welfare Benefits Plan. AT&T Savings Plans means the AT&T defined contribution plans, in effect as of the time relevant to the applicable provision of this Agreement, -3- sponsored by AT&T or by any AT&T Entity, other than the Broadband Long Term Savings Plan. AT&T Toll Discount Program means the AT&T Senior Manager Telephone Discount Program and the AT&T Toll Discount Program in effect as of the time relevant to the applicable provisions of this Agreement. AT&TMPP means the AT&T Management Pension Plan in effect as of the time relevant to the applicable provision of this Agreement. AT&TPP means the AT&T Pension Plan in effect as of the time relevant to the applicable provision of this Agreement. Auditing Party is defined in Section 6.4(a). Award, when immediately preceded by "AT&T," means an award under the AT&T Long Term Incentive Plan. When immediately preceded by "Broadband," Award means an award under the Broadband Adjustment Plan. Benefit Plan shall mean, with respect to an entity or any of its Subsidiaries, (a) each "employee welfare benefit plan" (as defined in Section 3(1) of ERISA) and all other employee benefits arrangements, policies or payroll practices (including, without limitation, severance pay, sick leave, vacation pay, salary continuation, disability, retirement, deferred compensation, bonus, stock purchase, stock option or other equity-based compensation, hospitalization, medical insurance or life insurance) sponsored or maintained by such entity or by any of its Subsidiaries (or to which such entity or any of its Subsidiaries contributes or is required to contribute) and (b) all "employee pension benefit plans" (as defined in Section 3(2) of ERISA), occupational pension plan or arrangement or other pension arrangements sponsored, maintained or contributed to by such entity or any of its Subsidiaries (or to which such entity or any of its Subsidiaries contributes or is required to contribute). When immediately preceded by "AT&T," Benefit Plan means any Benefit Plan sponsored, maintained or contributed to by AT&T or a Communications Services Entity. When immediately preceded by "Broadband," Benefit Plan means any Benefit Plan sponsored, maintained or contributed to by Broadband or any Broadband Entity. The Broadband Benefit Plans are listed in Schedule 0 hereto. Broadband Adjustment Plan means the long term incentive plan or program to be established by AT&T Broadband, effective immediately prior to the Distribution Date, in connection with the treatment of Awards as described in Article V. Broadband Common Stock Value means (a) if the AT&T Common Stock trades "ex-distribution" or "when issued (to give effect to the Distribution)" on the NYSE on or immediately prior to the Distribution Date, the excess of the AT&T Closing Stock Value over the AT&T Ex-Distribution Closing Stock Value, and (b) if the AT&T Common Stock does not trade "ex-distribution" or "when -4- issued (to give effect to the Distribution)" on the NYSE on or immediately prior to the Distribution Date, the opening per-share price of Parent Class A Special Common Stock (as defined in the Merger Agreement) as listed on Nasdaq as of the opening of trading on the first trading day following the Distribution Date, divided by the Exchange Ratio (as defined in the Merger Agreement); provided, however, that if, for purposes of clause (b), the Distribution occurs at a time when Nasdaq is open for trading, Broadband Common Stock Value shall be determined using the price at which Parent Class A Special Common Stock trades as of the moment immediately after the Distribution; and provided further, that if, for purposes of clause (b), the Distribution occurs prior to opening of trading on Nasdaq on the Distribution Date, the Broadband Common Stock Value shall be determined using the price at which Parent Class A Special Common Stock first trades on the Distribution Date. For purposes of this Section 0, the "AT&T Ex-Distribution Closing Stock Value" means the closing per-share price of the AT&T Common Stock trading "ex-distribution" or "when issued (to give effect to the Distribution)" as listed on the NYSE as of 4:00 P.M., Eastern Standard Time or Eastern Daylight Time (whichever shall then be in effect) on the Distribution Date; provided, however, that if the Distribution occurs at a time when the NYSE is open for trading, AT&T Ex-Distribution Closing Stock Value shall mean the price at which AT&T Common Stock trading "ex-distribution" or "when issued (to give effect to the Distribution)" last trades immediately before the Distribution; provided further, that if the Distribution occurs prior to the first trade on the Distribution Date, the AT&T Ex-Distribution Closing Stock Value shall mean the price at which AT&T Common Stock trading "ex-distribution" or "when issued (to give effect to the Distribution)" last trades on the trading day immediately preceding the Distribution Date. Broadband Employee means any individual who, immediately prior to the Distribution, is either actively employed by or then on Approved Leave of Absence from a Broadband Entity, other than a Broadband Transferee. Broadband Entities means the members of the AT&T Broadband Group, as defined in the Separation and Distribution Agreement, including without limitation AT&T Broadband; AT&T Broadband, L.L.C., a Delaware limited liability company; MediaOne Group Inc., a Delaware corporation; and each of their respective Subsidiaries and Affiliates. Broadband Long Term Savings Plans means the AT&T Broadband Long Term Savings Plan, the United Artists Cablesystems Corporation Savings and Investment Plan and the TKR Cable Company Defined Contribution Plan, each as in effect as of the time relevant to the applicable provision of this agreement. Broadband Participant means any Broadband Employee, Broadband Transferee and any former employee, director or consultant of an AT&T Entity whose services immediately before such employment or service ended were -5- being primarily performed for a Broadband Entity, in each case, who holds an award under any AT&T Long Term Incentive Plan. Broadband Pension Plans means the AT&T Broadband Pension Plan, the AT&T Broadband Non-Qualified Pension Plan, the Kearns-Tribune Corporation Pension Plan and the MediaOne Group Mid Career Plan, each as in effect as of the time relevant to the applicable provision of this Agreement. Broadband Severance Plan means the AT&T Broadband Severance Plan. Broadband Transferees means those AT&T Employees who are listed on Schedule 0 hereto, as such Schedule may be amended from time to time by the mutual written consent of AT&T and AT&T Broadband. Close of the Distribution Date means 11:59:59 P.M., Eastern Standard Time or Eastern Daylight Time (whichever shall then be in effect), on the Distribution Date. COBRA means the continuation coverage requirements for "group health plans" under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and as codified in Code Section 4980B and ERISA Sections 601 through 608. Code means the Internal Revenue Code of 1986, as amended, or any successor federal income tax law. Reference to a specific Code provision also includes any proposed, temporary or final regulation in force under that provision. Communications Services Entities means the members of the AT&T Communications Group, as defined in the Separation and Distribution Agreement, and their respective Subsidiaries and Affiliates after the Distribution Date. Distribution has the meaning given that term in the Separation and Distribution Agreement. Distribution Date has the meaning given that term in the Separation and Distribution Agreement. Distribution Ratio means a fraction, the numerator of which shall be the number of shares of AT&T Broadband Common Stock distributed to the shareholders of AT&T Common Stock in the Distribution, and the denominator of which is the number of shares of AT&T Common Stock outstanding at the close of business on the Record Date. [Assumed to be one]. Distribution Year means the calendar year during which the Distribution Date occurs. -6- EBLIP means the AT&T Executive Basic Life Insurance Program in effect as of the time relevant to the applicable provisions of this Agreement. ERISA means the Employee Retirement Income Security Act of 1974, as amended. Reference to a specific provision of ERISA also includes any proposed, temporary or final regulation in force under that provision. Former Employee is defined in Section 5.3(b)(i). Health and Welfare Plans shall mean any plan, fund or program which was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, medical, surgical or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs or day care centers, scholarship funds, or prepaid legal services, including any such plan, fund or program as defined in Section 3(1) of ERISA. When immediately preceded by "AT&T," Health and Welfare Plans means each Health and Welfare Plan that is an AT&T Benefit Plan. When immediately preceded by "Broadband," Health and Welfare Plans means the AT&T Broadband Health and FSA Plan, the AT&T Broadband Life Insurance Plan, the AT&T Broadband Long-Term Care Insurance Plan, the AT&T Broadband Pre-Paid Legal Expense Plan, the AT&T Broadband Severance Plan, the AT&T Broadband Disability Plan, the MediaOne Group VEBA Trust and the AT&T Broadband VEBA Trust and each other Health and Welfare Plan that is a Broadband Benefit Plan. HIPAA means the health insurance portability and accountability requirements for "group health plans" under the Health Insurance Portability and Accountability Act of 1996, as amended. Immediately after the Distribution Date means on the first moment of the day after the Distribution Date. Individual Agreement means an individual contract or agreement (whether written or unwritten) entered into prior to the Close of the Distribution Date (other than an Individual Deferral Agreement as defined below) between any AT&T Entity and an AT&T Executive that establishes the right of such individual to special executive compensation or benefits, including a supplemental pension benefit, deferred compensation, severance, hiring bonus, loan, guaranteed payment, special allowance, tax equalization or disability benefit, or a share units grant (payable in the form of cash or otherwise) under individual phantom share agreements. An Individual Agreement does not include any individual contract, application or agreement entered into or by any AT&T Entity and an AT&T Executive (or his or her assignee) that relates to eligibility for coverage under the AT&T Post-Retirement Welfare Benefits Plan, or life insurance coverage for the AT&T Executive under the EBLIP, the SMULIP, the SVULIP, or the AT&T Estate -7- Enhancement Program (including the AT&T Alternative Death Benefit Program and the AT&T Special Death Benefit Program). Individual Deferral Agreement means an agreement entered into prior to the Close of the Distribution Date by any AT&T Entity and any AT&T Executive for the deferral of compensation (other than a deferral election made by an AT&T Executive or a Broadband Transferee under the AT&T Deferral Plan or the AT&T Broadband Deferred Compensation Plan) and with respect to which all events have occurred and all conditions have been satisfied entitling such individual to payment of such deferred compensation other than termination of employment or the mere passage of time. Intrinsic Value means, with respect to an Option, as defined below, the result obtained by multiplying (a) times (b) where "(a)" equals the result obtained by subtracting the exercise price per share of the Option from (i) the AT&T Closing Stock Value or (ii) the AT&T Opening Stock Value or (iii) the AT&T Broadband Common Stock Value, whichever is applicable, as specified in Section 0, and "(b)" equals the number of shares of stock subject to such Option, as specified in Section 0. In cases where the exercise price per share of an Option exceeds (i) the AT&T Closing Stock Value or (ii) the AT&T Opening Stock Value or (iii) the AT&T Broadband Common Stock Value, whichever is applicable, Intrinsic Value shall be a negative number. Merger Agreement means the Agreement and Plan of Merger dated as of December 19, 2001 by and among AT&T Corp., AT&T Broadband Corp., Comcast Corporation, AT&T Broadband Acquisition Corp., Comcast Acquisition Corp. and AT&T Comcast Corporation. Liabilities has the meaning given that term in the Separation and Distribution Agreement. Nasdaq means The Nasdaq Stock Market. Non-parties is defined in Section 0. NYSE means the New York Stock Exchange. Option, when immediately preceded by "AT&T," means an option (either nonqualified or incentive) to purchase, or a stock appreciation right with respect to, shares of AT&T Common Stock pursuant to an AT&T Long Term Incentive Plan. When immediately preceded by "Broadband," Option means an option (either nonqualified or incentive) to purchase, or a stock appreciation right with respect to, shares of AT&T Broadband Common Stock pursuant to the Broadband Adjustment Plan. Participating Company means (a) AT&T, (b) any Person (other than an individual) that AT&T has approved for participation in, and which is participating in, a plan sponsored by any AT&T Entity, and (c) any Person (other than an -8- individual) which, by the terms of such a plan, participates in such plan or any employees of which, by the terms of such plan, participate in or are covered by such plan. Person has the meaning given that term in the Separation and Distribution Agreement. Senior Manager means an employee or former employee, at salary grade level above "E" or (or comparable positions) of an AT&T Entity (other than a Broadband Entity), who immediately before the Close of the Distribution Date is eligible to participate in or receive a benefit under any AT&T Executive Benefit Plan. Separation and Distribution Agreement is defined in the recitals to this Agreement. Separation Transactions is defined in the recitals to this Agreement. SMULIP means the AT&T Senior Management Universal Life Insurance Program in effect as of the time relevant to the applicable provisions of this Agreement. Subsidiaries has the meaning given that term in the Separation and Distribution Agreement. SVULIP means the AT&T Supplemental Variable Universal Life Insurance Program in effect as of the time relevant to the applicable provisions of this Agreement. Tax Sharing Agreement means the Tax Sharing Agreement entered into as of the date hereof between AT&T and AT&T Broadband. Transition Period has the meaning set forth in Section 2.8. U.S. means the 50 United States and the District of Columbia. GENERAL PRINCIPLES Employment of Broadband Transferees. Effective not later than immediately before the Distribution, all Broadband Transferees, other than Broadband Transferees on Approved Leave of Absence, shall become employees of AT&T Broadband or another Broadband Entity. Employment of Broadband Employees. All Broadband Employees and Broadband Transferees, other than Broadband Transferees on Approved Leave of -9- Absence, shall continue to be employees of AT&T Broadband or another Broadband Entity, as the case may be, immediately after the Distribution. Employment of Broadband Transferees on Leave Status. In the case of any Broadband Transferee who is on Approved Leave of Absence as of the Distribution Date, AT&T or a Communication Services Entity after the Distribution Date shall continue to employ such Broadband Transferee on Leave Status until the first business day following expiration of the Broadband Transferee's Approved Leave of Absence. A Broadband Transferee on Approved Leave of Absence shall be transferred to the employ of AT&T Broadband or another Broadband Entity upon his or her return to active service immediately following the conclusion of such Approved Leave of Absence (provided such return occurs no later than the first anniversary of the Distribution Date, or such a later date if such Approved Leave of Absence is preceded by a short-term disability, e.g., related to childbirth). Assumption and Retention of Liabilities; Related Assets. As of the Distribution Date, except as expressly provided in this Agreement, AT&T and the Communication Services Entities shall assume or retain, as applicable, and AT&T hereby agrees to pay, perform, fulfill and discharge, (i) all Liabilities under all AT&T Benefit Plans, (ii) all Liabilities with respect to the employment or termination of employment of all AT&T Employees and their dependents and beneficiaries (other than the Broadband Transferees), former employees of any AT&T Entity (other than a Broadband Entity), including, without limitation those Liabilities arising out of or resulting from employment of any Broadband Transferee by any AT&T Entity for periods prior to which they began performing services for any Broadband Entity on or before the Distribution Date, and their dependents and beneficiaries, and other service providers (including any individual who is, or was, an independent contractor, temporary employee, temporary service worker, consultant, freelancer, agency employee, leased employee, on-call worker, incidental worker, or nonpayroll worker of any AT&T Entity (other than a Broadband Entity) or in any other employment, non-employment, or retainer arrangement, or relationship with any AT&T Entity (other than a Broadband Entity)), in each case that arose in connection with or as a result of employment with or the performance of services to any AT&T Entity (other than a Broadband Entity), (iii) any other Liabilities expressly assigned to AT&T or a Communications Services Entity under this Agreement and (iv) all Liabilities with respect to Broadband Transferees on Approved Leave of Absence Status until their employment by AT&T Broadband or a Broadband Entity begins, as set forth in Section 0 (excluding Liabilities arising in connection with or as a result of the employment of Broadband Transferees while rendering services to any Broadband Entity or under any Broadband Benefit Plan). All assets held in trust to fund the AT&T Benefit Plans and all insurance policies funding the AT&T Benefit Plans shall be AT&T Communications Assets (as defined in the Separation and Distribution Agreement), except to the extent specifically provided otherwise in this Agreement. From and after the Distribution Date, except as expressly provided in this Agreement, AT&T Broadband and the Broadband Entities shall assume or retain, as -10- applicable, and AT&T Broadband hereby agrees to pay, perform, fulfill and discharge, (i) all Liabilities under all Broadband Benefit Plans, (ii) all Liabilities with respect to the employment or termination of employment of Broadband Transferees (and for Broadband Transferees on Approved Leave of Absence, upon their transfer to employment by AT&T Broadband or a Broadband Entity as set forth in Section 0) and their dependents and beneficiaries, including without limitation those Liabilities arising out of or resulting from employment by any AT&T Entity for periods after they began performing services for any Broadband Entity and on or before the Distribution Date (excluding such Liabilities with respect to benefits accrued or claims incurred prior to the Distribution Date under the AT&T Benefit Plans), (iii) all Liabilities with respect to the employment or termination of employment of all Broadband Employees, former employees of a Broadband Entity and other service providers (including any individual who is, or was, an independent contractor, temporary employee, temporary service worker, consultant, freelancer, agency employee, leased employee, on-call worker, incidental worker, or nonpayroll worker of AT&T Broadband or a Broadband Entity or in any other employment, non-employment, or retainer arrangement, or relationship with AT&T Broadband or a Broadband Entity), and their dependents and beneficiaries, and (iv) all Liabilities that are expressly assigned to AT&T Broadband or any Broadband Entity under this Agreement. Notwithstanding any other provision of this Agreement except Sections 0 and 0, neither AT&T Broadband nor any Broadband Entity shall have any obligation to or Liabilities with respect to any Broadband Transferee on Approved Leave of Absence until he or she becomes an employee of AT&T Broadband or a Broadband Entity as provided in Section 0. All assets held in trust to fund the Broadband Benefit Plans and all insurance policies funding the Broadband Benefit Plans shall be AT&T Broadband Assets (as defined in the Separation and Distribution Agreement), except to the extent specifically provided otherwise in this Agreement. Broadband Participation in AT&T Benefit Plans. Effective as of the Close of the Distribution Date, AT&T Broadband and each other Broadband Entity shall cease to be a Participating Company in any AT&T Benefit Plan, as well as the AT&T Work and Family Program, the AT&T Relocation Program and the Theodore N. Vail Award Program and Trust, and AT&T and AT&T Broadband shall take all necessary action before the Distribution Date to effectuate such cessation as a Participating Company. AT&T Participation in Broadband Benefit Plans. Effective as of the Close of the Distribution Date, AT&T and each Communications Services Entity shall cease to be a Participating Company in any Broadband Benefit Plan, and AT&T and AT&T Broadband shall take all necessary action before the Distribution Date to effectuate such cessation as a Participating Company. Terms of Participation by Broadband Transferees in Broadband Benefit Plans. Each Broadband Benefit Plan shall provide that all service, all eligible compensation as recognized under the Broadband Benefit Plan and all other benefit-affecting determinations with respect to all Broadband Transferees that, as of the Close of the Distribution Date, were recognized under any corresponding AT&T Benefit Plan shall, as of Immediately after the Distribution -11- Date, receive full recognition, credit and validity and be taken into account under such Broadband Benefit Plan, except to the extent that duplication of benefits would result and except for purposes of benefit accruals under any defined benefit pension plan. Service Recognition. AT&T, AT&T Broadband, the Communications Services Entities and the other Broadband Entities shall (a) mutually credit service recognized by the others under the terms of their respective Benefit Plans where appropriate (but not for purposes of benefit accruals under any defined benefit pension plan), (b) where reasonably practicable, arrange for transfer of accounts between the Broadband Long Term Savings Plans and the AT&T Savings Plans, and (c) provide coverage and benefits relating to health and welfare plans in a manner consistent with the provisions of Sections 0, 0 and 0, with respect to individuals who cease employment with AT&T Broadband or another Broadband Entity and immediately become employees of AT&T or a Communications Services Entity and AT&T Employees who cease employment with AT&T or a Communications Services Entity and who immediately become employees of AT&T Broadband or another Broadband Entity, in each case within a period not to exceed six months in duration after the Distribution Date (the "Transition Period"). The service crediting described above shall be subject to any applicable "service bridging" or "break in service" rules under the Broadband Benefit Plans and the AT&T Benefit Plans. Approval by AT&T as Sole Shareholder. Prior to the Distribution, AT&T shall cause AT&T Broadband to adopt the Broadband Adjustment Plan which shall have terms and conditions that are substantially similar to the AT&T 1997 Long Term Incentive Program, except that a change of control shall mean a change of control of AT&T Broadband, which plan shall be approved prior to the Distribution by AT&T as AT&T Broadband's sole shareholder. If AT&T Broadband or any other Broadband Entity adopts any other Broadband Benefit Plan, one or more benefit plans for non-employee directors of AT&T Broadband or any other Broadband Entity or "change in control" compensation and benefit provisions, or enters into or assumes any employment agreements with executives of AT&T Broadband or any other Broadband Entity, while AT&T Broadband or the other Broadband Entities are wholly owned subsidiaries of AT&T, and the plan, plans, provisions or agreements are reasonably acceptable to AT&T, and the parties mutually agree that shareholder approval is legally required or advisable, then AT&T shall cooperate in obtaining such shareholder approval before the Distribution Date of any such Broadband Benefit Plan, non-employee director plan, "change in control" provision or employment agreement. The adoption and approval of such plans, benefits, provisions or agreements (other than the adoption of the Broadband Adjustment Plan) shall be subject to Section 8.01(xv) of the Merger Agreement, without regard to that portion of the introductory language of such Section that relates to the Employee Benefits Agreement. AT&T Labor Agreements. As of the Close of the Distribution Date, AT&T shall retain all AT&T Labor Agreements and AT&T shall take all actions -12- reasonably necessary and within its power and authority to ensure that, from and after the Distribution Date, except as required by applicable law, AT&T Broadband shall have no obligation related to or derived from (1) any AT&T Labor Agreement (other than, without limiting any rights of Parent under the Merger Agreement, as a result of a violation before the Distribution Date by any Broadband Entity of any obligation that it may have under such AT&T Labor Agreement) or (2) any other legal obligations, duties, requirements, claims or Liabilities related to collective bargaining, recognition, or unfair labor practices involving an AT&T Entity (other than AT&T Broadband or another Broadband Entity). Change in Control Benefits. Various provisions of a number of Benefit Plans sponsored by AT&T and/or AT&T Broadband are automatically effected in the event of a "Change in Control" of AT&T, as such term is defined in the AT&T 1997 Long Term Incentive Program, in accordance with the provisions of the Resolutions of the Board of Directors of AT&T effective as of October 23, 2000. In addition, from and after the Distribution, corresponding provisions of the Broadband Benefit Plans will be automatically effected as a result of a "Change in Control" of AT&T Broadband, as defined in and pursuant to the Broadband Adjustment Plan. To the extent any such provisions of an AT&T Benefit Plan or a Broadband Benefit Plan or of such Resolutions differ from the provisions of this Agreement, those provisions will supersede specific provisions of this Agreement following any such "Change in Control." AT&T and AT&T Broadband shall continue to maintain after the Distribution Date such plans and programs as are necessary to provide the benefits specified in such Resolutions to eligible employees following such a "Change in Control," as that term is defined in the AT&T 1997 Long Term Incentive Plan as of the date of such resolutions and in the Broadband Adjustment Plan (as adopted pursuant to Section 0), as the case may be (except that the Broadband Benefit Plans shall be amended as of the Distribution to provide that a "Change in Control" means a "Change in Control" of AT&T Broadband). DEFINED CONTRIBUTION AND DEFINED BENEFIT PLANS Savings Plans. Broadband Long Term Savings Plan Trust. Effective as of the Close of the Distribution Date, any trusts established and forming part of the Broadband Long Term Savings Plans (the "Broadband Savings Trust") shall cease to participate in the AT&T Savings Plan Group Trust. AT&T and AT&T Broadband shall take all actions necessary or appropriate, and adopt or cause to be adopted any amendments to any trust agreements or plan documents reasonably necessary to ensure that settlor responsibility for and control of the Broadband Savings Trust is assumed or retained by AT&T Broadband following the Distribution. From and after the Distribution Date, AT&T Broadband shall assume and retain sole and complete responsibility for the Broadband -13- Long Term Savings Plans and the Broadband Savings Trust and any and all assets and Liabilities related thereto. AT&T Savings Plans and Trust. Effective as of the Close of the Distribution Date, AT&T shall retain sole and complete responsibility for, and all Liabilities relating to, the AT&T Savings Plans and the AT&T Savings Plan Group Trust. Without limiting the generality of the foregoing, AT&T and AT&T Broadband shall take all actions necessary or appropriate, and adopt or cause to be adopted any amendments to any trust agreements or plan documents reasonably necessary to ensure that settlor responsibility and control of the AT&T Savings Plan Group Trust is retained by AT&T from and after the Distribution. Assumption of Liabilities and Transfer of Accounts. AT&T and AT&T Broadband shall adopt, or cause to be adopted, all reasonable and necessary plan amendments and procedures by which each Broadband Employee and each Broadband Transferee who has an account under the AT&T Savings Plans may make a one-time election to have such account transferred to the Broadband Long Term Savings Plan, and each AT&T Employee (excluding Broadband Transferees) who has an account under the Broadband Long Term Savings Plan may make a one-time election to have such account transferred to the appropriate AT&T Savings Plan, in each case, as soon as practicable after April 15 of the year following the Distribution Year or such earlier date as AT&T and AT&T Broadband shall mutually determine, or to have such account remain in the AT&T Savings Plans or the Broadband Long Term Savings Plan until the AT&T Employee, the Broadband Employee or Broadband Transferee receives a distribution from such plan in accordance with the terms of the plans and applicable law; provided, however, that such transfer shall not occur if AT&T or AT&T Broadband reasonably determines that the transfer could result in the failure of any AT&T Savings Plan or the Broadband Long Term Savings Plan to qualify under Code Section 401(a). Such transfers shall be made in such manner and upon such terms and conditions as AT&T and AT&T Broadband shall mutually agree, but shall accommodate the in-kind transfer of qualifying employer securities of AT&T and AT&T Broadband and outstanding loan balances. Vesting. As of the Close of the Distribution Date, all account balances of AT&T Employees (excluding Broadband Transferees) in the Broadband Long Term Savings Plan, and all account balances of Broadband Employees and Broadband Transferees in the AT&T Savings Plans, shall be immediately vested. Exchange of Data; Account Transfer. AT&T and AT&T Broadband agree to provide to each other, as soon as practicable after the Distribution Date, a list of the AT&T Employees (excluding Broadband Transferees) who were participants in or are otherwise entitled to benefits under the Broadband Long Term Savings Plan and a list of Broadband Employees and Broadband Transferees who were participants in or are otherwise entitled to benefits under the AT&T Savings Plan, including descriptions of their respective account balances and the protected benefits (within the meaning of Section 411(d)(6) of the Code) attached to their accounts. Except as otherwise specifically provided above regarding plan qualification, as soon as practicable after April 15 of the year following the Distribution Year, or such earlier date as AT&T and AT&T Broadband -14- shall mutually agree: (i) AT&T Broadband shall cause the accounts (including any outstanding loan balances) of the AT&T Employees who elect a transfer under the Broadband Long Term Savings Plan to be transferred to the AT&T Savings Plan and its related trust in cash or such other assets as mutually agreed by AT&T and AT&T Broadband (in any event, including in-kind transfers of AT&T Common Stock, AT&T Broadband Common Stock and participant loan balances), and the AT&T Savings Plan shall assume and be solely responsible for all Liabilities under each of the AT&T Savings Plans with respect to AT&T Employees who elect a transfer of their accounts (to the extent assets related to those accounts are transferred from the Broadband Long Term Savings Plans); and (ii) AT&T shall cause the accounts (including any outstanding loan balances) of the Broadband Employees and Broadband Transferees who elect a transfer under the AT&T Savings Plan to be transferred to the Broadband Long Term Savings Plan and the Broadband Savings Trust in cash or such other assets as mutually agreed by AT&T and AT&T Broadband (in any event, including in-kind transfers of AT&T Common Stock, AT&T Broadband Common Stock and participant loan balances) and the Broadband Long Term Savings Plan shall assume and be solely responsible for all Liabilities under the Broadband Long Term Savings Plans to or relating to Broadband Employees and Broadband Transferees who elect a transfer of their accounts (to the extent assets related to those accounts are transferred from the AT&T Savings Plans); and (iii) AT&T and AT&T Broadband shall cause their respective savings plans and related trusts to satisfy all protected benefit requirements under the Code and applicable law with respect to the transferred accounts. "Lost" Company Match. AT&T shall make a one-time payment directly to the Broadband Transferees, in the year following the Distribution Year, of the amount of "lost savings plan matching contributions," if any, to which they would have been entitled under existing AT&T practices with respect to compensation earned on or before the Distribution Date that is in excess of the annual limits imposed by Code Section 401(a)(17). AT&T Pension Plans. Retention of AT&T Pension Plans. Effective as of the Close of the Distribution Date, AT&T shall retain: sponsorship of the AT&T Pension Plans and their related trusts and any other trust or other funding arrangement established or maintained with respect to such plans, or any assets held as of the Distribution Date with respect to such plans; and all Liabilities relating to, arising out of or resulting from claims incurred by or on behalf of any individuals with respect to benefits under any AT&T Pension Plan. Vesting. Effective as of the Close of the Distribution Date, each Broadband Employee and each Broadband Transferee who is a participant in an AT&T Pension Plan shall be vested in his or her accrued benefit under the AT&T Pension Plans. -15- Commencement of Pension. Effective as of the Close of the Distribution Date, each Broadband Employee and Broadband Transferee who is a participant in an AT&T Pension Plan shall be deemed to have terminated employment with the sponsor of such AT&T Pension Plan and shall be eligible to commence his or her pension in accordance with the terms of such plan. Bridging. Effective as of the Close of the Distribution Date, all unbridged net credited service of each Broadband Employee and Broadband Transferee who transferred, or was reassigned, to a Broadband Entity on or after March 9, 1999 and before the Close of the Distribution Date from a Participating Company in the AT&TMPP or the AT&TPP shall be bridged, provided that the unbridged net credited service would have been eligible for bridging under the bridging rules of the AT&TMPP or the AT&TPP in the event that the Broadband Employee and Broadband Transferee had continued to qualify as an "Employee" under the AT&TMPP or the AT&TPP and satisfied the applicable bridging rules under those plans. Conversions to Cash Balance. Each Broadband Employee and Broadband Transferee who transferred, or was reassigned, to a Broadband Entity on or after March 9, 1999 from a Participating Company in the AT&TMPP or the AT&TPP who has a portion of his or her accrued benefit under a prior formula under the AT&T Pension Plans that has not yet been converted to cash balance shall be deemed to have completed any minimum period of net credited service that is required for such conversion. Broadband Pension Plans. Assumption or Retention of Broadband Pension Plans. Effective as of the Close of the Distribution Date, AT&T Broadband shall assume or retain, as applicable: sponsorship of the Broadband Pension Plans and their related trusts and any other trust or other funding arrangement established or maintained with respect to such plans, or any assets held as of the Distribution Date with respect to such plans; and all Liabilities relating to, arising out of or resulting from claims incurred by or on behalf of any individuals with respect to benefits under any Broadband Pension Plan. Vesting. Effective as of the Close of the Distribution Date, the Broadband Pension Plan shall be amended to provide that each AT&T Employee (excluding Broadband Transferees) who has any accrued benefits under the Broadband Pension Plan shall be vested, as of the Close of the Distribution Date, in his or her accrued benefit under the Broadband Pension Plan. Bridging. Effective as of the Close of the Distribution Date, the Broadband Pension Plan shall be amended to provide that any unbridged term of employment of each AT&T Employee who transferred, or was reassigned, on or after June 15, 2000 and before the Close of the Distribution Date to AT&T or a Communications Services Entity from a Broadband Entity shall be bridged, provided that the unbridged term of employment would have been eligible for bridging under the bridging rules of the -16- Broadband Pension Plan in the event that the AT&T Employee had continued to qualify as an "Employee" under the Broadband Pension Plan and satisfied the applicable bridging rules under such plan. Commencement of Pension. Effective as of the Close of the Distribution Date, each AT&T Employee (excluding Broadband Transferees) who is a participant in the Broadband Pension Plan shall be deemed to have terminated employment with the sponsor of such Broadband Pension Plan and shall be eligible to commence his or her pension in accordance with the terms of such plan. HEALTH AND WELFARE PLANS Assumption of Health and Welfare Plan Liabilities. General. As of the Close of the Distribution Date, AT&T shall retain: sponsorship of all AT&T Health and Welfare Plans and any trust or other funding arrangement established or maintained with respect to such plans, or any assets held as of the Distribution Date with respect to such plans; and all Liabilities relating to, arising out of, or resulting from health and welfare coverage or claims incurred by or on behalf of AT&T Employees, Broadband Transferees and, to the extent applicable, Broadband Employees, or their covered dependents under the AT&T Health and Welfare Plans on or before the Close of the Distribution Date; and except as provided in Section 0, all Liabilities relating to health and welfare coverage or claims incurred by or on behalf of AT&T Employees or their covered dependents after the Close of the Distribution Date under the AT&T Health and Welfare Plans. Except as provided in Section 0, AT&T shall not assume any Liability relating to health and welfare claims incurred by or on behalf of Broadband Transferees, Broadband Employees or their covered dependents after the Distribution Date, and such claims shall be satisfied pursuant to Section 0. Except as provided in Section 0, a claim or Liability (1) for medical, dental, vision and/or prescription drug benefits shall be deemed to be incurred upon the rendering of health services giving rise to the obligation to pay such benefits; (2) for life insurance and accidental death and dismemberment and business travel accident insurance benefits and workers' compensation benefits shall be deemed to be incurred upon the occurrence of the event giving rise to the entitlement to such benefits; (3) for salary continuation or other disability benefits shall be deemed to be incurred upon the effective date that an individual is deemed to be disabled, giving rise to the entitlement to such benefits; and (4) for a period of continuous hospitalization shall be deemed to be incurred on the date of admission to the hospital. Certain Specific Claims. AT&T shall be responsible for all Liabilities under the applicable AT&T Health and Welfare Plan that relate to, arise out of or result from any period of continuous hospitalization of a Broadband Transferee, a Broadband Employee or his or her covered dependent which begins before the Close of the -17- Distribution Date under an AT&T Health and Welfare Plan and continues after the Close of the Distribution Date; provided, however, that AT&T shall not be responsible for Liabilities in excess of the benefits otherwise provided by the terms of the respective plans. AT&T also shall be responsible for all Liabilities under the applicable AT&T Health and Welfare Plan that relate to, arise out of or result from any denture work, bridge work, crown installation or root canal therapy for a Broadband Transferee, a Broadband Employee or his or her covered dependent for which preparatory dental services have been rendered under an AT&T Health and Welfare Plan on or before the Distribution Date and such dental treatment continues after the Distribution Date, provided that such dental treatment is concluded within allowable time limitations under the applicable AT&T Health and Welfare Plan. Coverage for any such hospitalization or dental services shall be provided after the Distribution Date without interruption under the appropriate AT&T Health and Welfare Plan until such hospitalization or treatment for such condition is concluded or discontinued subject to applicable plan rules and limitations. The corresponding Broadband Health and Welfare Plan that covers the Broadband Transferee or his or her covered dependent after the Distribution Date shall be secondarily liable (for purposes of coordination of benefits) in accordance with its terms and conditions with respect to any such hospitalization or dental treatment. Health and Welfare Plan Transitional Coverage Rules. General. As of the Close of the Distribution Date, AT&T Broadband shall retain: sponsorship of all Broadband Health and Welfare Plans and any trust or other funding arrangement established or maintained with respect to such plans, or any assets held as of the Distribution Date with respect to such plans; and all Liabilities relating to, arising out of or resulting from health and welfare coverage or claims incurred by or on behalf of Broadband Employees and their covered dependents under the Broadband Health and Welfare Plans on or before the Distribution Date; and all Liabilities relating to health and welfare coverage or claims incurred by or on behalf of Broadband Employees or their covered dependents and Broadband Transferees or their covered dependents after the Distribution Date, except as provided in Section 0. Broadband Transferees and Broadband Benefit Plans. Broadband Transferees and their eligible covered dependents who were participants in the AT&T Health and Welfare Plans as of the Close of the Distribution Date shall be immediately eligible, after the Close of the Distribution Date, to participate in the corresponding Broadband Health and Welfare Plans then available to similarly situated Broadband Employees, subject to the terms and conditions of such plans, but without regard for any requirements of proof of insurability and without regard to any restrictions or limitations with respect to preexisting condition, provided such pre-existing condition is otherwise a covered condition under the terms of such plan. Subject to the agreement of any -18- applicable insurer, all compensation, periods of service, benefit elections, deductible payments, payments toward the applicable out-of-pocket maximums and other benefit-affecting determinations affecting Broadband Transferees that, as of the Close of the Distribution Date, were recognized under the AT&T Health and Welfare Plans shall receive full recognition, credit and validity and be taken into account under the Broadband Health and Welfare Plans Immediately after the Distribution Date in a manner consistent with the manner in which such benefit affecting determinations were treated under the terms of the AT&T Health and Welfare Plans immediately prior to the Close of the Distribution Date. AT&T Employees and AT&T Benefit Plans; Broadband Employees and Broadband Benefit Plans. Any AT&T Employee who participates in an AT&T Health and Welfare Plan immediately before the Close of the Distribution Date shall automatically continue such participation in the AT&T Health and Welfare Plan without any change in coverage and without the need for any new or additional enrollment and without change in any election made with respect to coverage under such plan. Any Broadband Employee who participates in a Broadband Health and Welfare Plan immediately before the Close of the Distribution Date shall automatically continue such participation without change in coverage, and without the need for any new or additional enrollment and without change in any election made with respect to coverage under such plan. HCRA/CECRA Post-Distribution Transitional Rules. AT&T Health Care Reimbursement Account Plan; Broadband Transferees. To the extent any Broadband Transferee or Broadband Employee made contributions to the AT&T Health Care Reimbursement Account Plan ("AT&T HCRA Plan") during the Distribution Year, such Broadband Transferee or Broadband Employee shall be permitted to file claims for reimbursement for qualifying health care expenses incurred during the Distribution Year through the Close of the Distribution Date, for a total amount not to exceed the amount elected by such Broadband Transferee or Broadband Employee for that year. Such claims may be filed at any time on or before April 15 of the year following the Distribution Year in the manner permitted under the AT&T HCRA Plan. Account balances, whether positive or negative, shall not be transferred or assigned from AT&T or a Communication Services Entity to AT&T Broadband or another Broadband Entity. Any Broadband Transferee or Broadband Employee who made contributions to the AT&T HCRA Plan during the Distribution Year shall have the right to elect continuation coverage in the AT&T HCRA for the balance of the Distribution Year through COBRA. AT&T Child/Elder Care Reimbursement Account Plan; Broadband Transferees. To the extent any Broadband Transferee or Broadband Employee made contributions to the AT&T Child/Elder Care Reimbursement Account Plan ("AT&T CECRA Plan") during the Distribution Year and such Broadband Transferee or Broadband Employee has a positive account balance in his or her "Child/Elder Care Reimbursement Account" under the AT&T CECRA Plan as of the Close of the Distribution Date, such Broadband Transferee or Broadband Employee shall be entitled to file claims for reimbursement for qualifying child and elder care expenses incurred at any -19- time during the Distribution Year for a total amount not to exceed the amount of his or her positive account balance determined as of the Close of the Distribution Date. A Broadband Transferee or Broadband Employee shall be considered to have a "positive account balance" in the AT&T CECRA Plan if, as of the determination date, (i) the total amount he or she actually contributed to the AT&T CECRA Plan for the Distribution Year, minus (ii) the total amount of reimbursements paid to such Broadband Transferee or Broadband Employee for qualifying child care and elder care expenses incurred at any time during the Distribution Year, is a positive number. Such claims may be filed at any time on or before April 15 of the year following the Distribution Year, in the manner permitted under the AT&T CECRA Plan. Account balances, whether positive or negative, shall not be transferred or assigned from AT&T or a Communication Services Entity to AT&T Broadband or another Broadband Entity. Workers' Compensation Liabilities. Except as provided below, all workers' compensation Liabilities relating to, arising out of, or resulting from any claim by an AT&T Employee or Broadband Transferee that results from an accident occurring, or from an occupational disease which becomes manifest, on or before the Close of the Distribution Date and while such AT&T Employee or Broadband Transferee was employed by an AT&T Entity (other than a Broadband Entity) shall be retained by AT&T. AT&T shall assume and be solely responsible for all workers' compensation Liabilities relating to, arising out of, or resulting from any claim incurred for a compensable injury sustained (i) by each individual who was, at the time of such injury, employed by any AT&T Entity (other than a Broadband Entity), and (ii) by an AT&T Employee after the Distribution Date. All workers' compensation Liabilities relating to, arising out of, or resulting from any claim by a Broadband Employee that results from an accident occurring, or from an occupational disease which becomes manifest, on or before the Distribution Date and while such Broadband Employee was employed by AT&T Broadband or another Broadband Entity shall be retained by AT&T Broadband. AT&T Broadband shall assume and be solely responsible for all workers' compensation Liabilities relating to, arising out of, or resulting from any claim incurred for a compensable injury sustained (i) by each individual who was, at the time of such injury, employed by AT&T Broadband or other Broadband Entity, and (ii) by a Broadband Employee after the Distribution Date. For purposes of this Agreement, a compensable injury shall be deemed to be sustained upon the occurrence of the event giving rise to eligibility for workers' compensation benefits or an occupational disease becomes manifest, as the case may be. AT&T, AT&T Broadband, the Communications Services Entities and the other Broadband Entities shall cooperate with respect to any notification to appropriate governmental agencies of the Distribution and the issuance of new, or the transfer of existing, workers' compensation insurance policies and claims handling contracts. Payroll Taxes and Reporting of Compensation. AT&T, AT&T Broadband, the Communication Services Entities and the other Broadband Entities shall take such action as may be reasonably necessary or appropriate in order to minimize Liabilities related to payroll taxes after the Distribution Date, -20- including as described in Section 0(iii)-(vi). AT&T, AT&T Broadband, each Communication Services Entities and each other Broadband Entity shall each bear its responsibility for payroll tax obligations and for the proper reporting to the appropriate governmental authorities of compensation earned by their respective employees after the Close of the Distribution Date, including compensation related to the exercise of Options, as described in Section 0(iii)-(vi). AT&T Post-Retirement Welfare Benefits Plan. Retention of AT&T Post-Retirement Welfare Benefits Plan. As of the Close of the Distribution Date, AT&T shall retain: the AT&T Post-Retirement Welfare Benefits Plan and any trust or other funding arrangement established or maintained with respect to such plans, or any assets held as of the Distribution Date with respect to such plans; and all Liabilities relating to, arising out of, or resulting from claims incurred by or on behalf of any participant or their covered dependents under the AT&T Post-Retirement Welfare Benefits Plans. Assumption or Retention of Broadband Post-Retirement Medical Plans. As of the Close of the Distribution Date, AT&T Broadband shall assume or retain, as applicable: the post-retirement medical expense portion of the MediaOne Health Care Plan or any other post-retirement welfare benefit plan maintained by AT&T Broadband or another Broadband Entity, and any trust or other funding arrangement established or maintained with respect to such plans, or any assets held as of the Distribution Date with respect to such plans; all Liabilities relating to, arising out of, or resulting from claims incurred by or on behalf of any participant or their covered dependents under the MediaOne post-retirement medical expense plan or any other post-retirement welfare benefit plan maintained by AT&T Broadband or another Broadband Entity. Eligibility of Broadband Employees; Rule of 65. As of the Close of the Distribution Date, AT&T shall amend the AT&T Post-Retirement Welfare Benefits Plan, to provide that each Broadband Employee or Broadband Transferee who was an AT&T management employee and was transferred or reassigned to AT&T Broadband or another Broadband Entity before the Distribution Date and on or after March 9, 1999, and after attaining at least ten years of net credited service as of the date of such transfer or reassignment, shall be eligible to participate in the AT&T Post-Retirement Welfare Benefits Plan, provided that the sum of such individual's age and net credited service (both expressed in days), determined as of the Distribution Date, is no less than 23,725 days (which equals the product of 65 years and 365 days per year) (referred to as the "Rule of 65"). While a Broadband Employee or a Broadband Transferee who is eligible to participate in the AT&T Post-Retirement Welfare Benefits Plan is covered as an active -21- employee under the Broadband Health and Welfare Plans, the coverage provided to such Broadband Employee or Broadband Transferee and his or her covered dependents (if any) under the AT&T Post-Retirement Welfare Benefits Plan shall be secondary to the coverage provided under the Broadband Health and Welfare Plans. COBRA and HIPAA Compliance. AT&T shall be responsible for administering compliance with the health care continuation requirements of COBRA, the certificate of creditable coverage requirements of HIPAA, and the corresponding provisions of the AT&T Health and Welfare Plans with respect to Broadband Transferees and Broadband Employees (if any) and their covered dependents who incur a COBRA qualifying event or loss of coverage under the AT&T Health and Welfare Plans at any time on or before the Close of the Distribution Date. Effective Immediately after the Distribution Date, AT&T and the Communications Services Entities shall be responsible for administering compliance with the health care continuation requirements of COBRA, the certificate of creditable coverage requirements of HIPAA, and the corresponding provisions of the AT&T Health and Welfare Plans with respect to AT&T Employees and their covered dependents who incur a COBRA qualifying event or loss of coverage under the AT&T Health and Welfare Plans at any time after the Close of the Distribution Date. Effective Immediately after the Distribution Date, AT&T Broadband or another Broadband Entity shall be responsible for administering compliance with the health care continuation requirements of COBRA, the certificate of creditable coverage requirements of HIPAA, and the corresponding provisions of the Broadband Health and Welfare Plans with respect to Broadband Employees and Broadband Transferees and their covered dependents who incur a COBRA qualifying event or loss of coverage under the Broadband Health and Welfare Plans at any time after the Close of the Distribution Date. AT&T shall assume or retain all Liabilities and obligations under COBRA with respect to any individual whose employment with an AT&T Entity terminated prior to the Close of the Distribution Date and whose last employment with an AT&T Entity was not with AT&T Broadband or another Broadband Entity. AT&T Broadband or another applicable Broadband Entity shall assume or retain all Liabilities and obligations under COBRA with respect to any individual whose employment with an AT&T Entity terminated prior to the Close of the Distribution Date and whose last employment with an AT&T Entity was with AT&T Broadband or another Broadband Entity. Long-Term Care; Direct Pay Arrangements. As of the Close of the Distribution Date, AT&T shall retain all Liabilities relating to the AT&T Long-Term Care Plan for Management Employees and the AT&T Long-Term Care Plan for Occupational Employees and shall take, or cause its third-party vendor or insurer to take, all such actions as are or may be reasonably necessary to enable any Broadband Transferee or Broadband Employee (if any) and his or her eligible family members covered under either the AT&T Long-Term Care Plan for Management Employees or the AT&T Long-Term Care Plan for Occupational Employees as of the Distribution Date to continue such coverage on a direct pay basis after the Close of the Distribution Date. -22- Severance Benefits. AT&T Broadband shall provide to Broadband Transferees who become eligible to receive severance benefits under the Broadband Severance Plan after the Close of the Distribution Date but prior to the first anniversary of the Distribution Date, severance payments in an amount not less than the greater of (i) the severance payment amounts that such Broadband Transferees would have received under the AT&T Force Management Program as in effect on the Distribution Date as set forth in Schedule 4.9 or (ii) the severance payment amounts otherwise payable to Broadband Transferees under the Broadband Severance Plan as in effect on the date of termination of employment. The determination of severance payments under either the AT&T Force Management Program or the Broadband Severance Plan shall take into account service with AT&T prior to the Close of the Distribution Date and service with AT&T Broadband or a Broadband Entity after the Close of the Distribution Date. EXECUTIVE BENEFITS AND OTHER BENEFITS Individual Agreements - Assumption of Liabilities and Consents. AT&T has been providing compensation and benefits, subject to reimbursement from a Broadband Entity, to Broadband Transferees during the period those Broadband Transferees have been providing services on a substantially full-time basis to a Broadband Entity. AT&T shall continue to provide such compensation and benefits through the Distribution Date (or, in the case of a Broadband Transferee on Approved Leave of Absence, until he or she becomes a Broadband Employee in accordance with Section 0), and be entitled to reimbursement from AT&T Broadband or another Broadband Entity, in accordance with established practice and Section 0. Certain Individual Agreements provide for the payment of certain compensation and benefits in the event of the termination of employment of the individual covered by the terms of such Individual Agreements. Effective as of the Close of the Distribution Date (or, in the case of Broadband Transferees on Approved Leave of Absence, the date on which such Broadband Transferee becomes employed by AT&T Broadband or another Broadband Entity pursuant to Section 0), AT&T Broadband shall assume or retain, as applicable, all Liabilities with respect to those Individual Agreements and other matters set forth on Schedule 0 to this Agreement in consideration of and with respect to services rendered to AT&T Broadband or another Broadband Entity after the Distribution Date, including without limitation, payment of any compensation or benefit which is not yet due and payable pursuant to the terms of such Individual Agreement. A Broadband Transferee who is a party to an Individual Agreement, the obligations of which are assumed or retained by AT&T Broadband pursuant to the provisions of this Section 0, shall not be deemed to have terminated employment in connection with or in anticipation of the consummation of the transactions contemplated by the Separation and Distribution Agreement for purposes of administering benefits under such Individual Agreement, the payment or vesting of which is conditioned upon termination of employment. -23- Effective as of the Close of the Distribution Date, AT&T shall retain all Liabilities with respect to any Individual Agreements between AT&T and any AT&T Employee (except for Individual Agreements assumed by AT&T Broadband pursuant to Section 0) in consideration of and with respect to services rendered prior to, on or after the Distribution Date, including payment of any compensation or benefits which is not yet due and payable pursuant to the terms of any such Individual Agreement. AT&T Short Term Incentive Plan and AT&T Bonus Plan Award. The AT&T Broadband Board of Directors shall be responsible for determining all awards that would otherwise be payable under the AT&T Short Term Incentive Plan to Broadband Transferees who are Senior Managers, and AT&T Broadband shall be responsible for determining all awards that would otherwise be payable pursuant to the AT&T Bonus Plan Award to Broadband Transferees who are not Senior Managers, for the Distribution Year. AT&T Broadband shall also determine for Broadband Transferees (other than for Senior Managers) (i) the extent to which established performance criteria (as interpreted by AT&T Broadband, in its sole discretion, after taking into account the effects of the Separation Transactions) have been met, and (ii) the payment level for each Broadband Transferee. AT&T Broadband shall assume all Liabilities with respect to any such awards payable to Broadband Transferees for the Distribution Year and thereafter. Notwithstanding the foregoing, AT&T Broadband shall honor the terms of Individual Agreements as set forth in Section 0. The AT&T Board of Directors shall be responsible for determining all awards that would otherwise be payable under the AT&T Short Term Incentive Plan to AT&T Employees, (excluding Broadband Transferees) who are Senior Managers, and AT&T shall be responsible for determining all awards that would otherwise be payable pursuant to the AT&T Bonus Plan Award to AT&T Employees (excluding Broadband Transferees) who are not Senior Managers, for the Distribution Year. AT&T shall also determine for AT&T Employees (excluding Broadband Transferees) who are not Senior Managers (i) the extent to which established performance criteria (as interpreted by AT&T, in its sole discretion, after taking into account the effects of the Separation Transactions) have been met, and (ii) the payment level for each such AT&T Employee (excluding Broadband Transferees). AT&T shall retain all Liabilities with respect to any such awards payable to AT&T Employees for the Distribution Year and thereafter. Notwithstanding the foregoing, AT&T shall honor the terms of Individual Agreements as set forth in Section 0. AT&T Long Term Incentive Plans. AT&T and AT&T Broadband shall use their reasonable best efforts to take all actions necessary or appropriate so that each outstanding award granted under any AT&T Long Term Incentive Plan held by any individual shall be adjusted as set forth in this Article V. -24- AT&T Options Held by Current Employees. As determined by the Committee (as that term is defined in the AT&T 1997 Long Term Incentive Program) pursuant to its authority under any of the AT&T Long Term Incentive Plans, each AT&T Option outstanding under any AT&T Long Term Incentive Plan as of the Distribution Date that is held by an AT&T Employee (other than a Broadband Transferee) shall be subject to the same terms and conditions after the Distribution as the terms and conditions applicable to such AT&T Option immediately prior to the Distribution; provided, however, that from and after the Close of the Distribution (i) the number of shares of AT&T Common Stock subject to such AT&T Option, rounded to the nearest whole share, shall be equal to the product of (x) the number of shares of AT&T Common Stock subject to such AT&T Option immediately prior to the Distribution Date and (y) the quotient obtained by dividing the AT&T Closing Stock Value by the AT&T Opening Stock Value and (ii) the exercise price of such AT&T Option, rounded to the nearest whole cent, shall be equal to the product of (x) the exercise price of such AT&T Option immediately prior to the Distribution and (y) the quotient obtained by dividing the AT&T Opening Stock Value by the AT&T Closing Stock Value. As determined by the Committee (as that term is defined in the AT&T 1997 Long Term Incentive Program) pursuant to its authority under any of the AT&T Long Term Incentive Plans, each AT&T Option outstanding under any AT&T Long Term Incentive Plan as of the Distribution Date that is held by a Broadband Employee or a Broadband Transferee shall be converted into a Broadband Option issued pursuant to the Broadband Adjustment Plan, subject to the same terms and conditions after the Distribution as the terms and conditions applicable to such AT&T Option immediately prior to the Distribution; provided, however, that from and after the Close of the Distribution (i) the number of shares of AT&T Broadband Common Stock subject to such Broadband Option, rounded to the nearest whole share, shall be equal to the product of (x) the number of shares of AT&T Common Stock subject to the AT&T Option immediately prior to the Distribution Date and (y) the quotient obtained by dividing the AT&T Closing Stock Value by the Broadband Common Stock Value, (ii) the exercise price of such Broadband Option, rounded to the nearest whole cent, shall be equal to the product of (x) the exercise price of the AT&T Option immediately prior to the Distribution and (y) the quotient obtained by dividing the Broadband Common Stock Value by the AT&T Closing Stock Value, and (iii) each Broadband Option shall be subject to the change in control provisions of the Broadband Adjustment Plan. AT&T Options Held by Former Employees. (i) As determined by the Committee (as that term is defined in the AT&T 1997 Long Term Incentive Program) pursuant to its authority under any of the AT&T Long Term Incentive Plans, each AT&T Option outstanding under any AT&T Long Term Incentive Plan as of the Distribution Date that is held by any individual who is not an AT&T Employee, a Broadband Employee or a Broadband Transferee (a "Former Employee") shall be converted, immediately prior to the Distribution, into an adjusted AT&T Option under the applicable AT&T Long Term Incentive Plan and a Broadband Option under the Broadband Adjustment Plan, whereby the combined Intrinsic Value of such adjusted AT&T Option and -25- Broadband Option held by such individual immediately after the Distribution equals the Intrinsic Value of such AT&T Option immediately before the Distribution. (ii) The adjustment set forth in Section 5.3(b)(i) shall be made as follows: Exercise Price of Adjusted AT&T Option. The exercise price per share of AT&T Common Stock subject to an adjusted AT&T Option shall equal the product obtained by multiplying (a) times (b) where "(a)" equals the exercise price per share of the AT&T Option with respect to which the adjustment is being made immediately before the Distribution, and "(b)" equals the quotient obtained by dividing the AT&T Opening Stock Value by the AT&T Closing Stock Value. Exercise Price of Broadband Option. The exercise price per share of AT&T Broadband Stock subject to a Broadband Option issued pursuant to Section 0(i) shall equal the product obtained by multiplying (c) times (d) where "(c)" equals the exercise price per share of the AT&T Option with respect to which the Broadband Option is granted immediately before the Distribution and "(d)" equals the quotient obtained by dividing the Broadband Common Stock Value by the AT&T Closing Stock Value. Number of Shares Subject to the Broadband Options. The number of shares of AT&T Broadband Common Stock subject to a Broadband Option granted pursuant to Section 0(i) shall equal the quotient obtained by dividing (a) by (b) where "(a)" equals the amount determined by multiplying the Intrinsic Value of the AT&T Option with respect to which the adjustment is being made, based on the AT&T Closing Stock Value and the exercise price per share of such AT&T Option, by a fraction, the numerator of which is the Broadband Stock Value and the denominator of which is the AT&T Closing Stock Value, and "(b)" equals the Intrinsic Value of an Option to purchase one share of AT&T Broadband Common Stock based on the Broadband Common Stock Value and the exercise price of such Broadband Option as calculated in (B) above. Number of Shares Subject to Adjusted AT&T Options. The number of shares of AT&T Common Stock subject to an adjusted AT&T Option shall equal the quotient obtained by dividing (a) by (b) where "(a)" equals (i) the Intrinsic Value of the AT&T Option with respect to which the adjustment is being made, based on the AT&T Closing Stock Value and the exercise price per share of such AT&T Option, minus (ii) the Intrinsic Value of the Broadband Option granted pursuant to Section 0(ii)(C) with respect to the AT&T Option for which the adjustment is being made, based upon the Broadband Stock Value, and "(b)" equals the Intrinsic Value of an Option to purchase one share of AT&T Common Stock based on the AT&T Opening Stock Value and the exercise price of such adjusted AT&T Option as set forth above. Miscellaneous Option Terms. AT&T and AT&T Broadband acknowledge that, in the context of the Separation Transactions, the adjustment to AT&T Options as set forth in this Section 0 will be implemented, in part, by the issuance of Broadband Options under the terms of the Broadband Adjustment Plan. Accordingly, it is intended that, to the extent of the issuance of such Broadband Options in connection with the adjustments set forth in this Section 0, the Broadband Adjustment Plan shall be considered a successor to the AT&T Long Term Incentive Plan and to have assumed the obligation of the AT&T Long Term Incentive Plan to make the adjustment of AT&T Options as set forth in this Section 0. After the Distribution Date, adjusted AT&T Options, regardless of by whom held, shall be settled by AT&T pursuant to the terms of the AT&T Long Term -26- Incentive Plan, and Broadband Options, regardless of by whom held, shall be settled by AT&T Broadband pursuant to the terms of the Broadband Adjustment Plan. (iii) Except as provided pursuant to a separate agreement between AT&T and Qwest Communications International, Inc. (the "Qwest Agreement"), AT&T or a Communications Services Entity shall claim the benefit of federal, state, and local tax deductions related to the exercise of all adjusted AT&T Options after the Distribution Date and none of AT&T Broadband or any Broadband Entity shall claim any such tax deductions. Except as otherwise provided pursuant to the Qwest Agreement, after the Distribution Date, AT&T and the Communications Services Entities shall be responsible for the proper payroll tax treatment and the proper reporting to the appropriate governmental authorities of compensation relating to all option exercises of AT&T Options. (iv) Except with respect to Broadband Options granted pursuant to this Section 0 with respect to options subject to the Qwest Agreement, AT&T Broadband or a Broadband Entity shall claim the benefit of federal, state and local tax deductions related to the exercise of Broadband Options after the Distribution Date and neither AT&T nor any Communications Services Entity shall claim any such tax deductions. Except with respect to Broadband Options granted pursuant to this Section 0 with respect to options subject to the Qwest Agreement, after the Distribution Date, AT&T Broadband and the Broadband Entities shall be responsible for the proper payroll tax treatment and the proper reporting to the appropriate governmental authorities of compensation relating to all option exercises of Broadband Options. (v) (A) With respect to any adjusted AT&T Option held by persons, other than AT&T Employees, who as of the date of exercise are no longer employed by an AT&T Entity, but whose last employment with an AT&T Entity was with a Broadband Entity, and (B) with respect to any Broadband Option held by persons, other than Broadband Employees, who as of the date of exercise are no longer employed by an AT&T Entity, but whose last employment with an AT&T Entity was not with a Broadband Entity (each, a "Crossover Option"), in each case Salomon Smith Barney, or such other entity as AT&T or AT&T Broadband may agree, shall act as the recordkeeper for the Crossover Options; provided, however, that each of AT&T and AT&T Broadband shall expeditiously select and agree upon a recordkeeper so as to avoid any unreasonable expenses. If the exercise of Crossover Options is made pursuant to a broker-assisted cashless exercise through the recordkeeper in accordance with the regulations of the Federal Reserve Board, then immediately after such exercise, the recordkeeper shall sell the number of shares necessary to remit the following payments (which may be all the shares): (i) to the issuer of the option, the exercise price; and (ii) to the former employer of the option holder, the employee's share of income and payroll taxes. The recordkeeper shall thereafter remit to the option holder (i) the balance of the proceeds from the sale of all shares or (ii) the remaining whole shares and cash for any fractional shares, as applicable. (vi) AT&T and AT&T Broadband agree to act (or to take such action) with respect to such federal, state, or local tax deductions, and with respect to fulfilling the payroll tax and reporting obligations on compensation, consistent with (iii) through (v) above, as are reasonably necessary or appropriate to achieve, maintain and/or preserve such tax results. -27- (vii) If (a) as a result of a determination (as defined in Section 1313 of the Code) or (b) in the opinion of nationally recognized tax counsel to AT&T or AT&T Broadband, which opinion and tax counsel are reasonably acceptable to the other party hereto, as a result of final or pending Treasury Regulations, Internal Revenue Service announcement or otherwise, in each case, there is a substantial likelihood that the tax deductions related to the exercise of Options under this Agreement and/or the payroll tax and reporting obligations related to the exercise of Options, will be inconsistent with all or any part of Section 0(iii) through (vi) above, the parties shall negotiate in good faith to restructure the arrangements set forth herein so that (I) if, pursuant to the determination or opinion, a party gets a tax deduction it was not entitled to claim under the terms of this Agreement, that party shall pay over to the party entitled to claim the deduction under the terms of this Agreement, as if and for the tax year(s) recognized through a reduction in taxes due and/or the receipt of a refund in an amount equal to the lesser of (x) its tax benefit and (y) the benefit otherwise available to the party entitled to such deduction under the terms of this Agreement, as if and for the tax year(s) when such deduction would have resulted in a reduction in taxes due and/or the receipt of a refund and (II) the reporting and financial burden of the payroll taxes are, to the extent practicable, as described above. Any such amounts shall be payable within 30 days of the filing of the return in which the benefit described in (x) or (y) of the preceding sentence, whichever is later, is reflected. If the parties are unable to reach an agreement on how to restructure the arrangements set forth herein within 90 days of such determination or the receipt of the opinion of counsel described in the first sentence of this subparagraph (vii) such disagreement shall be resolved by a nationally recognized law firm or accounting firm ("Independent Third Party"), selected in a manner similar to the procedure set forth in Section 11.7(a) of the Tax Sharing Agreement, whose judgment shall be conclusive and binding upon the parties. The cost of any Independent Third Party shall be shared equally between the parties. Vesting and Exercisability of Options. Each adjusted AT&T Option issued to an AT&T Employee (other than a Broadband Transferee) as part of the adjustment to AT&T Options pursuant to this Section 0 shall, except as specifically provided herein, be subject to the same terms and conditions set forth in the original AT&T Option with respect to which the adjusted AT&T Option was issued. Each Broadband Option issued to a Broadband Employee or Broadband Transferee as part of the adjustment to AT&T Options pursuant to this Section 5.3 shall, except as specifically provided herein, be subject to the same terms and conditions set forth in the original AT&T Option with respect to which the Broadband Option was received except that each unvested Broadband Option shall be subject to the change in control provisions of the Broadband Adjustment Plan. Notwithstanding the foregoing, the adjusted AT&T Options and Broadband Options shall not be exercisable during a period beginning on a date prior to the Distribution Date determined by AT&T in its sole discretion, and continuing until the AT&T Opening Stock Value and the Broadband Common Stock Value are determined immediately after the Distribution, or such longer period as AT&T or AT&T Broadband determines necessary to implement the provisions of this Section 0. -28- Each Broadband Option and each AT&T Option issued to any Former Employee as part of the adjustment to AT&T Options pursuant to this Section 0 shall be subject to the same terms and conditions regarding term, vesting and other provisions regarding exercise as set forth in the original AT&T option with respect to which the adjusted AT&T Option was issued and the Broadband Option was received. Restricted Shares. As determined by the Committee (as that term is defined in the AT&T 1997 Long Term Incentive Program) pursuant to its authority under any of the AT&T Long Term Incentive Plans: Each AT&T Participant who is the holder of an AT&T Award consisting of AT&T restricted shares that is outstanding as of the Distribution Date shall receive, as of the Close of the Distribution Date: an award under the applicable AT&T Long Term Incentive Plan for the number of stock units (valued with respect to AT&T Broadband Common Stock), determined by multiplying the number of AT&T restricted shares held as of the Distribution Date by the Distribution Ratio; and a number of adjusted AT&T restricted shares under the applicable AT&T Long Term Incentive Plan determined by dividing (a) by (b) where "(a)" equals the value of the AT&T restricted shares held as of the Distribution Date, based on the AT&T Closing Stock Value, reduced by the value of the stock units awarded pursuant to Section 5.3(e)(i)(A), based on the Broadband Common Stock Value, and "(b)" equals the value of a single AT&T restricted share, based on the AT&T Opening Stock Value. Each Broadband Participant holding an AT&T Award consisting of AT&T restricted shares outstanding as of the Distribution Date shall receive, as of the Close of the Distribution Date: an award under the Broadband Adjustment Plan for a number of AT&T Broadband restricted shares (valued with respect to AT&T Broadband Common Stock) determined by multiplying the number of AT&T restricted shares held as of the Distribution Date by the Distribution Ratio; and an award under the Broadband Adjustment Plan for a number of AT&T restricted shares, determined by dividing (a) by (b) where "(a)" equals the value of the AT&T restricted shares held as of the Distribution Date, based on the AT&T Closing Stock Value, reduced by the value of the AT&T Broadband restricted shares awarded pursuant to Section 5.3(e)(ii)(A), based on the Broadband Common Stock Value, and "(b)" equals the value of a single AT&T stock unit, based on the AT&T Opening Stock Value. Each Broadband Participant shall continue to vest or satisfy service requirements with respect to his or her Broadband Award of restricted shares under the Broadband Adjustment Plan and shall continue to vest in his or her adjusted AT&T restricted shares under the AT&T Long-Term Incentive Plan during his or her employment with AT&T Broadband or another Broadband Entity and shall continue to be subject to the same terms and conditions of the original AT&T restricted share award, except: (A) employment with AT&T Broadband or another Broadband Entity shall be treated as continued employment, (B) any term of such award with respect to a change in control of AT&T shall be modified to refer to a change in control of AT&T Broadband; and (C) with respect to restricted shares granted pursuant to -29- Section 5.3(e)(ii)(A) (the value of which is determined by reference to the underlying value of AT&T Broadband Common Stock), dividend equivalents paid with respect to any such award shall be payable after the Distribution Date with reference to dividends on AT&T Broadband Common Stock, if any. Each AT&T Participant shall continue to vest or satisfy service requirements with respect to his or her award of AT&T Award of restricted shares and stock units under the AT&T Long Term Incentive Plan in accordance with the terms and conditions of the original AT&T restricted share award with respect to which the AT&T Award of restricted shares and stock units are issued, except: (A) each such award shall be settled by AT&T or a Communications Services Entity in accordance with the terms of such award and the applicable AT&T Long Term Incentive Plan; and (B) with respect to stock units granted pursuant to Section 5.3(e)(i)(A) (the value of which is determined by reference to the underlying value of AT&T Broadband Common Stock), dividend equivalents paid with respect to any such award shall be payable after the Distribution Date with reference to dividends on AT&T Broadband Common Stock, if any. Restricted Stock Units. As determined by the Committee (as that term is defined in the AT&T 1997 Long Term Incentive Program) pursuant to its authority under any of the AT&T Long Term Incentive Plans: Each AT&T Participant who is the holder of an AT&T Award consisting of AT&T restricted stock units that is outstanding as of the Distribution Date shall receive, as of the Close of the Distribution Date: an award under the applicable AT&T Long Term Incentive Plan for the number of stock units (valued with respect to AT&T Broadband Common Stock), determined by multiplying the number of AT&T restricted stock units held as of the Distribution Date by the Distribution Ratio; and a number of adjusted AT&T restricted stock units under the applicable AT&T Long Term Incentive Plan determined by dividing (a) by (b) where "(a)" equals the value of the AT&T restricted stock units held as of the Distribution Date, based on the AT&T Closing Stock Value, reduced by the value of the stock units awarded pursuant to Section 5.3(f)(i)(A), based on the Broadband Common Stock Value, and "(b)" equals the value of a single AT&T restricted stock unit, based on the AT&T Opening Stock Value. Each Broadband Participant holding an AT&T Award consisting of AT&T restricted stock units outstanding as of the Distribution Date shall receive, as of the Close of the Distribution Date: an award under the Broadband Adjustment Plan for a number of AT&T Broadband restricted stock units (valued with respect to AT&T Broadband Common Stock) determined by multiplying the number of AT&T restricted stock units held as of the Distribution Date by the Distribution Ratio; and an award under the Broadband Adjustment Plan for a number of stock units (valued with respect to AT&T Common Stock), determined by dividing (a) by (b) where "(a)" equals the value of the AT&T restricted stock units held as of the Distribution Date, based on the AT&T Closing Stock Value, reduced by the value of the AT&T Broadband restricted stock units awarded pursuant -30- to Section 5.3(f)(ii)(A), based on the Broadband Common Stock Value, and "(b)" equals the value of a single AT&T stock unit, based on the AT&T Opening Stock Value. Each Broadband Participant shall continue to vest or satisfy service requirements with respect to his or her Broadband Award of restricted stock units and stock units under the Broadband Adjustment Plan in accordance with the terms and conditions of the original AT&T restricted stock unit award with respect to which the Broadband Award of restricted stock units and stock units are issued, except: (A) any term of such award with respect to a change in control of AT&T shall be modified to refer to a change in control of AT&T Broadband; (B) with respect to restricted stock units granted pursuant to Section 5.3(f)(ii)(A) (the value of which is determined by reference to the underlying value of AT&T Broadband Common Stock), dividend equivalents paid with respect to any such award shall be payable after the Distribution Date with reference to dividends on AT&T Broadband Common Stock, if any; and (C) each such award shall be settled by AT&T Broadband or another Broadband Entity in accordance with the terms of such award and the Broadband Adjustment Plan. Each AT&T Participant shall continue to vest or satisfy service requirements with respect to his or her award of AT&T Award of restricted stock units and stock units under the AT&T Long Term Incentive Plan in accordance with the terms and conditions of the original AT&T restricted stock unit award with respect to which the AT&T Award of restricted stock units and stock units are issued, except: (A) each such award shall be settled by AT&T or a Communications Services Entity in accordance with the terms of such award and the applicable AT&T Long Term Incentive Plan; and (B) with respect to stock units granted pursuant to Section 5.3(f)(i)(A) (the value of which is determined by reference to the underlying value of AT&T Broadband Common Stock), dividend equivalents paid with respect to any such award shall be payable after the Distribution Date with reference to dividends on AT&T Broadband Common Stock, if any Performance Shares. As determined by the Committee (as that term is defined in the AT&T 1997 Long Term Incentive Program) pursuant to its authority under any of the AT&T Long Term Incentive Plans: Each AT&T Participant who is the holder of an AT&T Award consisting of AT&T performance shares for any open cycle that is outstanding as of the Distribution Date shall receive, as of the Close of the Distribution Date: an award under the applicable AT&T Long Term Incentive Plan for the number of stock units (valued with respect to AT&T Broadband Common Stock), determined by multiplying the number of AT&T performance shares held as of the Distribution Date by the Distribution Ratio; and an adjusted award of AT&T performance shares under the applicable AT&T Long Term Incentive Plan for a number of AT&T performance shares (valued with respect to AT&T Common Stock) determined by dividing (a) by (b) where "(a)" equals the value of the AT&T performance shares held as of the Distribution Date, based on the AT&T Closing Stock Value, reduced by the value of the stock units awarded pursuant to Section 5.3(g)(i)(A), based on the Broadband Common Stock Value, and "(b)" equals the value of a single AT&T performance share, based on the AT&T Opening Stock Value. -31- Each Broadband Participant holding an AT&T Award consisting of AT&T performance shares for any open cycle that is outstanding as of the Distribution Date shall receive, as of the Close of the Distribution Date: an award under the Broadband Adjustment Plan for a number of AT&T Broadband performance shares (valued with respect to AT&T Broadband Common Stock) determined by multiplying the number of AT&T performance shares held as of the Distribution Date by the Distribution Ratio; and an award under the Broadband Adjustment Plan for a number of stock units (valued with respect to AT&T Common Stock), determined by dividing (a) by (b) where "(a)" equals the value of the AT&T performance shares held as of the Distribution Date, based on the AT&T Closing Stock Value, reduced by the value of the AT&T Broadband performance shares awarded pursuant to Section 5.3(g)(ii)(A), based on the Broadband Common Stock Value, and "(b)" equals the value of a single AT&T stock unit, based on the AT&T Opening Stock Value. Each Broadband Participant shall continue to vest or satisfy service requirements with respect to his or her Broadband Award of adjusted performance shares and stock units under the Broadband Adjustment Plan in accordance with the terms and conditions of the original AT&T performance share award with respect to which the adjusted performance shares and stock units are issued, except: (A) any term of such award with respect to a change in control of AT&T shall be modified to refer to a change in control of AT&T Broadband; (B) the value and performance criteria of AT&T Broadband performance shares held by a Broadband Participant will be based on the underlying value of a share of AT&T Broadband Common Stock and performance measures as determined by the Compensation and Employee Benefits Committee of the AT&T Broadband Board of Directors (or its successor) from time to time; (C) each stock unit awarded pursuant to Section 0(ii)(B) shall be deemed earned at 100% of target, valued by reference to the underlying value of a share of AT&T Common Stock; (D) with respect to performance shares granted pursuant to Section 0(ii)(A) (the value of which is determined by reference to the underlying value of AT&T Broadband Common Stock), dividend equivalents paid with respect to any such award shall be payable after the Distribution Date with reference to dividends on AT&T Broadband Common Stock, if any; and (E) each such award shall be settled by AT&T Broadband or another Broadband Entity in accordance with the terms of such award and the Broadband Adjustment Plan. Each AT&T Participant shall continue to vest or satisfy service requirements with respect to his or her award of adjusted performance shares and stock units under the AT&T Long Term Incentive Plan in accordance with the terms and conditions of the original AT&T performance share award with respect to which the adjusted performance shares and stock units are issued, except: (A) the value and performance criteria of AT&T performance shares held by an AT&T Participant will be based on the underlying value of a share of AT&T Common Stock after the Distribution and performance measures as determined by the Compensation and Employee Benefits Committee of the AT&T Board of Directors (or its successor) from time to time; (B) each stock unit issued pursuant to Section 0(i)(A) shall be deemed earned at 100% of target, valued by reference to the underlying value of a share of AT&T Broadband Common Stock; (C) each such award shall be settled by AT&T or a Communications Services Entity in accordance with the terms of such award and the applicable AT&T Long Term Incentive Plan; and (D) with respect to stock units granted pursuant to Section 0(i)(A) (the value of which is determined by reference to the underlying value of AT&T -32- Broadband Common Stock), dividend equivalents paid with respect to any such award shall be payable after the Distribution Date with reference to dividends on AT&T Broadband Common Stock, if any. Partial Interests in Shares or Stock Units. To the extent that any adjustment in stock options, performance shares, stock units, restricted stock, or restricted stock units results in any fractional interest in shares (or stock units), normal rounding principles shall be applied such that adjustments resulting in a fractional interest of .5 or greater will be rounded up to the nearest whole share or unit and adjustments resulting in a fractional interest of less than .5 will be rounded down to the nearest whole share or unit. No fractional interests in shares or stock units shall be payable in cash or otherwise. Incentive Stock Options; Foreign Grants/Awards. AT&T and AT&T Broadband shall use their best efforts to preserve the value and tax treatment accorded incentive stock options awarded under the AT&T Long Term Incentive Plan, and to preserve the value and tax treatment accorded grants/awards provided to non-U.S. employees under any domestic or foreign equity-based incentive program sponsored by an AT&T Entity. The parties hereby delegate to the AT&T Executive Vice President-Human Resources, for periods before the Distribution Date, the authority to determine an appropriate methodology for adjusting such grants or awards in a manner that is, to the extent possible, consistent with the treatment of such awards and grants for U.S. employees. Individual Enforcement. Notwithstanding the provisions of Section 0 of this Agreement or any provision of any other Ancillary Agreement (as defined in the Separation and Distribution Agreement) or the Merger Agreement, any individual who, immediately prior to the Distribution is a holder of an AT&T Option, a grant of AT&T restricted stock, restricted stock units, performance shares or stock units, shall have the right in his or her individual capacity to enforce the provisions of this Section 0, subject to the provisions of Section 0. AT&T Employee Stock Purchase Plan. In accordance with the AT&T Employee Stock Purchase Plan, AT&T shall cause (a) all amounts credited to the "Periodic Deposit Account" of each Broadband Transferee and each Broadband Employee under the AT&T Employee Stock Purchase Plan to be applied on the next exercise date coincident with or next following the Distribution Date or, with respect to a Broadband Transferee who is on an Approved Leave of Absence as of the Distribution Date, the next exercise date after the date the employment of such a Broadband Transferee is transferred to a Broadband Entity (the "Next Exercise Date") toward the purchase of AT&T Common Stock, and then (b) stock certificates with respect to whole shares of all AT&T Common Stock and any other stock held by the recordkeeper, and cash with respect to fractional shares of AT&T Common Stock and any other stock held by the recordkeeper, to be distributed as soon as practicable after the Next Exercise Date, and then (c) the recordkeeping accounts of all Broadband Transferees and Broadband Employees to be terminated under the AT&T Stock Purchase Plan. -33- Savings Clause. Notwithstanding any other provision of Section 0, if and to the extent either AT&T or AT&T Broadband shall determine in its reasonable judgment, after consultation with its legal counsel or financial accountants, as appropriate, that any action required to be taken by it under Section 0 does not comply with applicable laws or does not properly satisfy all relevant financial accounting pronouncements, then AT&T and AT&T Broadband shall take such other action as they mutually agree is necessary or appropriate in order to address such laws or such financial accounting concerns. Registration Requirements. As soon as possible following the time as of which the Form 10 or Form 8-A, as the case may be, is declared effective by the Securities and Exchange Commission but in any case before the Distribution Date and before the date of issuance or grant of any Broadband Option and/or shares of AT&T Broadband Common Stock pursuant to this Article V, AT&T Broadband agrees that it shall file a Form S-8 Registration Statement with respect to and cause to be registered pursuant to the Securities Act of 1933, as amended, the shares of AT&T Broadband Common Stock authorized for issuance under the Broadband Adjustment Plan as required pursuant to such Act and any applicable rules or regulations thereunder. Non-Competition Guidelines. AT&T Non-Competition Guideline. Effective as of the Close of the Distribution Date, AT&T shall cause the AT&T Non-Competition Guideline, to be amended to provide that all AT&T Employees who terminate employment with AT&T or a Communications Services Entity and become employed by AT&T Broadband or another Broadband Entity at any time prior to the end of the sixth calendar month that ends after the Close of the Distribution Date, shall not be subject to the AT&T Non-Competition Guideline while such individual is employed by AT&T Broadband, another Broadband Entity or Parent (as defined in the Merger Agreement) or any of its Affiliates; provided, however, that nothing in this Section 5.7(a) shall relieve any person from any obligation under the AT&T Non-Competition Guideline with respect to engaging in conduct (e.g., recruitment or solicitation of AT&T Employees or criticism of AT&T) that is "in conflict with or adverse to the interests of" AT&T, as such terms are defined in the AT&T Non-Competition Guideline. Notwithstanding the foregoing, no AT&T Employee who becomes employed by AT&T Broadband or another Broadband Entity shall be deemed to have violated the AT&T Non-Competition Guideline as a result of the recruitment or solicitation of any AT&T Employee in accordance with the People Movement Guidelines set forth in Exhibit 5.7(a) to this Agreement. Notwithstanding the foregoing, an AT&T Employee, who terminates employment with AT&T or a Communications Services Entity and becomes employed by AT&T Broadband or another Broadband Entity at any time prior to the end of the sixth calendar month that ends after the Close of the Distribution Date, shall be deemed to be employed by a competitor of AT&T for purposes of determining compliance with the provisions of the AT&T Non-Competition Guideline only if within the six month period following such individual's termination of employment with AT&T or such Communication Services Entity and before the end of the sixth calendar month that ends after the Close of the Distribution Date, such individual becomes employed by a company -34- that is an active and significant competitor of AT&T excluding Parent or any of its Affiliates. For purposes of this paragraph, during the six month period following the Close of the Distribution Date, "active and significant competitor" means a company in competition with AT&T in a line of business which represents more than five percent (5%) of AT&T's consolidated gross revenues (excluding AT&T Broadband's revenues) for its most recently completed fiscal year. After the end of the six month period following the Close of the Distribution Date, whether an employer is a competitor of AT&T will be determined pursuant to AT&T's current usual and customary practice in administering the AT&T Non-Competition Guideline. Broadband Non-Competition Guideline. In the event that AT&T Broadband shall adopt or maintain a non-competition guideline effective for periods after the Distribution Date, such guideline shall expressly provide that no employee of AT&T Broadband or other Broadband Entity who terminates employment with AT&T Broadband or another Broadband Entity and becomes employed by AT&T or a Communications Services Entity at any time prior to the end of the sixth calendar month that ends after the Close of the Distribution Date, shall be treated as being employed by a competitor of AT&T Broadband or another Broadband Entity for purposes of determining compliance with the non-competition provisions of such AT&T Broadband non-competition guideline while such individual remains employed by AT&T or a Communications Services Entity; provided, however, that nothing in this Section 5.7(b) shall relieve any person from any obligation under such Broadband non-competition guideline with respect to engaging in conduct (e.g., recruitment or solicitation of employees or criticism of AT&T Broadband) that is "in conflict with or adverse to the interests of" AT&T Broadband or any Broadband Entity, as such terms are defined in such guideline. Notwithstanding the foregoing, no Broadband Employee who becomes employed by AT&T or a Communications Services Entity shall be deemed to have violated such guideline as a result of the recruitment or solicitation of any employee of AT&T Broadband or another Broadband Entity to the extent that the hiring of any employee of AT&T Broadband or another Broadband Entity conforms to procedures set forth in the People Movement Guidelines attached to this Agreement as Exhibit 5.7(b). Notwithstanding the foregoing, a Broadband Employee who terminates employment with AT&T Broadband or another Broadband Entity and becomes employed by AT&T or a Communications Services Entity at any time prior to the end of the sixth calendar month that ends after the Close of the Distribution Date shall be deemed to be employed by a competitor of AT&T Broadband for purposes of determining compliance with the provisions of the Broadband non-competition guideline only if within the six month period following such individual's termination of employment with AT&T Broadband or another Broadband Entity and before the end of the sixth calendar month that ends after the Close of the Distribution Date, such Broadband Employee becomes employed by a company excluding AT&T and the Communications Services Entities that is an active and significant competitor of AT&T Broadband. For purposes of this paragraph, during the six month period following the Close of the Distribution Date, "active and significant competitor" means a company in competition with AT&T Broadband in a line of business which represents more than five percent (5%) of the AT&T Broadband consolidated gross revenues for its most recently completed fiscal year (excluding AT&T's revenues). At the conclusion of such six calendar month period, AT&T Broadband may deem employment, other than continuing -35- employment with AT&T or a Communications Services Entity, to be a violation of such AT&T Broadband non-competition guideline. Confidentiality and Proprietary Information. No provision of the Separation and Distribution Agreement or this Agreement shall be deemed to release any individual for any violation of the Broadband non-competition guideline or such AT&T Non-Competition Guideline pertaining to confidential or proprietary information or any agreement or policy pertaining to confidential or proprietary information of AT&T Broadband or any of its Affiliates or of AT&T or any of its Affiliates, respectively, or otherwise relieve any individual of his or her obligations under such guideline or any such agreements or policies. Deferral Plans and Individual Deferral Agreements. AT&T shall retain all Liabilities relating to (i) AT&T Deferral Plan Participants under the AT&T Deferral Plan, (ii) Non-Employee Directors under the AT&T Directors' Deferral Plan, and (iii) all Individual Deferral Agreements except as listed on Schedule 5.1(b), and AT&T shall make payments under such plans and Individual Deferral Agreements at the times and in the manner designated in the applicable schedules on file with AT&T as of the Distribution Date and in accordance with the terms of such plans and Individual Deferral Agreements, including the Special Distribution Option approved by the AT&T Board. For purposes of this Section 5.8, no AT&T Deferral Plan Participants, other than Broadband Transferees, and/or parties to Individual Deferral Agreements, shall be deemed to have terminated employment for purposes of administration of the AT&T Deferral Plan or any Individual Deferral Agreements as a result of the consummation of the transactions contemplated by the Separation and Distribution Agreement. AT&T Broadband and the Broadband Entities shall assume or retain, as applicable, all Liabilities with respect to any Individual Deferral Agreement with respect to Broadband Transferees as listed on Schedule 5.1(b). Notwithstanding anything in this Section 0 to the contrary, if any Broadband Transferee has elected to defer compensation under the AT&T Deferral Plan prior to the Distribution Date, and as of the Distribution Date such compensation is not yet otherwise payable pursuant to the terms of any such election, then AT&T Broadband, at the time such Broadband Transferee becomes an employee of AT&T Broadband or any other Broadband Entity, shall honor such deferral election as if it had been properly and timely made under the applicable AT&T Broadband deferred compensation plan, and shall allow such Broadband Transferee to immediately commence deferral of such compensation in accordance with the terms of the original deferral election. AT&T Non-Qualified Pension Plans and Arrangements. AT&T shall retain all Liabilities relating to the AT&T Non-Qualified Pension Plan, the AT&T Excess Benefit and Compensation Plan, the AT&T Mid-Career Pension Plan, the AT&T Senior Management Long Term Disability and Survivor Protection Plan, and any individual non-qualified pension arrangements other than those listed in Schedule 5.10 hereto and all Liabilities relating to AT&T Employees or Broadband Transferees under the AT&T Non-Qualified Pension Plan, the AT&T Excess Benefit and Compensation Plan, the AT&T Mid-Career Pension Plan, the AT&T Senior Management Long Term Disability and Survivor Protection Plan, and any individual non-qualified pension arrangements other than those listed in -36- Schedule 5.10 hereto and all Liabilities with respect to any participant under such plans and arrangements as of the Close of the Distribution Date, as well as all assets held under any trust or other arrangement established as maintained for the funding of such Liabilities, and shall make benefit payments to AT&T Employees and Broadband Transferees at such times and in such manner as is provided for under the terms of the respective non-qualified pension plans and arrangements. Broadband Non-Qualified Pension Plans and Arrangements. For periods after the Distribution Date, AT&T Broadband shall retain all Liabilities relating to the AT&T Broadband Non-Qualified Pension Plan, the MediaOne Group Mid-Career Plan, the MediaOne Group Non-Qualified Pension & Mid-Career Pension Trust, the AT&T Broadband Deferred Compensation Plan, the MediaOne Group Deferred Compensation Trust and any individual non-qualified pension arrangements identified in Schedule 5.10 hereto and all Liabilities relating to Broadband Employees under such plans and arrangements as of the Close of the Distribution Date, and shall make benefit payments to Broadband Employees at such times and in such manner as is provided for under the terms of the respective non-qualified pension plans and arrangements. Life Insurance Programs. AT&T Senior Management Universal Life Insurance Program. As of the Close of the Distribution Date, AT&T shall retain all Liabilities relating to the AT&T Senior Management Universal Life Insurance Program. The life insurance amount under the SMULIP shall be frozen (the "frozen SMULIP coverage") as of the Close of the Distribution Date for any Broadband Transferee who is a SMULIP participant as of the Close of the Distribution Date and who either (i) is then eligible to participate in the AT&T Post-Retirement Welfare Benefits Plan or (ii) may be eligible to participate in the AT&T Post-Retirement Welfare Benefits Plan pursuant to the provisions of Section 4.6. AT&T shall allow such Broadband Transferee to continue to participate in the SMULIP until the Broadband Transferee's attainment of his or her "normal termination date" under the terms of the SMULIP as such terms exist on the date of this Agreement. During the Broadband Transferee's participation in the SMULIP after the Distribution Date, AT&T shall pay the premiums determined to be due under the applicable life insurance policy (and any tax adjustment payments, determined in accordance with the terms of the SMULIP as they exist on the date of this Agreement) to provide the frozen SMULIP coverage amount. The participation of each other Broadband Transferee who participates in the SMULIP shall terminate as of the Close of the Distribution Date, the life insurance policy covering the life of such Broadband Transferee under the SMULIP may be allowed to lapse, surrendered for its cash surrender value, or continued with premium payments being made from the Broadband Transferee's (or his or her assignee's) personal assets and, after the Close of the Distribution Date, none of AT&T, AT&T Broadband, the Broadband Entities and the Communications Services Entities shall have any further obligation with respect thereto. -37- AT&T Executive Basic Life Insurance Program. As of the Close of the Distribution Date, AT&T shall retain all Liabilities relating to the AT&T Executive Basic Life Insurance Program. The life insurance amount under the EBLIP shall be frozen (the "frozen EBLIP coverage") as of the Close of the Distribution Date for any Broadband Transferee who is an EBLIP participant as of the Close of the Distribution Date and who either (i) is then eligible to participate in the AT&T Post-Retirement Welfare Benefits Plan; or (ii) may be eligible to participate in the AT&T Post-Retirement Welfare Benefits Plan pursuant to the provisions of Section 4.6. AT&T shall allow such Broadband Transferee to continue to participate in the EBLIP until Broadband Transferee's attainment of his or her "normal termination date" under the terms of the EBLIP as such terms exist on the date of this Agreement. During the Broadband Transferee's period of continued participation in the EBLIP, AT&T shall pay the premiums determined to be due under the applicable life insurance policy to provide the frozen EBLIP coverage. Notwithstanding any provision of this Section 5.11(b) to the contrary, after any Broadband Transferee who continues to participate in the EBLIP attains age 66, the participant's frozen EBLIP coverage shall be reduced according to the benefit schedule of the EBLIP for participants age 66 and older as such schedule exists on the date of this Agreement. The participation of all other Broadband Transferees who participate in the EBLIP shall terminate as of the Close of the Distribution Date, and AT&T shall transfer ownership of the life insurance policy covering the Broadband Transferee ("EBLIP Policy") (after withdrawing the total cash surrender value from the life insurance policy) to the Broadband Transferee (or his or her assignee). Following transfer of the EBLIP Policy, AT&T, AT&T Broadband, the Broadband Entities and the Communications Services Entities, as the case may be, shall have no further obligation with respect to the EBLIP Policy and the Broadband Transferee (or his or her assignee) may allow the EBLIP Policy to lapse or continue the coverage under the EBLIP Policy with premium payments being made from the Broadband Transferee's (or his or her assignee's) personal assets. AT&T Estate Enhancement Program. As of the Close of the Distribution Date, AT&T shall retain all Liabilities relating to the AT&T Estate Enhancement Program. AT&T Supplemental Variable Universal Life Insurance Program. As of the Close of the Distribution Date, AT&T shall retain all Liabilities relating to the AT&T Supplemental Variable Universal Life Insurance Program. The participation of all Broadband Transferees in the SVULIP shall terminate as of the Close of the Distribution Date. Affected Broadband Transferees may, in their sole discretion, continue, on a direct-pay basis, part or all of the coverage previously provided to them under the SVULIP. Financial Counseling. As of the Close of the Distribution Date, AT&T shall retain all Liabilities relating to the AT&T Senior Management Financial Counseling Program or the AT&T Executive Financial Counseling Program and all AT&T agreements with vendors for the provision of financial counseling services. Following the Distribution Date, AT&T shall provide financial counseling program benefits (including preparation of income tax returns for the Distribution Year) for one year following the Distribution Date for those -38- Broadband Transferees who immediately before the Close of the Distribution Date were (i) receiving financial counseling program benefits under either the AT&T Senior Management Financial Counseling Program or the AT&T Executive Financial Counseling Program, and (ii) then eligible to participate in the AT&T Post-Retirement Welfare Benefits Plans or who would be eligible to so participate pursuant to Section 0. To the extent the provision of any such benefit by AT&T is taxable income to the Broadband Transferee, AT&T shall make a tax adjustment payment to such Broadband Transferee in accordance with AT&T tax "gross-up" policies for similarly situated retiring employees at the AT&T Executive level. AT&T financial counseling benefits will terminate for all other Broadband Transferees as of the Close of the Distribution Date. Except as provided in Section 0, AT&T shall have no responsibility for providing financial counseling services to any Broadband Transferee. Toll Discount Program. As of the Close of the Distribution Date, AT&T shall retain all Liabilities relating to the AT&T Toll Discount Program. Any Broadband Employee or Broadband Transferee who is eligible to participate in the AT&T Post-Retirement Welfare Benefits Plan as of the Close of the Distribution Date shall be entitled to continue to receive toll reimbursements in accordance with the terms of the applicable assumed AT&T Toll Discount Program. AT&T shall discontinue making toll reimbursements to each other Broadband Employee and Broadband Transferee under the AT&T Toll Discount Program effective as of the later of (a) the Close of the Distribution Date (or such sooner date when AT&T terminates the AT&T Toll Discount Program) or (b) the date on which the Broadband Employee or Broadband Transferee would no longer be in an eligible class of employees under the applicable AT&T Toll Discount Program. Relocation Plan. AT&T Broadband shall be responsible for all Liabilities with respect to the relocation expenses of any Broadband Transferee related to their employment by Broadband or a Broadband Entity. AT&T shall be responsible for all Liabilities with respect to the relocation expenses authorized by AT&T for any employees who, before the Close of the Distribution Date, leave the employment of AT&T Broadband or a Broadband Entity to become employees of AT&T or a Communications Services Entity. Senior Manager Car Allowance. As of the Close of the Distribution Date, AT&T shall retain all Liabilities relating to the Senior Manager Ground Transportation Program. AT&T shall discontinue making car allowance payments to each Broadband Transferee under the Senior Manager Ground Transportation Program effective as of the later of (a) the Close of the Distribution Date (or such sooner date when AT&T terminates the Senior Manager Ground Transportation Program) or (b) the date on which the Broadband Transferee would no longer be in an eligible class of employees under that program. Taxable Fringe Benefits. As of the Close of the Distribution Date, AT&T shall retain all Liabilities with respect to the AT&T Taxable Fringe Benefit -39- Program. AT&T shall discontinue providing benefits to each Broadband Transferee under the AT&T Taxable Fringe Benefit Program effective as of the later of (a) the Close of the Distribution Date (or such sooner date when AT&T terminates the AT&T Taxable Fringe Benefit Program) and (b) the date on which the Broadband Transferees would no longer be in an eligible class of employees under that program. Separation Plans. Certain plans and programs of AT&T, including but not limited to the AT&T Senior Officer Separation Plan (the "SOSP"), the AT&T Senior Management Separation Plan (the "SMSP") and the AT&T Special Executive Separation Plan (the "SESP"), provide for the payment of certain compensation and benefits in the event of the termination of employment of the individual covered by the terms of such plans. As of the Close of the Distribution Date, AT&T shall retain all Liabilities relating to the SOSP, the SMSP and the SESP and all Liabilities relating to, arising out of, or resulting from claims incurred by or on behalf of any individual under such plans. A Broadband Transferee shall not be deemed to have terminated employment for purposes of determining eligibility for benefits under the SOSP, the SMSP, the SESP or other similar plans and programs in connection with or in anticipation of the consummation of the transactions contemplated by the Separation and Distribution Agreement, and shall cease to be covered thereby as of the Close of the Distribution Date. GENERAL AND ADMINISTRATIVE Payment of Liabilities. AT&T Broadband shall pay directly, or reimburse AT&T in accordance with established practice for, all compensation payable to Broadband Transferees for services rendered to AT&T Broadband or another Broadband Entity while in the employ of AT&T or an Communication Services Entity on or before the Distribution Date (or, in the case of a Broadband Transferee on Approved Leave of Absence, until he or she becomes a Broadband Employee in accordance with Section ERROR! REFERENCE SOURCE NOT FOUND.) to the extent not already reimbursed. To the extent the amount of such Liabilities is not yet determinable because the status of individuals as Broadband Transferees is not yet determined, except as otherwise specified herein or in another Ancillary Agreement with respect to particular Liabilities, AT&T Broadband shall make such payments or reimbursements based upon AT&T's reasonable estimates of the amounts thereof, and when such status is determined, AT&T Broadband shall make additional reimbursements or payments, or AT&T shall reimburse AT&T Broadband, to the extent necessary to reflect the actual amount of such Liabilities. Sharing of Participant Information. AT&T and AT&T Broadband shall share, and AT&T shall cause each Communications Services Entity to share, and AT&T Broadband shall cause each other Broadband Entity to share with each -40- other and their respective agents and vendors (without obtaining releases) all participant information necessary for the efficient and accurate administration of each of the Broadband Benefit Plans and the AT&T Benefit Plans. AT&T and AT&T Broadband and their respective authorized agents shall, subject to applicable laws on confidentiality, be given reasonable and timely access to, and may make copies of, all information relating to the subjects of this Agreement in the custody of the other party, to the extent necessary for such administration. Until the Close of the Distribution Date, all participant information shall be provided in the manner and medium applicable to Participating Companies in Benefit Plans of AT&T generally, and thereafter until December 31, 2002, all participant information shall be provided in a manner and medium as may be mutually agreed to by AT&T and AT&T Broadband. AT&T Broadband will notify AT&T of the termination following the Distribution Date of any Broadband Employee or Broadband Transferee who is eligible to participate in the AT&T Post-Retirement Welfare Benefits Plans. Best Efforts/Cooperation. Each of the parties hereto will use its commercially reasonable best efforts to promptly take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. Each of the parties hereto shall cooperate fully on any issue relating to the transactions contemplated by this Agreement for which the other party seeks a determination letter or private letter ruling from the Internal Revenue Service, an advisory opinion from the Department of Labor or any other filing, consent or approval with respect to or by a governmental agency. Non-Termination of Employment; No Third-Party Beneficiaries. Without limiting the generality of Section 11.5 of the Separation and Distribution Agreement, which is hereby incorporated herein by reference, except as expressly provided in Section ERROR! REFERENCE SOURCE NOT FOUND. of this Agreement, no provision of this Agreement or the Separation and Distribution Agreement shall be construed to create any right, or accelerate entitlement, to any compensation or benefit whatsoever on the part of any AT&T Employee, Broadband Employee or Broadband Transferee or other future, present, or former employee of any AT&T Entity under any Broadband Benefit Plan or AT&T Benefit Plan or otherwise. Without limiting the generality of the foregoing: (i) except as expressly provided in this Agreement or with respect to the AT&T Pension Plans and the AT&T Post-Retirement Welfare Benefits Plan, the occurrence of the Close of the Distribution Date shall not cause any employee to be deemed to have incurred a termination of employment which entitles such individual to the commencement of benefits under any of the AT&T Benefit Plans or any of the Individual Agreements or severance under the AT&T Force Management Plan or the Broadband Severance Plan; (ii) except as expressly provided in this Agreement, nothing in this Agreement shall preclude AT&T or any Communications Services Entity, at any time after the Close of the Distribution Date, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any AT&T -41- Benefit Plan, any benefit under any Benefit Plan or any trust, insurance policy or funding vehicle related to any AT&T Benefit Plan; and (iii) except as expressly provided in this Agreement, nothing in this Agreement shall preclude AT&T Broadband or any other Broadband Entity, at any time after the Close of the Distribution Date, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any Broadband Benefit Plan, any benefit under any Benefit Plan or any trust, insurance policy or funding vehicle related to any Broadband Benefit Plan. Audit Rights With Respect to Information Provided. Each of AT&T and AT&T Broadband, and their duly authorized representatives, shall have the right to conduct reasonable audits with respect to all information provided to it by the other party. The party conducting the audit (the "Auditing Party") may adopt reasonable procedures and guidelines for conducting audits and the selection of audit representatives under this Section 0. The Auditing Party shall have the right to make copies of any records at its expense, subject to the confidentiality provisions set forth in the Separation and Distribution Agreement, which are incorporated by reference herein. The party being audited shall provide the Auditing Party's representatives with reasonable access during normal business hours to its operations, computer systems and paper and electronic files, and provide workspace to its representatives. After any audit is completed, the party being audited shall have the right to review a draft of the audit findings and to comment on those findings in writing within ten business days after receiving such draft. The Auditing Party's audit rights under this Section 0 shall include the right to audit, or participate in an audit facilitated by the party being audited, of any Subsidiaries and Affiliates of the party being audited and to require the other party to request any benefit providers and third parties with whom the party being audited has a relationship, or agents of such party, to agree to such an audit to the extent any such persons are affected by or addressed in this Agreement (collectively, the "Non-parties"). The party being audited shall, upon written request from the Auditing Party, provide an individual (at the Auditing Party's expense) to supervise any audit of a Non-party. The Auditing Party shall be responsible for supplying, at the Auditing Party's expense, additional personnel sufficient to complete the audit in a reasonably timely manner. The responsibility of the party being audited shall be limited to providing, at the Auditing Party's expense, a single individual at each audited site for purposes of facilitating the audit. Fiduciary Matters. It is acknowledged that actions required to be taken pursuant to this Agreement may be subject to fiduciary duties or standards of conduct under ERISA or other applicable law, and no party shall be deemed to be in violation of this Agreement if it fails to comply with any provisions hereof based upon its good faith determination that to do so would violate such a fiduciary duty or standard. Each party shall be responsible for taking such actions as are deemed necessary and appropriate to comply with its own -42- fiduciary responsibilities and shall fully release and indemnify the other party for any Liabilities caused by the failure to satisfy any such responsibility. Collective Bargaining. To the extent any provision of this Agreement is contrary to the provisions of any collective bargaining agreement to which AT&T or any Affiliate of AT&T is a party, the terms of such collective bargaining agreement with respect to the entities bound by such collective bargaining agreement shall prevail. Should any provisions of this Agreement be deemed to relate to a topic determined by an appropriate authority to be a mandatory subject of collective bargaining, AT&T, AT&T Broadband, another Broadband Entity or a Communications Services Entity may be obligated to bargain with the union representing affected employees concerning those subjects. Consent of Third Parties. If any provision of this Agreement is dependent on the consent of any third party (such as a vendor or a union) and such consent is withheld, the parties hereto shall use their reasonable best efforts to implement the applicable provisions of this Agreement to the full extent practicable. If any provision of this Agreement cannot be implemented due to the failure of such third party to consent, the parties hereto shall negotiate in good faith to implement the provision in a mutually satisfactory manner. The phrase "reasonable best efforts" as used herein shall not be construed to require any party to incur any non-routine or unreasonable expense or Liability or to waive any right. MISCELLANEOUS Effect If Distribution Does Not Occur. If the Separation and Distribution Agreement is terminated prior to the Distribution Date, then all actions and events that are, under this Agreement, to be taken or occur effective immediately prior to or as of the Close of the Distribution Date, or Immediately after the Distribution Date, or otherwise in connection with the Separation Transactions shall not be taken or occur except to the extent specifically agreed by AT&T and AT&T Broadband. Relationship of Parties. Nothing in this Agreement shall be deemed or construed by the parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the parties, it being understood and agreed that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties other than the relationship set forth herein. Affiliates. Each of AT&T and AT&T Broadband shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth in this Agreement to be performed by another Broadband Entity or a Communications Services Entity, respectively. -43- Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be delivered by hand or sent by facsimile or sent, postage prepaid, by registered, certified or express mail or reputable overnight courier service and shall be deemed given when so delivered by hand or facsimile, or, if mailed, three days after mailing (one Business Day in the case of express mail or overnight courier service), as follows (or at such other address for a party as shall be specified by notice given in accordance with this Section 0): if to AT&T: AT&T Corp. 295 North Maple Avenue Basking Ridge, New Jersey 07920-1002 Attention: Mirian Graddick with copies to: AT&T Corp. 295 North Maple Avenue Basking Ridge, New Jersey 07920-1002 Attention: Robert Feit, Esq. Facsimile No.: (908) 221-8287 Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 Attention: Karen G. Krueger Facsimile No.: (212) 403-2242 if to AT&T Broadband: AT&T Broadband, LLC 188 Inverness Drive West Englewood CO 80112 Attention: David R. Brunick Facsimile No.: (303) 858-3184 with a copy to: Sean Lindsay 188 Inverness Drive West Englewood CO 80112 Facsimile: (303) 858-3482 Incorporation of Separation and Distribution Agreement Provisions. The following provisions of the Separation and Distribution Agreement are hereby incorporated herein by reference, and unless otherwise expressly specified herein, such provisions shall apply as if fully set forth herein (references in this Section 0 to an "Article" or "Section" shall mean Articles or Sections of the Separation and Distribution Agreement, and, except as expressly set forth below, -44- references in the material incorporated herein by reference shall be references to the Separation and Distribution Agreement): Article V (relating to Mutual Releases and Indemnification); Article VII (relating to Exchange of Information and Confidentiality); Article VIII (relating to Further Assurances and Additional Covenants); Article IX (relating to Termination); Article X (relating to Dispute Resolution and Arbitration); and Article XI (relating to Miscellaneous), excluding the notice provisions thereof. Governing Law. To the extent not preempted by applicable federal law, this Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York, irrespective of the choice of laws principles of the State of New York, as to all matters, including matters of validity, construction, effect, performance and remedies. References. Except as provided in Section 7.5, all references to Sections, Articles, Exhibits or Schedules contained herein mean Sections, Articles, Exhibits or Schedules of or to this Agreement, as the case may be, unless otherwise stated. -45- IN WITNESS WHEREOF, the parties have caused this Employee Benefits Agreement to be duly executed as of the day and year first above written. AT&T CORP. By: /s/ Marilyn J. Wasser ------------------------------------ Name: Marilyn J. Wasser Title: Vice President -- Law and Secretary AT&T BROADBAND CORP. By: /s/ Raymond E. Liguori ------------------------------------ Name: Raymond E. Liguori Title: President 46 EX-10.I.38 5 e56632ex10-i_38.txt AMENDED AND RESTATED AGREEMENT Exhibit (10)(i)38 EXECUTION COPY ================================================================================ AMENDED AND RESTATED 364-DAY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Dated as of December 14, 2001 among AT&T CORP., THE LENDERS PARTY HERETO, CITIBANK, N.A., CREDIT SUISSE FIRST BOSTON, DEUTSCHE BANK AG NEW YORK BRANCH and GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative Agents, and CITIBANK, N.A., as Paying Agent, with SALOMON SMITH BARNEY INC., CREDIT SUISSE FIRST BOSTON, DEUTSCHE BANC ALEX. BROWN INC. and GOLDMAN SACHS CREDIT PARTNERS L.P., as Joint Lead Arrangers and Bookrunners and BANK ONE, NA, THE BANK OF TOKYO- MITSUBISHI, LTD., NEW YORK BRANCH, BANK OF AMERICA, N.A., BARCLAYS BANK PLC, BNP PARIBAS, THE ROYAL BANK OF SCOTLAND PLC, NEW YORK BRANCH, INTESABCI, NEW YORK BRANCH, THE FUJI BANK, LIMITED, HSBC BANK USA, and FIRST UNION NATIONAL BANK, as Co-Arrangers i TABLE OF CONTENTS Page ARTICLE I Definitions SECTION 1.01. Defined Terms..........................................1 ARTICLE II The Credits SECTION 2.01. Commitments...........................................17 SECTION 2.02. Loans.................................................17 SECTION 2.03. Competitive Bid Procedure.............................18 SECTION 2.04. Standby Borrowing Procedure...........................20 SECTION 2.05. Conversion and Continuation of Standby Loans..........20 SECTION 2.06. Fees..................................................21 SECTION 2.07. Repayment of Loans; Evidence of Debt..................22 SECTION 2.08. Interest on Loans.....................................22 SECTION 2.09. Default Interest......................................23 SECTION 2.10. Alternate Rate of Interest............................23 SECTION 2.11. Termination and Reduction of Commitments..............23 SECTION 2.12. Prepayment............................................24 SECTION 2.13. Reserve Requirements; Change in Circumstances.........24 SECTION 2.14. Change in Legality....................................26 SECTION 2.15. Indemnity.............................................26 SECTION 2.16. Pro Rata Treatment....................................27 SECTION 2.17. Sharing of Setoffs....................................27 SECTION 2.18. Payments..............................................28 SECTION 2.19. Taxes.................................................28 SECTION 2.20. Mandatory Assignment; Commitment Termination..........30 ARTICLE III Representations and Warranties SECTION 3.01. Organization; Powers..................................30 SECTION 3.02. Authorization.........................................31 SECTION 3.03. Enforceability........................................31 SECTION 3.04. Governmental Approvals................................31 SECTION 3.05. Financial Statements..................................31 SECTION 3.06. Litigation; Compliance with Laws......................31 SECTION 3.07. Federal Reserve Regulations...........................32 SECTION 3.08. Investment Company Act; Public Utility Holding Company Act...................................32 SECTION 3.09. Use of Proceeds.......................................32 SECTION 3.10. No Material Misstatements.............................32 ARTICLE IV Conditions of Effectiveness and of Lending SECTION 4.01. All Borrowings........................................32 SECTION 4.02. Closing Date..........................................33 ARTICLE V Covenants SECTION 5.01. Existence.............................................33 SECTION 5.02. Financial Statements, Reports, Etc....................33 ii SECTION 5.03. Maintaining Records...................................34 SECTION 5.04. Use of Proceeds.......................................34 SECTION 5.05. Consolidations, Mergers, Sales of Assets and Separation Transactions...........................34 SECTION 5.06. Limitations on Liens..................................35 SECTION 5.07. Limitations on Sale and Leaseback Transactions........35 SECTION 5.08. Total Debt to EBITDA Ratio............................35 ARTICLE VI Events of Default ARTICLE VII The Agents ARTICLE VIII Miscellaneous SECTION 8.01. Notices...............................................39 SECTION 8.02. Survival of Agreement.................................39 SECTION 8.03. Binding Effect........................................39 SECTION 8.04. Successors and Assigns................................40 SECTION 8.05. Expenses; Indemnity...................................42 SECTION 8.06. Applicable Law........................................42 SECTION 8.07. Waivers; Amendment....................................43 SECTION 8.08. Entire Agreement......................................43 SECTION 8.09. Severability..........................................43 SECTION 8.10. Counterparts..........................................43 SECTION 8.11. Headings..............................................43 SECTION 8.12. Jurisdiction, Etc.....................................43 SECTION 8.13. Waiver of Jury Trial...................................1 iii Exhibits and Schedules Exhibit A-1 Form of Competitive Bid Request Exhibit A-2 Form of Notice of Competitive Bid Request Exhibit A-3 Form of Competitive Bid Exhibit A-4 Form of Competitive Bid Accept/Reject Letter Exhibit A-5 Form of Standby Borrowing Request Exhibit B Form of Assignment and Acceptance Exhibit C Form of Opinion of Counsel for AT&T Corp. Exhibit D Form of Note Exhibit E Form of AT&T Business Guaranty Schedule 2.01 Commitments AMENDED AND RESTATED 364-DAY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT (the "Agreement") dated as of December [__], 2001, among AT&T CORP., a New York corporation (the "Borrower"), the lenders listed in Schedule 2.01 (the "Lenders"), CITIBANK, N.A. ("Citibank"), CREDIT SUISSE FIRST BOSTON ("CSFB"), DEUTSCHE BANK AG NEW YORK BRANCH ("DB") and GOLDMAN SACHS CREDIT PARTNERS L.P. ("GSCP"), as administrative agents for the Lenders (in such capacity, the "Administrative Agents"), Citibank, as paying agent for the Lenders (in such capacity, the "Paying Agent") and with SALOMON SMITH BARNEY INC., CSFB, DEUTSCHE BANC ALEX. BROWN INC. ("DBAB") and GSCP, as joint lead arrangers and bookrunners (the "Joint Lead Arrangers"). PRELIMINARY STATEMENTS (1) The Borrower is a party to that certain 364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of December 28, 2000, among the Borrower, the lenders party thereto, the co-arrangers party thereto, The Chase Manhattan Bank ("Chase"), CSFB and GSCP, as administrative agents, Chase, as paying agent, and Chase Securities Inc., CSFB and GSCP, as joint lead arrangers and bookrunners (the "Existing Bank Agreement"). (2) The parties hereto have agreed to amend and restate the Existing Bank Agreement, on the terms and conditions hereinafter set forth, to provide for, among other things, a reduction in the Total Commitment of the Lenders hereunder. (3) The Borrower has requested that the Lenders continue to extend credit to the Borrower to enable it to borrow on a standby revolving credit basis on and after the date hereof and at any time and from time to time prior to the Maturity Date (as herein defined) a principal amount not in excess of $8,000,000,000 at any time outstanding. The Borrower has also requested that the Lenders continue to provide a procedure pursuant to which the Borrower may invite the Lenders to bid on an uncommitted basis on short-term borrowings by the Borrower maturing on or prior to the Maturity Date. The proceeds of such borrowings are to be used to refinance the Existing Bank Agreement (as hereinafter defined) and for other general corporate purposes of the Borrower, including the repayment of maturing commercial paper of the Borrower. The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions herein set forth. Accordingly, the Borrower, the Lenders and the Agents agree that, effective as of the Closing Date, the Existing Bank Agreement is hereby amended and restated in its entirety to read as follows: DEFINITIONS DEFINED TERMS. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. "ABR Loan" shall mean any Standby Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Administrative Agents" shall have the meaning specified in the recital of parties to this Agreement. "Administrative Fees" shall have the meaning assigned to such term in Section 2.06(c). 2 "Affiliate" shall mean, when used with respect to a specified person, another person that directly or indirectly controls or is controlled by or is under common control with the person specified. "Agent Parties" shall mean the Agents and the Joint Lead Arrangers. "Agents" shall mean the Administrative Agents and the Paying Agent. "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Paying Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as effective. For purposes hereof, "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as released on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so released for any day which is a Business Day, the arithmetic average (rounded upwards to the next 1/100th of 1%), as determined by the Paying Agent, of the quotations for the day of such transactions received by the Paying Agent from three Federal funds brokers of recognized standing selected by it. If for any reason the Paying Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Paying Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Applicable Facility Fee Percentage" shall mean on any date, a percentage per annum determined by reference to the Public Debt Ratings in effect on such date as set forth below: 3 APPLICABLE FACILITY FEE PERCENTAGE PRICING GRID
APPLICABLE PUBLIC DEBT FACILITY RATINGS FEE S&P/MOODY'S PERCENTAGE ----------- ---------- Level 1 Greater than or 0.075% equal to A and A2 Level 2 Greater than or 0.085% equal to A- or A3 and A-1 and P-1 but less than Level 1 Level 3 Greater than or 0.10% equal to A- or A3 and A-2 and P-2 but less than Level 2 Level 4 Greater than or 0.10% equal to BBB+ or Baa1 but less than Level 3 Level 5 Greater than or equal to BBB or Baa2 but less 0.125% than Level 4 Level 6 Less than BBB and Baa2 0.175%
"Applicable Margin" shall mean on any date, with respect to Eurodollar Standby Loans, a percentage per annum determined by reference to the Public Debt Ratings in effect on such date as set forth below: 4 APPLICABLE MARGIN PRICING GRID
PUBLIC DEBT RATINGS APPLICABLE S&P/MOODY'S MARGIN Level 1 Greater than or 0.325% equal to A and A2 Level 2 Greater than or 0.415% equal to A- or A3 and A-1 and P-1 but less than Level 1 Level 3 Greater than or 0.525% equal to A- or A3 and A-2 and P-2 but less than Level 2 Level 4 Greater than or 0.65% equal to BBB+ or Baa1 but less than Level 3 Level 5 Greater than or equal to BBB or Baa2 but less 0.875% than Level 4 Level 6 Less than BBB and Baa2 1.325%
"Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee with the consent of the Borrower, and accepted by the Paying Agent in accordance with Section 8.04(e), substantially in the form of Exhibit B hereto. "AT&T Broadband" means the Borrower's broadband business; provided that for purposes of the definition of "Indebtedness", "AT&T Broadband" shall mean any Person or Persons (whether existing as of the date hereof or subsequently formed) holding any significant portion of the Borrower's broadband business upon consummation of a Separation Transaction. 5 "AT&T Business" means a Person (whether existing as of the date hereof or subsequently formed) that holds all or substantially all of the Borrower's consumer services and business services businesses upon consummation of a Separation Transaction involving AT&T Broadband. "AT&T Business Spinoff" has the meaning set forth in Section 5.05(c). "AT&T Latin America" means AT&T Latin America Corp., a Delaware corporation. "At Home Corporation" means At Home Corporation, a Delaware corporation. "Attributable Debt" shall mean, as of the date of its determination, the present value (discounted semiannually at an interest rate implicit in the terms of the lease) of the obligation of a lessee for rental payments pursuant to any Sale and Leaseback Transaction (reduced by the amount of the rental obligations of any sublessee of all or part of the same property) during the remaining term of such Sale and Leaseback Transaction (including any period for which the lease relating thereto has been extended), such rental payments not to include amounts payable by the lessee for maintenance and repairs, insurance, taxes, assessments and similar charges and for contingent rents (such as those based on sales); provided, however, that in the case of any Sale and Leaseback Transaction in which the lease is terminable by the lessee upon the payment of a penalty, Attributable Debt shall mean the lesser of the present value of (a) the rental payments to be paid under such Sale and Leaseback Transaction until the first date (after the date of such determination) upon which it may be so terminated plus the then applicable penalty upon such termination and (b) the rental payments required to be paid during the remaining term of such Sale and Leaseback Transaction (assuming such termination provision is not exercised). "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Board of Directors" shall mean the Board of Directors of the Borrower or any duly authorized committee thereof. "Borrowing" shall mean a group of Loans of a single Type made by the Lenders (or, in the case of a Competitive Borrowing, by the Lender or Lenders whose Competitive Bids have been accepted pursuant to Section 2.03) on a single date and as to which a single Interest Period is in effect. "Business Day" shall mean any day (other than a day which is a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City; provided, however, that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Closing Date" shall mean the date hereof. 6 "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Commitment" shall mean, with respect to each Lender, the Commitment of such Lender as set forth in Schedule 2.01 hereto. "Competitive Bid" shall mean an offer by a Lender to make a Competitive Loan pursuant to Section 2.03. "Competitive Bid Accept/Reject Letter" shall mean a notification made by the Borrower pursuant to Section 2.03(d) in the form of Exhibit A-4. "Competitive Bid Rate" shall mean, as to any Competitive Bid made by a Lender pursuant to Section 2.03(b), (i) in the case of a Eurodollar Loan, the Margin, and (ii) in the case of a Fixed Rate Loan, the fixed rate of interest offered by the Lender making such Competitive Bid. "Competitive Bid Request" shall mean a request made pursuant to Section 2.03 in the form of Exhibit A-1. "Competitive Borrowing" shall mean a Borrowing consisting of a Competitive Loan or concurrent Competitive Loans from the Lender or Lenders whose Competitive Bids for such Borrowing have been accepted by the Borrower under the bidding procedure described in Section 2.03. "Competitive Loan" shall mean a Loan from a Lender to the Borrower pursuant to the bidding procedure described in Section 2.03. Each Competitive Loan shall be a Eurodollar Competitive Loan or a Fixed Rate Loan. "Consolidated" refers to the consolidation of accounts in accordance with GAAP. "Consolidated Net Tangible Assets" shall mean, at any date, as to the Borrower, the total assets appearing on the most recently prepared consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of the most recent fiscal quarter of the Borrower for which such balance sheet is available, prepared in accordance with GAAP, less (a) all current liabilities as shown on such balance sheet and (b) Intangible Assets. "Default" shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "dollars" or "$" shall mean lawful money of the United States of America. "Equity Interests" means, with respect to any Person, shares of capital stock of (or other ownership or profit interests in) such Person, warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or 7 warrants, rights or options for the purchase or other acquisition from such Person of such shares (or such other interests), and other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are authorized or otherwise existing on any date of determination. "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar Loans. "Eurodollar Competitive Loan" shall mean any Competitive Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Eurodollar Loan" shall mean any Eurodollar Competitive Loan or Eurodollar Standby Loan. "Eurodollar Standby Loan" shall mean any Standby Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning assigned to such term in Article VI. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Existing Bank Agreement" shall have the meaning set forth in Preliminary Statement No. (1). "Facility Fee" shall have the meaning assigned to such term in Section 2.06(a). "Fee Letter" shall mean the Fee Letter dated October 19, 2001, among the Borrower, the Joint Lead Arrangers, DB and Citibank. "Fees" shall mean the Facility Fee, the Utilization Fee and the Administrative Fees. "Financial Officer" of any corporation shall mean the chief financial officer, principal accounting officer, Treasurer or Assistant Treasurer of such corporation. "Fixed Rate Borrowing" shall mean a Borrowing comprised of Fixed Rate Loans. "Fixed Rate Loan" shall mean any Competitive Loan bearing interest at a fixed percentage rate per annum (expressed in the form of a decimal to no more than four decimal places) specified by the Lender making such Loan in its Competitive Bid. "Funded Debt" shall mean any Indebtedness maturing by its terms more than one year from the date of the determination thereof, including any Indebtedness renewable or extendible at the option of the obligor to a date later than one year from the date of the determination thereof. 8 "GAAP" shall mean generally accepted accounting principles, applied on a consistent basis. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Indebtedness" of any Person shall mean all indebtedness representing money borrowed which is created, assumed, incurred or guaranteed in any manner by such Person or for which such Person is responsible or liable (whether by agreement to purchase indebtedness of, or to supply funds to or invest in, others or otherwise), excluding indebtedness of AT&T Latin America and Monetized Debt; provided that for purposes of determining compliance with Section 5.08, (a) Indebtedness in the form of guarantees entered into by the Borrower or its Subsidiaries or for which the Borrower or any of its Subsidiaries is responsible or liable shall exclude (i) keep-well and other similar agreements to advance or supply funds (x) for the purchase or payment of any primary obligation of any other Person (the "primary obligor") or (y) to maintain working capital or equity capital of the primary obligor or otherwise maintain the net worth or solvency of the primary obligor and (ii) guarantees of obligations for which cross-guarantees or cross-indemnifications in favor of the Borrower or such Subsidiary from AT&T Wireless Services, Inc., Liberty Media Corporation, AT&T Corp., AT&T Broadband or AT&T Business exist and (b) Indebtedness shall be calculated net of cash and cash equivalents held by the Borrower and its Consolidated Subsidiaries on the date of determination (other than cash and cash equivalents held by AT&T Latin America). "Intangible Assets" shall mean the value (net of any applicable reserves), as shown on or reflected in the most recently prepared consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of the most recent fiscal quarter of the Borrower of: (i) all trade names, trademarks, licenses, patents, copyrights and goodwill; (ii) organizational costs; and (iii) deferred charges (other than prepaid items such as insurance, taxes, interest, commissions, rents and similar items and tangible assets being amortized); but in no event shall the term "Intangible Assets" include product development costs. "Interest Payment Date" shall mean, with respect to any Loan, the last day of the Interest Period applicable thereto and, in the case of a Eurodollar Loan with an Interest Period of more than three months' duration or a Fixed Rate Loan with an Interest Period of more than 90 days' duration, each day that would have been an Interest Payment Date for such Loan had successive Interest Periods of three months' duration or 90 days' duration, as the case may be, been applicable to such Loan and, in addition, the date of any conversion of such Loan to a Loan of a different Type. "Interest Period" shall mean (a) as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the Borrower may elect, (b) as to any ABR Borrowing, the period commencing on the date of 9 such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the earliest of (i) the next succeeding March 31, June 30, September 30 or December 31, (ii) the Maturity Date, and (iii) the date such Borrowing is converted to a Borrowing of a different Type in accordance with Section 2.05 or repaid or prepaid in accordance with Section 2.07 or Section 2.12 and (c) as to any Fixed Rate Borrowing, the period commencing on the date of such Borrowing and ending on the date specified in the Competitive Bids in which the offer to make the Fixed Rate Loans comprising such Borrowing were extended, which shall not be earlier than seven days after the date of such Borrowing or later than 360 days after the date of such Borrowing; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of Eurodollar Loans only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "Joint Lead Arrangers" shall have the meaning specified in the recital of parties to this Agreement. "LIBO Rate" shall mean, with respect to each Interest Period, a rate of interest determined on the basis of at least two offered rates for deposits in United States dollars for a period equal to such Interest Period commencing on the first day of such Interest Period appearing on the Reuters Screen LIBO Page as of 11:00 a.m. (London time) on the day that is two Business Days prior to the first day of such Interest Period. If at least two such offered rates appear on the Reuters Screen LIBO Page, the rate with respect to each Interest Period will be the arithmetic average (rounded upwards to the next 1/16th of 1%) of such offered rates. If fewer than two offered rates appear, "LIBO Rate" in respect of any Interest Period will be determined on the basis of the rates at which deposits in United States dollars are offered by the Paying Agent at approximately 11:00 a.m. (London time) on the day that is two Business Days preceding the first day of such Interest Period to prime banks in the London interbank market for a period equal to such Interest Period commencing on the first day of such Interest Period. "Lien" means any mortgage, pledge, security interest, lien, charge or other encumbrance, but shall not include any of the foregoing types of encumbrances that are incidental to the conduct of the business of the Borrower or any Restricted Subsidiary or the ownership of the property and assets of any of them and that were not incurred in connection with the incurrence of any Indebtedness. Such incidental encumbrances that are to be excluded from the term "Lien" include, without limitation: (i) pledges or deposits made to secure obligations of the Borrower or Restricted Subsidiary under workmen's compensation laws or similar legislation; (ii) liens imposed by law, such as materialmen's, mechanics', carriers', workmen's, vendors', repairmen's, or other like liens incurred in the ordinary course of business; (iii) governmental (Federal, state or municipal) liens arising out of contracts for the purchase of products of the Borrower or a Restricted Subsidiary, and deposits or pledges to obtain the release of any of the foregoing liens; (iv) liens created by or resulting from any litigation or legal proceeding 10 that is currently being contested in good faith by appropriate proceedings; (v) leases made or existing on Principal Property entered into in the ordinary course of business by the Borrower or a Restricted Subsidiary; (vi) landlords' liens under leases of Principal Property to which the Borrower or a Restricted Subsidiary is a party; (vii) zoning restrictions, easements, licenses or restrictions on the use of Principal Property or minor irregularities in the title thereto; (viii) deposits in connection with bids, tenders, contracts (other than for the payment of money) to which the Borrower or any Restricted Subsidiary is a party; (ix) deposits to secure public or statutory obligations of the Borrower or any Restricted Subsidiary; (x) deposits in connection with obtaining or maintaining self-insurance or to obtain the benefits of any law, regulation or arrangement pertaining to unemployment insurance, old age pensions, social security or similar matters; (xi) deposits of cash or obligations of the United States of America to secure surety, appeal or customs bonds to which the Borrower or any Restricted Subsidiary is a party; and (xii) liens for taxes or assessments or governmental charges or levies not yet due or delinquent, or which can thereafter be paid without penalty, or which are being contested in good faith by appropriate proceedings. "Loan" shall mean a Competitive Loan or a Standby Loan, whether made as a Eurodollar Loan, an ABR Loan or a Fixed Rate Loan, as permitted hereby. "Long-Term Debt" shall mean, at any time, any publicly-held senior unsecured debt obligations outstanding at such time with a maturity more than one year after the date of any determination hereunder. "Long-Term Senior Debt" shall have the meaning specified in the definition of "Public Debt Ratings". "Margin" shall mean, as to any Eurodollar Competitive Loan, the margin (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) to be added to or subtracted from the LIBO Rate in order to determine the interest rate applicable to such Loan, as specified in the Competitive Bid relating to such Loan. "Margin Regulations" shall mean Regulations T, U and X of the Board as from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Margin Stock" shall have the meaning given such term under Regulation U of the Board. "Material Adverse Effect" shall mean a materially adverse effect on the business, assets, operations or condition, financial or otherwise, of the Borrower and its Subsidiaries taken as a whole (it being understood that neither the proposed Separation Transactions nor any event, condition or result reflected in reports or financial statements filed with the SEC prior to November 13, 2001, shall be deemed to give rise to a Material Adverse Effect). "Maturity Date" shall mean December 13, 2002. 11 "Monetized Debt" shall mean Indebtedness of the Borrower or a non-operating Subsidiary of the Borrower secured by capital stock of Persons not directly or indirectly controlled by the Borrower (collectively, the "Available Stock"), so long as the Borrower or such non-operating Subsidiary has at all times sufficient Available Stock so that upon maturity or exchange prior to maturity it may satisfy substantially all of the obligations arising under such Indebtedness (other than obligations to pay cash coupon amounts on such Indebtedness) solely by the delivery of Available Stock. "Moody's" shall mean Moody's Investors Service, Inc. or any successor rating agency. "Operational EBITDA" shall mean, for any period operating income (or operating loss) of the Borrower and its Consolidated Subsidiaries, excluding the operating income (or operating loss) of AT&T Latin America and At Home Corporation plus, to the extent deducted in determining such operating income (or operating loss), the sum of (a) depreciation expense, (b) amortization expense, (c) restructuring and other charges and (d) asset impairment charges. If the Borrower acquires (whether by purchase, merger, consolidation or otherwise) all or substantially all of the assets or property of any other Person, or engages in any asset sale permitted by Section 5.05, during any period in respect of which Operational EBITDA is to be determined hereunder, such Operational EBITDA will be determined on a pro forma basis as if such acquisition or such asset sale occurred on the first day of the relevant period if the Operational EBITDA attributable to such acquisition or assets sold represents more than 10% of the Borrower's Operational EBITDA calculated immediately prior to giving effect to such acquisition or such asset sale. "Paying Agent" shall have the meaning specified in the recital of parties to this Agreement. "Person" or "person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Principal Property" of the Borrower shall mean any land, land improvements, building and associated factory, laboratory office and switching equipment (excluding all products marketed by the Borrower or any Subsidiary) constituting a manufacturing facility, development facility, warehouse facility, service facility, office facility or operating facility (including any portion thereof), which facility (a) is owned by or leased to the Borrower or any Restricted Subsidiary, (b) is located within the United States and (c) has an acquisition cost plus capitalized improvements in excess of 0.25% of Consolidated Net Tangible Assets of the Borrower as of the date of such determination, other than (i) any such facility, or portion thereof, which has been financed by obligations issued by or on behalf of a State, a Territory or a possession of the United States, or any political subdivision of any of the foregoing, or the District of Columbia, the interest on which is excludable from gross income of the holders thereof (other than a "substantial user" of such facility or a "related person" as those terms are used in Section 103 of the Code) pursuant to the provisions of Section 103 of the Code (or any similar provisions 12 hereafter enacted) as in effect at the time of issuance of such obligations, (ii) any such facility which the Borrower's Board of Directors may by resolution declare is not of material importance to the Borrower and the Restricted Subsidiaries taken as a whole and (iii) any such facility, or portion thereof, owned or leased jointly or in common with one or more persons other than the Borrower and any Subsidiary of the Borrower and in which the interest of the Borrower and all Subsidiaries of the Borrower does not exceed 50%. "Public Debt Ratings" means, as of any date, the lowest rating (other than any rating based on, or incorporating an expectation of, the prospective occurrence and consequences of a Separation Transaction in which AT&T Broadband is separated from AT&T Business) that has been most recently announced by either S&P or Moody's, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt (the "Long-Term Senior Debt") and commercial paper (the "Short-Term Debt") issued by the Borrower; provided that (i) if the Borrower has caused the credit facility evidenced by this Agreement to be rated by S&P and Moody's, then such ratings shall be used in lieu of the ratings applicable to Long-Term Senior Debt and Short-Term Debt of the Borrower for all purposes hereunder, (ii) if the event referred to in the preceding clause (i) has not occurred and AT&T Business has assumed the obligations of Borrower hereunder then the Long-Term Senior Debt and Short-Term Debt ratings of AT&T Business will be used in lieu of such ratings of the Borrower and (iii) if the events referred to in the preceding clauses (i) and (ii) have not occurred but the Borrower has delivered to the Paying Agent a guaranty in substantially the form of Exhibit E hereto (the "AT&T Business Guarantee"), pursuant to which AT&T Business guarantees the obligations of the Borrower under this Agreement, the ratings established by S&P and Moody's for Long-Term Senior Debt of AT&T Business shall be used in lieu of the ratings applicable to Long-Term Senior Debt of the Borrower for all purposes hereunder and, if higher, the ratings established by S&P and Moody's for the Short-Term Debt of AT&T Business shall be used in lieu of the ratings applicable to Short-Term Debt of the Borrower for all purposes hereunder, in each case, for such time as the AT&T Business Guarantee remains in effect. For purposes of the foregoing, with respect to the Borrower or AT&T Business, as the case may be, (a) if S&P or Moody's shall have in effect a rating for only one but not both of the Long-Term Senior Debt or the Short-Term Debt, the Applicable Margin and the Applicable Facility Fee Percentage shall be the lowest level that may be determined by reference to the available rating; (b) if only one of S&P and Moody's shall have in effect Public Debt Ratings, the Applicable Margin and the Applicable Facility Fee Percentage shall be determined by reference to the available rating; (c) if neither S&P nor Moody's shall have in effect Public Debt Ratings for either of the Long-Term Senior Debt or the Short-Term Debt, the Applicable Margin and the Applicable Facility Fee Percentage will be set in accordance with Level 6 under the definition of "Applicable Margin" or "Applicable Facility Fee Percentage", as the case may be; (d) if any rating established by S&P or Moody's shall be changed, such change shall be effective as of the date on which such change is first announced publicly by the rating agency making such change; and (e) if S&P or Moody's shall change the basis on which ratings are established, each reference to the Public Debt Ratings announced by S&P or Moody's, as the case may be, shall refer to the then equivalent rating by S&P or Moody's, as the case may be. 13 "Register" shall have the meaning given such term in Section 8.04(d). "Regulation D" shall mean Regulation D of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Required Lenders" shall mean, at any time, Lenders having Commitments representing at least 51% of the Total Commitment or, if the Commitments shall have been terminated, or for purposes of acceleration pursuant to clause (ii) of Article VI, Lenders holding Loans representing at least 51% of the aggregate principal amount of the Loans outstanding. "Responsible Officer" of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "Restricted Securities" shall mean any shares of capital stock or Indebtedness of any Restricted Subsidiary (but shall not include any Margin Stock). "Restricted Subsidiary" shall mean (a) any Subsidiary of the Borrower (i) which has substantially all of its property within the United States of America, (ii) which owns or is a lessee of any Principal Property, and (iii) in which the investment of the Borrower and all other Subsidiaries of the Borrower exceeds 0.25% of Consolidated Net Tangible Assets of the Borrower as of the date of such determination; provided, however, that the term "Restricted Subsidiary" shall not include (A) any Subsidiary of the Borrower (x) primarily engaged in the business of purchasing, holding, collecting, servicing or otherwise dealing in and with installment sales contracts, leases, trust receipts, mortgages, commercial paper or other financing instruments and any collateral or agreements relating thereto, including in the business, individually or through partnerships, of financing (whether through long- or short-term borrowings, pledges, discounts or otherwise) the sales, leasing or other operations of the Borrower and the Subsidiaries or any of them, or (y) engaged in the business of financing the assets and operations of third parties; provided that, notwithstanding (x) and (y) above, such Subsidiary of the Borrower shall be a Restricted Subsidiary if it owns, leases or operates any property which would qualify as Principal Property except as incidental to such financing business; or (B) any Subsidiary of the Borrower acquired or organized after April 1, 1986, for the purpose of acquiring the stock or business or assets of any person other than the Borrower or any Restricted Subsidiary, whether by merger, consolidation, acquisition of stock or assets or similar transaction analogous in purpose or effect, so long as such Subsidiary of the Borrower does not acquire by merger, consolidation, acquisition of stock or assets or similar transactions analogous in purpose or effect all or any substantial part of the business or assets of the Borrower or any Restricted Subsidiary of the Borrower; and (b) any other Subsidiary of the Borrower which is hereafter designated by the Board of Directors of the Borrower as a Restricted Subsidiary of the Borrower. 14 "Sale and Leaseback Transaction" shall mean any arrangement with any person providing for the leasing by the Borrower or any Restricted Subsidiary of any Principal Property (whether such Principal Property is now owned or hereafter acquired) that has been or is to be sold or transferred by the Borrower or such Restricted Subsidiary to such person, other than (a) temporary leases for a term, including renewals at the option of the lessee, of not more than three years; (b) leases between the Borrower and a Restricted Subsidiary or between Restricted Subsidiaries; and (c) leases of Principal Property executed by the time of, or within 180 days after the latest of, the acquisition, the completion of construction or improvement (including any improvements on property which will result in such property becoming Principal Property), or the commencement of commercial operation of such Principal Property. "SEC" shall mean the Securities and Exchange Commission. "Secured Indebtedness" shall mean (a) Indebtedness of the Borrower or a Restricted Subsidiary which is secured by any Lien upon any Principal Property or Restricted Securities and (b) Indebtedness of the Borrower or a Restricted Subsidiary in respect of any conditional sale or other title retention agreement covering Principal Property or Restricted Securities; but "Secured Indebtedness" shall not include any of the following: Indebtedness of the Borrower and the Restricted Subsidiaries outstanding on April 1, 1986, secured by then existing Liens upon, or incurred in connection with conditional sales agreements or other title retention agreements with respect to Principal Property or Restricted Securities; Indebtedness which is secured by (A) purchase money Liens upon Principal Property or Restricted Securities acquired after April 1, 1986, or (B) Liens placed on Principal Property after April 1, 1986, during construction or improvement thereof (including any improvements on property which will result in such property becoming Principal Property) or placed thereon within 180 days after the later of acquisition, completion of construction or improvement or the commencement of commercial operation of such Principal Property or improvement, or placed on Restricted Securities acquired after April 1, 1986, or (C) conditional sale agreements or other title retention agreements with respect to any Principal Property or Restricted Securities acquired after April 1, 1986, if (in each case referred to in this subparagraph (ii)) (x) such Lien or agreement secures all or any part of the Indebtedness incurred for the purpose of financing all or any part of the purchase price or cost of construction of such Principal Property or improvement or Restricted Securities and (y) such Lien or agreement does not extend to any Principal Property or Restricted Securities other than the Principal Property or Restricted Securities so acquired or the Principal Property, or portion thereof, on which the property so constructed, or such improvement, is located; provided, however, that the amount by which the aggregate principal amount of Indebtedness secured by any such Lien or agreement exceeds the cost to the Borrower or such Restricted Subsidiary of the related acquisition, construction or improvement shall be considered to be "Secured Indebtedness"; Indebtedness which is secured by Liens on Principal Property or Restricted Securities, which Liens exist at the time of acquisition (by any manner 15 whatsoever) of such Principal Property or Restricted Securities by the Borrower or a Restricted Subsidiary; Indebtedness of Restricted Subsidiaries owing to the Borrower or any other Restricted Subsidiary and Indebtedness of the Borrower owing to any Restricted Subsidiary; in the case of any corporation which becomes (by any manner whatsoever) a Restricted Subsidiary after April 1, 1986, Indebtedness which is secured by Liens upon, or conditional sale agreements or other title retention agreements with respect to, its property which constitutes Principal Property or Restricted Securities, which Liens exist at the time such corporation becomes a Restricted Subsidiary; guarantees by the Borrower of Secured Indebtedness and Attributable Debt of any Restricted Subsidiaries and guarantees by a Restricted Subsidiary of the Secured Indebtedness and Attributable Debt of the Borrower and any other Restricted Subsidiaries; Indebtedness arising from any Sale and Leaseback Transaction; Indebtedness secured by Liens on property of the Borrower or a Restricted Subsidiary in favor of the United States of America, any State, Territory or possession thereof, or the District of Columbia, or any department, agency or instrumentality or political subdivision of the United States of America or any State, Territory or possession thereof, or the District of Columbia, or in favor of any other country or any political subdivision thereof, if such Indebtedness was incurred for the purpose of financing all or any part of the purchase price or the cost of construction of the property subject to such Liens; provided, however, that the amount by which the aggregate principal amount of Indebtedness secured by any such Lien exceeds the cost to the Borrower or such Restricted Subsidiary of the related acquisition or construction shall be considered to be "Secured Indebtedness"; and the replacement, extension or renewal (or successive replacements, extensions or renewals) of any Indebtedness (in whole or in part) excluded from the definition of "Secured Indebtedness" by subparagraphs (i) through (viii) above; provided, however, that no Lien securing, or conditional sale or title retention agreement with respect to, such Indebtedness shall extend to or cover any Principal Property or any Restricted Securities, other than such property which secured the Indebtedness so replaced, extended or renewed (plus improvements on or to any such Principal Property); provided further, however, that to the extent that such replacement, extension or renewal increases the principal amount of Indebtedness secured by such Lien or is in a principal amount in excess of the principal amount of Indebtedness excluded from the definition of "Secured Indebtedness" by subparagraphs (i) through (viii) above, the amount of such increase or excess shall be considered to be "Secured Indebtedness". In no event shall the foregoing provisions be interpreted to mean or their operation to cause the same Indebtedness to be included more than once in the calculation of "Secured Indebtedness" as that term is used in this Agreement. "Separation Transaction" shall mean any disposition, spin-off or other similar transaction (whether pursuant to a single transaction or a series of related transactions) of any division or line of business of the Borrower or any of its Subsidiaries as a result of 16 which, after giving effect thereto, such division or line of business is no longer a part of or conducted by the Borrower or any of its Subsidiaries. The separation of AT&T Broadband from AT&T Business shall constitute a "Separation Transaction". "SFAS Statement No. 133" shall mean the Statement of Financial Accounting Standards No. 133 ("Accounting for Derivative Instruments and Hedging Activities"). "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or any successor rating agency. "Short-Term Debt" shall have the meaning assigned to such term in the definition of Public Debt Rating. "Standby Borrowing" shall mean a Borrowing consisting of simultaneous Standby Loans from each of the Lenders. "Standby Borrowing Request" shall mean a request made pursuant to Section 2.04 in the form of Exhibit A-5. "Standby Loans" shall mean the revolving loans made by the Lenders to the Borrower pursuant to Section 2.04. Each Standby Loan shall be a Eurodollar Standby Loan or an ABR Loan. "Subsidiary" shall mean, at any time, any Person, a majority of the Voting Equity Interests of which are at such time owned or controlled, directly or indirectly, by the Borrower or by one or more Subsidiaries of the Borrower. As used herein, Voting Equity Interests are Equity Interests entitled to vote in the election of directors (or comparable management positions). "Total Commitment" shall mean, at any time, the aggregate amount of Commitments of all the Lenders, as in effect at such time. "Transactions" shall have the meaning assigned to such term in Section 3.02. "Type" when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, "Rate" shall include the LIBO Rate, the Alternate Base Rate and the Fixed Rate. "Utilization Fee" shall have the meaning assigned to such term in Section 2.06(b). Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided 17 that, if the Borrower notifies the Paying Agent that the Borrower wishes to amend any covenant in Article V to eliminate the effect of any change in GAAP on the operation of such covenant (or if the Paying Agent notifies the Borrower that the Required Lenders wish to amend Article V for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Lenders. THE CREDITS COMMITMENTS. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Standby Loans to the Borrower, at any time and from time to time on and after the date hereof and until the earlier of the Maturity Date and the termination of the Commitment of such Lender, in an aggregate principal amount at any time outstanding not to exceed such Lender's Commitment minus the amount by which the Competitive Loans outstanding at such time shall be deemed to have used such Commitment pursuant to Section 2.16, subject, however, to the conditions that (i) at no time shall (A) the sum of (x) the outstanding aggregate principal amount of all Standby Loans made by all Lenders plus (y) the outstanding aggregate principal amount of all Competitive Loans made by all Lenders exceed (B) the Total Commitment, and (ii) at all times the outstanding aggregate principal amount of all Standby Loans made by each Lender shall equal the product of (A) the percentage which its Commitment represents of the Total Commitment times (B) the outstanding aggregate principal amount of all Standby Loans made pursuant to Section 2.04. Each Lender's Commitment is set forth opposite its name in Schedule 2.01. Such Commitments may be terminated or reduced from time to time pursuant to Section 2.11. Within the foregoing limits, the Borrower may borrow, pay or prepay and reborrow Standby Loans hereunder, on and after the Closing Date and prior to the Maturity Date, subject to the terms, conditions and limitations set forth herein. LOANS. (b) Each Standby Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Commitments; provided, however, that the failure of any Lender to make any Standby Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.03. The Standby Loans or Competitive Loans comprising any Borrowing shall be (i) in the case of Competitive Loans, in an aggregate principal amount which is an integral multiple of $1,000,000 and not less than $5,000,000 and (ii) in the case of Standby Loans, in an aggregate principal amount which is an integral multiple of $10,000,000 and not less than $50,000,000 (or an aggregate principal amount equal to the remaining balance of the available Commitments). Each Competitive Borrowing shall be comprised entirely of Eurodollar Competitive Loans or Fixed Rate Loans, and each Standby Borrowing shall be comprised entirely of Eurodollar Standby Loans or ABR Loans, as the Borrower may request pursuant to Section 2.03 or 2.04, as applicable. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing which, if made, would result in an aggregate of more than 25 separate Standby Borrowings comprised of Eurodollar Standby Loans being outstanding hereunder at any one time. 18 For purposes of the foregoing, Loans having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Loans. Subject to Section 2.05, each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to the Paying Agent in New York, New York, not later than 12:00 noon, New York City time, and the Paying Agent shall by 3:00 p.m., New York City time, credit the amounts so received to the general deposit account of the Borrower with the Paying Agent or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. Competitive Loans shall be made by the Lender or Lenders whose Competitive Bids therefor are accepted pursuant to Section 2.03 in the amounts so accepted. Standby Loans shall be made by the Lenders pro rata in accordance with Section 2.16. Unless the Paying Agent shall have received notice from a Lender prior to the date (or in the case of ABR Borrowings, prior to 12:00 noon New York City time on the date of such Borrowing) of any Borrowing that such Lender will not make available to the Paying Agent such Lender's portion of such Borrowing, the Paying Agent may assume that such Lender has made such portion available to the Paying Agent on the date of such Borrowing in accordance with this paragraph (c) and the Paying Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have made such portion available to the Paying Agent, such Lender and the Borrower severally agree to repay to the Paying Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Paying Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Effective Rate. If such Lender shall repay to the Paying Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. COMPETITIVE BID PROCEDURE. (c) In order to request Competitive Bids, the Borrower shall hand deliver, telex or telecopy to the Paying Agent a duly completed Competitive Bid Request in the form of Exhibit A-1 hereto, to be received by the Paying Agent (i) in the case of a Eurodollar Competitive Borrowing, not later than 10:00 a.m., New York City time, four Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before a proposed Competitive Borrowing. No ABR Loan shall be requested in, or made pursuant to, a Competitive Bid Request. A Competitive Bid Request that does not conform substantially to the format of Exhibit A-1 may be rejected in the Paying Agent's sole discretion, and the Paying Agent shall promptly notify the Borrower of such rejection by telex or telecopy. Each Competitive Bid Request shall refer to this Agreement and specify (x) whether the Borrowing then being requested is to be a Eurodollar Borrowing or a Fixed Rate Borrowing, (y) the date of such Borrowing (which shall be a Business Day) and the aggregate principal amount thereof which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000, and (z) the Interest Period with respect thereto (which may not end after the Maturity Date). Promptly after its receipt of a Competitive Bid Request that is not rejected as aforesaid, the Paying Agent shall invite by telex or telecopy (in the form set forth in Exhibit A-2 hereto) the Lenders to bid, on the terms and conditions of this Agreement, to make Competitive Loans pursuant to the Competitive Bid Request. Each Lender invited to bid may, in its sole discretion, make one or more Competitive Bids to the Borrower responsive to the Borrower's Competitive Bid Request. Each Competitive Bid by a Lender must be received by the Paying Agent via telex or 19 telecopy, in the form of Exhibit A-3 hereto, (i) in the case of a Eurodollar Competitive Borrowing, not later than 9:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the day of a proposed Competitive Borrowing. Multiple bids will be accepted by the Paying Agent. Competitive Bids that do not conform substantially to the format of Exhibit A-3 may be rejected by the Paying Agent after conferring with, and upon the instruction of, the Borrower, and the Paying Agent shall notify the Lender making such nonconforming bid of such rejection as soon as practicable. Each Competitive Bid shall refer to this Agreement and specify (x) the principal amount (which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan or Loans that the Lender is willing to make to the Borrower, (y) the Competitive Bid Rate or Rates at which the Lender is prepared to make the Competitive Loan or Loans and (z) the Interest Period and the last day thereof. If any Lender invited to bid shall elect not to make a Competitive Bid, such Lender shall so notify the Paying Agent via telex or telecopy (I) in the case of Eurodollar Competitive Loans, not later than 9:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing, and (II) in the case of Fixed Rate Loans, not later than 9:30 a.m., New York City time, on the day of a proposed Competitive Borrowing; provided, however, that failure by any Lender to give such notice shall not cause such Lender to be obligated to make any Competitive Loan as part of such Competitive Borrowing. A Competitive Bid submitted by a Lender pursuant to this paragraph (b) shall be irrevocable. The Paying Agent shall promptly notify the Borrower, by telex or telecopy, of all the Competitive Bids made, the Competitive Bid Rate and the principal amount of each Competitive Loan in respect of which a Competitive Bid was made and the identity of the Lender that made each bid. The Paying Agent shall send a copy of all Competitive Bids to the Borrower for its records as soon as practicable after completion of the bidding process set forth in this Section 2.03. The Borrower may in its sole and absolute discretion, subject only to the provisions of this paragraph (d), accept or reject any Competitive Bid referred to in paragraph (c) above. The Borrower shall notify the Paying Agent by telephone, confirmed by telex or telecopy in the form of a Competitive Bid Accept/Reject Letter, whether and to what extent it has decided to accept or reject any of or all the bids referred to in paragraph (c) above, (x) in the case of a Eurodollar Competitive Borrowing, not later than 10:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing, and (y) in the case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time, on the day of a proposed Competitive Borrowing; provided, however, that (i) the failure by the Borrower to give such notice shall be deemed to be a rejection of all the bids referred to in paragraph (c) above, (ii) the Borrower shall not accept a bid made at a particular Competitive Bid Rate if it has decided to reject a bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in the Competitive Bid Request, (iv) if the Borrower shall accept a bid or bids made at a particular Competitive Bid Rate but the amount of such bid or bids shall cause the total amount of bids to be accepted by the Borrower to exceed the amount specified in the Competitive Bid Request, then the Borrower shall accept a portion of such bid or bids in an amount equal to the amount specified in the Competitive Bid Request less the amount of all other Competitive Bids accepted with respect to such Competitive Bid Request, which acceptance, in the case of multiple bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such bid at such Competitive Bid Rate, and (v) except pursuant to clause (iv) 20 above, no bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; provided further, however, that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner which shall be in the discretion of the Borrower. A notice given by the Borrower pursuant to this paragraph (d) shall be irrevocable. The Paying Agent shall promptly notify each bidding Lender whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate) by telex or telecopy sent by the Paying Agent, and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Loan in respect of which its bid has been accepted. A Competitive Bid Request shall not be made within five Business Days after the date of any previous Competitive Bid Request. No Competitive Borrowing shall be requested or made hereunder if after giving effect thereto any of the conditions set forth in Section 2.01 would not be met. If the Paying Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such bid directly to the Borrower one quarter of an hour earlier than the latest time at which the other Lenders are required to submit their bids to the Paying Agent pursuant to paragraph (b) above. All notices required by this Section 2.03 shall be given in accordance with Section 8.01. STANDBY BORROWING PROCEDURE. In order to request a Standby Borrowing, the Borrower shall hand deliver, telex or telecopy to the Paying Agent a duly completed Standby Borrowing Request in the form of Exhibit A-5 (a) in the case of a Eurodollar Standby Borrowing, not later than 10:30 a.m., New York City time, three Business Days before a proposed Borrowing and (b) in the case of an ABR Borrowing, not later than 10:30 a.m., New York City time, on the day of a proposed Borrowing. No Fixed Rate Loan shall be requested or made pursuant to a Standby Borrowing Request. Such notice shall be irrevocable and shall in each case specify (i) whether the Borrowing then being requested is to be a Eurodollar Standby Borrowing or an ABR Borrowing; (ii) the date of such Standby Borrowing (which shall be a Business Day) and the amount thereof; and (iii) if such Borrowing is to be a Eurodollar Standby Borrowing, the Interest Period with respect thereto, which shall not end after the Maturity Date. If no election as to the Type of Standby Borrowing is specified in any such notice, then the requested Standby Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Standby Borrowing is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Notwithstanding any other provision of this Agreement to the contrary, the Borrower shall not be entitled to request any Standby Borrowing if the Interest Period requested with respect to such Standby Borrowing would end after the Maturity Date. The Paying Agent shall promptly advise the Lenders of any notice given pursuant to this Section 2.04 and of each Lender's portion of the requested Borrowing. CONVERSION AND CONTINUATION OF STANDBY LOANS. The Borrower shall have the right at any time upon prior irrevocable notice to the Paying Agent (i) not later than 10:30 a.m., New York City time, on the day of the conversion, to convert all or any part of any Eurodollar Standby Borrowing into an ABR Borrowing, (ii) not later than 10:30 a.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Borrowing into a Eurodollar Standby Borrowing or to continue any Eurodollar Standby Borrowing as a Eurodollar Standby Borrowing for 21 an additional Interest Period and (iii) not later than 10:30 a.m., New York City time, three Business Days prior to conversion, to convert the Interest Period, with respect to any Eurodollar Standby Borrowing to another permissible Interest Period, subject in each case to the following: if less than all the outstanding principal amount of any Standby Borrowing shall be converted or continued, the aggregate principal amount of the Standby Borrowing converted or continued shall be an integral multiple of $10,000,000 and not less than $50,000,000; accrued interest on a Standby Borrowing (or portion thereof) being converted shall be paid by the Borrower at the time of conversion; if any Eurodollar Standby Borrowing is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.15; any portion of a Standby Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurodollar Standby Borrowing; any portion of a Eurodollar Standby Borrowing which cannot be continued as a Eurodollar Standby Borrowing by reason of clause (d) above shall be automatically converted at the end of the Interest Period in effect for such Eurodollar Standby Borrowing into an ABR Borrowing; and no Interest Period may be selected for any Eurodollar Standby Borrowing that would end later than the Maturity Date. Each notice of the Borrower pursuant to this Section 2.05 shall be irrevocable and shall refer to this Agreement and specify (i) the identity and amount of the Standby Borrowing that the Borrower requests to be converted or continued, (ii) whether such Standby Borrowing is to be converted to or continued as a Eurodollar Standby Borrowing, or an ABR Borrowing, (iii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (iv) if such Standby Borrowing is to be converted to or continued as a Eurodollar Standby Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Standby Borrowing, the Borrower shall be deemed to have selected an Interest Period of one month's duration. If the Borrower shall not have given notice in accordance with this Section 2.05 to convert or continue any Standby Borrowing, such Standby Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be converted or continued into a new Interest Period as an ABR Borrowing. FEES. (d) The Borrower agrees to pay to each Lender, through the Paying Agent, on each March 31, June 30, September 30 and December 31 (with the first payment being due on December 31, 2001) and on the date on which the Commitment of such Lender shall be terminated or reduced as provided herein, a facility fee (a "Facility Fee") on the average daily amount of the Commitment of such Lender, whether used or unused, during the preceding quarter (or other period commencing on the date of this Agreement, or ending with the Maturity Date or any date on which the Commitment of such Lender shall be terminated or reduced) at a rate per annum equal to the Applicable Facility Fee Percentage in effect from time to time. All Facility Fees shall be computed on the basis of the actual number of days elapsed in a year of 365 or 366 days, as the case may be. The Facility Fee due to each Lender shall commence to accrue on the date of this Agreement, and shall cease to accrue on the earlier of the Maturity Date and the termination of the Commitment of such Lender as provided herein. 22 The Borrower agrees to pay to each Lender, through the Paying Agent, on each March 31, June 30, September 30 and December 31 and on each date on which the Commitment of such Lender shall be terminated or reduced as provided herein, a utilization fee (a "Utilization Fee") equal to a pro rata portion (based on the ratio of such Lender's Commitment to the Total Commitment) of 0.25% per annum on the principal amount of the outstanding Loans, including Competitive Loans, whether or not made by such Lender, for each day during the preceding quarter (or other period commencing on the date hereof or ending with the Maturity Date or any date on which the Commitment of such Lender shall be terminated) on which the sum of the outstanding Standby Loans and the outstanding Competitive Loans exceeds 25% of the Total Commitment. The Utilization Fee due to each Lender shall be payable in arrears and shall commence to accrue on the date hereof and cease to accrue on the earlier of the Maturity Date and the termination of the Commitment of such Lender as provided herein. The Borrower agrees to pay the Paying Agent, for its own account, the agency and other fees referred to in the Fee Letter (the "Administrative Fees") at the times and in the amounts agreed upon in the Fee Letter. All Fees shall be paid on the dates due, in immediately available funds, to the Paying Agent for distribution, if and as appropriate, among the Lenders. Once paid, none of the Fees shall be refundable under any circumstances. REPAYMENT OF LOANS; EVIDENCE OF DEBT. (e) The Borrower hereby agrees that the outstanding principal balance of each Standby Loan shall be payable on the Maturity Date, and that the outstanding principal balance of each Competitive Loan shall be payable on the last day of the Interest Period applicable thereto. Each Loan shall bear interest on the outstanding principal balance thereof as set forth in Section 2.08. Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to the appropriate lending office of such Lender resulting from each Loan made by such lending office of such Lender from time to time, including the amounts of principal and interest payable and paid such lending office of such Lender from time to time under this Agreement. The Paying Agent shall maintain the Register pursuant to Section 8.04(d), and a subaccount for each Lender, in which Register and accounts (taken together) shall be recorded (i) the amount of each Loan made hereunder, the Type of each Loan made and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Paying Agent hereunder from the Borrower and each Lender's share thereof. The entries made in the Register and accounts maintained pursuant to paragraph (b) and (c) of this Section 2.07 shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Paying Agent to maintain such account, such Register or such subaccount, as applicable, or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans made to the Borrower by such Lender in accordance with their terms. INTEREST ON LOANS. (f) Subject to the provisions of Section 2.09, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to (i) in the case of each Eurodollar Standby Loan, the LIBO Rate for the Interest 23 Period in effect for such Borrowing plus the Applicable Margin from time to time in effect and (ii) in the case of each Eurodollar Competitive Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Margin offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03. Subject to the provisions of Section 2.09, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, for periods during which the Alternate Base Rate is determined by reference to the Prime Rate and 360 days for periods during which the Alternate Base Rate is determined by reference to the Federal Funds Effective Rate) at a rate per annum equal to the Alternate Base Rate. Subject to the provisions of Section 2.09, each Fixed Rate Loan shall bear interest at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the fixed rate of interest offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03. Interest on each Loan shall be payable on each Interest Payment Date applicable to such Loan except as otherwise provided in this Agreement. The applicable LIBO Rate or Alternate Base Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined in good faith by the Paying Agent, and such determination shall be conclusive absent manifest error. DEFAULT INTEREST. If the Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, whether by scheduled maturity, notice of prepayment, acceleration or otherwise, the Borrower shall on demand from time to time from the Paying Agent pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the Alternate Base Rate plus 2%. ALTERNATE RATE OF INTEREST. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Paying Agent shall have determined in good faith (i) that dollar deposits in the principal amounts of the Eurodollar Loans comprising such Borrowing are not generally available in the London interbank market or (ii) that reasonable means do not exist for ascertaining the LIBO Rate, the Paying Agent shall, as soon as practicable thereafter, give telex or telecopy notice of such determination to the Borrower and the Lenders. In the event of any such determination under clauses (i) or (ii) above, until the Paying Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (x) any request by the Borrower for a Eurodollar Competitive Borrowing pursuant to Section 2.03 shall be of no force and effect and shall be denied by the Paying Agent and (y) any request by the Borrower for a Eurodollar Standby Borrowing pursuant to Section 2.04 shall be deemed to be a request for an ABR Borrowing. In the event a Lender notifies the Paying Agent that the rates at which dollar deposits are being offered will not adequately and fairly reflect the cost to such Lender of making or maintaining its Eurodollar Loan during such Interest Period, the Paying Agent shall notify the Borrower of such notice and until the Lender shall have advised the Paying Agent that the circumstances giving rise to such notice no longer exist, any request by the Borrower for a Eurodollar Standby Borrowing shall be deemed a request for an ABR Borrowing for the same Interest Period with respect to such Lender. Each determination by the Paying Agent hereunder shall be in good faith and conclusive absent manifest error. TERMINATION AND REDUCTION OF COMMITMENTS. (g) The Commitments shall be automatically terminated on the Maturity Date. 24 Upon at least three Business Days' prior irrevocable telex or telecopy notice to the Paying Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Total Commitment; provided, however, that (i) each partial reduction of the Total Commitment shall be in an integral multiple of $10,000,000 and in a minimum principal amount of $50,000,000 and (ii) no such termination or reduction shall be made which would reduce the Total Commitment to an amount less than the aggregate outstanding principal amount of the Competitive Loans. Each reduction in the Total Commitment hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrower shall pay to the Paying Agent for the account of the Lenders, on the date of each termination or reduction of the Commitment, the Facility Fees on the amount of the Commitments so terminated or reduced accrued through the date of such termination or reduction. PREPAYMENT. (h) The Borrower shall have the right at any time and from time to time to prepay any Standby Borrowing, in whole or in part, upon giving telex or telecopy notice (or telephone notice promptly confirmed by telex or telecopy notice) to the Paying Agent: (i) before 10:00 a.m., New York City time, three Business Days prior to prepayment, in the case of Eurodollar Loans and (ii) before 10:00 a.m., New York City time, one Business Day prior to prepayment, in the case of ABR Loans; provided, however, that each partial prepayment shall be in an amount which is an integral multiple of $10,000,000 and not less than $50,000,000. The Borrower shall not have the right to prepay any Competitive Borrowing. On the date of any termination or reduction of the Commitments pursuant to Section 2.11, the Borrower shall pay or prepay so much of the Standby Borrowings as shall be necessary in order that the aggregate principal amount of the Competitive Loans and Standby Loans outstanding will not exceed the Total Commitment, after giving effect to such termination or reduction. Each notice of prepayment from the Borrower shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing (or portion thereof) by the amount stated therein on the date stated therein. All prepayments under this Section 2.12 shall be subject to Section 2.15 but otherwise without premium or penalty. All prepayments under this Section 2.12 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES. (i) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) shall result in the imposition, modification or applicability of any reserve, special deposit or similar requirement against assets or deposits with or for the account of or credit extended by any Lender, or shall result in the imposition on such Lender or the London interbank market of any other condition affecting this Agreement, such Lender's Commitment or any Eurodollar Loan or Fixed Rate Loan made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. Notwithstanding the foregoing, no Lender shall be entitled to request compensation under this paragraph with respect to any Competitive Loan if the change giving rise to such request was applicable to such 25 Lender at the time of submission of the Competitive Bid pursuant to which such Competitive Loan shall have been made. If any Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted after the date hereof pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date hereof of any other law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement, such Lender's Commitment or the Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender's holding company could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. It is acknowledged that this Agreement is being entered into by the Lenders on the understanding that the Lenders will not be required to maintain capital against their Commitments under currently applicable laws, regulations and regulatory guidelines. A certificate of the Lender setting forth such amount or amounts (including computation of such amount or amounts) as shall be necessary to compensate the Lender or its holding company as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Borrower and such amount or amounts may be reviewed by the Borrower. Unless the Borrower disagrees in good faith with the computation of the amount or amounts in such certificate, the Borrower shall pay to the Lender, within 10 Business Days after receipt by the Borrower of such certificate delivered by the Lender, the amount shown as due on any such certificate. If the Borrower, after receipt of any such certificate from the Lender, disagrees with the Lender on the computation of the amount or amounts owed to the Lender pursuant to paragraph (a) or (b) above, the Lender and the Borrower shall negotiate in good faith to promptly resolve such disagreement. In either case, however, the Lender shall have a duty to mitigate the damages that may arise as a consequence of paragraph (a) or (b) above to the extent that such mitigation will not, in the judgment of the Lender, entail any cost or disadvantage to the Lender that the Lender is not reimbursed or compensated for by the Borrower. Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's right to demand compensation with respect to such period or any other period. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition which shall have occurred or been imposed. 26 CHANGE IN LEGALITY. (j) Notwithstanding any other provision herein, if after the date hereof any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by 30 days' (or such shorter period as shall be required in order to comply with applicable law) written notice to the Borrower and to the Paying Agent, such Lender may: declare that Eurodollar Loans will not thereafter be made by such Lender hereunder, whereupon such Lender shall not submit a Competitive Bid in response to a request for Eurodollar Competitive Loans and any request by the Borrower for a Eurodollar Standby Borrowing shall, as to such Lender only, be deemed a request for an ABR Loan unless such declaration shall be subsequently withdrawn; and require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal which would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. For purposes of this Section 2.14, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan, if lawful, on the last day of the Interest Period currently applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower. Before giving any such notice, such Lender shall designate a different lending office if such designation will avoid the need for giving such notice and will not, in the judgment of such Lender, be otherwise disadvantageous to such Lender. INDEMNITY. The Borrower shall indemnify each Lender against any out-of-pocket loss or expense which such Lender may sustain or incur as a consequence of (a) any failure by the Borrower to borrow or to refinance, convert or continue any Loan hereunder after irrevocable notice of such borrowing, refinancing, conversion or continuation has been given pursuant to Section 2.03, 2.04 or 2.05, (b) any payment, prepayment or conversion, or an assignment required under Section 2.20, of a Eurodollar Loan by the Borrower required by any other provision of this Agreement or otherwise made or deemed made on a date other than the last day of the Interest Period, if any, applicable thereto, (c) any default by the Borrower in payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise) or (d) the occurrence of any Event of Default. In the case of a Eurodollar Loan, such out-of-pocket loss or expense shall be limited to an amount equal to the excess, if any, of (i) such Lender's cost of obtaining the funds for the Loan being paid, prepaid, converted or not borrowed, converted or continued (based on the LIBO Rate applicable thereto) for the period from the date of such payment, prepayment, conversion or failure to borrow, convert or continue to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the Interest Period for such Loan which would have commenced on the date of such failure) over (ii) the amount of interest that would be realized by such 27 Lender in reemploying the funds so paid, prepaid, converted or not borrowed, converted or continued for such period or Interest Period, as the case may be. In the case of an ABR Loan, such out-of-pocket loss or expense shall be limited to an amount equal to the excess, if any, of (i) such Lender's cost of obtaining the funds for the ABR Loan being paid, prepaid, converted or not borrowed, converted or continued for the period from the date of such payment, prepayment, conversion or failure to borrow, convert or continue to the next Business Day for such ABR Loan over (ii) the amount of interest that would be realized by such Lender in reemploying the funds so paid, prepaid, converted or not borrowed, converted or continued until the next Business Day, as the case may be. A certificate of the Lender setting forth such amount or amounts (including the computation of such amount or amounts) as shall be necessary to compensate the Lender or its holding company for the out-of-pocket expenses defined herein shall be delivered to the Borrower and such amount or amounts may be reviewed by the Borrower. If the Borrower, after receipt of any such certificate from the Lender, disagrees in good faith with the Lender on the computation of the amount or amounts owed to the Lender pursuant to this Section 2.15, the Lender and the Borrower shall negotiate in good faith to promptly resolve such disagreement. Each Lender shall have a duty to mitigate the damages to such Lender that may arise as a consequence of clause (a), (b), (c) or (d) above to the extent that such mitigation will not, in the judgment of such Lender, entail any cost or disadvantage to such Lender that such Lender is not reimbursed or compensated for by the Borrower. PRO RATA TREATMENT. Except as required under Sections 2.10, 2.13, 2.14, 2.15, 2.19 and 2.20, each Standby Borrowing, each payment or prepayment of principal of any Standby Borrowing, each payment of interest on the Standby Loans, each payment of the Facility Fees and Utilization Fees, each reduction of the Commitments and each refinancing or conversion of any Borrowing with a Standby Borrowing of any Type, shall be allocated pro rata among the Lenders in accordance with their respective Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Standby Loans). Each payment of principal of any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective principal amounts of their outstanding Competitive Loans comprising such Borrowing. Each payment of interest on any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective amounts of accrued and unpaid interest on their outstanding Competitive Loans comprising such Borrowing. For purposes of determining the available Commitments of the Lenders at any time, each outstanding Competitive Borrowing shall be deemed to have utilized the Commitments of the Lenders (including those Lenders which shall not have made Loans as part of such Competitive Borrowing) pro rata in accordance with their respective Commitments. Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Paying Agent may, in its discretion, round each Lender's percentage of such Borrowing to the next higher or lower whole dollar amount. SHARING OF SETOFFS. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Standby Loan or Loans as a result of which the unpaid principal portion of the Standby Loans of such Lender shall be proportionately less than the unpaid principal portion of the Standby Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Standby Loans of such other Lender, so that the aggregate unpaid principal amount of the Standby Loans and participations in the Standby Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Standby Loans then 28 outstanding as the principal amount of its Standby Loans prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Standby Loans outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that, if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.17 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Standby Loan deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower to such Lender by reason thereof as fully as if such Lender had made a Standby Loan directly to the Borrower in the amount of such participation. PAYMENTS. (k) The Borrower shall make each payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder from an account in the United States not later than 12:00 noon, New York City time, on the date when due in dollars to the Paying Agent at its offices at 2 Penns Way, Suite 200, New Castle, Delaware 19720, in immediately available funds. Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. TAXES. (l) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.18, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto imposed by the United States or any political subdivision or taxing authority thereof, excluding taxes imposed on the Paying Agent or any Lender's (or any transferee's or assignee's, including a participation holder's (any such entity a "Transferee")) net income and franchise taxes imposed on the Paying Agent or any Lender (or Transferee) by the United States or any political subdivision or taxing authority thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender (or any Transferee) or the Paying Agent, (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.19) such Lender (or Transferee) or the Paying Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement imposed by the United States or any political subdivision or taxing authority thereof (hereinafter referred to as "Other Taxes"). The Borrower will indemnify each Lender (or Transferee) and the Paying Agent for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes on amounts payable under this Section 2.19) paid by such Lender (or Transferee) or the Paying Agent, as the case may be, with respect to the Borrower and any liability (including penalties, interest and reasonable out-of-pocket expenses) arising therefrom or with 29 respect thereto (other than any such liability that results from the negligence or willful misconduct of the Lender (or Transferee) or the Paying Agent), whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant taxing authority or other Governmental Authority. Such indemnification shall be made within 30 days after the date any Lender (or Transferee) or the Paying Agent, as the case may be, makes written demand therefor. If the Borrower or any Lender (or Transferee) or the Paying Agent shall determine that Taxes or Other Taxes may not have been correctly or legally assessed by the relevant taxing authority or other Governmental Authority, and that a Lender (or Transferee) or the Paying Agent may be entitled to receive a refund in respect of Taxes or Other Taxes, it shall promptly notify the other party of the availability of such refund and such Lender (or Transferee) or the Paying Agent shall, within 30 days after receipt of a request by the Borrower, apply for such refund at the Borrower's expense. If any Lender (or Transferee) or the Paying Agent receives a refund or credit or offset against another tax liability in respect of any Taxes or Other Taxes for which such Lender (or Transferee) or the Paying Agent has received payment from the Borrower hereunder it shall promptly repay such refund or credit or offset against another tax liability (including any interest received by such Lender (or Transferee) or the Paying Agent from the taxing authority with respect to the refund with respect to such Taxes or Other Taxes) to the Borrower, net of all out-of-pocket expenses of such Lender; provided that the Borrower, upon the request of such Lender (or Transferee) or the Paying Agent, agrees to return such refund or credit or offset against another tax liability (plus penalties, interest or other charges) to such Lender (or Transferee) or the Paying Agent in the event such Lender (or Transferee) or the Paying Agent is required to repay such refund or credit or offset against another tax liability. For purposes of the preceding sentence, the Paying Agent or any Lender shall determine in good faith and in its discretion the amount of any credit or offset against another tax liability and shall be under no obligation to make available to the Borrower any of its tax returns or any other information that it deems to be confidential. As soon as practicable after the date of any payment of Taxes or Other Taxes withheld by the Borrower in respect of any payment to any Lender (or Transferee) or the Paying Agent, the Borrower will furnish to the Paying Agent, at its address referred to in Section 8.01, the original or a certified copy of a receipt evidencing payment thereof. Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.19 shall survive the payment in full of the principal of and interest on all Loans made hereunder. Each Lender (or Transferee) which is organized outside the United States shall, prior to the due date of the first payment by the Borrower to such Lender (or Transferee) hereunder, deliver to the Borrower such certificates, documents or other evidence, as required by the Code or Treasury Regulations issued pursuant thereto, including Internal Revenue Service Form W-8BEN or Form W-8ECI, or any successor or other form prescribed by the Internal Revenue Service properly completed and duly executed by such Lender (or Transferee) establishing that such payment is (i) not subject to withholding under the Code because such payment is effectively connected with the conduct by such Lender (or Transferee) of a trade or business in the United States or (ii) totally exempt from United States tax under a provision of an applicable tax treaty. Each such Lender (or Transferee) that changes its funding office shall promptly notify the Borrower of such change and, upon written request from the Borrower, shall deliver any new certificates, documents or other evidence required pursuant to the preceding sentence prior to the immediately following due date of any payment by the Borrower hereunder. Unless the Borrower and the Paying Agent have received forms or other documents satisfactory to them indicating that payments hereunder are not 30 subject to United States withholding tax, notwithstanding paragraph (a), the Borrower or the Paying Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender (or Transferee) organized under the laws of a jurisdiction outside the United States. The Borrower shall not be required to pay any additional amounts to any Lender (or Transferee) in respect of Taxes and Other Taxes pursuant to paragraphs (a), (b) and (c) above if the obligation to pay such additional amounts would not have arisen but for a failure by such Lender (or Transferee) to comply with the provisions of paragraph (f) above unless such Lender (or Transferee) is unable to comply with paragraph (f) because of (i) a change in applicable law, regulation or official interpretation thereof or (ii) an amendment, modification or revocation of any applicable tax treaty or a change in official position regarding the application or interpretation thereof, in each case after the date hereof (and, in the case of a Transferee, after the date of assignment or transfer). Any Lender (or Transferee) claiming any additional amounts payable under this Section 2.19 shall (i) to the extent legally able to do so, upon written request from the Borrower, file any certificate or document if such filing would avoid the need for or reduce the amount of any such additional amounts which may thereafter accrue, and the Borrower shall not be obligated to pay such additional amounts if, after the Borrower's request, any Lender (or Transferee) could have filed such certificate or document and failed to do so; or (ii) consistent with legal and regulatory restrictions, use reasonable efforts to change the jurisdiction of its applicable lending office if the making of such change would avoid the need for or reduce the amount of any additional amounts which may thereafter accrue and would not, in the sole determination of such Lender (or Transferee), be otherwise disadvantageous to such Lender (or Transferee). MANDATORY ASSIGNMENT; COMMITMENT TERMINATION. In the event any Lender delivers to the Paying Agent or the Borrower, as appropriate, a certificate in accordance with Section 2.13(c) or a notice in accordance with Section 2.10 or 2.14, or the Borrower is required to pay any additional amounts or other payments in accordance with Section 2.19, the Borrower may, at its own expense, and in its sole discretion (a) require such Lender to transfer and assign in whole or in part, without recourse (in accordance with Section 8.04), all or part of its interests, rights and obligations under this Agreement (other than outstanding Competitive Loans) to an assignee which shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority and (ii) the Borrower or such assignee shall have paid to the assigning Lender in immediately available funds the principal of and interest accrued to the date of such payment on the Loans made by it hereunder and all other amounts owed to it hereunder or (b) terminate the Commitment of such Lender and prepay all outstanding Loans (other than Competitive Loans) of such Lender; provided that (x) such termination of the Commitment of such Lender and prepayment of Loans does not conflict with any law, rule or regulation or order of any court or Governmental Authority and (y) the Borrower shall have paid to such Lender in immediately available funds the principal of and interest accrued to the date of such payment on the Loans (other than Competitive Loans) made by it hereunder and all other amounts owed to it hereunder. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to each of the Lenders that: ORGANIZATION; POWERS. The Borrower (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, 31 (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (c) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a Material Adverse Effect, and (d) has the corporate power and authority to execute, deliver and perform its obligations under this Agreement and to borrow funds hereunder. AUTHORIZATION. The execution, delivery and performance by the Borrower of this Agreement and the Borrowings of the Borrower hereunder (collectively, the "Transactions") (a) have been duly authorized by all requisite corporate actions and (b) will not (i) violate (A) any provision of any law, statute, rule or regulation (including, without limitation, the Margin Regulations) or of the certificate of incorporation or other constitutive documents or by-laws of the Borrower, (B) any order of any Governmental Authority or (C) any provision of any indenture, agreement or other instrument to which the Borrower is a party or by which the Borrower or any of its property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon any property or assets of the Borrower. ENFORCEABILITY. This Agreement has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. GOVERNMENTAL APPROVALS. No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required in connection with the Transactions. FINANCIAL STATEMENTS. (m) The Borrower has heretofore furnished to the Agents and the Lenders copies of (i) its consolidated financial statements for the year ended December 31, 2000, which were included in the Borrower's annual report on Form 10-K filed with the SEC on April 2, 2001 (and amended on April 17, 2001) under the Exchange Act, and the restated financial statements on Form 8-K filed with the SEC on September 24, 2001 and (ii) its consolidated financial statements for the nine months ended September 30, 2001, which were included in the Borrower's Quarterly Report on Form 10-Q filed with the SEC on November 13, 2001 under the Exchange Act. Such financial statements present fairly, in all material respects, the consolidated financial condition and the results of operations of the Borrower as of such dates in accordance with GAAP. As of the date hereof, there has been no material adverse change in the consolidated financial condition of the Borrower from the financial condition reflected in the financial statements referred to in the first sentence of paragraph (a) above (it being understood that neither the proposed Separation Transactions nor any event, condition or result accurately reflected in reports or financial statements filed with the SEC prior to November 13, 2001, shall be deemed to give rise to a material adverse change). LITIGATION; COMPLIANCE WITH LAWS. (n) There are no actions or proceedings filed or (to the knowledge of the Borrower) investigations pending or overtly threatened against the Borrower in any court or before any Governmental Authority or arbitration board or tribunal which question the validity or legality of or seek damages in connection with this Agreement, the Transactions or any action taken or to be taken pursuant to this Agreement and no order or judgment has been issued or entered restraining or enjoining the Borrower from the execution, delivery or performance of this Agreement nor is there any action or proceeding which involves a probable risk of an adverse 32 determination which would have any such effect; nor is there as of the date hereof any other action or proceeding filed or (to the knowledge of the Borrower) investigation pending or overtly threatened against the Borrower in any court or before any Governmental Authority or arbitration board or tribunal which involves a probable risk of a material adverse decision which would result in a Material Adverse Effect or materially restrict the ability of the Borrower to comply with its obligations under this Agreement. Neither the Borrower nor any of its Subsidiaries is in violation of any law, rule or regulation, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default would result in a Material Adverse Effect. FEDERAL RESERVE REGULATIONS. (o) Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose which entails a violation of, or which is inconsistent with, the provisions of the Margin Regulations. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor any of its Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. USE OF PROCEEDS. All proceeds of the Loans shall be used to refinance the Existing Bank Agreement and for other general corporate purposes of the Borrower, including without limitation, the repayment of maturing commercial paper of the Borrower. NO MATERIAL MISSTATEMENTS. No report, financial statement or other written information furnished by or on behalf of the Borrower to any Agent or any Lender pursuant to Section 3.05 or Section 5.02 hereof contains or will contain any material misstatement of fact or omits or will omit to state any material fact necessary to make the statements therein, taken as a whole, in the light of the circumstances under which they were or will be made, not misleading. CONDITIONS OF EFFECTIVENESS AND OF LENDING The obligations of the Lenders to make Loans hereunder are subject to the satisfaction of the following conditions: ALL BORROWINGS. On the date of each Borrowing: The Paying Agent shall have received a notice of such Borrowing as required by Section 2.03 or Section 2.04, as applicable. The representations and warranties set forth in Article III hereof shall be true and correct in all material respects on and as of the date of such Borrowing with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. The Borrower shall be in compliance with all the terms and provisions set forth herein in all material respects, and at the time of and immediately after such Borrowing no Event of Default or Default shall have occurred and be continuing. 33 Each Borrowing shall be deemed to constitute a representation and warranty by the Borrower on the date of such Borrowing as to the matters specified in paragraphs (b) and (c) of this Section 4.01. CLOSING DATE. This Agreement shall be effective upon the satisfaction of the following conditions set forth in this Section 4.02: The Paying Agent shall have received a favorable written opinion of the General Attorney for Corporate Matters of the Borrower, dated the Closing Date and addressed to the Lenders, to the effect set forth in Exhibit C hereto. The Paying Agent shall have received (i) a long form certificate as to the certificate of incorporation, including all amendments thereto, of the Borrower, as of a recent date by the Secretary of State of the state of incorporation of the Borrower and a certificate as to the good standing of the Borrower as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or an Assistant Secretary of the Borrower dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of the Borrower as in effect on the Closing Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Agreement and the Borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the certificate of incorporation of the Borrower has not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer executing this Agreement or any other document delivered in connection herewith on behalf of the Borrower; and (iii) a certificate of another officer of the Borrower as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above. The Paying Agent shall have received a certificate from the Borrower, dated the Closing Date and signed by a Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01. The Paying Agent shall have received any Fees and other amounts due and payable on or prior to the Closing Date to the extent invoiced. COVENANTS The Borrower covenants and agrees with each Lender and each Agent that so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any Fees or any other expenses or amounts payable hereunder shall be unpaid, unless the Required Lenders shall otherwise consent in writing: EXISTENCE. The Borrower will do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under Section 5.05. FINANCIAL STATEMENTS, REPORTS, ETC. The Borrower will furnish to the Paying Agent for distribution to the Lenders: promptly after the filing or sending thereof and in any event not later than (i) 105 days after the end of each fiscal year, a copy of the Borrower's report on Form 10-K which the Borrower files with the SEC for such year and (ii) 15 days after being sent to its public security holders, a copy of the Borrower's annual report; 34 promptly after the filing thereof, and in any event within 60 days after the end of each of the first three fiscal quarters during each fiscal year, the Borrower's report on Form 10-Q which the Borrower files with the SEC for such quarter; concurrently with any delivery of information under paragraph (a) above, a certificate of a Financial Officer certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto; promptly after the same become publicly available, copies of all other reports filed by it with the SEC, or any Governmental Authority succeeding to any of or all the functions of the SEC, or distributed to its shareholders, as the case may be; and promptly after the same become publicly available, notice that either or both of the Public Debt Ratings have changed from the immediately preceding Public Debt Ratings previously reported to the Paying Agent by the Borrower. Reports required to be delivered pursuant to subsections (a), (b) and (d) of this Section 5.02 shall be deemed to have been delivered on the date on which the Borrower posts such reports on the Borrower's website on the Internet at the website address listed on the signature pages hereof or when such report is posted on the SEC's website at www.sec.gov; provided that the Borrower shall deliver paper copies of the reports referred to in subsections (a), (b) and (d) of this Section 5.02 to any Agent or any Lender who requests the Borrower to deliver such paper copies until written notice to cease delivering paper copies is given by such Agent or such Lender and provided further that in every instance the Borrower shall provide paper copies of the certificate required by subsection (c) and the notice required by subsection (e) to the Paying Agent and each of the Lenders until such time as the Paying Agent shall provide the Borrower written notice otherwise. MAINTAINING RECORDS. The Borrower will record, summarize and report all financial information in accordance with GAAP. USE OF PROCEEDS. The Borrower will use the proceeds of the Loans only for the purposes set forth in Section 3.09. CONSOLIDATIONS, MERGERS, SALES OF ASSETS AND SEPARATION TRANSACTIONS. (p) Nothing contained in this Agreement shall prevent any consolidation of the Borrower with, or merger of the Borrower into, another corporation or corporations (whether or not affiliated with the Borrower), or successive consolidations or mergers to which the Borrower or its successor or successors shall be a party or parties, or shall prevent any sale or conveyance of the property of the Borrower (including stock of Subsidiaries) as an entirety or substantially as an entirety to any other corporation (whether or not affiliated with the Borrower) authorized to acquire and own or operate the same; provided, however, that the Borrower hereby covenants and agrees, that, upon any such consolidation, merger, sale or conveyance, the due and punctual payment of the principal of and interest on all the Loans and the due and punctual performance and observance of all the covenants and conditions of this Agreement to be performed or observed by the Borrower shall be expressly assumed, by one or more agreements, reasonably satisfactory in form to the Required Lenders, executed and delivered to the Paying Agent by the corporation formed by such consolidation, or into which the Borrower shall have been merged, or which shall have acquired such property. In the case of any such consolidation, merger, sale or conveyance, and following such an assumption by the successor corporation, such successor corporation shall succeed to and be substituted for the Borrower, with the same effect as if it had been named herein. Notwithstanding clause (a) above, the Borrower will not effect, or permit any Subsidiary to effect, a Separation Transaction unless, at the time thereof and after giving effect thereto, (i) no Default or Event of Default shall have occurred and be 35 continuing, (ii) the Public Debt Rating of the Borrower (or, in the case of a Separation Transaction that is an AT&T Business Spinoff (as defined in clause (c) below), the Public Debt Rating of AT&T Business) for its Long-Term Senior Debt is at least BBB+ by S&P and Baa1 by Moody's, and (iii) all preferred Equity Interests held by, and intercompany Indebtedness owed to, the Borrower in or by any Subsidiary that is the subject of the Separation Transaction are redeemed or repaid in full. In the event that a Separation Transaction permitted by Section 5.05(b) occurs in which AT&T Broadband is separated from AT&T Business by means of a spinoff of AT&T Business (or by means of a similar transaction whereby AT&T Business ceases to be any of the Borrower or its Subsidiaries) (any such Separation Transaction, an "AT&T Business Spinoff"), then AT&T Business shall assume all rights and obligations of the original Borrower under this Agreement and, upon effectiveness of such assumption, the original Borrower shall automatically be discharged from all obligations (including, without limitation, payment obligations with respect to any Loans) hereunder. LIMITATIONS ON LIENS. The Borrower will not create, assume, incur or guarantee, and will not permit any Restricted Subsidiary to create, assume, incur or guarantee, any Secured Indebtedness without making provision whereby all the Loans shall be secured equally and ratably with (or prior to) such Secured Indebtedness (together with, if the Borrower shall so determine, any other Indebtedness of the Borrower or such Restricted Subsidiary then existing or thereafter created which is not subordinate to the Loans) so long as such Secured Indebtedness shall be outstanding, unless such Secured Indebtedness, when added to (a) the aggregate amount of all Secured Indebtedness then outstanding (not including in this computation Secured Indebtedness if the Loans are secured equally and ratably with (or prior to) such Secured Indebtedness and further not including in this computation any Secured Indebtedness which is concurrently being retired) and (b) the aggregate amount of all Attributable Debt then outstanding pursuant to Sale and Leaseback Transactions entered into by the Borrower after April 1, 1986, or entered into by a Restricted Subsidiary after April 1, 1986, or, if later, the date on which it became a Restricted Subsidiary (not including in this computation any Attributable Debt which is concurrently being retired), would not exceed 10% of Consolidated Net Tangible Assets of the Borrower. LIMITATIONS ON SALE AND LEASEBACK TRANSACTIONS. The Borrower will not, and will not permit any Restricted Subsidiary to, enter into any Sale and Leaseback Transaction unless (a) the sum of (i) the Attributable Debt to be outstanding pursuant to such Sale and Leaseback Transaction, (ii) all Attributable Debt then outstanding pursuant to all other Sale and Leaseback Transactions entered into by the Borrower after April 1, 1986, or entered into by a Restricted Subsidiary after April 1, 1986, or, if later, the date on which it became a Restricted Subsidiary and (iii) the aggregate of all Secured Indebtedness then outstanding (not including in this computation Secured Indebtedness if the Loans are secured equally and ratably with (or prior to) such Secured Indebtedness) would not exceed 10% of Consolidated Net Tangible Assets or (b) an amount equal to the greater of (i) the net proceeds to the Borrower or the Restricted Subsidiary of the sale of the Principal Property sold and leased back pursuant to such Sale and Leaseback Transaction and (ii) the amount of Attributable Debt to be outstanding pursuant to such Sale and Leaseback Transaction is applied to the retirement of Funded Debt of the Borrower or any Restricted Subsidiaries (other than Funded Debt which is subordinate to the Loans or which is owing to the Borrower or any Restricted Subsidiaries) within 180 days after the consummation of such Sale and Leaseback Transaction. TOTAL DEBT TO EBITDA RATIO. As of the last day of each fiscal quarter, the ratio of Consolidated Indebtedness of the Borrower and its Consolidated Subsidiaries on such day to Consolidated Operational EBITDA of the Borrower and its Consolidated Subsidiaries for the four consecutive fiscal quarters ending on such day shall not exceed 3.00:1.00. 36 EVENTS OF DEFAULT In case of the happening of any of the following events (each an "Event of Default"): any representation or warranty made or deemed made in or in connection with the execution and delivery of this Agreement or the Borrowings hereunder, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; default shall be made in the payment of any interest on any Loan or any Fee or any other amount (other than an amount referred to in paragraph (b) above) due hereunder, when and as the same shall become due and payable, and such default shall continue unremedied for a period of ten days; default shall be made in the due observance or performance of any covenant, condition or agreement contained in Section 5.01, 5.04, 5.05 or 5.08; default shall be made in the due observance or performance of any covenant, condition or agreement contained herein (other than those specified in (b), (c) or (d) above) and such default shall continue unremedied for a period of 30 days after notice thereof from the Paying Agent or any Lender to the Borrower; a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of the Borrower in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Borrower or for any substantial part of its property or ordering the winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; and the Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law; or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Borrower or for any substantial part of its property or make any general assignment for the benefit of creditors; or the Borrower shall admit in writing its inability to pay its debts generally as they become due, or corporate action shall be taken by the Borrower in furtherance of any of the aforesaid purposes; then, and in every such event (other than an event described in paragraph (f) or (g) above), and at any time thereafter during the continuance of such event, the Paying Agent, at the request of the Required Lenders, shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein to the contrary notwithstanding; and, in any event 37 with respect to the Borrower described in paragraph (f) or (g) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein to the contrary notwithstanding. THE AGENTS In order to expedite the transactions contemplated by this Agreement, Citibank, N.A. is hereby appointed to act as Paying Agent on behalf of the Lenders and Citibank, N.A., Credit Suisse First Boston, Deutsche Bank AG New York Branch and Goldman Sachs Credit Partners L.P. are hereby appointed to act as Administrative Agents on behalf of the Lenders. The Administrative Agents do not assume any responsibility or obligation under this Agreement or any duties as agents for the Lenders. The title "Administrative Agent" implies no fiduciary obligation on the part of any Administrative Agent to any Person and the use of such title does not impose on any Administrative Agent any duties under this Agreement. Each of the Lenders hereby authorizes each Agent to take such actions on behalf of such Lender and to exercise such powers as are specifically delegated to such Agent by the terms and provisions hereof, together with such actions and powers as are reasonably incidental thereto. The Paying Agent is hereby expressly authorized by the Lenders, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Loans and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) to give notice on behalf of each of the Lenders to the Borrower of any Event of Default specified in this Agreement of which the Paying Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by the Borrower pursuant to this Agreement as received by the Paying Agent. It is understood that the Agent Parties shall not have any duties or obligations except those expressly set forth herein. Neither any Agent Party nor any of its directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its or his own gross negligence or willful misconduct, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by the Borrower of any of the terms, conditions, covenants or agreements contained in this Agreement. No Agent Party shall be responsible to the Lenders for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement or other instruments or agreements. Each Agent Party may deem and treat the Lender which makes any Loan as the holder of the indebtedness resulting therefrom for all purposes hereof until, in the case of the Paying Agent, the Paying Agent shall have received notice from such Lender or, in the case of any other Agent Party, such Agent Party shall have received notice from the Paying Agent that it received such notice from such Lender, in each case, given as provided herein, of the 38 transfer thereof. Each Agent Party shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders (or when expressly required hereby, all the Lenders) and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders. Each Agent Party shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither any Agent Party nor any of its directors, officers, employees or agents shall have any responsibility to the Borrower on account of the failure of or delay in performance or breach by any Lender of any of its obligations hereunder or to any Lender on account of the failure of or delay in performance or breach by any other Lender or the Borrower of any of their respective obligations hereunder or in connection herewith. Each Agent Party may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that each Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor Paying Agent as provided below, any Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation of the Paying Agent, the Required Lenders shall have the right to appoint a successor Paying Agent acceptable to the Borrower. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Paying Agent gives notice of its resignation, then the retiring Paying Agent may, on behalf of the Lenders, appoint a successor Paying Agent which shall be a bank with an office in New York, New York, having a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as a Paying Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Paying Agent and the retiring Paying Agent shall be discharged from its duties and obligations hereunder. After any Agent's resignation hereunder, the provisions of this Article and Section 8.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as an Agent. With respect to the Loans made by it hereunder, any Agent in its individual capacity and not as an Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not an Agent, and each Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not an Agent. Each Lender agrees (i) to reimburse the Paying Agent, on demand, in the amount of its pro rata share (based on its Commitment hereunder) of any expenses incurred for the benefit of the Lenders by such Agent, including reasonable counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, which shall not have been reimbursed by the Borrower, and (ii) to indemnify and hold harmless each Agent Party and any of its directors, officers, employees or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against it in its capacity as an Agent Party or any of them in any way relating to or arising out of this Agreement or any action taken or omitted by it or any of them under this Agreement to the extent the same shall not have been reimbursed by the Borrower; provided that no Lender shall be liable to any Agent Party for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of such Agent Party or any of its directors, officers, employees or agents. 39 Each Lender acknowledges that it has, independently and without reliance upon any Agent Party or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon any Agent Party or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any related agreement or any document furnished hereunder or thereunder. MISCELLANEOUS NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telex, telecopy, graphic scanning or other telegraphic communications equipment of the sending party, as follows: if to the Borrower, to it at AT&T Corp., 295 North Maple Avenue, Basking Ridge, New Jersey 07920, Attention of Patrick Moletteri, Senior Treasury Manager (Facsimile No. 908-630-1965) with a copy to Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017, Attention of Peter S. W. Levin (Facsimile No. 212-450-4800); if to the Paying Agent, to it at 2 Penns Way, Suite 200, New Castle, Delaware 19720, Attention: Bank Loan Syndications; if to an Administrative Agent, to it at its address (or telecopy number) set forth in Schedule 2.01; and if to a Lender, to it at its address (or telecopy number) set forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender became a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telex, telecopy, graphic scanning or other telegraphic communications equipment of the sender, or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 8.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 8.01. SURVIVAL OF AGREEMENT. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not been terminated. BINDING EFFECT. This Agreement shall become effective when it shall have been executed by the Borrower and each Agent and when the Paying Agent shall have received copies hereof (telefaxed or otherwise) which, when taken together, bear the signatures of each Lender, and thereafter shall be binding upon and inure to the benefit of the Borrower, each Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its respective 40 rights or duties hereunder or any interest herein without the prior consent of all the Lenders and any attempted assignment without such consent shall be void. SUCCESSORS AND ASSIGNS. (q) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, the Agents or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided, however, that (i) the Borrower must give its prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) in the case of an assignment made by a Lender to a Person other than a Lender or an Affiliate of a Lender, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Paying Agent) shall not be less than $25,000,000 (or the remaining balance of its Commitment) and the amount of the Commitment of such Lender remaining after such assignment shall not be less than $25,000,000 or shall be zero, and (iii) the parties to each such assignment shall execute and deliver to the Paying Agent an Assignment and Acceptance, and a processing and recordation fee of $3,000. Upon acceptance and recording pursuant to paragraph (e) of this Section 8.04, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto (but shall continue to be entitled to the benefits of Sections 2.13, 2.15, 2.19 and 8.05, as well as to any Fees accrued for its account hereunder and not yet paid)) and (C) Schedule 2.01 shall be deemed amended to give effect to such assignment. Notwithstanding the foregoing, any Lender assigning its rights and obligations under this Agreement may retain any Competitive Loans made by it outstanding at such time, and in such case shall retain its rights hereunder in respect of any Loans so retained until such Loans have been repaid in full in accordance with this Agreement. By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto or the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.02 and such other documents and information as it has deemed appropriate to make its own credit 41 analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon any Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to such Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. The Paying Agent shall maintain at one of its offices in the City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and the principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive in the absence of manifest error and the Borrower, the Agents and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and each Lender, at any reasonable time and from time to time upon reasonable prior notice. Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the processing and recordation fee referred to in paragraph (b) above and, if required, the written consent of the Borrower to such assignment, the Paying Agent shall (i) accept such Assignment and Acceptance and (ii) record the information contained therein in the Register. Each Lender may, without the consent of the Borrower or any of the Agents, sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) each participating bank or other entity shall be entitled to the benefit of the cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if it was the selling Lender, except that all claims and petitions for payment and payments made pursuant to such Sections shall be made through such selling Lender, and (iv) the Borrower, the Agents and the other Lenders shall continue to deal solely and directly with such selling Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right (and participating banks or other entities shall have no right) to enforce the obligations of the Borrower relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, or extending any scheduled principal payment date or date fixed for the payment of interest on the Loans). Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.04, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree 42 (subject to customary exceptions) to preserve the confidentiality of any such confidential information relating to the Borrower. The Borrower shall not assign or delegate any of its respective rights and duties hereunder without the prior written consent of all Lenders and any attempted assignment without such consent shall be void. Any Lender may at any time pledge all or any portion of its rights under this Agreement to a Federal Reserve Bank; provided that no such pledge shall release any Lender from its obligations hereunder or substitute any such Bank for such Lender as a party hereto. In order to facilitate such an assignment to a Federal Reserve Bank, the Borrower shall, at the request of the assigning Lender, duly execute and deliver to the assigning Lender a promissory note or notes in substantially the form of Exhibit D hereto evidencing the Loans made to the Borrower by the assigning Lender hereunder. EXPENSES; INDEMNITY. (r) The Borrower agrees to pay all reasonable out-of-pocket expenses incurred by any Agent in connection with entering into this Agreement or by the Paying Agent in connection with any amendments, modifications or waivers of the provisions hereof, or incurred by any Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement or in connection with the Loans made hereunder, including the reasonable fees and disbursements of a single counsel for the Agents or, in the case of enforcement or protection, counsel for the Lenders. The Borrower agrees to indemnify the Agent Parties, the Lenders, their respective Affiliates, and their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees and expenses, incurred by or asserted against any Indemnitee arising out of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the transactions contemplated thereby, (ii) the use of the proceeds of the Loans or (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the negligence or willful misconduct of such Indemnitee. The provisions of this Section 8.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the invalidity or unenforceability of any term or provision of this Agreement or any investigation made by or on behalf of any Agent Party or any Lender. All amounts due under this Section 8.05 shall be payable on written demand therefor. All out-of-pocket expenses that any Lender may sustain or incur as a consequence of (a), (b), (c) or (d) of Section 2.15 but that are not included in the calculations made pursuant to the second and third sentences of Section 2.15, shall be included in the amount or amounts payable to such Lender and in the manner provided pursuant to this Section 8.05. APPLICABLE LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. 43 WAIVERS; AMENDMENT. (s) No failure or delay of any Agent or any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Agents and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, without the prior written consent of each Lender affected thereby, (ii) increase the Commitment or decrease the Facility Fee of any Lender without the prior written consent of such Lender, or (iii) amend or modify the provisions of Section 2.16 or Section 8.04(h), the provisions of this Section or the definition of the "Required Lenders", without the prior written consent of each Lender; provided further, however, that no such agreement shall amend, modify or otherwise affect the rights or duties of any Agent hereunder without the prior written consent of such Agent. Each Lender shall be bound by any waiver, amendment or modification authorized by this Section and any consent by any Lender pursuant to this Section shall bind any assignee of its rights and interests hereunder. ENTIRE AGREEMENT. This Agreement, any promissory notes issued hereunder, and the Fee Letter constitute the entire contract among the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the Fee Letter. Nothing in this Agreement or the Fee Letter expressed or implied, is intended to confer upon any party other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement or the Fee Letter. SEVERABILITY. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 8.03. HEADINGS. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. JURISDICTION, ETC. (t) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or for recognition or enforcement of any 44 judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement in the courts of any jurisdiction. Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENTS AND THE LENDERS IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF ANY AGENT OR ANY LENDER IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF. IN WITNESS WHEREOF, the Borrower, the Agents and the Lenders have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. AT&T CORP. By: ________________________________ Name: Title: Website: CITIBANK, N.A., individually and as an Agent By: _________________________________________ Name: Title: CREDIT SUISSE FIRST BOSTON, individually and as an Agent By: ____________________________________ Name: Title: DEUTSCHE BANK AG NEW YORK BRANCH, individually and as an Agent By: _____________________________ Name: Title: By: _____________________________ Name: Title: GOLDMAN SACHS CREDIT PARTNERS L.P., individually and as an Agent By: _______________________________ Name: Title: BANKONE, N.A. By: _______________________________ Name: Title: THE BANK OF TOKYO-MITSUBISHI, LTD., N.Y. BRANCH By: _______________________________ Name: Title: BANK OF AMERICA N.A. By: _______________________________ Name: Title: BARCLAYS BANK PLC By: _______________________________ Name: Title: BNP PARIBAS By: _______________________________ Name: Title: HSBC BANK USA By: _______________________________ Name: Title: INTESABCI S.P.A NEW YORK BRANCH By: _______________________________ Name: Title: By: _______________________________ Name: Title: THE FUJI BANK, LIMITED By: _______________________________ Name: Title: ROYAL BANK OF SCOTLAND PLC By: _______________________________ Name: Title: ABN AMRO BANK By: _______________________________ Name: Title: ING (U.S.) CAPITAL LLC By: _______________________________ Name: Title: LLOYDS TSB BANK PLC By: _______________________________ Name: Title: By: _______________________________ Name: Title: BAYERISCHE LANDESBANK GIROZENTRALE, CAYMAN ISLANDS BRANCH By: _______________________________ Name: Title: FLEET NATIONAL BANK By: _______________________________ Name: Title: MELLON BANK, N.A. By: _______________________________ Name: Title: BANKGESELLSCHAFT BERLIN AG By: _______________________________ Name: Title: ROYAL BANK OF CANADA By: _______________________________ Name: Title: CAIXA GERAL DE DEPOSITOS, S.A. By: _______________________________ Name: Title: COMERICA BANK By: _______________________________ Name: Title: THE NORTHERN TRUST COMPANY By: _______________________________ Name: Title: THE WELLS FARGO BANK, NATIONAL ASSOCIATION By: _______________________________ Name: Title: By: _______________________________ Name: Title: CIBC INC. By: _______________________________ Name: Title: MALAYAN BANKING BERHAD By: _______________________________ Name: Title: THE SANWA BANK, LIMITED By: _______________________________ Name: Title: STATE STREET BANK AND TRUST COMPANY By: _______________________________ Name: Title: FIRST UNION NATIONAL BANK By: _______________________________ Name: Title: SCHEDULE 2.01 Commitments and Lending Offices
- ------------------------------------------------------------------------------------------------------- NAME OF INITIAL COMMITMENT LENDING OFFICE LENDER PARTY - ------------------------------------------------------------------------------------------------------- Citibank N.A. $500,000,000 Citibank, N.A. Two Penns Way Suite 200 New Castle, DE 19720 Attn: Betsy Wier Phone: (309) 894-6025 Fax: (309) 894-6120 - ------------------------------------------------------------------------------------------------------- Credit Suisse First $500,000,000 Credit Suisse First Boston Boston Eleven Madison Avenue New York, NY 10010 Attn: Edward Markowski / Nirmala Dutgana Phone: 212-538-3380 / 3525 Fax: 212-538-3477 / 561-8926 - ------------------------------------------------------------------------------------------------------- Deutsche Bank Alex $500,000,000 Deutsche Bank Alex Brown Brown 90 Hudson Street Mail stop no. JCY05-0511 Jersey City, N.J. 07302 Attn: Nelson Lugaro - Loan Administrator Phone: 201-593-2225 Fax: 201-593-2313 / 2314 - ------------------------------------------------------------------------------------------------------- Goldman Sachs Credit $500,000,000 Goldman Sachs Credit Partners L.P. Partners L.P. c/o Goldman, Sachs & Co. 85 Broad Street - 6th Floor New York, NY 10004 Attn: Barbara Aaron / Sally Wenden Phone: 212-357-3111/9735 Fax: 212-428-1243 - ------------------------------------------------------------------------------------------------------- BankOne, N.A. $400,000,000 - ------------------------------------------------------------------------------------------------------- The Bank of $400,000,000 The Bank of Tokyo-Mitsubishi, Ltd., N.Y. Branch Tokyo-Mitsubishi, One BankOne Plaza Ltd., N.Y. Branch Suite IL1-10, 0629 Chicago, IL 60670 Attn: Medy Hernandez Phone: 312-732-8297 Fax: 312-732-4840 - -------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------- Bank of America N.A. $400,000,000 - ------------------------------------------------------------------------------------------------------- Barclays Bank plc $400,000,000 Barclays Bank plc 222 Broadway New York, NY 10038 Attn: George Sierzputowski Phone: 212-412-3710 Fax: 212-412-5306 - ------------------------------------------------------------------------------------------------------- BNP Paribas $400,000,000 BNP Paribas 919 Third Avenue New York, NY 10022 Attn: Landsworth Tulloch Phone: 212-471-6649 Fax: 212-471-6603 - ------------------------------------------------------------------------------------------------------- First Union National $400,000,000 First Union National Bank Bank 201 South College Street 17th Floor Charlotte, NC 28288-1183 Attn: Lisa Davis Phone: 704-715-8102 Fax: 704-383-7201 - ------------------------------------------------------------------------------------------------------- HSBC Bank USA $400,000,000 HSBC Bank USA One HSBC Center 26th Floor Buffalo, NY 14203 Attn: Marie Bax Phone: 716-841-5668 Fax: 716-841-0269 - ------------------------------------------------------------------------------------------------------- IntesaBci S.p.A $400,000,000 IntesaBci S.p.A 1 William Street New York, NY 10004 Attn: Isabella Castrogiovanni Phone: 212-607-3522 Fax: 212-607-3897 - ------------------------------------------------------------------------------------------------------- The Fuji Bank, Limited $400,000,000 - ------------------------------------------------------------------------------------------------------- The Royal Bank of $400,000,000 The Royal Bank of Scotland plc Scotland plc 65 East 55th Street, 21st Floor New York, NY 10022 Attn: Sheila Shaw Phone: 212-401-1406 Fax: 212-401-1336 - -------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------- ABN Amro Bank $300,000,000 - ------------------------------------------------------------------------------------------------------- ING (U.S.) Capital LLC $300,000,000 ING (U.S.) Capital LLC 135 East 57th Street New York, NY 10022 Attn: Annette Miller-Lewis Phone: 646-424-8226 Fax: 646-424-8260 - ------------------------------------------------------------------------------------------------------- Lloyds TSB Bank plc $300,000,000 Lloyds TSB Bank plc 1251 Avenue of the Americas New York, NY 10020 Attn: Patricia Kilian Phone: 212-930-8914 Fax: 212-930-5098 - ------------------------------------------------------------------------------------------------------- Bayerische Landesbank $200,000,000 Bayerische Landesbank Girozentrale, Cayman Islands Branch Girozentrale, Cayman 560 Lexington Avenue Islands Branch New York, NY 10022 Attn: Patricia Sanchez Phone: 212-310-9810 Fax: 212-310-9930 - ------------------------------------------------------------------------------------------------------- Fleet National Bank $200,000,000 Fleet National Bank 100 Federal Street Boston, MA 02110 Attn: Michael Shuhy Phone: 617-434-5543 Fax: 617-434-1240 - ------------------------------------------------------------------------------------------------------- Mellon Bank, N.A. $200,000,000 Mellon Bank, N.A. 3 Mellon Bank Center Room 1203 Pittsburgh, PA 15259 Attn: Daria A. Armen Phone: 412-234-1870 Fax: 412-209-6117 - ------------------------------------------------------------------------------------------------------- Bankgesellschaft $100,000,000 Bankgesellschaft Berlin AG, London Branch Berlin AG, London 1 Crown Court, Cheapside Branch London EC2V 6LR Attn: Penny Neville-Park / Collette Hayden Phone: 011-44-20-7572-6327 / 6350 Fax: 011-44-20-7572-6359 - ------------------------------------------------------------------------------------------------------- Royal Bank of Canada $100,000,000 Royal Bank of Canada One Liberty Plaza New York, NY 10006-1404 Attn: Manager, Loans Administration Phone: 212-428-6322 - -------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------- Fax: 212-428-2372 - ------------------------------------------------------------------------------------------------------- Caixa Geral de $50,000,000 Caixa Geral de Depositos, S.A. Depositos, S.A. 280 Park Avenue 28th Floor East Building New York, NY 10017 Attn: Dale Prusinowski Phone: 212-557-0025 Fax: 212-687-0848 - ------------------------------------------------------------------------------------------------------- Comerica Bank $50,000,000 Comercia Bank U.S. Banking/Northeast 500 Woodward Avenue, 9th Floor MC 3279 Detroit, MI 48275-3279 Attn: Venus Moses / Munther Abukhader Phone: 313-222-3319 / 5601 Fax: 313-222-3330 / 3776 - ------------------------------------------------------------------------------------------------------- The Northern Trust $50,000,000 The Northern Trust Company Company 50 S. LaSalle Street Chicago, IL 60675 Attn: Ms. Linda Honda Phone: 312-444-3532 Fax: 312-630-1566 - ------------------------------------------------------------------------------------------------------- The Wells Fargo Bank, $50,000,000 The Wells Fargo Bank, National Association National Association - -------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------- CIBC Inc. $25,000,000 CIBC Inc. 2727 Paces Ferry Road, Suite 120 2 Paces West, Building 2 Atlanta, GA 30339 Attn: Bonnie Harris Phone: 770-319-4850 Fax: 770-319-4950 - ------------------------------------------------------------------------------------------------------- Malayan Banking $25,000,000 Malayan Banking Berhad, New York Branch Berhad, 400 Park Avenue, 9th Floor New York Branch New York, NY 10022 Attn: Nicki Chan / P.C. Kim Phone: 212-303-1319 Fax: 212-308-0109 - ------------------------------------------------------------------------------------------------------- The Sanwa Bank, Limited $25,000,000 The Sanwa Bank, Limited, New York Branch 55 East 52nd Street New York, NY 10055 Attn: Shirley Mosquera Phone: 212-339-6362 Fax: 212-754-2368 - ------------------------------------------------------------------------------------------------------- State Street Bank and $25,000,000 State Street Bank and Trust Company Trust Company 2 Avenue de Lafayette Boston, MA 02111 Attn: Mary H. Carey Phone: 617-662-3413 Fax: 617-662-4201 - ------------------------------------------------------------------------------------------------------- TOTAL $8,000,000,000
EXHIBIT A-1 FORM OF COMPETITIVE BID REQUEST Citibank, N.A., as Paying Agent for the Lenders referred to below, __________ __________ Attention:[Date] Ladies and Gentlemen: The undersigned, AT&T Corp. (the "Borrower"), refers to the Amended and Restated 364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of December [__], 2001 (as it may be amended, modified, extended or restated from time to time, the "Credit Agreement"), among the Borrower, the Lenders named therein, Citibank, N.A. ("Citibank"), Credit Suisse First Boston, Deutsche Bank AG New York Branch and Goldman Sachs Credit Partners L.P., as Administrative Agents, and Citibank, as Paying Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Borrower hereby gives you notice pursuant to Section 2.03(a) of the Credit Agreement that it requests a Competitive Borrowing under the Credit Agreement, and in that connection sets forth below the terms on which such Competitive Borrowing is requested to be made: (A) Date of Competitive Borrowing (which is a Business Day) ______________________ (B) Principal Amount of Competitive Borrowing 1/ ______________________ (C) Interest rate basis 2/ ______________________ (D) Interest Period and the last day thereof 3/ ______________________ Upon acceptance of any or all of the Loans offered by the Lenders in response to this request, the Borrower shall be deemed to have represented and warranted that the conditions to lending specified in Section 4.01(b) and (c) of the Credit Agreement have been satisfied. Very truly yours, AT&T CORP., By:_______________________________ Name: __________________ 1/ Not less than $5,000,000 (and in integral multiples of $1,000,000) or greater than the Total Commitment then available. 2/ Eurodollar Loan or Fixed Rate Loan. 3/ Which shall be subject to the definition of "Interest Period" and end not later than the Maturity Date. Form of Competitive Bid Request 2 Title: [Responsible Officer] AMENDED AND RESTATED 364-DAY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT EXHIBIT A-2 FORM OF NOTICE OF COMPETITIVE BID REQUEST [Name of Lender] [Address] Attention: [Date] Ladies and Gentlemen: Reference is made to the Amended and Restated 364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of December [__], 2001 (as it may be amended, modified, extended or restated from time to time, the "Credit Agreement"), among AT&T Corp., the Lenders named therein, Citibank, N.A. ("Citibank"), Credit Suisse First Boston, Deutsche Bank AG New York Branch and Goldman Sachs Credit Partners L.P., as Administrative Agents, and Citibank, as Paying Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. AT&T Corp. (the "Borrower") made a Competitive Bid Request on [ ], [2001] [2002], pursuant to Section 2.03(a) of the Credit Agreement, and in that connection you are invited to submit a Competitive Bid by [Date]/[Time]. 4/ Your Competitive Bid must comply with Section 2.03(b) of the Credit Agreement and the terms set forth below on which the Competitive Bid Request was made: (A) Date of Competitive Borrowing ______________________ (B) Principal amount of Competitive Borrowing ______________________ (C) Interest rate basis ______________________ (D) Interest Period and the last day thereof ______________________ Very truly yours, CITIBANK, N.A., as Paying Agent, By:_______________________________ Name: Title: [Responsible Officer] __________________ 4/ The Competitive Bid must be received by the Paying Agent (i) in the case of Eurodollar Loans, not later than 9:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing, and (ii) in the case of Fixed Rate Loans, not later than 9:30 a.m., New York City time, on the Business Day of a proposed Competitive Borrowing. Form of Competitive Bid Request EXHIBIT A-3 FORM OF COMPETITIVE BID Citibank, N.A., as Paying Agent for the Lenders referred to below, __________________ __________________ Attention: Ladies and Gentlemen: The undersigned, [Name of Lender], refers to the Amended and Restated 364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of December [__], 2001 (as it may be amended, modified, extended or restated from time to time, the "Credit Agreement"), among AT&T Corp., the Lenders named therein, Citibank, N.A. ("Citibank"), Credit Suisse First Boston, Deutsche Bank AG New York Branch and Goldman Sachs Credit Partners L.P., as Administrative Agents, and Citibank, as Paying Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The undersigned hereby makes a Competitive Bid pursuant to Section 2.03(b) of the Credit Agreement, in response to the Competitive Bid Request made by AT&T Corp. (the "Borrower") on [ ], [2001][2002], and in that connection sets forth below the terms on which such Competitive Bid is made: (A) Principal Amount 5/ ______________________ (B) Competitive Bid Rate 6/ ______________________ (C) Interest Period and last day thereof ______________________ The undersigned hereby confirms that it is prepared, subject to the conditions set forth in the Credit Agreement, to extend credit to the Borrower upon acceptance by the Borrower of this bid in accordance with Section 2.03(d) of the Credit Agreement. Very truly yours, [NAME OF LENDER], By:_______________________________ Name: Title: __________________ 5/ Not less than $5,000,000 or greater than the requested Competitive Borrowing and in integral multiples of $1,000,000. Multiple bids will be accepted by the Paying Agent. 6/ i.e., LIBO Rate + or - %, in the case of Eurodollar Loans or %, in the case of Fixed Rate Loans. Form of Competitive Bid EXHIBIT A-4 FORM OF COMPETITIVE BID ACCEPT/REJECT LETTER Citibank, N.A., as Paying Agent for the Lenders referred to below, __________ __________ Attention: Ladies and Gentlemen: The undersigned, AT&T Corp. (the "Borrower"), refers to the Amended and Restated 364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of December [__], 2001, (as it may be amended, modified, extended or restated from time to time, the "Credit Agreement"), among the Borrower, the Lenders named therein, Citibank, N.A. ("Citibank"), Credit Suisse First Boston, Deutsche Bank AG New York Branch and Goldman Sachs Credit Partners L.P., as Administrative Agents, and Citibank, as Paying Agent for the Lenders. In accordance with Section 2.03(c) of the Credit Agreement, we have received a summary of bids in connection with our Competitive Bid Request dated ___________ and in accordance with Section 2.03(d) of the Credit Agreement, we hereby accept the following bids for maturity on [date]:
Principal Amount Fixed Rate/Margin Lender ---------------------------------------------------------------- $ [%]/[+/-. %] $
We hereby reject the following bids:
Principal Amount Fixed Rate/Margin Lender ---------------------------------------------------------------- $ [%]/[+/-. %] $
The $_______ should be deposited in Citibank, N.A. account number [ ] on [date]. Very truly yours, AT&T CORP., By:_______________________________ Name: Title: Form of Competitive Bid Accept/Reject Letter EXHIBIT A-5 FORM OF STANDBY BORROWING REQUEST Citibank, N.A., as Paying Agent for the Lenders referred to below, __________ __________ Attention: [Date] Ladies and Gentlemen: The undersigned, AT&T Corp. (the "Borrower"), refers to the Amended and Restated 364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of December [__], 2001 (as it may be amended, modified, extended or restated from time to time, the "Credit Agreement"), among the Borrower, the Lenders named therein, Citibank, N.A. ("Citibank"), Credit Suisse First Boston, Deutsche Bank AG New York Branch and Goldman Sachs Credit Partners L.P., as Administrative Agents, and Citibank, as Paying Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Borrower hereby gives you notice pursuant to Section 2.04 of the Credit Agreement that it requests a Standby Borrowing under the Credit Agreement, and in that connection sets forth below the terms on which such Standby Borrowing is requested to be made: (A) Date of Standby Borrowing (which is a Business Day) ______________________ (B) Principal Amount of Standby Borrowing 7/ ______________________ (C) Interest rate basis 8/ ______________________ (D) Interest Period and the last day thereof 9/ ______________________ Upon acceptance of any or all of the Loans made by the Lenders in response to this request, the Borrower shall be deemed to have represented and warranted that the conditions to lending specified in Section 4.01(b) and (c) of the Credit Agreement have been satisfied. Very truly yours, AT&T CORP., By:_________________________________________ Name: Title: [Responsible Officer] __________________ 7/ Not less than $50,000,000 (and in integral multiples of $10,000,000) or greater than the Total Commitment then available. 8/ Eurodollar Loan or ABR Loan. 9/ Which shall be subject to the definition of "Interest Period" and end not later than the Maturity Date. Form of Standby Borrowing Request EXHIBIT B FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Amended and Restated 364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of December [__], 2001(as the same may be modified, amended, extended or restated from time to time, the "Credit Agreement"), among AT&T Corp., (the "Borrower"), the lenders party thereto (the "Lenders"), Citibank, N.A. ("Citibank"), Credit Suisse First Boston, Deutsche Bank AG New York Branch and Goldman Sachs Credit Partners L.P., as Administrative Agents, and Citibank, as Paying Agent for the Lenders (in such capacity, the "Paying Agent"). Terms defined in the Credit Agreement are used herein with the same meanings. 1. The Assignor hereby sells and assigns, without recourse, to the Assignee, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Effective Date set forth below, the interests set forth below (the "Assigned Interest") in the Assignor's rights and obligations under the Credit Agreement, including, without limitation, the interests set forth herein in the Commitment of the Assignor on the Effective Date and the Competitive Loans (if noted on the attached Schedule) and Standby Loans owing to the Assignor which are outstanding on the Effective Date, together with unpaid interest accrued on the assigned Loans to the Effective Date. Each of the Assignor and the Assignee hereby makes and agrees to be bound by all the representations, warranties and agreements set forth in Section 8.04(c) of the Credit Agreement, a copy of which has been received by each such party. From and after the Effective Date (i) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the interests assigned by this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent of the interests assigned by this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 2. This Assignment and Acceptance is being delivered to the Paying Agent together with (i) if the Assignee is organized under the laws of a jurisdiction outside the United States, the forms specified in Section 2.19(f) of the Credit Agreement, duly completed and executed by such Assignee, and (ii) a processing and recordation fee of $3,000. 3. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. Date of Assignment: Legal Name of Assignor: Legal Name of Assignee: Assignee's Address for Notices: Effective Date of Assignment (may not be fewer than 5 Business Days after the Date of Assignment): Form of Assignment and Acceptance 2
Percentage Assigned of Facility Principal Amount and Commitment thereunder Assigned (and (set forth, to at least 8 decimals, identifying information as a percentage of the Facility as to individual and the aggregate Commitments Competitive Loans) of all Lenders thereunder) ------------------ -------------------------- Commitment Assigned: $ % Standby Loans: Competitive Loans, if any:
The terms set forth above and on the reverse side hereof are hereby agreed to: Accepted: as of _____________________, ______________________, as Assignor AT&T CORP. By: ___________________________ By: _________________________________ Name: _________________________ Name: _______________________________ Title: ________________________ Title: ______________________________ ______________________, as Assignee By: ___________________________ Name: _________________________ Title: ________________________ Form of Assignment and Acceptance EXHIBIT C FORM OF OPINION OF COUNSEL FOR AT&T CORP. 10/ 1. AT&T Corp. (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of New York, (ii) has all requisite power and authority to own its property and assets and to carry on its business as now conducted, (iii) is qualified to do business in every jurisdiction within the United States where such qualification is required, except where the failure so to qualify would not result in a Material Adverse Effect on AT&T Corp., and (iv) has all requisite corporate power and authority to execute, deliver and perform its obligations under the Credit Agreement and to borrow funds thereunder. 2. The execution, delivery and performance by AT&T Corp. of the Credit Agreement and the Borrowings of AT&T Corp. thereunder (collectively, the "Transactions") (i) have been duly authorized by all requisite corporate action and (ii) will not (a) violate (1) any provision of law, statute, rule or regulation (including without limitation, the Margin Regulations), or of the certificate of incorporation or other constitutive documents or by-laws of AT&T Corp., (2) any order of any governmental authority or (3) any provision of any indenture, agreement or other instrument to which AT&T Corp. is a party or by which it or its property is or may be bound, (b) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument or (c) result in the creation or imposition of any lien upon any property or assets of AT&T Corp. 3. The Credit Agreement has been duly executed and delivered by AT&T Corp. and constitutes a legal, valid and binding obligation of AT&T Corp. enforceable against AT&T Corp. in accordance with its terms, subject as to the enforceability of rights and remedies to any applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors' rights from time to time in effect. 4. No action, consent or approval of, registration or filing with, or any other action by, any government authority is or will be required in connection with the Transactions, except such as have been made or obtained and are in full force and effect. 5. Neither AT&T Corp. nor any of its subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. __________________ 10/ Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Amended and Restated 364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of December __, 2001, among AT&T Corp., the lenders listed in Schedule 2.01 thereto, Citibank, N.A. ("Citibank"), Credit Suisse First Boston, Deutsche Bank AG New York Branch and Goldman Sachs Credit Partners L.P., as Administrative Agents, and Citibank, as Paying Agent (the "Credit Agreement"). Form of Opinion of Counsel for AT&T Corp. EXHIBIT D FORM OF NOTE $ [Amount of Commitment] New York, New York [Date] FOR VALUE RECEIVED, the undersigned, AT&T Corp., a New York corporation (the "Borrower"), hereby promises to pay to the order of [Name of Lender] (the "Lender"), at the office of Citibank, N.A. (the "Paying Agent") at [__________], on the Maturity Date (as defined in the Credit Agreement dated as of December [__], 2001 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among the Borrower, the Lenders named therein, Citibank, N.A., Credit Suisse First Boston, Deutsche Bank AG New York Branch and Goldman Sachs Credit Partners L.P., as Administrative Agents, and the Paying Agent) the lesser of the principal sum of [amount of Commitment in words] ($[ ]) and the aggregate unpaid principal amount of all Loans (as defined in the Credit Agreement) made to the Borrower by the Lender pursuant to the Credit Agreement, in lawful money of the United States of America, in immediately available funds, and to pay interest on the principal amount hereof from time to time outstanding, in like funds, at said office, at the rate or rates per annum, from the dates and payable on the dates provided in the Credit Agreement. The Borrower promises to pay interest, on demand, on any overdue principal and, to the extent permitted by law, overdue interest from their due dates at the rate or rates provided in the Credit Agreement. The Borrower hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever. The nonexercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. All borrowings evidenced by this Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates and maturity dates thereof shall be endorsed by the holder hereof on the schedule attached hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof, or otherwise recorded by such holder in its internal records; provided, however, that the failure of the holder to make such a notation or any error in such a notation shall not affect the obligations of the Borrower under this Note. The Loans evidenced hereby are Loans referred to in the Credit Agreement, which, among other things, contains provisions for the acceleration of the maturity thereof upon the happening of certain events, for optional and mandatory prepayment of the principal thereof prior to the maturity thereof and for the amendment or waiver of certain provisions of the Credit Agreement, all upon the terms and conditions therein specified. Form of Note 2 THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. AT&T CORP. By:_____________________________________ Name: Title: Form of Note 3 Loans and Payments
============================================================================================ Unpaid Name of Amount Principal Person and Type Maturity Balance Making Date of Loan Date Principal Payments Interest of Note Notation - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- ============================================================================================
Form of Note EXHIBIT E [FORM OF AT&T BUSINESS GUARANTEE] GUARANTEE AGREEMENT dated as of ___________, 200_, by AT&T Business, a ___________ corporation (with its successors, the "GUARANTOR") in favor of Citibank, N.A., as Paying Agent (with its successors, the "PAYING AGENT" or "CITIBANK"), for the benefit of the Lenders and the Agents (as defined in the Credit Agreement referred to below). W I T N E S S E T H : WHEREAS, AT&T Corp. (with its successors, the "BORROWER"), a New York corporation, the Lenders party thereto (the "LENDERS"), the Paying Agent, and Citibank, Credit Suisse First Boston, Deutsche Bank AG New York Branch and Goldman Sachs Credit Partners L.P., as Administrative Agents (the "ADMINISTRATIVE AGENTS" and, together with the Paying Agent, the "AGENTS"), are parties to an Amended and Restated 364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of December [__], 2001 (as amended from time to time, the "CREDIT AGREEMENT"); and WHEREAS, in consideration of the financial and other support that the Borrower has provided, and such financial and other support as the Borrower may in the future provide, to the Guarantor, the Guarantor is willing to enter into this Guarantee Agreement; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions. Terms defined in the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. SECTION 2. The Guarantee. The Guarantor hereby unconditionally guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of the principal and interest (including, without limitation, interest accruing during the pendency of any bankruptcy or insolvency proceedings whether or not allowable or allowed thereunder) on any Loan under the Credit Agreement, and the full and punctual payment when due of all other amounts payable by the Borrower under the Credit Agreement (all such obligations being the "GUARANTEED OBLIGATIONS"). Upon failure by the Borrower to pay punctually any such amount, the Guarantor agrees that it shall forthwith on demand pay the amount not so paid at the place and in the manner specified in the Credit Agreement. SECTION 3. Guarantee Unconditional. The obligations of the Guarantor under or in respect of this Guarantee are independent of any other obligations of the Borrower under or in respect of the Credit Agreement, and a separate action or actions may be brought and prosecuted against the Guarantor to enforce this Guarantee, irrespective of whether any action is brought against the Borrower or whether the Borrower is joined in any such action or actions. The Form of AT&T Business Guarantee 2 liability of the Guarantor under this Guarantee shall be irrevocable, absolute and unconditional irrespective of, and the Guarantor hereby irrevocably waives, to the extent such waiver is legally permitted, any defenses it may now have or hereafter acquire in any way relating to, any or all of the following: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of the Borrower under the Credit Agreement, by operation of law or otherwise; (ii) any modification or amendment of or supplement to the Credit Agreement; (iii) any release, impairment, non-perfection or invalidity of any direct or indirect security for any obligation of the Borrower under the Credit Agreement; (iv) any change in the corporate existence, structure or ownership of the Borrower, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower or any of its assets or any resulting release or discharge of any obligation of the Borrower contained in the Credit Agreement; (v) the existence of any claim, set-off or other rights which the Guarantor may have at any time against the Borrower, any Agent, any Lender or any other Person, whether in connection with the Credit Agreement or with any unrelated transactions; provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (vi) any invalidity or unenforceability relating to or against the Borrower for any reason of the Credit Agreement, or any provision of applicable law or regulation purporting to prohibit the payment by the Borrower of the principal of or interest on the Loans or any other amount payable by the Borrower under the Credit Agreement; or (vii) any other act or omission to act or delay of any kind by the Borrower, any Agent, any Lender or any other party to the Credit Agreement, or any other circumstance whatsoever which might, but for the provisions of this Section, constitute a legal or equitable discharge of or defense to obligations of the Guarantor hereunder. SECTION 4. Representations and Warranties. The Guarantor represents and warrants that: (a) Corporate Organization. The Guarantor (i) is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, (ii) has all requisite power and authority to own its property and assets and carry on its business as now conducted, (iii) is duly qualified in every jurisdiction where such qualification is required, except where the failure to so qualify would not result in a Material Adverse Effect and (iv) has the corporate power and authority to execute, deliver and perform its obligations under this Guarantee Agreement. Form of AT&T Business Guarantee 3 (b) Authorization; No Conflict. The execution, delivery and performance by the Guarantor of this Guarantee Agreement (i) have been duly authorized by all requisite corporate actions and (ii) will not (A) violate (1) any provision of any law, statute, rule or regulation or of the certificate of incorporation or other constitutive documents or by-laws of the Guarantor, (2) any order of any Governmental Authority or (3) any provision of any indenture, agreement or other instrument to which the Guarantor is a party or by which the Guarantor or any of its property is or may be bound, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument or (C) result in the creation or imposition of any Lien upon any property or assets of the Guarantor. (c) Binding Effect. This Guarantee Agreement is a legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding at law or in equity. (d) Independent Decision. The Guarantor has, independently and without reliance upon any Lender or any Agent and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Guarantee, and the Guarantor has established adequate means of obtaining from the Borrower on a continuing basis information pertaining to, and is now and on a continuing basis will be completely familiar with, the business, condition (financial or otherwise), operations, performance, properties and prospects of the Borrower. SECTION 5. Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances. (a) The Guarantor's obligations hereunder shall remain in full force and effect until the Commitments under the Credit Agreement shall have terminated and the principal of and interest on the Loans and all other amounts payable by the Borrower under the Credit Agreement shall have been paid in full. If at any time any payment of the principal of or interest on any Loan or any other amount payable by the Borrower under the Credit Agreement is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, the Guarantor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 6. Waivers by the Guarantor. (a) The Guarantor irrevocably waives notice of acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Borrower or any other Person. (b) The Guarantor hereby unconditionally and irrevocably waives any defense arising by reason of any claim or defense based upon an election of remedies by any Lender or any Agent that in any manner impairs, reduces, releases or otherwise adversely affects the subrogation, reimbursement, exoneration, contribution or indemnification rights of the Guarantor Form of AT&T Business Guarantee 4 or other rights of the Guarantor to proceed against the Borrower, any other guarantor or any other Person. (c) The Guarantor hereby unconditionally and irrevocably waives any duty on the part of any Lender or any Agent to disclose to the Guarantor any matter, fact or thing relating to the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower or any of its Subsidiaries now or hereafter known by such Lender or Agent. (d) The Guarantor acknowledges that it will receive substantial direct and indirect benefits from the financing arrangements contemplated by the Credit Agreement and that the waivers set forth in Section 3 and this Section 6 are knowingly made in contemplation of such benefits. SECTION 7. Subrogation. Upon making any payment hereunder with respect to the obligations of the Borrower, the Guarantor shall be subrogated to the rights of the payee against the Borrower with respect to such obligation; provided that the Guarantor shall not enforce any payment by way of subrogation (including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of any Lender or the Paying Agent against the Borrower, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from the Borrower, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right), until the repayment in full of all amounts payable by the Borrower under the Credit Agreement and the termination of the Commitments under the Credit Agreement. SECTION 8. Stay of Acceleration. If acceleration of the time for payment of any amount payable by the Borrower under the Credit Agreement is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of the Credit Agreement shall nonetheless be payable by the Guarantor hereunder forthwith on demand by the Paying Agent made at the request of the Required Lenders. SECTION 9. Amendments; Supplements. Any provision of this Guarantee Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Guarantor, the Paying Agent and the Required Lenders; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all of the Lenders, (a) reduce or limit the obligations of the Guarantor hereunder, release the Guarantor hereunder if immediately before and after giving effect to such release the Borrower's Public Debt Rating is less than BBB+ by S&P or Baa1 by Moody's, or otherwise limit the Guarantor's liability with respect to the obligations owing to the Lenders under or in respect of the Credit Agreement, (b) postpone any date fixed for payment hereunder or (c) change the number of Lenders or the percentage of (x) the Total Commitments, or (y) the aggregate unpaid principal amount of the Loans that, in each case, shall be required for the Lenders or any of them to take any action hereunder. Form of AT&T Business Guarantee 5 SECTION 10. Continuing Guarantee. This Guarantee is a continuing Guarantee and shall be binding upon the Guarantor and its successors and assigns, and inure to the benefit of and be enforceable by the Paying Agent, the Agents or the Lenders and their respective successors and assigns. This Guarantee is for the benefit of the Agents and the Lenders and its successors and permitted assigns pursuant to Sections 8.04 of the Credit Agreement, and in the event of an assignment of all or any of any Lender's interest in and to its rights and obligations under the Credit Agreement in accordance with the Credit Agreement, the assignor's rights hereunder, to the extent applicable to the indebtedness or obligation so assigned, shall automatically be transferred with such indebtedness or obligation. SECTION 11. Limitation on the Obligations. The obligations of the Guarantor hereunder shall be limited to an aggregate amount that is equal to the largest amount that would not render the obligations of the Guarantor hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code or any comparable provisions of applicable law. SECTION 12. Right of Set-Off. Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request specified by Article VI of the Credit Agreement to authorize the Paying Agent to declare the Loans due and payable pursuant to the provisions of said Article VI, each Agent and each Lender and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Agent, such Lender or such Affiliate to or for the credit or the account of the Guarantor against any and all of the Guaranteed Obligations of the Guarantor now or hereafter existing hereunder, irrespective of whether such Agent or such Lender shall have made any demand under this Guarantee and although such Guaranteed Obligations may be unmatured. Each Agent and each Lender agrees promptly to notify the Guarantor after any such set-off and application; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Agent and each Lender and their respective Affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Agent, such Lender and their respective Affiliates may have. SECTION 13. Taxes; Expenses; Indemnity; Miscellaneous. The provisions of Sections 2.19, 8.01, 8.05, 8.06 and 8.10 through 8.14, inclusive, of the Credit Agreement apply to the Guarantor and this Guarantee Agreement mutatis mutandis, with notice to the Guarantor to be at: AT&T Business [Address] Attention: Fax: Form of AT&T Business Guarantee 6 IN WITNESS WHEREOF, the undersigned has caused this Guarantee Agreement to be duly executed by its authorized officer as of the day and year first above written. AT&T BUSINESS By:_____________________________________ Name: Title: EX-10.III.A.21 6 e56632ex10-iii_a21.txt FORM OF EMPLOYMENT AGREEMENT Exhibit (10)(iii)(A)21 EMPLOYMENT AGREEMENT This Agreement, effective April 9, 2001, by and between Betsy Bernard ("Executive") and AT&T Corp., a New York Corporation with its principal place of business at 295 N. Maple Avenue, Basking Ridge New Jersey ("Company") (collectively "the Parties"): WHEREAS, Executive seeks employment with the Company; and WHEREAS, the Company seeks to secure Executive's services on the terms provided herein; NOW THEREFORE, in consideration of the mutual covenants set forth below, the Parties agree as follows: Term of Employment. Effective April 9, 2001 ("Effective Date"), the Company will hire Executive on a full time basis to render exclusive services to the Company and its affiliates under the terms set forth in this Agreement. The Executive accepts this employment and will render services as required by the Company using the Executive's best efforts and will report to the President of AT&T Corp. This Agreement should not be construed or interpreted as containing any guarantee of continued employment. The employment relationship at AT&T is by mutual consent ("Employment-At-Will"). This means that executives have the right to terminate their employment at any time and for any reason. Likewise, the Company reserves the right to discontinue Executive's employment with or without cause at any time and for any reason, subject to the rights of Executive to the severance benefits as set forth in this Agreement. Title of Executive. At Effective Date, Executive's title shall be President and CEO of AT&T Consumer Services. 1 2 Compensation and Benefits. Base Salary. The Executive shall receive salary compensation ("Base Salary") from the Company in payment for all of Executive's services under this Agreement at an annual rate of Six Hundred Thousand ($600,000.00) dollars per year, subject to review by the Company's compensation committee on an annual basis with regard to the possibility of an increase in Base Salary provided, however, the Executive's Base Salary shall not be decreased. The Company shall pay Executive the Base Salary in monthly installments. Annual Bonus. The Annual Bonus ("Annual Bonus") for Company executives is based on measures of Company and individual performance. The Company makes no representations under the terms of this Agreement regarding criteria for or amounts of bonuses paid during the term of this Agreement. However, Executive shall be entitled to receive an annual bonus during the term of this Agreement under the same terms and conditions as other Company executives. The target amount for Executive's Annual Bonus shall be one hundred percent of base salary, Six Hundred Thousand ($600,000.00) Dollars, subject to review by the Company's compensation committee on an annual basis with regard to the possibility of an increased target Annual Bonus. Executive shall become eligible for a bonus under this paragraph beginning in 2002 for performance year 2001 and in each March thereafter during the term of this Agreement. The bonus for performance year 2001 shall not be subject to proration for Executive's partial service in that year. 3 AT&T Long Term Incentive Compensation. All compensation under this Paragraph 4 shall be subject to the terms of the AT&T 1997 Long Term Incentive Program (or its successor) and the AT&T Non-Competition Guideline, attached to this Agreement as Attachments A and B, respectively. The awards described below in Paragraphs 4(a), 4(b) and 4(c) comprise the Annual Long Term Incentive Grant for 2001. Any future Annual Long Term Incentive Grants, to the extent applicable, will be decided by the Company's Board of Directors. The awards described in Paragraphs 4(d), 4(e) and 4(f) are special one-time hiring grants under the AT&T Long Term Incentive Plan. 2001 AT&T Performance Shares. On the Effective Date, Company will grant Executive Thirty-Six Thousand Nine Hundred (36,900) AT&T Performance Shares covering the 2001-2003 performance period. Payment for Performance Shares awarded under this paragraph 4(a) are contingent upon the Company's attainment of financial performance measurements determined by the Company's Board of Directors. Payout, if any, for Performance Shares awarded under this paragraph shall be made during the first quarter of 2004 or as otherwise determined by the Company's Board of Directors. 2001 AT&T Stock Options. Company will grant Executive options for One Hundred Forty-Five Thousand Four Hundred (145,400) shares of AT&T Common Stock. Sixty percent (60%) of these options will be granted on the Effective Date. The remainder of the options (40%) will be granted later in 4 2001 at the time such grant is made to other executives. For stock options granted under this paragraph 4(b), the term of the stock option grant is ten years and the stock options will vest Twenty-Five percent (25%) annually beginning on the first anniversary of the Effective Date. The stock option price of the initial sixty percent (60%) shall be the fair market value of AT&T Common Stock on the Effective Date; the stock option price of the remaining forty percent (40%) shall be the fair market value of AT&T Common Stock on the date those options are granted. Restricted Stock Units. On the Effective Date, the Company shall grant Executive One Hundred Nineteen Thousand Three Hundred (119,300) AT&T Restricted Stock Units. Restricted Stock units issued to Executive under this paragraph 4(c) shall vest three years from the date of the grant. Special Stock Option Grants. (i) If AT&T Corp. issues a separate stock tracking the performance of AT&T Consumer Services ("Consumer Tracking Stock"), then Executive shall be eligible to receive a stock option grant for Consumer Tracking Stock in an amount that, based on ratio of tracking stock to Long Term Incentive payments, is consistent with Consumer Tracking Stock provided to other similarly situated Executives and subject to the same terms as any stock option grant for Consumer Tracking Stock made to other similarly situated Executives. For example, if the Board determines that the value of a tracker option grant should be X% of an executive's long term incentive 5 target for 2001, then Executive's tracker option grant value would be X% of her $5.2m 2001 long term incentive target for 2001. (ii) On the Effective Date the Company will make a one-time grant to Executive of options for Eight Hundred Thousand (800,000) shares of AT&T Common Stock. For stock options granted under this paragraph 4(d)(ii), the term of the stock option grant is ten (10) years and the stock options shall vest Thirty-Three and One-Third Per Cent (33 1/3%) annually beginning on the first anniversary of the Effective Date. The stock option price shall be the fair market value of AT&T Common Stock on the Effective Date. (iii) On the Effective Date the Company will make a one-time grant of AT&T stock options to Executive determined as follows: $1,890,000 will be divided by the product of the fair market value of AT&T stock on Effective Date and .4. From the number which results from this calculation will be subtracted 145,400. The resulting number will be the number of stock options granted to Executive under this subparagraph. The term of the stock option grant is ten (10) years and the stock options shall vest twenty five percent annually beginning on the first anniversary of the Effective Date. The stock option price shall be the fair market value of AT&T Common Stock on the Effective Date Seasoned Performance Shares. The Company shall issue to Executive Performance Share grants for the 1999-2001 and 2000-2002 cycles. On the Effective Date, Company will grant Executive Thirty-Six Thousand Nine 6 Hundred (36,900) AT&T Performance Shares covering the 1999-2001 performance period and Thirty-Six Thousand Nine Hundred (36,900) AT&T Performance Shares covering the 2000-2002 performance period. Payment for Performance Shares awarded under this paragraph 4(e) are contingent upon the Company's attainment of financial performance measurements determined by the Company's Board of Directors. Payout, if any, for Performance Share awarded under this paragraph shall be made during the first quarter of 2002 and the first quarter of 2003, respectively, or as otherwise determined by the Company's Board of Directors. (f) Special Grant of AT&T Restricted Shares. On the Effective Date the Company shall award the Executive a one-time grant of One Hundred Seventy Five Thousand (175,000) AT&T Restricted Shares. Such shares shall vest Thirty Three and One Third Percent (33 1/3%) per year beginning on the first anniversary of the Effective Date. Restitution for Certain Forfeitures. In order to address certain forfeitures associated with Executive leaving her prior employer, and to incent Executive to join the Company, the Company shall provide to Executive the following cash hiring bonuses: A payment of Three Hundred Thousand Dollars ($300,000.00) within 30 days from the Effective Date; A payment of One Million Dollars ($1,000,000.00) after one (1) full year of employment; 7 Special Deferral Account: On the Effective Date, the Company will credit the amount of Three Million Dollars ($3,000,000.00) to a Special Deferral Account in Executive's name, which shall be credited with interest at a quarterly rate equal to one quarter (1/4) of the average rate applicable to the Ten (10) Year Treasury Note for the prior calendar quarter, plus .5 percent. The Special Deferral Account shall bear interest from the Effective Date. This Special Deferral Account shall vest on the third anniversary of the Effective Date, provided, however, that if Executive leaves the employ of the Company voluntarily or because of a Company initiated termination for Cause (as defined in paragraph 15) prior to the third anniversary of the Effective Date, the Special Deferral Account shall be forfeited in its entirety. Attachment C contains the terms and conditions of the Special Deferral Account. When Executive sells her vacation home in Lake Tahoe a payment equal to the amount the Company would have paid for real estate commission, closing costs and shipment of household goods to had the Executive been entitled to relocation benefits on the vacation home pursuant to the Company's relocation plan. To the extent the Company's reimbursement of the Executive's relocation expense results in taxable income to the Executive, the Company will provide a tax allowance to offset the federal and state income and Medicare portion of FICA tax impact of this payment (to the extent not otherwise deductible or for which Executive is not entitled to an offsetting reduction in taxable income) and an additional 8 allowance to offset the federal income and Medicare portion of FICA tax impact of the tax allowance itself. Other Compensation. Perquisites. During Executive's employment under this Agreement, the Company shall provide Executive with the perquisites of employment as are commonly provided to other Company executives at a level of authority commensurate to Executive and shall reimburse Executive for reasonable and necessary business expenses. Benefits. During Executive's employment under this Agreement, the Company shall provide to Executive coverage under benefit programs in accordance with those Executive, mid-career hire and Senior Management benefit plans as are generally made available to other Company executives. Attachment D outlines the benefits available on the Effective Date. The Company reserves the right to modify and/or eliminate any benefit plan applicable to Executive; provided, however, that any modification or deletion of a benefit plan shall not affect Executive to any greater or lesser extent than any other Company executive. Relocation. The Company shall pay for Executive's relocation under the terms of AT&T Relocation Plan B. The terms and conditions of AT&T Relocation Plan B shall apply, including but not limited to the requirement that Executive use a registered real estate broker approved by the relocation firm assigned to Executive. Any tax allowances payable under 9 this paragraph will be in accordance with the terms and conditions of AT&T Relocation Plan B. Financial Counseling. The Company shall reimburse Executive for financial counseling fees paid to her personal financial counselor during her employment with the Company. Executive will not be required to use one of the three AT&T approved financial counseling firms. Fees subject to reimbursement shall include fees for individual financial counseling, preparation of federal and state income tax returns and preparation of Executive's will and other estate planning documents. The Company shall pay Executive a federal tax allowance on the reimbursed fees, calculated in accordance with Company practices applicable to other Company executives. Costs Associated with this Agreement. The Company shall reimburse Executive for costs incurred by Executive for attorney review and financial counseling associated with negotiation and execution of this Agreement. To the extent the Company's reimbursement of these costs results in taxable income to the Executive, the Company will provide a tax allowance to offset the federal income, state income, and the Medicare portion of FICA tax impact of this payment (to the extent not otherwise deductible) and an additional allowance to offset the federal income, state income, and Medicare portion of FICA tax impact of the tax allowance itself. Legal Fees. Executive represents that (a) she has not executed in favor of U S West Communications or Qwest Communications International, Inc. 10 (Qwest) any covenant not to compete with Qwest and (b) she is not aware of any requirement or request by Company to make any disclosure or take any action in her Company role that would violate any continuing duty which she may owe to Qwest. Based upon these representations, the Company shall reimburse Executive for reasonable legal fees and costs incurred by Executive in resisting or defending any claim, demand, lawsuit or arbitration proceeding brought against her by her previous employer, Qwest. This obligation of the Company includes all legal expenses and attorneys fees incurred by Executive in connection with responding to demands by Qwest and negotiations with Qwest with respect to any such claims or demands irrespective of whether formal legal proceedings are commenced. This obligation also includes all legal expenses and attorneys fees incurred by Executive in connection with responding to demands by Qwest and negotiations with Qwest prior to the date of this Agreement. The Company shall also indemify and hold harmless Executive from any other costs, expenses, losses, judgments, or awards entered against Executive in any such legal proceeding, including, without limitation, lawsuits or arbitration proceedings, to the fullest extent allowed by law. Executive further agrees that if any lawsuit or arbitration against her is filed by Qwest, she will, to the fullest extent legally permissible, keep the Company fully informed of all developments in connection with any such proceeding and cooperate with Company in connection with its obligations outlined herein. To the extent the Company's reimbursements under this 11 Paragraph 6(f) results in taxable income to the Executive, the Company will provide a tax allowance to offset the federal income, state income, and Medicare portion of FICA tax impact of this payment (to the extent not otherwise deductible) and an additional allowance to offset the federal and state income, and Medicare portion of FICA tax impact of the tax allowance itself. Company Airplane. For a period of time until Executive relocates to New Jersey, but not to extend beyond September 30, 2003, she will be authorized to use a Company provided plane (plane to be provided will be in the class of "corporate jet aircraft") to commute from Denver or Lake Tahoe to New Jersey and from New Jersey to Denver or Lake Tahoe (one round trip per week). To the extent that the use of the Company plane is considered taxable income to Executive the Company will provide a tax allowance to offset the Federal and state Income and Medicare portion of FICA tax impact of this payment (to the extent not otherwise deductible) and an additional allowance to offset the Federal and state Income and Medicare portion of FICA tax impact of the tax allowance itself. The Company also agrees that Executive may designate one other person to travel with her on a Company provided plan for three house-hunting trips during this period. Imputed income resulting from this person's travel will also be grossed-up as described above in this paragraph. As an OG member Executive will have priority use of corporate aircraft for business purposes. 12 Impact of Company Restructuring on Restricted Stock Units, Restricted Shares, Stock Options and Performance Shares. In the event that AT&T Wireless and AT&T Broadband become independent companies from AT&T Corp. through a divestiture, sale or some similar means, all grants made under this Agreement in the form of Restricted Stock Units, Restricted Shares, Stock Options and Performance Shares based on AT&T Corp. stock shall be treated in accordance with the plan developed and approved by the Company's Board of Directors as such plan is applicable to equity granted in 2001 to Executive and other Company executives . Change in Control. In the event of a Change in Control of the Company, severance payments to Executive shall be governed by the Change in Control provisions applicable to OG members approved by the Company's Board of Directors on October 25, 2000. Confidentiality of Trade Secrets and Business Information. Executive agrees that she will not, at any time during her employment or thereafter, disclose or use any trade secret, proprietary or confidential information of the Company or any subsidiary or affiliate of the Company, obtained during the course of her employment, except as required in the course of such employment or with the written permission of the Company or, as applicable, any subsidiary or affiliate of the Company or as may be required by law, provided that, if Executive receives legal process with 13 regard to disclosure of such information, she shall promptly notify the Company and cooperate with the Company in seeking a protective order. Executive agrees that at the time of the termination of her employment with the Company, whether at the instance of the Executive or the Company, and regardless of the reasons therefore, she will deliver to the Company, and not keep or deliver to anyone else, any and all notes, files, memoranda, papers and, in general, any and all physical matter containing information, including any and all documents significant to the conduct of the business of the Company or any subsidiary or affiliate of the Company which are in her possession, except for any documents for which the Company or any subsidiary or affiliate of the Company has given written consent to removal at the time of the termination of the Executive's employment and her personal rolodex, phone book and similar items. Non-competition. In consideration for payments made under this Agreement, including but not limited to Paragraphs 3(a), 3(b), and (4), Executive agrees that she will not, for a period of Two (2) years after her Employment with the Company, establish a relationship with a competitor (including but not limited to an employment or consulting relationship) or engage in any activity which is in conflict with or adverse to the interest of the Company, as defined by the AT&T Non-Competition Guideline (hereinafter referred to as a "Competitive Activity"). Executive recognizes that this obligation includes, and is not limited to, an agreement that she shall not work for a competitor of AT&T 14 Corp. as an executive, consultant, independent contractor or in any other capacity for a period of Two (2) years following the termination of her employment with the Company, regardless of whether Executive or the Company terminates the employment relationship. In addition to Executive's obligations outlined in paragraph 10(a) of this Agreement, any and all payments (except those made from Company-sponsored tax-qualified pension or welfare plans), benefits or other entitlements to which the Executive may be eligible in accordance with the terms hereof, may be forfeited, whether or not in pay status, at the discretion of the Company, if Executive engages in Competitive Activity for a period of Two (2) years following termination of her Employment from the Company, regardless of whether Executive or the Company terminates the employment relationship. The payments, benefits and other entitlements hereunder are being made in part in consideration of the obligations of this paragraph 10 and in particular the post-employment payments, benefits and other entitlements are being made in consideration of, and dependent upon compliance with this paragraph. This paragraph shall apply notwithstanding any other provision of this Agreement. No forfeiture or cancellation shall take place under paragraph 10(b) with respect to any payments, benefits or entitlements hereunder or under any other award agreement, plan or practice unless the Company shall have first given Executive written notice of its intent to so forfeit, or cancel or pay out and Executive has not, within thirty (30) calendar days of giving 15 such notice, ceased such unpermitted Competitive Activity, provided that the foregoing prior notice procedure shall not be required with respect to a Competitive Activity which Executive initiated after the Company had informed the Executive in writing that it believed such Competitive activity violated this paragraph 10 or the AT&T Non-Competition Guideline. Nothing in this Section 10 shall prohibit the Executive from being a passive owner of not more than one percent (1%) of the outstanding common stock, capital stock and equity of any firm, corporation or enterprise so long as the Executive has no active participation in the management of business of such firm, corporation or enterprise. If the restrictions stated herein are found by a court to be unreasonable, the Parties agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall be resolved by third party mediation of the dispute and, failing that, by binding arbitration, to be held in New Jersey, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The Company shall pay the costs of the arbitrator or the mediator but not the legal fees of 16 Executive; provided, however, that the Company shall bear all such costs if Executive prevails in such arbitration on any material issue. Non-Interference. During Executive's employment and for a period of Two (2) years following the effective date of Executive's termination, for any reason, from the Company, Executive agrees not to directly or indirectly recruit, solicit or induce, any employees, consultants or independent contractors of the Company to terminate, alter or modify their employment or other relationship with the Company. During Executive's employment and for a period of Two (2) years following the effective date of Executive's termination, for any reason, from the Company, Executive agrees not to directly or indirectly solicit any customer or business partner of the Company to terminate, alter or modify their relationship with the Company or interfere with the Company's relationships with any of its customers or business partners on behalf of any enterprise that directly or indirectly competes with the Company. Injunction. If Executive commits a breach of any of the provisions of Paragraphs 9 through 12 or any part thereof, the Company shall have the right and remedy to have the provisions of this Agreement specifically enforced by way of preliminary and/or permanent injunction by any court having jurisdiction, it being acknowledged and agreed by Executive and Company that any such breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. Furthermore, this Agreement is intended to protect the 17 proprietary rights of the Company in important ways, and even the threat of any misuse of the technology or other confidential information of the Company would be irreparably harmful because of the importance of that technology and confidential information. In light of these considerations, Executive agrees that a court of competent jurisdiction should immediately enjoin any breach or threatened breach of Paragraphs 9 through 12 of this Agreement, upon Company's request, and the Company is released from the requirement of posting any bond in connection with temporary or preliminary injunctive relief, to the extent permitted by law. Such right to injunctive relief shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. Company Initiated Termination of Employment or Good Reason Termination. Should the Company terminate Executive's employment without Cause or should Executive terminate her employment for Good Reason, Executive will receive a payment equivalent to the payment to which other similarly situated Company executives would be entitled at the time of the termination of her employment under the terms of the Senior Officer Separation Plan applicable to OG members. This payment shall be payable to Executive within ninety (90) days of her last day of employment with the Company. For termination by Executive for Good Reason or by the Company without Cause, Executive shall also be entitled to the following: (a) accelerated vesting of Stock Options, Restricted Shares and Restricted Stock Units in accordance with the terms applicable to Company initiated 18 terminations; (b) payment of Annual Bonus in the target amount for the year in which the termination occurs, prorated to reflect length of employment during that year; (c) outstanding Performance Shares shall continue to vest; (d) immediate vesting of the Special Deferral Account set forth in paragraph 5(c); (e) payment to Executive of any unpaid hiring bonus under paragraphs 5(a), (b), and (d) of this Agreement; (f) coverage for herself and eligible dependents under the Senior Management Separation Medical Plan; (g) continuation of Senior Management Universal Life Insurance; and (h) financial counseling for one year, including income tax return preparation for year of termination and a federal tax allowance to Executive for the cost of the financial counseling in accordance with Company practices applicable to other Company executives. Termination for Cause and Good Reason. For purposes of this Agreement, "Cause" and "Good Reason" shall be defined as follows: a) "Good Reason" termination shall mean any termination of Executive's Company employment initiated by Employee, resulting from any of the following events without Employee's express written consent, which are not cured by the Company within twenty (20) days of Employee giving the Company written notice thereof: (i) Executive's demotion to a position which is not of a rank and responsibility comparable to members of the 19 current Operations Group or those of a similar/replacing governance body; provided, however, that the Company's decision not to continue an Operations Group shall not be Good Reason, and provided, further, that (1) while a change in the position to which Executive reports will constitute Good Reason, changes in the specific individuals to whom Executive reports shall not, alone, constitute Good Reason, and/or (2) a reduction in your business unit's budget or a reduction in your business unit's head count, by themselves, do not constitute Good Reason, or (ii) A reduction in Executive's "Total Annual Compensation" (defined as the sum of Annual Base Salary Rate, Target Annual Incentive and "Target Annual Long Term Incentive Grants") for any calendar or fiscal year, as applicable, to an amount that is less than the Total Annual Compensation that existed in the prior calendar or fiscal year, as applicable. For purposes of this Paragraph the dollar value of the "Target Annual Long Term Incentive Grants" shall exclude the value of any special one-time or periodic long-term incentive grants, and shall be determined by valuing Performance Shares, Stock Units, Restricted Stock and Restricted 20 Stock Units, etc., at the market share price utilized in valuing the annual Senior Management compensation structures in the materials presented to the Compensation and Employee Benefits Committee of the Company's Board of Directors ("the Committee") when authorizing such grants, and assuming 100% performance achievement if such grants include performance criteria. Stock Options and Stock Appreciation Rights will be valued by the Black-Scholes methodology (and related share price) as utilized in the materials presented to the Committee when authorizing such grants. b) Cause termination shall mean: (i) Executive's conviction (including a plea of guilty or nolo contendere) of a crime involving theft, fraud, dishonesty or moral turpitude; (ii) violation by Executive of the Company's Code of Conduct or Non-Competition Guideline; (iii) gross omission or gross dereliction of any statutory, common law or other duty of loyalty to the company or any of its affiliates; or 21 (iv) repeated failure to carry out the duties of Executive's position despite specific instruction to do so. c) A termination for Cause shall not take effect unless the provisions of this paragraph (c) are complied with. The Executive shall be given written notice by the Company of the intention to terminate her for Cause, such notice (A) to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which the proposed termination for Cause is based and (B) to be given within six (6) months of the Company learning of such act or acts or failure or failures to act. The Executive shall have ten (10) calendar days after the date that such written notice has been given to the Executive in which to cure such conduct, to the extent such cure is possible. If she fails to cure such conduct, the Executive shall then be entitled to a hearing before the President or such other persons or committees as the Board of Directors or the Chief Executive Officer may direct or appoint. Such hearing shall be held within fifteen (15) calendar days of such notice to the Executive, provided she requests such hearing within ten (10) calendar days of the written notice from the Company of the intention to terminate her for Cause. If, within five (5) calendar days following such hearing, the Executive is furnished written notice by the Company confirming that, in its judgment, grounds for Cause on the basis of the original notice exist, she shall thereupon be terminated for Cause. 22 Termination Without Good Reason or For Cause. Should Executive leave her employment without Good Reason ("Voluntary Termination"), Executive shall receive nothing further under this Agreement except for (i) Stock Options, Performance Shares, Restricted Shares and Restricted Stock Units already vested and (ii) if Voluntary Termination occurs after September 30, 2003, benefits under the then-applicable Senior Management Separation Medical Plan. In the event of a Voluntary Termination, Executive's Stock Options, Performance Shares, Restricted Shares and Restricted Stock Units awarded but not vested shall be cancelled. If Executive is terminated for Cause at any time during this Agreement, she shall receive nothing further from the Company as of the date of her termination and all Stock Options, Performance Shares, Restricted Shares and Restricted Stock Units vested but not exercised or paid shall be cancelled. Special Voluntary Termination. If Executive resigns after September 30, 2003, and is not the President and CEO of the AT&T Consumer Services unit with its own tracking stock or of another publicly traded AT&T business unit spin-off ("Special Voluntary Termination") Executive's resignation shall be considered as a termination for "Good Reason" and she shall be entitled to the benefits set forth in paragraph 16 as well as the benefits set forth in paragraph 14 above. Death and Long Term Disability. 23 Termination Due to Death. In the event that the Executive's employment is terminated due to her death, her estate or her beneficiaries, as the case may be, shall be entitled to the following benefits: (i) Annual Bonus at target level for such year prorated for the time on the payroll in the performance year, payable in a single installment as soon as practicable following Executive's death; (ii) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable in accordance with the terms of the grants applicable to death; (iii) lapse of the restrictions on Restricted Stock Units and Restricted Stock; (iv) payout at target for each Performance Share cycle in which the Executive was participating at the time of her death, prorated for the amount of time on the payroll in the applicable three (3) year cycle (provided, however, for Seasoned Performance Shares described in Paragraph 4(e) there is no prorate for the period of time in each performance cycle prior to the Effective Date); (v) vesting and payout of the Special Deferral Account under Paragraph 5(c); (vi) payment of any unpaid cash hiring bonus under paragraphs 5(a), (b), and (d); and (vii) financial counseling for one year including individual tax return preparation for Executive for the year of death with a federal tax allowance for the cost of the financial counseling calculated in accordance with Company practices applicable to other executives. Termination Due to Disability. The Company shall have the right to terminate Executive's employment due to her Disability. In the event that the 24 Executive's employment is terminated due to her Disability, she shall be entitled to the following benefits: (i) disability benefits in accordance with a disability program then in effect for senior executives of the Company; (ii) Annual Bonus at target level for such year prorated for the time on the payroll in the performance year, payable in a single installment as soon as practicable after termination due to Disability; (iii) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable in accordance with the terms of the grants applicable to Disability; (iv) lapse of the restrictions on Restricted Stock Units and Restricted Stock; (v) payout at target for each Performance Share cycle in which the Executive was participating at the time of her Disability, prorated for the amount of time on the payroll in the applicable three (3) year cycle (provided, however, for Seasoned Performance Shares described in Paragraph 4(e) there is no prorate for the period of time in each performance cycle prior to the Effective Date); (vi) vesting and payout of the Special Deferral Account under paragraph 5(c); (vii) payment of any unpaid cash hiring bonus under paragraph 5(a), (b), and (d); and (viii) financial counseling for one year including individual tax return preparation for Executive for the year of termination due to Disability, with a federal tax allowance for the cost of the financial counseling in accordance with Company practices applicable to other Company executives. For purposes of this paragraph 18, "Disability" shall mean the inability of Executive to perform her duties under this Agreement by reason of any physical or 25 mental impairment that is expected to prevent Executive from performing her duties for a period exceeding twelve (12) months. Provided, however, that nothing in this paragraph or this Agreement shall prevent the Company from reassigning Executive's job duties on a temporary basis during any period in which the Executive is receiving benefits under the Company's applicable short-term disability benefits plan until the Executive returns to work full-time or is terminated due to Disability. Such temporary reassignment of duties would not be a Good Reason termination. Membership on Boards. Executive may continue to serve on the Boards of Directors or Advisory Committees of other companies in positions held prior to the Effective Date assuming that the other company is not a competitor of the Company as determined by the Secretary of the Company's Board of Directors. Executive agrees to provide a list, as soon as practicable following the Effective Date, of such Board and Committee memberships so that the Company may make such determination. Other Terms. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey, without regard to conflict of law rules. If any provision of this Agreement is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remaining provisions of this Agreement, without regard to the 26 invalid portion, and any such invalid provisions shall be reformed and construed to the extent necessary to permit their enforceability so as to reflect the intent of the parties hereto. Executive hereby represents and warrants that (i) Executive has the right to enter into this Agreement with the Company and to grant the rights contained in this Agreement, and (ii) the provisions of this Agreement do not violate any other contracts or agreements that the Executive has entered into with any other individual or entity. Executive agrees that the terms of this Agreement are reasonable and properly required for the protection of the Company's legitimate business interests. If any of the covenants or provisions contained in this Agreement, or any part thereof, is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remainder of the covenant, covenants or provisions which shall be given the maximum effect possible without regard to the invalid portions and the remainder shall then be fully enforceable. The article headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. This Agreement sets forth the entire agreement and understanding of the Parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. 27 This Agreement may not be amended, modified, superseded or waived, except by a written instrument executed by both Parties hereto, or, in the case of a waiver, by the party waiving compliance. The failure of either Party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either Party of the breach of any term or covenant contained in this Agreement whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. Duration of Terms. The respective rights and obligations of the parties hereunder shall survive any termination of Executive's employment or this Agreement to the extent necessary to the intended preservation of such rights and obligations. Acknowledgment. Executive acknowledges that before signing this Agreement, Executive was given the opportunity to read it, evaluate it and discuss it with Executive's personal advisors, Executive's attorney and with representatives of the Company. Executive further acknowledges that the Company has not provided Executive with any legal advice regarding this Agreement. Assignment. The Company specifically reserves the right to assign the terms of this Agreement to any successor, whether the successor is the 28 result of any sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any form or combination thereof, provided that such assignee or transferee assumes the liabilities, obligations and duties of the Company as set forth in this Agreement. No sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any form or combination thereof shall be construed as a termination of Executive's employment and will not trigger the Company's obligations under paragraphs 14, 16 or 17 of this Agreement. Release for Severance Payments. The Company shall be required to pay Executive payments upon her termination under this Agreement only if Executive executes a release upon her termination releasing the Company from any liability arising from her employment. This release shall include, but not be limited to, claims arising under employment statutes such as the Civil Rights Act of 1964, as amended, and the Age Discrimination in Employment Act. In the event of any termination of employment under this Agreement, the Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment she may obtain. 29 Vacation. The Executive shall be entitled to five (5) weeks paid vacation in each calendar year of employment which shall accrue and otherwise be subject to the Company's vacation policy for senior executives. Indemnity. a) The Company agrees that if the Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that she is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust, limited liability company or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent legally permitted or authorized by the Company's certificate of incorporation or bylaws or resolutions of the Company's Board of Directors or, if greater, by the laws of the State of New Jersey, against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines, ERISA excise taxes or other liabilities or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to 30 be a director, member, employee or agent of the Company or other entity and shall inure to the benefit of the Executive's heirs, executors and administrators. The Company shall advance to the Executive all reasonable costs and expenses incurred by her in connection with a Proceeding within twenty (20) calendar days after receipt by the Company of a written request for such advance. Such request shall include an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that she is not entitled to be indemnified against such costs and expenses. (b) Neither the failure of the Company (including its board of directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of any proceeding concerning payment of amounts claimed by the Executive under Section 16(a) above that indemnification of the Executive is proper because she has met the applicable standard of conduct, nor a determination by the Company (including its board of directors, independent legal counsel or stockholders) that the Executive has not met such applicable standard of conduct, shall create a presumption that the Executive has not met the applicable standard of conduct. (c) The Company agrees to continue and maintain a directors' and officers' liability insurance policy covering the Executive to the extent the Company provides such coverage for its other executive officers. Such insurance coverage shall be maintained for at least six (6) years following any Change of Control. 31 (d) Following the termination of her employment for any reason, Executive shall reasonably cooperate with the Company with respect to the prosecution or defense by the Company of any legal proceedings in which Executive is or ought to be a witness. Executive's obligation to cooperate pursuant to this paragraph shall continue until such legal proceedings are concluded or her services as a witness or consultant are no longer requires. Executive shall be compensated for such time spent by her at the request of the Company at an hourly rate equal to her effective hourly rate (including base salary and target short term bonus) immediately preceding the termination of her employment Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed given when (a) delivered personally, (b) sent by certified mail, postage prepaid, return receipt requested or (c) delivered by overnight courier; to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give such notice of: If to the Company: AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ 07920 Attention: Executive Vice President Human Resources 32 If to the Executive: Ms. Betsy Bernard c/o AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ 07920 IN WITNESS WHEREOF, the Parties have executed this Agreement. 4/6/01 /s/ Betsy Bernard - ------------------------- ------------------------------- Dated Betsy Bernard 4/6/01 /s/ Mirian Graddick-Weir - ------------------------- ------------------------------- Dated AT&T Corp. By: Mirian Graddick-Weir EVP - Human Resources EX-10.III.A.23 7 e56632ex10-iii_a23.txt FORM OF EMPLOYMENT AGREEMENT Exhibit (10)(iii)(A)23 EMPLOYMENT AGREEMENT This Agreement, effective October 25, 2001, by and between William T. Schleyer ("Executive") and AT&T Corp., a New York Corporation with its principal place of business at 295 N. Maple Avenue, Basking Ridge, New Jersey ("Company") (collectively "the Parties"): WHEREAS, Executive seeks employment with the Company; WHEREAS, the Company seeks to secure Executive's services on the terms provided herein; and NOW THEREFORE, in consideration of the mutual covenants set forth below, the Parties agree as follows: Term of Employment. Effective October 25, 2001 ("Effective Date"), the Company will hire Executive on a full time basis to render exclusive services to the Company under the terms set forth in this Agreement. Executive accepts this employment and will render services as required by the Company using Executive's best efforts. This Agreement provides for Executive's employment to commence on the Effective Date and to conclude on the third anniversary of the Effective Date, unless extended in writing by both Executive and the Company or terminated earlier under the terms and conditions provided for in this Agreement. Title of Executive. At Effective Date, Executive's title shall be Chief Executive Officer of AT&T Broadband. 2 Compensation. Only the cash compensation set forth in this paragraph 3 (with the exception as noted in paragraph 3(b)) shall be counted in the calculation of Executive's pension-related benefits under any AT&T pension plan applicable to management employees (or any successor thereto) and/or any other Company pension plan or benefit that might apply to Executive during his employment with the Company. In the event of a conflict between this Agreement and a particular plan regarding the inclusion or exclusion of compensation under this paragraph from the applicable pension plan or benefit, the plan and not this Agreement shall control. (a) Base Salary. Executive shall receive salary compensation ("Base Salary") from the Company in payment for Executive's services during his employment under this Agreement at an annual rate of Nine Hundred Twenty-Five Thousand ($925,000.00) dollars per year, subject to review by the Company's Compensation Committee on an annual basis with regard to the possibility of an increase in Base Salary provided, however, Executive's Base Salary rate shall not be decreased. The Company shall pay Executive the Base Salary in monthly installments which shall be pro-rated to reflect time worked for any year in which Executive does not work a full year. 3 (b) Annual Bonus. The Annual Bonus ("Annual Bonus") for Company executives is based on measures of Company and individual performance. The Company makes no representations under the terms of this Agreement regarding criteria for or amounts of bonuses paid during the term of this Agreement. However, Executive shall be entitled to receive an annual bonus during the term of this Agreement under the same terms and conditions as other Company executives. Beginning in 2002, the target amount for Executive's Annual Bonus shall not be less than one hundred percent (100%) of Base Salary, Nine Hundred Twenty-Five Thousand ($925,000.00) Dollars, subject to review by the Company's Compensation Committee on an annual basis with regard to the possibility of an increased Annual Bonus and subject to the caveat that the Company's financial performance could result in a decrease or elimination of the Annual Bonus for any year(s). Executive will not be eligible for a bonus in 2001. However, the Company shall pay him One Hundred Fifty-Four Thousand dollars ($154,000.00) in or about March 2002 for the portion of performance year 2001 in which he was employed by the Company. Executive's 2001 bonus shall not be considered income for purposes of any Company benefit plan. AT&T Long Term Incentive Compensation. All compensation under this Paragraph 4 shall be subject to the terms of the AT&T 1997 Long Term Incentive Program (or its successor) and the AT&T Non-Competition Guideline (and any successor thereto), attached to this Agreement as 4 Attachments A and B, respectively. The awards described below in paragraphs (a) and (b) comprise the Annual Long Term Incentive Grant for 2001 and shall be equal at the time of the grant to Eight Million Dollars ($8,000,000.00). Any future Annual Long Term Incentive Grants, if any, will be decided by the Company's Board of Directors and Executive shall be eligible for same on the same terms and conditions of other similarly-situated Company executives. All compensation under this paragraph 4 is conditioned upon Executive's employment with the Company as of the vesting date, except to the extent modified by the terms of the Senior Officer Separation Plan in effect at the time of Executive's termination from employment without Cause or For Good Reason, as provided in paragraph 14 or to the extent required under paragraph 19. 2001 AT&T Stock Options. On the Effective Date, Company will grant Executive options to purchase Four Hundred Thirty Thousand Eight Hundred (430,800) shares of AT&T Common Stock. For stock options granted under this paragraph 4(a), the term of the stock option grant is ten years and the stock options will vest Twenty-Five percent (25%) annually beginning on the first anniversary of the Effective Date. The stock option price shall be the fair market value of AT&T Common Stock on the Effective Date. Restricted Shares. On the Effective Date, the Company shall grant Executive One Hundred Fourteen Thousand Four Hundred Fifty (114,450) AT&T Restricted Shares. The Restricted Shares awarded under this 5 paragraph 4(b) shall vest Thirty-Three and One-Third percent (33 1/3%) annually beginning on the first anniversary of the Effective Date. Restitution for Certain Forfeitures. In order to address certain forfeitures associated with Executive leaving his prior employer, to incent Executive to join the Company, and to serve as consideration for certain of Executive's commitments under this Agreement, including paragraphs 9 through 12, the Company shall provide to Executive on the Effective Date: (i) a one-time hiring bonus in the form of Two Hundred Seventy-Seven Thousand (277,000) stock options. The stock options awarded under this paragraph 4(c)(i) shall have a term of ten years and shall vest Thirty-Three and One-Third percent (33 1/3%) annually beginning on the first anniversary of the Effective Date. The stock option price shall be the fair market value of AT&T Common Stock on the Effective Date. (ii) a one-time hiring bonus in the form of Fifty-Six Thousand Two Hundred (56,200) restricted shares that shall vest Fifty percent (50%) annually beginning on the first anniversary of the Effective Date. Other Compensation and Benefits. Perquisites. During Executive's employment under this Agreement, the Company shall provide Executive with the perquisites of employment as are provided to other Company executives at a level of authority commensurate to Executive and shall reimburse Executive for reasonable 6 and necessary business expenses. Executive shall not, however, be provided a car allowance but shall be provided signing authority for a Company airplane. Benefits. 1. Upon Effective Date and during Executive's employment under this Agreement, the Company shall provide to Executive coverage under benefit programs in accordance with those Executive, mid-career hire and Senior Management benefit plans as are generally made available to other Company executives. The terms of the applicable plan and not this Agreement govern the provision of benefits to Executive under the specific plans. Moreover, the Company reserves the right to modify and/or eliminate any benefit plan applicable to Executive; provided, however, that any modification or deletion of a benefit plan shall not affect Executive to any greater or lesser extent than any other Company executive. 2. Should the Company separate itself from ownership of its business unit known as AT&T Broadband (regardless of the form of the divestiture, including but not limited to, a sale of assets or spin-off), then Executive shall cease participating in the Company's benefit plans and shall become a participant in the benefit plans applicable to AT&T Broadband. AT&T Broadband shall have the right to modify and/or eliminate any benefit plan applicable to Executive; provided, however, that 7 any modification or deletion of a benefit plan shall not affect Executive to any greater or lesser extent than any other AT&T Broadband executive. Temporary Living Expenses. For the duration of Executive's employment, the Company shall pay for his housing costs in Denver, Colorado. The Company anticipates that this cost will not exceed five thousand dollars ($5,000.00) per month; provided, however, that if the costs exceed five thousand dollars ($5,000.00) per month, then Executive may request an increase from the Company to cover costs in excess of the amounts paid under this paragraph. The Temporary Living Expenses covered under this paragraph are the following: rental cost of the residence, rental cost of the furniture, maintenance for the residence and utilities. All payments for Temporary Living Expenses under this paragraph shall be grossed-up to approximate as closely as possible federal income taxes, state income taxes and the Medicare portion of FICA taxes owed by Executive for such payments. Financial Counseling. The Company shall pay financial counseling fees to Executive's personal financial counselor on his behalf during Executive's employment with the Company. The services reimbursed shall be those set forth in the Company's financial counseling plan applicable to Executives, except that Executive will not be required to use one of the three Company approved financial counseling firms. Fees subject to reimbursement shall include fees for individual financial counseling, preparation of federal and state income tax returns and preparation of 8 Executive's will and other estate planning documents. The Company shall pay Executive a federal tax allowance on the reimbursed fees, calculated in accordance with Company practices applicable to other Company executives. Indemnification and Directors' and Officers' Insurance. The Company shall indemnify Executive for any action taken in the course and scope of his employment to the fullest extent permitted by law. If provided to other comparable Company executives, the Company shall provide Directors' and Officers' Insurance to Executive during and after his employment on the same terms and conditions applicable to other comparable Company executives. Impact of Company Restructuring on Restricted Stock Units, Restricted Shares and Stock Options. In the event that AT&T Broadband becomes an independent company from AT&T Corp. through a divestiture, sale or some similar means, all grants made under this Agreement or awarded to Executive during his employment in the form of Restricted Stock Units, Restricted Shares and Stock Options based on AT&T Corp. stock shall be treated in accordance with the plan developed and approved by the Company's Board of Directors for equity granted to Executive and other Company executives . Change in Control. In the event of a Company-initiated termination without Cause or for Good Reason within two years following a Change in Control 9 of the Company, as defined in the 1997 AT&T Long Term Incentive Program, severance payments to Executive shall be governed by the Change in Control provisions applicable to Operating Group members approved by the Company's Board of Directors on October 25, 2000. Treatment of equity upon a change in control shall be governed by the terms of the applicable grant. For purposes of this paragraph only, the terms "Cause" and "Good Reason" shall have the definitions set forth in the then-applicable Senior Officer Separation Plan with respect to Changes in Control. Confidentiality of Trade Secrets and Business Information. Executive agrees that he will not, at any time during his employment or thereafter, disclose or use any trade secret, proprietary or confidential information of the Company or any subsidiary or affiliate of the Company, obtained during the course of his employment, except as required in the course of such employment or with the written permission of the Company or, as applicable, any subsidiary or affiliate of the Company or as may be required by law, provided that, if Executive receives legal process with regard to disclosure of such information, he shall promptly notify the Company and cooperate with the Company in seeking a protective order. 10 Confidentiality Upon Termination. Executive agrees that at the time of the termination of his employment with the Company, whether at the instance of Executive or the Company, and regardless of the reasons therefore, he will deliver to the Company, and not keep or deliver to anyone else, any and all notes, files, memoranda, papers and, in general, any and all physical (including electronic) matter containing information, including any and all documents significant to the conduct of the business of the Company or any subsidiary or affiliate of the Company which are in his possession, except for any documents for which the Company or any subsidiary or affiliate of the Company has given written consent to removal at the time of the termination of Executive's employment and his personal rolodex. Non-competition. In consideration for payments made under this Agreement, including but not limited to Paragraphs 3 and 4, Executive agrees that he will not, for a period of Two (2) years after his Employment with the Company, establish a relationship with a competitor (including but not limited to an employment or consulting relationship) or engage in any activity which is in conflict with or adverse to the interest of the Company, as defined on the Effective Date by the AT&T Non-Competition Guideline (hereinafter referred to as a "Competitive Activity"). Executive recognizes that this obligation includes, and is not limited to, an agreement that he shall not work for a 11 competitor of AT&T Corp. as an executive, consultant, independent contractor or in any other capacity for a period of Two (2) years following the termination of his employment with the Company, regardless of whether Executive or the Company terminates the employment relationship. In addition to Executive's obligations outlined in paragraph 10 of this Agreement, any and all payments (except those made from Company-sponsored tax-qualified pension or welfare plans), benefits or other entitlements to which Executive may be eligible in accordance with the terms hereof, may be forfeited, whether or not in pay status, at the discretion of the Company, if Executive engages in Competitive Activity for a period of Two (2) years following termination of his Employment from the Company, regardless of whether Executive or the Company terminates the employment relationship. The payments, benefits and other entitlements hereunder are being made in part in consideration of the obligations of this paragraph 10 and in particular the post-employment payments, benefits and other entitlements are being made in consideration of, and dependent upon compliance with this paragraph. This paragraph shall apply notwithstanding any other provision of this Agreement. No forfeiture or cancellation shall take place under paragraph 10 with respect to any payments, benefits or entitlements hereunder or under any other award agreement, plan or practice unless the Company shall have first given Executive written notice of its intent to so forfeit, or cancel or 12 pay out and Executive has not immediately ceased such Competitive Activity, provided that the foregoing prior notice procedure shall not be required with respect to a Competitive Activity which Executive initiated after the Company had informed Executive in writing that it believed such Competitive activity violated this paragraph 10 or the AT&T Non-Competition Guideline and it shall not be applicable to Executive's obligation to refrain from criticizing, denigrating or otherwise speaking adversely or disclosing negative information about the Company. Nothing in this paragraph 10 shall prohibit Executive from being a passive owner of not more than ten percent (10%) of the outstanding common stock, capital stock and/or equity of any firm, corporation or enterprise so long as Executive has no active participation in the management of business of such firm, corporation or enterprise. Provided, however, that Executive may own no more than three percent (3%) of the outstanding common stock, capital stock and/or equity of any firm, corporation or enterprise that is a competitor of the Company as of the Effective Date so long as his ownership of a competitor or competitors does not comprise in the aggregate more than ten percent (10%) of his net worth as of the Effective Date and so long as Executive has no active participation in the management of business of such firm, corporation or enterprise. Moreover, Executive agrees that during his employment with the Company he will not increase his ownership in any competitor in which he holds more than one percent (1%) of the outstanding common stock, capital 13 stock and/or equity as of the Effective Date nor will he acquire during his employment an ownership interest of more than one percent (1%) in any competitor in which he does not hold an ownership interest of more than one percent (1%) as of the Effective Date. A competitor is an enterprise or business who is engaged in or has announced its intention to engage in, any of the businesses engaged in by the Company that comprise or will comprise more than two percent (2%) of both the Company and the competitor's revenue. If the restrictions stated herein are found by a court or an arbitrator to be unreasonable, the Parties agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court or arbitrator shall revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall be resolved by third party mediation of the dispute and, failing that, by binding arbitration, to be held in the metropolitan area of Executive's work location as assigned by the Company. The arbitration shall be conducted according to the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The Company shall pay the costs of the arbitrator or the mediator but not the attorneys' fees of Executive; provided, however, that the Company shall 14 reimburse Executive for attorneys' fees if Executive prevails in such arbitration on any material issue. Non-Interference. During Executive's employment and for a period of Two (2) years following the effective date of Executive's termination, for any reason, from the Company, Executive agrees not to directly or indirectly recruit, solicit or induce, any employees, consultants or independent contractors of the Company to terminate, alter or modify their employment or other relationship with the Company. During Executive's employment and for a period of Two (2) years following the effective date of Executive's termination, for any reason, from the Company, Executive agrees not to directly or indirectly solicit any customer or business partner of the Company to terminate, alter or modify its relationship with the Company or interfere with the Company's relationships with any of its customers or business partners on behalf of any enterprise that directly or indirectly competes with the Company. Injunction. If Executive commits a breach of any of the provisions of paragraphs 8 through 12 or any part thereof, the Company shall have the right and remedy to have the provisions of this Agreement specifically enforced by way of preliminary and/or permanent injunction by any court having jurisdiction, it being acknowledged and agreed by Executive and Company that any such breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. Furthermore, this Agreement is intended to protect the 15 proprietary rights of the Company in important ways, and even the threat of any misuse of the technology or other confidential information of the Company would be irreparably harmful because of the importance of that technology and confidential information. In light of these considerations, Executive agrees that a court of competent jurisdiction should immediately enjoin any breach or threatened breach of paragraphs 8 through 12 of this Agreement, upon Company's request, and the Company is released from the requirement of posting any bond in connection with temporary or preliminary injunctive relief, to the extent permitted by law. Such right to injunctive relief shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. Company Initiated Termination of Employment or Good Reason Termination. For termination by Executive for Good Reason or by the Company without Cause, the Senior Officer Separation Plan applicable to AT&T Broadband (or a successor thereto) at the time of the termination shall apply to Executive. For purposes of this paragraph 14, the terms "Good Reason" and "Cause" shall have the same meaning as the Senior Officer Separation Plan. If, at the time of his termination without Cause or with Good Reason, Company contributions on his behalf to the savings and pension plans (then in effect) have not vested, then the Company shall pay an amount to Executive equal to those accrued benefits as soon as practicable after termination. This payment shall be made from the Company's operating income. Paragraph 7 of this Agreement and not this paragraph applies to 16 terminations without Cause or with Good Reason following a Change in Control. Termination Without Good Reason or For Cause. Should Executive leave his employment without Good Reason ("Voluntary Termination"), Executive shall receive nothing further under this Agreement except that Stock Options and/or Restricted Shares already vested may be exercised according to the terms of the applicable grant. In the event of a Voluntary Termination, Executive's Stock Options and Restricted Shares awarded but not vested shall be cancelled. If Executive is terminated for Cause at any time during this Agreement, he shall receive nothing further from the Company as of the date of his termination and all Stock Options and Restricted Shares vested but not exercised or paid shall be cancelled. Death and Long Term Disability. This paragraph 16 shall apply in lieu of the Senior Officer Separation Plan in the event of termination due to Death or Disability. Termination Due to Death. In the event that Executive's employment is terminated due to his death, his estate or his beneficiaries, as the case may be, shall be entitled to the following benefits: (i) Annual Bonus at target level for such year prorated for the time on the payroll in the performance year, payable in a single installment as soon as practicable following Executive's death; (ii) all outstanding Stock Options and Restricted Shares shall vest and become exercisable if provided for and, if so, in accordance 17 with the terms of the provisions in the applicable grants governing vesting and exercisability in the event of death; and (iii) financial counseling for one year including individual tax return preparation for Executive for the year of death with a federal tax allowance for the cost of the financial counseling calculated in accordance with Company practices applicable to other executives. Termination Due to Disability. The Company shall have the right to terminate Executive's employment due to his Disability. In the event that Executive's employment is terminated due to his Disability, he shall be entitled to the following benefits: (i) disability benefits in accordance with a disability program then in effect for senior executives of the Company (although the terms of such disability program shall govern exclusively Executive's rights to benefits thereunder); (ii) Annual Bonus at target level for such year prorated for the time on the payroll in the performance year, payable in a single installment as soon as practicable after termination due to Disability; (iii) all outstanding Stock Options and Restricted Shares, whether or not then exercisable, shall become exercisable and shall remain exercisable if provided for and in accordance with the terms of the grants applicable to Disability; and (iv) financial counseling for one year including individual tax return preparation for Executive for the year of termination due to Disability, with a federal tax allowance for the cost of the financial counseling in accordance with Company practices applicable to other Company executives. For purposes of this paragraph 16, "Disability" shall 18 mean the inability of Executive to perform his duties under this Agreement by reason of any physical or mental impairment that is expected to prevent Executive from performing his duties for a period exceeding three (3) months. Provided, however, that nothing in this paragraph or this Agreement shall prevent the Company from reassigning Executive's job duties on a temporary basis during any period in which Executive is receiving benefits under the Company's applicable short-term disability benefits plan until Executive returns to work full-time or is terminated due to Disability. Such temporary reassignment of duties would not be a Good Reason termination. Membership on Boards. Executive may continue to serve on the Boards of Directors or Advisory Committees of other companies in positions held prior to the Effective Date assuming that the other company is not a competitor of the Company as determined by the Secretary of the Company's Board of Directors. Executive agrees to provide a list, as soon as practicable following the Effective Date, of such Board and Committee memberships so that the Company may make such determination. 17. Other Terms. (a) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Colorado, without regard to conflict of law rules. If any provision of this Agreement is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remaining provisions of this Agreement, without regard 19 to the invalid portion, and any such invalid provisions shall be reformed and construed to the extent necessary to permit their enforceability so as to reflect the intent of the Parties hereto. (b) Executive hereby represents and warrants that Executive has the right to enter into this Agreement with the Company and to grant the rights contained in this Agreement, and the provisions of this Agreement do not violate any other contracts or agreements that Executive has entered into with any other individual or entity. (c) Executive agrees that the terms of this Agreement are reasonable and properly required for the protection of the Company's legitimate business interests. If any of the covenants or provisions contained in this Agreement, or any part thereof, is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remainder of the covenant, covenants or provisions which shall be given the maximum effect possible without regard to the invalid portions and the remainder shall then be fully enforceable. The article headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. This Agreement may not be amended, modified, superceded or waived, except by a written instrument executed by both Parties hereto, or, in the case of a waiver, by the Party waiving noncompliance. The failure of either Party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No 20 waiver by either Party of the breach of any term or covenant contained in this Agreement whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such breach, or waiver of the breach of any other term or covenant contained in this Agreement. 18. Duration of Terms. The respective rights and obligations of the Parties hereunder shall survive any termination of Executive's employment or this Agreement to the extent necessary for the intended preservation of such rights and obligations. 19. End of Agreement. Should Executive remain employed for the three year term of this Agreement, all stock options, restricted shares and restricted stock units awarded to Executive under either this Agreement or during the term of his employment shall vest and remain exercisable for the full duration available under the terms applicable to each grant of stock options, restricted shares or restricted stock units. Executive shall not be entitled to severance benefits for termination at the expiration of this Agreement; provided, however, that if, at the time of his termination at the expiration of this Agreement, Company contributions on his behalf to the savings and pension plans (then in effect) have not vested, then the Company shall pay an amount to Executive equal to those accrued benefits as soon as practicable after termination. This payment shall be made from the Company's operating income. 21 20. Acknowledgment. Executive acknowledges that before signing this Agreement, Executive was given the opportunity to read it, evaluate it and discuss it with Executive's personal advisors, Executive's attorney and with representatives of the Company. Executive further acknowledges that the Company has not provided Executive with any legal advice regarding this Agreement. 21. Assignment. The Company specifically reserves the right to assign the terms of this Agreement to any successor, whether the successor is the result of any sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any form or combination thereof. No sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any form or combination thereof shall be construed as a termination of Executive's employment. 22. Release for Severance Payments. The Company shall be required to pay Executive payments upon his termination under this Agreement only if Executive executes a release upon his termination releasing the Company from any liability arising from his employment. Executive's obligation under this paragraph 22 shall apply regardless of the reason for the termination and regardless of whether the termination was without Cause or with Good Reason. A release acceptable under this paragraph 22 shall include, but not be limited to, claims arising under employment statutes such as the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act and claims for breach of contract. 22 In the event of any termination of employment under this Agreement, Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment he may obtain. 23. Cooperation After Termination of Employment. Following the termination of his employment for any reason, Executive shall reasonably cooperate with the Company with respect to the prosecution or defense by the Company of any legal proceedings in which Executive is or ought to be a witness. Executive's obligation to cooperate pursuant to this paragraph shall continue until such legal proceedings are concluded or his services as a witness or consultant are no longer required. The Company shall reimburse Executive for all travel and other out-of-pocket expenses required by his obligations under this paragraph. 24. Confidentiality. Executive agrees that unless required by law or required in order to enforce its terms, he shall not disclose the terms of this Agreement to anyone outside of his immediate family, his attorney, his accountant and his financial planner. 25. Effect of Separation of Telecommunications and Cable Businesses. Executive acknowledges that as of the Effective Date, the Company is comprised generally of two businesses, cable and telecommunications. As indicated in paragraphs 1 and 2, the Company is 23 hiring Executive as Chief Executive Officer of AT&T Broadband, the cable portion of the Company's business. If the cable and telecommunications portions of the Company separate after the Effective Date of this Agreement, then Executive's obligation to perform his duties shall remain with the entity referred to on Effective Date as AT&T Broadband. The Company's obligations under this Agreement shall likewise belong to AT&T Broadband. The portion of the Company focusing on telecommunications ("Teleco") shall have no responsibilities or liabilities under this Agreement upon separation of Teleco and AT&T Broadband. Should Teleco and AT&T Broadband separate, then Executive's obligations to the Company under the AT&T Non-Competition Guideline shall extend to AT&T Broadband and shall not survive as to Teleco. 26. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed given when (a) delivered personally, (b) sent by certified mail, postage prepaid, return receipt requested or (c) delivered by overnight courier; to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give such notice of: If to the Company: AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ 07920 Attention: Executive Vice President Human Resources 24 If to Executive: X 25 IN WITNESS WHEREOF, the Parties have executed this Agreement. 11/6/01 /s/ William T. Schleyer - ---------------------------- ------------------------------ Dated William T. Schleyer 11/6/01 /s/ Mirian Graddick-Weir - ---------------------------- ------------------------------ Dated AT&T Corp. By: Mirian Graddick-Weir EVP - Human Resources EX-10.III.A.33 8 e56632ex10-iii_a33.txt FORM OF LOAN AGREEMENT 1 Exhibit (10)(iii)(A)33 $1,240,339.73 32 Avenue of the Americas New York, New York 10013 April 13, 2001 For value received I, David Dorman, promise to pay on demand to the order of AT&T Corp. (AT&T) at AT&T Corporate Headquarters, 32 Avenue of the Americas, New York, New York 10013, the sum of one million, two hundred forty thousand, three hundred, thirty-nine dollars and seventy-three cents ($1,240,339.73). I understand that the interest for any month in which there is an unpaid balance shall be imputed to me as additional compensation at the applicable Federal short-term rate in effect for such month as established by the Internal Revenue Service, under Section 1274(d) of the Internal Revenue Code. If demand has not been made earlier, the full amount of unpaid principal shall immediately become due and payable on the earliest of December 31, 2002, my death or any other termination of my employment. Following my death or other termination of employment, AT&T shall apply the following payments related to my employment, less any amounts required to be withheld for FICA, and for federal, state and local income taxes, to the unpaid principal: Payments of compensation, including but not limited to salary and vacation pay unpaid as of my termination of employment, non-qualified deferred compensation, Long Term and Annual Incentive Awards, and severance benefits. I shall continue to be obligated for any unpaid principal that remains after the applications of such payments. 2 _______________________ ______________ David Dorman Date Witnessed by: _______________________ ______________ Date EX-10.III.A.34 9 e56632ex10-iii_a34.txt FORM OF SPECIAL DEFERRAL AGREEMENT 1 Exhibit (10)(iii)(A)34 January 16, 2002 Mr. Charles Noski Dear Chuck, PURSUANT TO THE TERMS OF YOUR EMPLOYMENT AGREEMENT DATED DECEMBER 8, 1999, IN THE EVENT THAT YOUR 1999-2001 AT&T SEASONED PERFORMANCE SHARES PAYS OUT AN AMOUNT LESS THAN THE TARGET AWARD OF YOUR PREVIOUS EMPLOYER FOR THE SAME PERFORMANCE PERIOD, YOU WILL BE ENTITLED TO AN ADDITIONAL AMOUNT TO OFFSET THE DIFFERENCE. IN SUCH EVENT AT&T WILL ESTABLISH A SPECIAL INDIVIDUAL DEFERRED ACCOUNT ("DEFERRED ACCOUNT") IN YOUR NAME FOR SUCH ADDITIONAL AMOUNT, IF ANY. THE MAINTENANCE, VESTING AND DISTRIBUTION OF THIS DEFERRED ACCOUNT SHALL BE IN ACCORDANCE WITH THE TERMS AND CONDITIONS SET FORTH BELOW IN THIS LETTER ("AGREEMENT"). As of February 28, 2002, (hereinafter the "Effective Date"), the Company shall credit the Deferred Account with an initial balance equal to the additional amount, if any, as described above. Commencing as of the Effective Date, the Company shall credit interest to the Deferred Account, compounded as of the end of each calendar quarter at the rate of the sum of (x) one-quarter (1/4) of the average rate applicable to the 10-year Treasury Note for the prior calendar quarter, plus (y) .50%. The Deferred Account will be maintained as a bookkeeping account on the records of the Company and you will have no present ownership right or interest in the Deferred Account, or in any assets of the Company with respect thereto. You shall not have any right to receive any payment with respect to the Deferred Account, except as expressly provided below. The Deferred Account may not be assigned, pledged or otherwise alienated by you and any attempt to do so, or any garnishment, execution or levy of any kind with respect to the Deferred Account, will not be recognized. The Deferred Account shall vest 100% immediately upon the Effective Date. The vested Deferred Account, including interest, shall be paid in one (1) lump sum as soon as administratively feasible in the calendar quarter immediately following your retirement/termination date from AT&T. In the event of Long Term Disability or your death, prior to receipt of the Deferred Account balance, the entire amount then credited to the Deferred Account shall be 2 distributed to you or your named beneficiary (or your estate if no beneficiary has been named), in a lump sum as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your death, or Long Term Disability occurs. Since the amount credited to the Deferred Account is immediately vested as of the Effective Date, it is subject to FICA taxes at vesting under current IRS regulations. You will be notified of the amount of FICA taxes due. Payments from the Deferred Account are subject to payroll tax withholding and reporting, and are in addition to and not in lieu of any qualified or non-qualified pension, savings, or other retirement plan, program or arrangement covering you. Amounts credited to the Deferred Account are not included in the base for calculating benefits under the employee benefit plans, programs or practices of the Company or its affiliates. The December 8, 1999 employment agreement, as amended herein, shall remain in full force and effect. This Agreement may not be amended or waived, unless the amendment or waiver is in a writing, signed by you and AT&T's Executive Vice President - Human Resources. It is agreed and understood that you will not disclose the specific terms of this letter or any fact concerning its negotiation or implementation, except in compliance with legal process, prior to the information being made public by the Company. You may, however, discuss the contents of this letter with your spouse, legal and/or financial counselor. The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of New Jersey, without regard to its conflict of laws rule. If you agree with the terms and conditions detailed above, please sign in the space provided below and return the executed copy to me. Sincerely, Mirian Graddick-Weir Executive Vice President - ------------------------------- ---------------------------- Acknowledged and agreed to Date Charles Noski EX-10.III.A.35 10 e56632ex10-iii_a35.txt FORM OF EMPLOYMENT AGREEMENT 1 Exhibit (10)(iii)(A)35 EMPLOYMENT AGREEMENT This Agreement, effective December 1, 2000, by and between David Dorman ("Executive") and AT&T Corp., a New York Corporation with its principal place of business at 295 N. Maple Avenue, Basking Ridge New Jersey ("Company") (collectively "the Parties"): WHEREAS, Executive seeks employment with the Company; and WHEREAS, the Company seeks to secure Executive's services on the terms provided herein; NOW THEREFORE, in consideration of the mutual covenants set forth below, the Parties agree as follows: Term of Employment. Effective December 1, 2000 ("Effective Date"), the Company will hire Executive on a full time basis to render exclusive services to the Company and its affiliates under the terms set forth in this Agreement. The Executive accepts this employment and will render services as required by the Company using the Executive's best efforts and will report to the Company's Chief Executive Officer ("CEO"). Employment under this Agreement shall terminate December 31, 2002; provided, however, that on December 31, 2002, and on each December 31 thereafter ("Extension Date"), Employment under this Agreement shall extend automatically for one additional year unless either the Company or the Executive provides the other written notice of its or his desire to terminate the Agreement no less than sixty (60) days prior to the Extension Date. Title of Executive. At Effective Date, Executive's title shall be President of AT&T Corp. In the event that AT&T Wireless and AT&T Broadband become independent companies from the entity referred to on Effective Date as AT&T Corp., then Executive's title shall become President and Chief Operating Officer of AT&T Corp.'s remaining business units. For purposes of this paragraph, "independent companies" shall mean that AT&T Wireless and AT&T Broadband have undergone a divestiture from AT&T Corp. and are no longer subject to ownership or control by AT&T Corp. Compensation and Benefits. Base Salary. The Executive shall receive salary compensation ("Base Salary") from the Company in payment for all of Executive's services under this Agreement at an annual rate of Nine Hundred Fifty Thousand ($950,000.00) dollars per year, subject to review by the Company's compensation committee on an annual basis with regard to the possibility of an increase in Base Salary. The Company shall pay Executive the Base Salary in monthly installments. Annual Bonus. The Annual Bonus ("Annual Bonus") for Company executives is based on measures of Company and individual performance. The Company makes no representations under the terms of this Agreement regarding criteria for or amounts of bonuses paid during the term of this Agreement. However, Executive shall be entitled to receive an annual bonus during the term of this Agreement under the same terms and conditions of other Company executives. The target amount for Executive's Annual Bonus shall be one hundred percent of base salary, 2 Nine Hundred Fifty Thousand ($950,000.00) Dollars, subject to review by the Company's compensation committee on an annual basis with regard to the possibility of an increased Annual Bonus. Executive shall become eligible for a bonus under this paragraph beginning in 2002 for performance year 2001 and for each March thereafter during the term of this Agreement. AT&T Long Term Incentive Compensation. All compensation under this Paragraph 4 shall be subject to the terms of the AT&T 1997 Long Term Incentive Program and the AT&T Non-Competition Guideline, attached to this Agreement as Attachments A and B, respectively. 2000 AT&T Performance Shares. On the Effective Date, Company will grant Executive Fifty Thousand Five Hundred (50,500) AT&T Performance Shares covering the 2000-2002 performance period. Payment for Performance Shares awarded under this paragraph 4(a) are contingent upon the Company's attainment of financial performance measurements determined by the Company's Board of Directors. Payout, if any, for shares awarded under this paragraph shall be made during the first quarter of 2003 or as otherwise determined by the Company's Board of Directors. 2000 AT&T Stock Options. On the Effective Date, Company will grant Executive options for Three Hundred Fifty Six Thousand Seven Hundred (356,700) shares of AT&T Common Stock. For stock options granted under this paragraph 4(b), the term of the stock option grant is ten years and the stock options will vest Twenty-Five percent (25%) annually beginning on the first anniversary of Effective Date. The stock option price shall be Nineteen and 7813/10000 Dollars ($19.7813) per share, the fair market value of AT&T Common Stock on December 1, 2000. 2001 Long Term Incentive Grants. In 2001, the Company shall make a grant to Executive of a long term incentive award as determined by the Company's Board of Directors valued at Nine Million Five Hundred Thousand Dollars ($9,500,000.00). Executive's award shall be issued at the same time, valued in the same manner, and contain the same components in the same ratio as the awards made to other members of the Operations Group. The valuation and conditions of payment for Executive's award under this paragraph 4(c) shall be determined by the Company's Board of Directors at the time such award is made to Executive and other members of the Operations Group. Special Retention Bonus. The Company shall issue Executive in 2001 a Special Retention Bonus of Restricted Stock Units equal at the time issued to an amount four times Executive's Base Salary as defined in paragraph 3(a) of this Agreement or Three Million Eight Hundred Thousand Dollars ($3,800,000.00). Restricted Stock Units issued to Executive under this paragraph 4(d) are subject to the vesting provisions and all other conditions applicable to other members of the Company's Operations Group, as will be determined by the Company's Board of Directors in January 2001. Special Stock Option Grant. If AT&T Corp. issues a separate stock tracking the performance of AT&T Consumer Services ("Consumer Tracking Stock"), then Executive shall receive a stock option grant for Consumer Tracking Stock in an amount that, based on ratio of tracking stock to Long Term Incentive payments, is consistent with Consumer Tracking Stock 3 provided to the CEO and other members of the Company's Operations Group and subject to the same terms as any stock option grant for Consumer Tracking Stock made to the Company's CEO and Operations Group. Restitution for Concert Forfeitures. In order to address certain forfeitures associated with Executive leaving Concert, and to incent Executive to join the Company, Executive will be provided with the following incentive compensation. The AT&T Non-Competition Guideline shall be applicable to all compensation awarded to Executive under this paragraph 5, except that Executive shall be prohibited from engaging in Competitive Activity, as that term in defined in the Non-Competition Guideline, for one (1) year for purposes of compensation under this paragraph 5. Any payment to Executive by the Company made under this paragraph 5 shall be reduced by the amount of the payment, if any, made to Executive by Concert for any item set forth in this paragraph. March 2001 Bonus. The Company shall pay Executive in or about March 2001 a bonus for performance year 2000 in the amount of Eight Hundred Thousand Dollars ($800,000.00). To the extent that Executive would have received more than this amount from Concert Global Networks USA L.L.C. ("Concert") for performance during 2000, then the Company shall pay Executive the amount he would have received from Concert had he remained employed at Concert through March 2001. Restricted Shares. On the Effective Date, the Company shall award the Executive a one-time award of Thirty Five Thousand Nine Hundred Fifty-Six (35,956) Restricted Shares to vest on April 1, 2002. Restricted Shares awarded under this paragraph 5(b) shall replace phantom restricted stock units of the Company and British Telecommunications P.L.C. ("BT") granted on April 1, 1999 according to the terms of the offer letter given to Executive at the outset of his employment with the global venture between the Company and BT later referred to as Concert (the "Concert Offer Letter"). The Concert Offer Letter is attached to this Agreement as Attachment C. Special Deferral Account. The Company shall be responsible for Concert's 2000 payment of Five Hundred Thousand Dollars ($500,000.00), with interest credited effective April 1, 2000, to Executive under the terms of Concert's retention package applicable to Executive. Concert's payment under this paragraph 5(c) shall be placed by the Company into a deferral account ("Special Deferral Account") previously established and containing the Company's 1999 payment of Five Hundred Thousand Dollars ($500,000.00) made on Executive's behalf per the terms of the Concert Offer Letter. On April 1, 2001, the Company shall place an additional Five Hundred Thousand Dollars ($500,000.00) in the Special Deferral Account. The terms and conditions of the original payment made in 1999, including the interest amount, shall continue for the original payment and the payments made under this paragraph 5(c). Conversion of Concert Long Term Incentive Program. The Company shall pay Executive under this paragraph 5(d) as follows in lieu of amounts Executive would have been entitled to receive under Concert's Long Term Incentive Program: (i) on Effective Date, the Company shall provide to Executive Five Hundred Forty Thousand Five Hundred Forty (540,540) Restricted Shares to vest on April 1, 2002; and (ii) a cash payment in April 2003 in the 4 amount of Three Million Eighty Thousand Dollars ($3,080,000.00). The cash payment outlined in this paragraph 5(d) is subject to Executive's employment through December 31, 2002, subject to Paragraph 14 relating to Company Initiated Termination or Good Reason Termination. If Executive wishes to make an election under Section 83(b) for payments made to him under this paragraph 5(d), then the Company will loan Executive Three Million, Seven Hundred Ninety Thousand, Five Hundred Twenty and 99/100 Dollars ($3,790,520.99) for Executive to pay federal and state taxes, with an additional loan to Executive in April 2001 for the payment of any additional federal taxes resulting from this election; provided, however, that Executive shall repay the Company the full amount of the loans by December 31, 2002. Interest on the loan under this paragraph for the payment of taxes shall be forgiven by the Company; provided, however, that the short-term interest rate set forth in Section 1274(d) of the United States Internal Revenue Code shall be in effect for each month in which there is an unpaid balance on this loan and this interest rate shall result in imputed income to Executive. Taxes for such imputed income are payable by Executive. Point Cast Stock Price Indemnification Payment. The Company shall not be responsible for the Point Cast stock price indemnification payment of One Million Four Hundred Thousand Dollars ($1,400,000.00). Repayment of Outstanding Loan. On January 2, 2001, the Company shall demand repayment of a loan made to Executive on or about March 19, 1999 in the amount of Two Million Dollars ($2,000,000.00). The interest on this loan is forgiven by the Company; provided, however, that the interest on this loan from the inception of this loan through December 31, 2000 shall be imputed income to Executive for 2000 and Executive agrees that the taxes on the forgiven interest shall be his responsibility. The interest on this loan for January 1 and 2, 2001 shall be imputed income to the Executive for 2001 and shall be his responsibility. The interest rate for this loan shall be the short-term interest rate set forth in Section 1274(d) of the United States Internal Revenue Code. Company Issuance of New Loan. On January 2, 2001, the Company shall issue a loan to Executive in the amount of Two Million Dollars ($2,000,000.00). The Company shall forgive all interest charges on the loan under this paragraph; provided, however, that the short-term interest rate set forth under Section 1274(d) of the United States Internal Revenue Code shall be in effect for each month in which there is an unpaid balance on this loan and this interest rate shall result in imputed income to Executive and the taxes on this imputed income are payable by Executive. Executive shall repay the Company for this loan in full on April 1, 2002. Other Compensation. Perquisites. During Executive's employment under this Agreement, the Company shall provide Executive with the perquisites of employment as are commonly provided to other Company executives and shall reimburse Executive for reasonable and necessary business expenses. Benefits. During Executive's employment under this Agreement, the Company shall provide to Executive coverage under benefit programs in accordance with those Executive, mid-career hire and Senior Management benefit plans as are generally made available to other Company executives. 5 Attachment D outlines the benefits available on the Effective Date. The Company reserves the right to modify and/or eliminate any benefit plan applicable to Executive; provided, however, that any modification or deletion of a benefit plan shall not affect Executive to any greater or lesser extent than any other Company executive. Special Temporary Living Allowance. Executive shall work in Atlanta, Georgia through December 31, 2000 and in New Jersey thereafter. Executive's travel between Atlanta, Georgia and New Jersey for December 2000 shall be reimbursed as a business expense. Beginning January 1, 2001 and continuing until Executive moves his residence to the New Jersey area, the Company shall pay Executive Six Thousand Dollars ($6,000.00) per month as a Special Temporary Living Allowance to compensate Executive for his temporary housing in New Jersey and trips to his Atlanta home. The Company shall gross-up for tax purposes the Special Temporary Living Allowance. The Company's obligation to pay Executive a Special Temporary Living Allowance shall terminate the earlier of December 31, 2002 or termination of Executive's employment with the Company. Relocation. The Company shall pay for Executive's relocation under the terms of AT&T Relocation Plan B. The terms and conditions of AT&T Relocation Plan B shall apply, including but not limited to the requirement that Executive use a registered real estate broker approved by the relocation firm assigned to Executive. The Company shall not reimburse Executive for any relocation expense incurred after the earlier of December 31, 2002 or Executive's last date of employment with the Company. All requests for reimbursement under this paragraph 6(d) shall be submitted to the Company by the earlier of March 31, 2003 or thirty (30) days after Executive's last day of employment with the Company Financial Counseling. The Company shall reimburse Executive for financial counseling fees paid to his personal financial counselor during his employment with the Company. Executive will not be required to use one of the three AT&T approved financial counseling firms. Fees subject to reimbursement shall include fees for individual financial counseling, preparation of federal and state income tax returns and preparation of Executive's will and other estate planning documents. The Company shall pay Executive a federal tax allowance on the reimbursed fees. Costs Associated with this Agreement. The Company shall reimburse Executive for costs incurred by Executive for attorney review and financial counseling associated with negotiation and execution of this Agreement. The Company shall gross-up for tax purposes reimbursement to Executive under this paragraph 6(f). Company Airplane. Executive shall have the authority to use Company-owned aircraft for business and personal travel during his employment with the Company. In the event that use by the Executive of the Company-owned aircraft during his employment results in income imputed to Executive, the Company will provide a gross-up to Executive of his compensation to offset Executive's tax obligation for imputed income resulting from this paragraph 6(g). Special Individual Pension Arrangement. Attachment E sets forth the terms of Executive's Special Individual Pension Arrangement. Attachment E replaces the former Special Individual Pension Arrangement implemented per the Concert Offer Letter which shall no longer apply. 6 Impact of Company Restructuring on Restricted Stock Units, Restricted Shares, Stock Options and Performance Shares. In the event that AT&T Wireless and AT&T Broadband become independent companies from AT&T Corp. through a divestiture, sale or some similar means, all grants made under this Agreement in the form of Restricted Stock Units, Restricted Shares, Stock Options and Performance Shares based on AT&T Corp. stock shall be apportioned among AT&T Corp., AT&T Wireless and AT&T Broadband stock according to a plan which shall be developed and approved by the Company's Board of Directors and applicable to Executive and other Company executives. Change in Control. In the event of a Change in Control of the Company, Section 11 of the AT&T 1997 Long Term Incentive Program (and any and all amendments thereto by the Company's Board of Directors) shall apply to all Stock Options, Restricted Shares, Restricted Stock Units and Performance Shares awarded to Executive under this Agreement prior to and not including January 1, 2001. All Stock Options, Restricted Shares, Restricted Stock Units and/or Performance Shares awarded after January 1, 2001 shall be governed exclusively by the Change in Control provisions contained therein. Severance payments to Executive shall be governed by the Change in Control provisions approved by the Company's Board of Directors at its October 22-23, 2000 meeting. Confidentiality of Trade Secrets and Business Information. Executive agrees that he will not, at any time during his employment or thereafter, disclose or use any trade secret, proprietary or confidential information of the Company or any subsidiary or affiliate of the Company, obtained during the course of his employment, except as required in the course of such employment or with the written permission of the Company or, as applicable, any subsidiary or affiliate of the Company or as may be required by law, provided that, if Executive receives legal process with regard to disclosure of such information, he shall promptly notify the Company and cooperate with the Company in seeking a protective order. Executive agrees that at the time of the termination of his employment with the Company, whether at the instance of the Executive or the Company, and regardless of the reasons therefore, he will deliver to the Company, and not keep or deliver to anyone else, any and all notes, files, memoranda, papers and, in general, any and all physical matter containing information, including any and all documents significant to the conduct of the business of the Company or any subsidiary or affiliate of the Company which are in his possession, except for any documents for which the Company or any subsidiary or affiliate of the Company has given written consent to removal at the time of the termination of the Executive's employment and his personal rolodex, phone book and similar items. 7 Non-competition. In consideration for payments made under this Agreement, including but not limited to paragraphs 3(a) and 3(b), Executive agrees that he will not, for a period of One (1) year after his Employment with the Company, establish a relationship with a competitor (including but not limited to an employment or consulting relationship) or engage in any activity which is in conflict with or adverse to the interest of the Company, as defined by the AT&T Non-Competition Guideline (hereinafter referred to as a "Competitive Activity"). Executive recognizes that this obligation includes, and is not limited to, an agreement that he shall not work for a competitor of AT&T Corp. as an executive, consultant, independent contractor or in any other capacity for a period of One (1) year following the termination of his employment with the Company, regardless of whether Executive or the Company terminates the employment relationship. In addition to Executive's obligations outlined in paragraph 10(a) of this Agreement, any and all payments (except those made from Company-sponsored tax-qualified pension or welfare plans), benefits or other entitlements to which the Executive may be eligible in accordance with the terms hereof, may be forfeited, whether or not in pay status, at the discretion of the Company, if Executive engages in Competitive Activity for a period of Two (2) years following termination of his Employment from the Company, regardless of whether Executive or the Company terminates the employment relationship. The payments, benefits and other entitlements hereunder are being made in part in consideration of the obligations of this paragraph 10 and in particular the post-employment payments, benefits and other entitlements are being made in consideration of, and dependent upon compliance with this paragraph. This paragraph shall apply notwithstanding any other provision of this Agreement; provided, however, that compensation awarded to Executive under paragraph 5 shall preclude Executive from Competitive Activity for One (1) year following the termination of his employment. No forfeiture or cancellation shall take place under paragraph 10(b) with respect to any payments, benefits or entitlements hereunder or under any other award agreement, plan or practice unless the Company shall have first given Executive written notice of its intent to so forfeit, or cancel or pay out and Executive has not, within thirty (30) calendar days of giving such notice, ceased such unpermitted Competitive Activity, provided that the foregoing prior notice procedure shall not be required with respect to either: (i) a Competitive Activity which Executive initiated after the Company had informed the Executive in writing that it believed such Competitive activity violated this paragraph 10 or the AT&T Non-Competition Guideline; or (ii) any Competitive Activity regarding wireless local, regional or long distance telephone services or other products or services, including broadband services, which are part of a line of business which represents more than five percent (5%) of the Company's consolidated gross revenues for its most recent completed fiscal year prior to the commencement of the Competitive Activity. Nothing in this Section 10 shall prohibit the Executive from being a passive owner of not more than one percent (1%) of the outstanding common 8 stock, capital stock and equity of any firm, corporation or enterprise so long as the Executive has no active participation in the management of business of such firm, corporation or enterprise. Nothing in this Section 10 or the Non-Competition Guideline shall preclude Executive from serving on the Board of Directors of a start-up Company ("NewCo") during the two (2) year period immediately following his last day of employment with the Company provided that no active and significant competitor of the Company is an active participant in the management of such NewCo. For purposes of this Agreement a Company shall cease being a NewCo should its annual revenue exceed 500 million dollars. Should the annual revenue of NewCo exceed 500 million dollars Executive's relationship with NewCo shall be subject to the Non Competition Guideline. Nothing in this paragraph shall be deemed to diminish or reduce the obligations of Executive not to use or disclose the Company's confidential and proprietary information. If the restrictions stated herein are found by a court to be unreasonable, the Parties agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall be resolved by third party mediation of the dispute and, failing that, by binding arbitration, to be held in New Jersey, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The Company shall pay the costs of the arbitrator or the mediator but not the legal fees of Executive; provided, however, that the Company shall bear all such costs if Executive prevails in such arbitration on any material issue. Non-Interference. During Executive's employment and for a period of Two (2) years following the effective date of Executive's termination, for any reason, from the Company, Executive agrees not to directly or indirectly recruit, solicit or induce, any employees, consultants or independent contractors of the Company to terminate, alter or modify their employment or other relationship with the Company. During Executive's employment and for a period of Two (2) years following the effective date of Executive's termination, for any reason, from the Company, Executive agrees not to directly or indirectly solicit any customer or business partner of the Company or interfere with the Company's relationships with any of its customers or business partners on behalf of any enterprise that directly or indirectly competes with the Company. Injunction. If Executive commits a breach of any of the provisions of Sections 8 through 12 or any part thereof, the Company shall have the right and remedy to have the provisions of this Agreement specifically enforced by way of preliminary and/or permanent injunction by any court having jurisdiction, it being acknowledged and agreed by Executive and Company that any such breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. Furthermore, this Agreement is intended to protect the proprietary rights of 9 the Company in important ways, and even the threat of any misuse of the technology or other confidential information of the Company would be irreparably harmful because of the importance of that technology and confidential information. In light of these considerations, Executive agrees that a court of competent jurisdiction should immediately enjoin any breach or threatened breach of paragraphs 8 through 12 of this Agreement, upon Company's request, and the Company is released from the requirement of posting any bond in connection with temporary or preliminary injunctive relief, to the extent permitted by law. Such right to injunctive relief shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. Company Initiated Termination of Employment or Good Reason Termination. Should the Company terminate Executive's employment without Cause or should Executive terminate his employment for Good Reason, Executive will receive a payment equivalent to payments to which other similarly situated Company executives would be entitled at the time of the termination of his employment under the terms of the Senior Officer Separation Plan. This payment shall be payable to Executive within ninety (90) days of his last day of employment with the Company. For termination by Executive for Good Reason or by the Company without Cause, Executive shall also be entitled to the following: (a) accelerated vesting of Stock Options, Restricted Shares and Restricted Stock Units in accordance with the terms under which the grants were made; (b) payment of Annual Bonus in the target amount for the year in which the termination occurs, prorated to reflect length of employment during that year; (c) outstanding Performance Shares shall continue to vest; (d) immediate vesting of the Special Deferral Account set forth in paragraph 5(c); (e) payment to Executive of any unpaid hiring bonus under paragraphs 5(c) and 5(d)(ii) of this Agreement; (f) payment of the Special Individual Pension Arrangement in accordance with its terms and reflecting the amount accrued as of the date of termination of Executive's employment; (g) coverage for himself and eligible dependents under the Senior Management Separation Medical Plan; (h) continuation of Senior Management Universal Life Insurance; and (i) financial counseling for one year, including income tax return preparation for year of termination and a federal tax allowance to Executive for the cost of the financial counseling. Termination for Cause and Good Reason. For purposes of this Agreement, "Cause" and "Good Reason" shall be defined as follows: (a) Cause shall mean: (1) conviction (including a plea of guilty or nolo contendere) of a felony or any crime or theft, dishonesty or moral turpitude; or (2) gross omission or gross dereliction of any statutory or common law duty of loyalty to the Company; or (3) violation of AT&T's Code of Conduct. (b) "Good Reason" shall mean any termination of Executive's Company employment, initiated by Executive, resulting from any of the following events without Executive's express written consent, which are not cured by the Company within twenty (20) days of Executive giving the Company written notice thereof: (i) Executive's demotion to a position which is not of a rank and responsibility comparable to members of the 10 current Operations Group or those of a successor governance body; provided, however, that the Company's decision not to continue an Operations Group shall not be Good Reason, and provided, further, that (1) changes in reporting relationships shall not, alone, constitute Good Reason, unless such change results in the Executive reporting to someone other than the Company's Chief Executive Officer (or similar office), and/or (2) a reduction in the Company's budget or employee head count, without more, do not constitute Good Reason, or (ii) A reduction in Executive's "Total Annual Compensation" (defined as the sum of Executive's Annual Base Salary Rate, Target Annual Incentive and "Target Annual Long Term Incentive Grants") for any calendar or fiscal year, as applicable, to an amount that is less than the Total Annual Compensation that existed in the prior calendar or fiscal year, as applicable. For purposes of this Paragraph the dollar value of the "Target Annual Long Term Incentive Grants" shall exclude the value of any special one-time or periodic long-term incentive grants, and shall be determined by valuing Performance Shares, Stock Units, Restricted Stock and stock options, Restricted Stock Units at the market share price utilized in valuing the annual Senior Management compensation structures in the materials presented to the Compensation and Employee Benefits Committee of the Company's Board of Directors ("the Committee") when authorizing such grants, and assuming 100% performance achievement if such grants include performance criteria. Stock Options and Stock Appreciation Rights will be valued by the Black-Scholes methodology (and related share price) as utilized in the materials presented to the Committee when authorizing such grants. Termination Without Good Reason or For Cause. Should Executive leave his employment without Good Reason ("Voluntary Termination"), Executive shall receive nothing further under this Agreement except for (i) Stock Options, Performance Shares, Restricted Shares and Restricted Stock Units already vested and (ii) benefits in the then-applicable Senior Management Separation Medical Plan but only if Voluntary Termination occurs after December 31, 2002. In the event of a Voluntary Termination, Executive's Stock Options, Performance Shares, Restricted Shares and Restricted Stock Units awarded but not vested shall be cancelled. If Executive is terminated for Cause at any time during this Agreement, he shall receive nothing further from the Company as of the date of his termination and all Stock Options, Performance Shares, Restricted Shares and Restricted Stock Units vested but not exercised shall be cancelled. Special Voluntary Termination. If Executive resigns after December 31, 2002 and, at the time of resignation, C. Michael Armstrong is no longer the Chief Executive Officer of the Company and Executive has not been appointed to 11 the position of Chief Executive Officer ("Special Voluntary Termination"), Executive shall be entitled to the benefits set forth in paragraph 16 as well as an accelerated vesting of Stock Options, Restricted Shares and Restricted Stock Units in accordance with terms applicable to terminations under a Company force management program. Outstanding Performance Shares awarded as of the date of Executive's Special Voluntary Termination will continue to vest as if Executive was still employed by the Company. Death and Long Term Disability. Termination Due to Death. In the event that the Executive's employment is terminated due to his death, his estate or his beneficiaries, as the case may be, shall be entitled to the following benefits: (i) vesting of the Special Individual Pension Arrangement in an amount through the date of the termination of Executive's employment and payment of the special survivor benefit according to the express terms thereunder; (ii) Annual Bonus at target level for such year prorated for the time worked in the performance year, payable in a single installment as soon as practicable following Executive's death; (iii) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable in accordance with the terms of the grants applicable to death; (iv) lapse of the restrictions on Restricted Stock Units and Restricted Stock; (v) payout at target for each Performance Share cycle in which the Executive was participating at the time of his death, prorated for the amount of time worked in the applicable three year cycle; (vi) vesting of the Special Deferral Account under Paragraph 5(c); (vii) payment of any unpaid cash hiring bonus under paragraph 5(d)(ii); and (viii) financial counseling for one year including individual tax return preparation for Executive and spouse for the year of death with a federal tax allowance for the cost of the financial counseling. Termination Due to Disability. The Company shall have the right to terminate Executive's employment due to his Disability. In the event that the Executive's employment is terminated due to his Disability, he shall be entitled to the following benefits: (i) disability benefits in accordance with a disability program then in effect for senior executives of the Company; (ii) the Special Individual Pension Arrangement shall fully vest according to its terms and based upon the amount accrued through the termination date of Executive's employment offset by any Company-provided disability benefits; (iii) Annual Bonus at target level for such year prorated for the time worked in the performance year, payable in a single installment as soon as practicable after termination due to Disability; (iv) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable in accordance with the terms of the grants applicable to Disability; (v) lapse of the restrictions on Restricted Stock Units and Restricted Stock; (vi) payout at target for each Performance Share cycle in which the Executive was participating at the time of his Disability, prorated for the amount of time worked in the applicable three year cycle; (vii) vesting of the Special Deferral Account under paragraph 5(c); (viii) payment of any unpaid cash hiring bonus under paragraph 5(d)(ii); and (ix) financial counseling for one year including individual tax return preparation for Executive for the year of termination due to Disability, with a federal tax allowance for the cost of the financial counseling. For purposes of this paragraph 18, "Disability" shall mean the 12 inability of Executive to perform his duties under this Agreement by reason of any physical or mental impairment that is expected to prevent Executive from performing his duties for a period exceeding twelve (12) months. Provided, however, that nothing in this paragraph or this Agreement shall prevent the Company from reassigning Executive's job duties on a temporary basis during any period in which the Executive is receiving benefits under the Company's applicable short-term disability benefits plan until the Executive returns to work full-time or is terminated due to Disability. Loan Repayment. Upon death, disability or termination of employment, for any reason, Executive or Executive's estate must repay all outstanding loans within ninety (90) days of the last day of employment. Membership on Boards. Executive may continue to serve on the Boards of Directors or Advisory Committees of other companies in positions held prior to the Execution Date assuming that the other company is not a competitor of the Company as determined by the Secretary of the Company's Board of Directors. Executive agrees to provide a list, as soon a practicable following the Execution Date, of such Board and Committee memberships so that the Company may make such determination. Other Terms. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey, without regard to conflict of law rules. If any provision of this Agreement is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remaining provisions of this Agreement, without regard to the invalid portion, and any such invalid provisions shall be reformed and construed to the extent necessary to permit their enforceability so as to reflect the intent of the parties hereto. Executive hereby represents and warrants that (i) Executive has the right to enter into this Agreement with the Company and to grant the rights contained in this Agreement, and (ii) the provisions of this Agreement do not violate any other contracts or agreements that the Executive has entered into with any other individual or entity. Executive agrees that the terms of this Agreement are reasonable and properly required for the protection of the Company's legitimate business interests. If any of the covenants or provisions contained in this Agreement, or any part thereof, is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remainder of the covenant, covenants or provisions which shall be given the maximum effect possible without regard to the invalid portions and the remainder shall then be fully enforceable. The article headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. This Agreement sets forth the entire agreement and understanding of the Parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. 13 This Agreement may not be amended, modified, superseded or waived, except by a written instrument executed by both Parties hereto, or, in the case of a waiver, by the party waiving compliance. The failure of either Party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either Party of the breach of any term or covenant contained in this Agreement whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. Duration of Terms. The respective rights and obligations of the parties hereunder shall survive any termination of Executive's employment or this Agreement to the extent necessary to the intended preservation of such rights and obligations. Acknowledgment. Executive acknowledges that before signing this Agreement, Executive was given the opportunity to read it, evaluate it and discuss it with Executive's personal advisors, Executive's attorney and with representatives of the Company. Executive further acknowledges that the Company has not provided Executive with any legal advice regarding this Agreement. Assignment. The Company specifically reserves the right to assign the terms of this Agreement to any successor, whether the successor is the result of any sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any form or combination thereof. No sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any form or combination thereof shall be construed as a termination of Executive's employment and will not trigger the Company's obligations under paragraphs 14, 16 or 17 of this Agreement. Release for Severance Payments. The Company shall be required to pay Executive payments upon the termination of his employment as provided under this Agreement only if Executive executes a release upon his termination releasing the Company from any liability arising from his employment or termination thereof. This release shall include, but not be limited to, claims for breach of contract or those arising under state and federal employment statutes, including but not limited to, the Civil Rights Act of 1964, as amended ("Title VII"), and the Age Discrimination in Employment Act. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed given when (a) delivered personally, (b) sent by certified mail, postage prepaid, return receipt requested or (c) delivered by overnight courier; to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give such notice of: If to the Company: AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ 07920 14 Attention: Executive Vice President Human Resources If to the Executive: Mr. David Dorman c/o AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ 07920 15 IN WITNESS WHEREOF, the Parties have executed this Agreement. - -------------------------- ------------------------------------ Dated David Dorman - -------------------------- ------------------------------------ Dated AT&T Corp. By: Mirian Graddick Weir Executive Vice President - Human Resources The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of New Jersey, without regard to its conflict of laws rule. If you agree with the terms and conditions detailed above, please sign in the space provided below and return the executed copy to me. Sincerely, Mirian Graddick-Weir Executive Vice President - ------------------------------- ---------------------------- Acknowledged and agreed to Date Charles Noski EX-12 11 e56632ex12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) For the years ended December 31,
2001 2000 1999 1998 1997 ---- ------ ------- ------ ------ Income from continuing operations before income taxes -- $2,414 $10,781 $8,151 $6,888 Add distributions of less than 50% owned affiliates -- 12 73 61 4 Add fixed charges, excluding capitalized interest and dividend requirements on subsidiary preferred stock and interest on trust preferred -- 3,203 1,709 479 534 securities Total earnings from continuing operations before income taxes and fixed charges -- $5,629 $12,563 $8,691 $7,426 Fixed Charges: Total interest expense -- $2,964 $ 1,503 $ 293 $ 304 Capitalized interest -- 177 143 106 100 Interest portion of rental expense -- 239 206 186 230 Dividend requirements on subsidiary preferred stock and interest on trust preferred securities -- 353 179 -- -- Total fixed charges -- $3,733 $ 2,031 $ 585 $ 634 Ratio of earnings to fixed charges (a) 1.5 6.2 14.9 11.7
(a) AT&T's loss for the year ended December 31, 2001 was inadequate to cover fixed charges, dividend requirements on subsidiary preferred stock and interest on trust preferred securities in the amount of $1.6 billion. EX-21 12 e56632ex21.txt LIST OF SUBSIDIARIES OF AT&T Exhibit 21 Exhibit 21 - Subsidiary List List of Subsidiaries of AT&T Corp. As of 3/28/02
Jurisdiction of Incorporation ACC Corp................................................. Delaware Alascom, Inc............................................. Alaska AT&T Communications, Inc................................. Delaware AT&T Communications of California, Inc................... California AT&T Communications of Delaware, LLC..................... Delaware AT&T Communications of Hawaii, Inc....................... Hawaii AT&T Communications of Illinois, Inc..................... Illinois AT&T Communications of Indiana, Inc...................... Indiana AT&T Communications of Maryland, LLC..................... Delaware AT&T Communications of Michigan, Inc..................... Michigan AT&T Communications of the Midwest, Inc.................. Iowa AT&T Communications of the Mountain States, Inc.......... Colorado AT&T Communications of Nevada, Inc....................... Nevada AT&T Communications of New England, Inc.................. New York AT&T Communications of New Hampshire, Inc................ New Hampshire AT&T Communications New Jersey Holdings, LLC............. Delaware AT&T Communications of New York, Inc..................... New York AT&T Communications of Ohio, Inc......................... Ohio AT&T Communications of the Pacific Northwest, Inc........ Washington AT&T Communications of Pennsylvania, Inc................. Pennsylvania AT&T Communications of the South Central States, LLC..... Delaware AT&T Communications of the Southern States, LLC.......... Delaware AT&T Communications of the Southwest, Inc................ Delaware AT&T Communications of Virginia, LLC..................... Virginia AT&T Communications of Washington D.C., LLC.............. Delaware AT&T Communications of West Virginia, Inc................ West Virginia AT&T Communications Holdings of Wisconsin, LLC........... Delaware AT&T Communications Services International Inc........... Delaware AT&T Global Communications Services Inc.................. Delaware AT&T Solutions Inc....................................... Delaware AT&T Global Network Services Inc......................... Delaware AT&T of Puerto Rico, Inc................................. New York Teleport Communications Group Inc........................ Delaware AT&T Broadband LLC ...................................... Delaware MediaOne Group, Inc. .................................... Delaware
EX-23.A 13 e56632ex23-a.txt CONSENT OF PRICEWATERHOUSECOOPERS, LLP Exhibit 23a CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements on Form S-3 for the Shareowner Dividend Reinvestment and Stock Purchase Plan (Registration No. 333-00573), Form S-8 for the AT&T Long Term Savings and Security Plan (Registration No. 333-47257), Forms S-8 for the AT&T Long Term Savings Plan for Management Employees (Registration Nos. 33-34264, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement Savings and Profit Sharing Plan (Registration No. 33-39708), Form S-8 for Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program (Registration No. 333-47251), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees (Registration No. 33-50819), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan (Registration No. 33-50817), Post-Effective Amendment No. 1 to Form S-8 Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee Stock Purchase Plan, Form S-8 for the AT&T Shares for Growth Program (Registration No. 333-47255), Form S-8 for the AT&T 1997 Long Term Incentive Program (Registration Nos. 333-43440 and 33-28665), Form S-3 for the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares (Registration No. 33-57745), and in Post-Effective Amendment Nos.1, 2 and 3 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-42150) for the NCR Corporation 1989 Stock Compensation Plan (Registration No.33-42150-01), the NCR Corporation 1984 Stock Option Plan (Registration No. 33-42150-02) and the NCR Corporation 1976 Stock Option Plan (Registration No. 33-42150-03), respectively, and the Post-Effective Amendment Nos. 1, 2, 3 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan (Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987 Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03) and the McCaw Cellular Communications, Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively, and Post-Effective Amendment No.1 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-45302) for the Teradata Corporation 1987 Incentive and Other Stock Option Plan (Registration No. 33-45302-01), Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. (Registration No. 33-63195), and in Post Effective Amendment Nos. 1, 2, 3, 4 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 333-49419) for the Teleport Communications Group Inc. 1993 Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC CorpEmployee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp. Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and in Post-Effective Amendment Nos.1 and 2 on Form S-8 and Post-Effective Amendment No. 3 to Form S-4 Registration Statement (Registration No. 333-70279) for the Tele-Communications, Inc. 1998 Incentive Plan, the Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan, the Tele-Communications International, Inc., the 1996 Nonemployee Director Stock Option Plan, the Tele-Communications International, Inc. 1995 Stock Incentive Plan (Registration No. 333-70279-01), the Liberty Media 401(K) Savings Plan, the TCI 401(K) Stock Plan (Registration No. 333-70279-02), , Form S-4 for Vanguard Cellular Systems, Inc. (Registration No. 333-75083), Form S-4 for MediaOne Corp, (Registration No. 333-86019), Post-Effective Amendment No. 1 to Form S-8 Registration Statement for the AT&T Long Term Savings Plan for Management Employees, the AT&T Long Term Savings Plan - San Francisco, and the AT&T Wireless Services 401(K) Retirement Plan (Registration No. 33-34264-1), Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement for the MediaOne Group 1999 Supplemental Stock Plan and the Amended MediaOne Group 1994 Stock Plan (Registration No. 333-86019-1), Post Effective Amendment No. 2 on Form S-8 to Form S-4 Registration Statement for MediaOne Group 401(K) Savings Plan (Registration No. 333-86019-2), Form S-8 for the AT&T Broadband Deferred Compensation Plan (Registration No. 333-53134), Form S-8 for AT&T Deferred Compensation Plan for Non-Employee Directors (Registration No. 333-61676), Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-01), Amendment No. 1 to Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-02), Amendment No. 2 to Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-03), Amendment No. 3 to Form S-3 for the Redemption of TCI Preferred Securities (Registration No. 333-73120-04) Form S-3 for the AT&T Universal Shelf Registration (Registration No. 333-83174, which supercedes Form S-3 for the $13,080,000 Debt Securities and Warrants to Purchase Debt Securities 333-71167), and Amendment No. 1 to the Form S-3 for the AT&T Universal Shelf Registration (Registration No. 333-83174-01) of our report dated March 25, 2002, relating to the consolidated financial statements of AT&T Corp. and its subsidiaries, which appears in this Annual Report on Form 10-K, for the year ended December 31, 2001.We also consent to the incorporation by reference of our report dated March 25, 2002, relating to the consolidated financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP New York, New York March 25, 2002 EX-23.B 14 e56632ex23-b.txt CONSENT OF KPMG, LLP Exhibit 23b Independent Auditors' Consent The Board of Directors Liberty Media Corporation: We consent to the incorporation by reference in the following AT&T Corp. registration statements of our report dated March 8, 2002, relating to the consolidated balance sheets of Liberty Media Corporation and subsidiaries ("New Liberty" or "Successor") as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive earnings, stockholders' equity, and cash flows for the years ended December 31, 2001 and 2000 and the period from March 1, 1999 to December 31, 1999 (Successor periods) and from January 1, 1999 to February 28, 1999 (Predecessor period), which appears as an exhibit to the AT&T Corp. 2001 Annual Report on Form 10-K:
Form Registration Statement No. Description - ---- -------------------------- ----------- S-3 333-00573 Shareholder Dividend Reinvestment and Stock Purchase Plan S-8 333-47257 AT&T Long Term Savings and Security Plan S-8 33-34264, 33-29256 and AT&T Long Term Savings Plan for Management 33-21937 Employees S-8 33-39708 AT&T Retirement Savings and Profit Sharing Plan S-8 333-47251 Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program S-8 33-50819 AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees S-8 33-50817 AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan S-8 33-54797 (Post-Effective AT&T 1996 Employee Stock Purchase Plan Amendment No. 1) S-8 333-47255 AT&T Shares for Growth Program S-8 333-43440 and 33-28665 AT&T 1997 Long Term Incentive Program S-3 33-49589 AT&T $2,600,000,000 Notes and Warrants to Purchase Notes S-3 33-59495 AT&T $3,000,000,000 Notes and Warrants to Purchase Notes S-4 33-57745 AT&T 5,000,000 Common Shares S-8 33-42150 (Post-Effective NCR Corporation 1989 Stock Compensation Plan Amendment Nos. 1 to Form S-4, (33-42150-01)) S-8 33-42150 (Post-Effective NCR Corporation 1984 Stock Compensation Plan Amendment No. 2 to Form S-4, (33-42150-02)) S-8 33-42150 (Post-Effective NCR Corporation 1976 Stock Compensation Plan Amendment No. 3 to Form
S-4, (33-42150-03)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. 1983 Non- Amendment No. 1 to Qualified Stock Option Plan Form S-4, (33-52119-01)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. 1987 Amendment No. 2 to Stock Option Plan Form S-4, (33-52119-02)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. Equity Amendment No. 3 to Purchase Plan Form S-4, (33-52119-03)) S-8 33-52119 (Post-Effective McCaw Cellular Communications, Inc. Employee Amendment No. 5 to Stock Purchase Plan Form S-4, (33-52119-05)) S-8 33-45302 (Post-Effective Teradata Corporation 1987 Incentive and Other Amendment No. 1 to Stock Option Plan Form S-4, (33-45302-01)) S-8 33-63195 AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. S-8 333-49419 (Post-Effective Teleport Communications Group Inc. 1993 Stock Amendment No. 1 to Option Plan Form S-4, (333-49419-01)) S-8 333-49419 (Post-Effective Teleport Communications Group Inc. 1996 Equity Incentive Plan Amendment No. 2 to Form S-4, (333-49419-02)) S-8 333-49419 (Post-Effective ACC Corp. Employee Long Term Incentive Plan Amendment No. 3 to Form S-4, (333-49419-03)) S-8 333-49419 (Post-Effective ACC Corp. Non-Employee Directors' Stock Option Plan Amendment No. 4 to Form S-4, (333-49419-04)) S-8 333-49419 (Post-Effective ACC Corp. 1996 UK Sharesave Scheme Amendment No. 5 to Form S-4, (333-49419-05)) S-8 333-70279 (Post-Effective Tele-Communications, Inc. 1998 Incentive Plan Amendments Nos. 1 and 3 to Form S-4, (333-70279-01)) Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan
Tele-Communications International, Inc., 1996 Nonemployee Director Stock Option Plan Tele-Communications International, Inc. 1995 Stock Incentive Plan S-8 333-70279 (Post-Effective Liberty Media 401(K) Savings Plan Amendment No. 2 to Form S-4, (333-70279-02)) TCI 401(K) Stock Plan S-4 333-75083 Vanguard Cellular Systems, Inc. S-4 333-86019 MediaOne Corp. S-8 33-34264-1 (Post-Effective AT&T Long Term Savings Plan for Management Amendment No. 1) Employees AT&T Long Term Savings Plan - San Francisco AT&T Wireless Services 401(K) Retirement Plan S-8 333-86019-1 (Post-Effective MediaOne Group 1999 Supplemental Stock Plan Amendment No. 1 to Form S-4) Amended MediaOne Group 1994 Stock Plan S-8 333-86019-2 (Post-Effective MediaOne Group 401(K) Savings Plan Amendment No. 2 to Form S-4) S-8 333-53134 AT&T Broadband Deferred Compensation Plan S-8 333-61676 AT&T Deferred Compensation Plan for Non- Employee Directors S-3 333-73120-01 Redemption of TCI Preferred Securities S-3 333-73120-02 (Amendment No. 1) Redemption of TCI Preferred Securities S-3 333-73120-03 (Amendment No. 2) Redemption of TCI Preferred Securities S-3 333-73120-04 (Amendment No. 3) Redemption of TCI Preferred Securities S-3 333-83174 (which supercedes AT&T Universal Shelf Registration Form S-3 for the $13,080,000 Debt Securities and Warrants to Purchase Debt Securities 333-71167) S-3 333-83174-01 (Amendment No. 1) AT&T Universal Shelf Registration
As discussed in notes 3 and 8 to the aforementioned consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities in 2001. As discussed in note 1 to the aforementioned consolidated financial statements, effective March 9, 1999, AT&T Corp., the former parent company of New Liberty, acquired Tele-Communications, Inc., the former parent company of Liberty Media Corporation, in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG LLP Denver, Colorado March 29, 2002 EX-24 15 e56632ex24.txt POWERS OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is an officer and director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as an officer and director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ C. Michael Armstrong --------------------------- C. Michael Armstrong Chairman and CEO Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ J. Michael Cook --------------------------- J. Michael Cook Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is an officer of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints M. J. WASSER as attorney for him and in his name, place and stead, and in his capacity as an officer of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorney full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ Nicholas S. Cyprus --------------------------- Nicholas S. Cyprus Vice President and Controller POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 25th day of March, 2002. /s/ Kenneth T. Derr --------------------------- Kenneth T. Derr Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is an officer and director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as an officer and director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ David W. Dorman --------------------------- David W. Dorman President Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ M. Kathryn Eickhoff --------------------------- M. Kathryn Eickhoff Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ George M. C. Fisher --------------------------- George M. C. Fisher Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ Shirley A. Jackson --------------------------- Shirley A. Jackson Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ Amos B. Hostetter, Jr. --------------------------- Amos B. Hostetter, Jr. Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ Donald F. McHenry --------------------------- Donald F. McHenry Director KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is an officer and director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as an officer and director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ Charles H. Noski --------------------------- Charles H. Noski Vice Chairman and Chief Financial Officer Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ Louis A. Simpson --------------------------- Louis A. Simpson Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ Michael I. Sovern --------------------------- Michael I. Sovern Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 27th day of March, 2002. /s/ Sanford I. Weill --------------------------- Sanford I. Weill Director EX-99 16 e56632ex99.txt LIBERTY MEDIA CORPORATION FINANCIALS Exhibit 99 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholder Liberty Media Corporation: We have audited the accompanying consolidated balance sheets of Liberty Media Corporation and subsidiaries ("New Liberty" or "Successor") as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive earnings, stockholders' equity, and cash flows for the years ended December 31, 2001 and 2000 and the period from March 1, 1999 to December 31, 1999 (Successor periods) and from January 1, 1999 to February 28, 1999 (Predecessor period). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned Successor consolidated financial statements present fairly, in all material respects, the financial position of New Liberty as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the Successor periods, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the results of their operations and their cash flows for the Predecessor period, in conformity with accounting principles generally accepted in the United States of America. As discussed in notes 3 and 8 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities in 2001. As discussed in note 1 to the consolidated financial statements, effective March 9, 1999, AT&T Corp., the former parent company of New Liberty, acquired Tele-Communications, Inc., the former parent company of Liberty Media Corporation, in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG LLP Denver, Colorado March 8, 2002 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000
2001 2000 * -------- ------ amounts in millions Assets Current assets: Cash and cash equivalents $ 2,077 1,295 Short-term investments 397 500 Trade and other receivables, net 356 307 Prepaid expenses and program rights 352 283 Deferred income tax assets (note 9) 311 242 Other current assets 38 73 -------- ------ Total current assets 3,531 2,700 -------- ------ Investments in affiliates, accounted for using the equity method, and related receivables (note 5) 10,076 20,464 Investments in available-for-sale securities and other cost investments (note 6) 23,544 19,035 Property and equipment, at cost 1,190 976 Accumulated depreciation (249) (131) -------- ------ 941 845 -------- ------ Intangible assets: Excess cost over acquired net assets 10,752 10,896 Franchise costs 190 190 -------- ------ 10,942 11,086 Accumulated amortization (1,588) (998) -------- ------ 9,354 10,088 -------- ------ Other assets, at cost, net of accumulated amortization 1,093 1,136 -------- ------ Total assets $ 48,539 54,268 ======== ======
(continued) LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000
2001 2000 * -------- ------ amounts in millions Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 127 148 Accrued interest payable 159 105 Other accrued liabilities 278 401 Accrued stock compensation (note 11) 833 1,216 Program rights payable 240 179 Current portion of debt 1,143 1,094 -------- ------ Total current liabilities 2,780 3,143 -------- ------ Long-term debt (note 8) 4,764 5,269 Call option obligations (note 8) 1,320 -- Deferred income tax liabilities (note 9) 8,977 11,337 Other liabilities 442 62 -------- ------ Total liabilities 18,283 19,811 -------- ------ Minority interests in equity of subsidiaries 133 348 Stockholders' equity (note 10): Preferred stock, $.01 par value Authorized 50,000,000 shares; no shares issued and outstanding -- -- Series A common stock $.01 par value Authorized 4,000,000,000 shares; issued and outstanding 2,378,127,544 shares at December 31, 2001 24 -- Series B common stock $.01 par value. Authorized 400,000,000 shares; issued and outstanding 212,045,288 shares at December 31, 2001 2 -- Additional paid-in capital 35,996 35,042 Accumulated other comprehensive earnings (loss), net of taxes (note 13) 840 (397) Accumulated deficit (6,739) (536) -------- ------ Total stockholders' equity 30,123 34,109 -------- ------ Commitments and contingencies (note 14) Total liabilities and stockholders' equity $ 48,539 54,268 ======== ======
- --------------------- * as restated, see note 2 See accompanying notes to consolidated financial statements. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
New Liberty Old Liberty ------------------------------------------ ------------ Year Year Ten months Two months ended ended ended ended December 31, December 31, December 31, February 28, 2001 2000 * 1999 * 1999 ------------ ------------ ------------ ------------ amounts in millions Revenue: (note 2) Unaffiliated parties $ 1,849 1,283 549 192 Related parties (note 10) 210 243 180 43 -------- ----- ------ --- 2,059 1,526 729 235 -------- ----- ------ --- Operating costs and expenses: Operating 1,089 801 343 95 Selling, general and administrative ("SG&A") 573 348 229 87 Charges from related parties (note 10) 20 37 24 6 Stock compensation-SG&A (note 11) 132 (950) 1,785 183 Depreciation 209 122 19 7 Amortization 775 732 543 15 Impairment of long-lived assets (note 3) 388 -- -- -- -------- ----- ------ --- 3,186 1,090 2,943 393 -------- ----- ------ --- Operating income (loss) (1,127) 436 (2,214) (158) Other income (expense): Interest expense (525) (399) (135) (26) Dividend and interest income 272 301 242 10 Share of losses of affiliates, net (note 5) (4,906) (3,485) (904) (66) Nontemporary declines in fair value of investments (note 6) (4,101) (1,463) -- -- Realized and unrealized gains (losses) on financial instruments, net (note 3) (174) 223 (153) -- Gains (losses) on dispositions, net (notes 5 and 6) (310) 7,340 4 14 Other, net (11) 3 (4) 363 -------- ----- ------ --- (9,755) 2,520 (950) 295 -------- ----- ------ --- Earnings (loss) before income taxes and minority interest (10,882) 2,956 (3,164) 137 Income tax benefit (expense) (note 9) 3,908 (1,534) 1,097 (211) Minority interests in losses of subsidiaries 226 63 46 4 -------- ----- ------ --- Earnings (loss) before cumulative effect of accounting change (6,748) 1,485 (2,021) (70) Cumulative effect of accounting change, net of taxes (notes 3 and 8) 545 -- -- -- -------- ----- ------ --- Net earnings (loss) $ (6,203) 1,485 (2,021) (70) ======== ===== ====== ====== Pro forma earnings (loss) per common share (note 3): Pro forma basic and diluted earnings (loss) before cumulative effect of accounting change $ (2.61) .57 (.78) (.03) Cumulative effect of accounting change, net of taxes .21 -- -- -- -------- ----- ------ --- Pro forma basic and diluted net earnings (loss) $ (2.40) .57 (.78) (.03) ======== ===== ====== ====== Pro forma number of common shares outstanding 2,588 2,588 2,588 2,588 ======== ===== ====== ======
- -------- * as restated, see note 2 See accompanying notes to consolidated financial statements. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
New Liberty Old Liberty ------------------------------------------ ------------ Year Year Ten months Two months ended ended ended ended December 31, December 31, December 31, February 28, 2001 2000 * 1999 * 1999 ------------ ------------ ------------ ------------ amounts in millions Net earnings (loss) $(6,203) 1,485 (2,021) (70) -------- ------- ------- ------ Other comprehensive earnings, net of taxes (note 13): Foreign currency translation adjustments (359) (202) 60 (15) Unrealized holding gains (losses) arising during the period (1,013) (6,115) 6,488 885 Recognition of previously unrealized losses (gains) on available-for-sale securities, net 2,696 (635) 7 -- Cumulative effect of accounting change (notes 3 and 8) (87) -- -- -- -------- ------- ------- ------ Other comprehensive (loss) earnings 1,237 (6,952) 6,555 870 -------- ------- ------- ------ Comprehensive earnings (loss) $(4,966) (5,467) 4,534 800 ======== ======= ======= ======
- -------------------- * as restated, see note 2 See accompanying notes to consolidated financial statements. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common stock Additional Preferred --------------------- paid-in stock Series A Series B capital --------- -------- -------- ----------- amounts in millions Balance at January 1, 1999 $ -- -- -- 4,682 Net loss -- -- -- -- Other comprehensive earnings -- -- -- -- Other transfers from related parties, net -- -- -- 430 --------- -------- -------- ----------- Balance on February 28, 1999 $ -- -- -- 5,112 ========= ======== ======== ========== Balance at March 1, 1999 (as restated, see note 2) $ -- -- -- 33,500 Net loss -- -- -- -- Other comprehensive earnings -- -- -- -- Transfer from related party for redemption of debentures -- -- -- 354 Gains in connection with issuances of stock of affiliates and subsidiaries, net of taxes (note 10) -- -- -- 108 Utilization of net operating losses of Liberty by AT&T (note 9) -- -- -- (88) --------- -------- -------- ----------- Balance at December 31, 1999 -- -- -- 33,874 --------- -------- -------- ----------- Net earnings -- -- -- -- Other comprehensive loss -- -- -- -- Issuance of AT&T Class A Liberty Media Group common stock for acquisitions (note 7) -- -- -- 1,064 Gains in connection with issuances of stock by affiliates and subsidiaries, net of taxes (note 10) -- -- -- 355 Utilization of net operating losses of Liberty by AT&T (note 9) -- -- -- (38) Other transfers to related parties, net -- -- -- (213) --------- -------- -------- ----------- Balance at December 31, 2000 -- -- -- 35,042 --------- -------- -------- ----------- Net loss -- -- -- -- Other comprehensive earnings -- -- -- -- Issuance of common stock upon consummation of Split Off Transaction (note 2) -- 24 2 (26) Contribution from AT&T upon consummation of Split Off Transaction (note 2) -- -- -- 803 Accrual of amounts due to AT&T for taxes on deferred intercompany gains (note 2) -- -- -- (115) Losses in connection with issuances of stock by subsidiaries and affiliates, net of taxes (note 10) -- -- -- (8) Utilization of net operating losses of Liberty by AT&T prior to Split Off Transaction (note 9) -- -- -- (2) Stock option exercises and issuance of restricted stock prior to Split Off Transaction -- -- -- 302 --------- -------- -------- ----------- Balance at December 31, 2001 $ -- 24 2 35,996 ========= ======== ======== ==========
Accumulated other comprehensive Accumulated Total earnings, (deficit) stockholders' net of taxes earnings equity ------------ ----------- ------------ amounts in millions Balance at January 1, 1999 3,186 952 8,820 Net loss -- (70) (70) Other comprehensive earnings 870 -- 870 Other transfers from related parties, net -- -- 430 ------------ ----------- ------------ Balance on February 28, 1999 4,056 882 10,050 ============ =========== ============ Balance at March 1, 1999 (as restated, see note 2) -- -- 33,500 Net loss -- (2,021) (2,021) Other comprehensive earnings 6,555 -- 6,555 Transfer from related party for redemption of debentures -- -- 354 Gains in connection with issuances of stock of affiliates and subsidiaries, net of taxes (note 10) -- -- 108 Utilization of net operating losses of Liberty by AT&T (note 9) -- -- (88) ------------ ----------- ------------ Balance at December 31, 1999 6,555 (2,021) 38,408 ------------ ----------- ------------ Net earnings -- 1,485 1,485 Other comprehensive loss (6,952) -- (6,952) Issuance of AT&T Class A Liberty Media Group common stock for acquisitions (note 7) -- -- 1,064 Gains in connection with issuances of stock by affiliates and subsidiaries, net of taxes (note 10) -- -- 355 Utilization of net operating losses of Liberty by AT&T (note 9) -- -- (38) Other transfers to related parties, net -- -- (213) ------------ ----------- ------------ Balance at December 31, 2000 (397) (536) 34,109 ------------ ----------- ------------ Net loss -- (6,203) (6,203) Other comprehensive earnings 1,237 -- 1,237 Issuance of common stock upon consummation of Split Off Transaction (note 2) -- -- -- Contribution from AT&T upon consummation of Split Off Transaction (note 2) -- -- 803 Accrual of amounts due to AT&T for taxes on deferred intercompany gains (note 2) -- -- (115) Losses in connection with issuances of stock by subsidiaries and affiliates, net of taxes (note 10) -- -- (8) Utilization of net operating losses of Liberty by AT&T prior to Split Off Transaction (note 9) -- -- (2) Stock option exercises and issuance of restricted stock prior to Split Off Transaction -- -- 302 ------------ ----------- ------------ Balance at December 31, 2001 840 (6,739) 30,123 ============ =========== ============
See accompanying notes to consolidated financial statements. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
New Liberty Old Liberty ------------------------------------------ ----------- Year Year Ten months Two months ended ended ended ended December 31, December 31, December 31, February 28, 2001 2000 * 1999 * 1999 ------------ ------------ ------------ ------------ amounts in millions Cash flows from operating activities: (note 4) Net earnings (loss) $(6,203) 1,485 (2,021) (70) Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Cumulative effect of accounting change, net of taxes (545) -- -- -- Depreciation and amortization 984 854 562 22 Impairment of long-lived assets 388 -- -- -- Stock compensation 132 (950) 1,785 183 Payments of stock compensation (244) (319) (111) (126) Share of losses of affiliates, net 4,906 3,485 904 66 Nontemporary decline in fair value of investments 4,101 1,463 -- -- Realized and unrealized losses (gains) on financial instruments, net 174 (223) 153 -- Losses (gains) on disposition of assets, net 310 (7,340) (4) (14) Minority interests in losses of subsidiaries (226) (63) (46) (4) Deferred income tax expense (benefit) (3,613) 1,821 (1,025) 212 Intergroup tax allocation (222) (294) (75) (1) Payments from AT&T pursuant to tax sharing agreement 166 414 1 -- Other noncash charges (income) 40 15 3 (354) Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions: Receivables 30 (116) 7 33 Prepaid expenses and program rights (148) (121) (119) (23) Payables and other current liabilities (4) 88 119 (31) ------------ ------------ ------------ ------------ Net cash provided (used) by operating activities 26 199 133 (107) ------------ ------------ ------------ ------------ Cash flows from investing activities: Cash paid for acquisitions (113) (735) (109) -- Capital expended for property and equipment (358) (221) (40) (15) Investments in and loans to equity affiliates (1,031) (1,568) (1,090) (30) Investments in and loans to cost investments (1,548) (1,791) (1,506) (21) Purchases of marketable securities (269) (848) (7,757) (3) Sales and maturities of marketable securities 615 1,820 5,725 9 Cash proceeds from dispositions 471 456 130 43 Other investing activities, net (5) 21 (11) (62) ------------ ------------ ------------ ------------ Net cash used by investing activities (2,238) (2,866) (4,658) (79) ------------ ------------ ------------ ------------ Cash flows from financing activities: Borrowings of debt 1,639 4,597 3,187 155 Proceeds attributed to call option obligations upon issuance of senior exchangeable debentures 1,028 -- -- -- Repayments of debt (1,048) (2,156) (2,211) (145) Net proceeds from issuance of stock by subsidiaries -- 121 123 -- Premium proceeds from financial instruments 383 -- -- -- Proceeds from settlement of financial instruments, net 366 -- -- -- Payment from AT&T related to Split Off Transaction 803 -- -- -- Cash transfers (to) from related parties (157) (286) (159) 31 Other financing activities, net (20) (28) (20) (52) ------------ ------------ ------------ ------------ Net cash provided (used) by financing activities 2,994 2,248 920 (11) ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 782 (419) (3,605) (197) Cash and cash equivalents at beginning of period 1,295 1,714 5,319 228 ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ 2,077 1,295 1,714 31 ============ ============ ============ ============
- ------- * as restated, see note 2 See accompanying notes to consolidated financial statements. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (1) Basis of Presentation The accompanying consolidated financial statements include the accounts of Liberty Media Corporation ("Liberty" or the "Company") and those of all majority-owned and controlled subsidiaries. ALL significant intercompany accounts and transactions have been eliminated in consolidation. Liberty's domestic subsidiaries generally operate or hold interests in businesses which provide programming services including production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software. In addition, certain of Liberty's subsidiaries hold interests in businesses engaged in wireless telephony, electronic retailing, direct marketing and advertising sales relating to programming services, infomercials and transaction processing. Liberty also has significant interests in foreign affiliates which operate in cable television, programming and satellite distribution. (2) AT&T Ownership of Liberty On March 9, 1999, AT&T Corp. ("AT&T") acquired Tele-Communications, Inc. ("TCI"), the former parent company of Liberty, in a merger transaction (the "AT&T Merger"). As a result of the AT&T Merger, each series of TCI common stock was converted into a class of AT&T common stock subject to applicable exchange ratios. The AT&T Merger was accounted for using the purchase method. Accordingly, at the time of the AT&T Merger, Liberty's assets and liabilities were recorded at their respective fair values resulting in a new cost basis. For financial reporting purposes the AT&T Merger is deemed to have occurred on March 1, 1999. Accordingly, for periods prior to March 1, 1999 the assets and liabilities of Liberty and the related consolidated financial statements are sometimes referred to herein as "Old Liberty," and for periods subsequent to February 28, 1999 the assets and liabilities of Liberty and the related consolidated financial statements are sometimes referred to herein as "New Liberty." The "Company" and "Liberty" refer to both New Liberty and Old Liberty. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued The following table represents the summary balance sheet of Old Liberty at February 28, 1999, prior to the AT&T Merger and the opening summary balance sheet of New Liberty subsequent to the AT&T Merger. Certain pre-merger transactions occurring between March 1, 1999, and March 9, 1999, that affected Old Liberty's equity, gains on issuance of equity securities by affiliates and subsidiaries, and stock compensation have been reflected in the two-month period ended February 28, 1999.
New Liberty Old Liberty ----------- ----------- amounts in millions Assets: Cash and cash equivalents $ 5,319 31 Other current assets 434 1,011 Investments in affiliates 17,116 3,971 Investments in available-for-sale securities 13,094 11,974 Property and equipment, net 125 111 Intangibles and other assets 11,159 389 ------- ------ $47,247 17,487 ======= ====== Liabilities and Equity: Current liabilities $ 1,872 1,051 Long-term debt 1,845 2,087 Deferred income taxes 9,972 4,147 Other liabilities 19 90 ------- ------ Total liabilities 13,708 7,375 ------- ------ Minority interests in equity of subsidiaries 39 62 Stockholder's equity 33,500 10,050 ------- ------ $47,247 17,487 ======= ======
From March 9, 1999 through August 9, 2001, AT&T owned 100% of the outstanding common stock of Liberty. During such time, the AT&T Class A Liberty Media Group common stock and the AT&T Class B Liberty Media Group common stock (together, the AT&T Liberty Media Group tracking stock) were tracking stocks of AT&T designed to reflect the economic performance of the businesses and assets of AT&T attributed to the Liberty Media Group. Liberty was included in the Liberty Media Group. On May 7, 2001, AT&T contributed to Liberty assets that were attributed to the Liberty Media Group but not previously owned by Liberty (the "Contributed Assets"). These assets included (i) preferred stock and common stock interests in a subsidiary of IDT Corporation, a multinational telecommunications services provider and (ii) an approximate 8% indirect common equity interest in Liberty Digital, Inc. ("Liberty Digital"). Subsequent to these contributions, the businesses and assets of Liberty and its subsidiaries constituted all of the businesses and assets of the Liberty Media Group. The contributions have been accounted for in a manner similar to a pooling of interests and, accordingly, the financial statements of Liberty for periods prior to the contributions have been restated to include the financial position and results of operations of the Contributed Assets. Effective August 10, 2001, AT&T effected the split-off of Liberty pursuant to which Liberty's common stock was recapitalized, and each outstanding share of AT&T Class A Liberty Media Group tracking stock was redeemed for one share of Liberty Series A common stock and each outstanding share of AT&T Class B Liberty Media Group tracking stock was redeemed for one share of Liberty Series B common stock (the "Split Off Transaction"). Subsequent to the Split Off Transaction, Liberty is no longer a subsidiary of AT&T and no shares of AT&T Liberty Media Group tracking stock remain outstanding. The Split Off Transaction has been accounted for at historical cost. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued In connection with the Split Off Transaction, Liberty has also been deconsolidated from AT&T for federal income tax purposes. As a result, AT&T was required to pay Liberty an amount equal to 35% of the amount of the net operating loss carryforward reflected in TCI's final federal income tax return that has not been used as an offset to Liberty's obligations under the AT&T Tax Sharing Agreement and that has been, or is reasonably expected to be, utilized by AT&T. The $803 million payment was received by Liberty prior to the Split Off Transaction and has been reflected as an increase to additional paid-in-capital in the accompanying consolidated statement of stockholders' equity. In addition, certain deferred intercompany gains will be includible in AT&T's taxable income as a result of the Split Off Transaction, and AT&T will be entitled to reimbursement from Liberty for the resulting tax liability of approximately $115 million. Such tax liability has been accrued as of December 31, 2001 and has been reflected as a reduction in additional paid-in-capital in the accompanying consolidated statement of stockholders' equity. (3) Summary of Significant Accounting Policies Cash and Cash Equivalents Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 2001 and 2000 was not material. Program Rights Prepaid program rights are amortized on a film-by-film basis over the anticipated number of exhibitions. Committed program rights and program rights payable are recorded at the estimated cost of the programs when the film is available for airing less prepayments. These amounts are amortized on a film-by-film basis over the anticipated number of exhibitions. Investments All marketable equity and debt securities held by the Company are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities that are classified as available-for-sale ("AFS Securities") and are hedged with a derivative financial instrument that qualifies as a fair value hedge under Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133") are recognized in the Company's consolidated statement of operations. Unrealized holding gains and losses of AFS Securities that are not hedged pursuant to Statement 133 are carried net of taxes as a component of accumulated other comprehensive earnings in stockholder's equity. Realized gains and losses are determined on an average cost basis. Other investments in which the Company's ownership interest is less than 20% and are not considered marketable securities are carried at the lower of cost or net realizable value. For those investments in affiliates in which the Company has the ability to exercise significant influence, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company's share of net earnings or losses of the affiliates as they occur rather then as dividends or other distributions are received, limited to the extent of the Company's investment in, advances to and commitments for the investee. The Company's share of net earnings or losses of affiliates includes the amortization of the difference between the Company's investment and its share of the net assets of the investee and also includes any nontemporary declines in fair value recognized during the period. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Subsequent to the AT&T Merger, changes in the Company's proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such subsidiary or equity investee, are recognized as increases or decreases in the Company's consolidated statements of stockholders' equity. The Company continually reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary ("nontemporary"). The Company considers a number of factors in its determination including (i) the financial condition, operating performance and near term prospects of the investee; (ii) the reason for the decline in fair value, be it general market conditions, industry specific or investee specific; (iii) analysts' ratings and estimates of 12 month share price targets for the investee; (iv) the length of time that the fair value of the investment is below the Company's carrying value; and (v) the Company's intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than temporary, the cost basis of the security is written down to fair value. In situations where the fair value of an investment is not evident due to a lack of a public market price or other factors, the Company uses its best estimates and assumptions to arrive at the estimated fair value of such investment. The Company's assessment of the foregoing factors involves a high degree of judgment and accordingly, actual results may differ materially from the Company's estimates and judgments. Writedowns for cost investments and AFS Securities are included in the consolidated statements of operations as nontemporary declines in fair values of investments. Writedowns for equity method investments are included in share of losses of affiliates. Property and Equipment Property and equipment, including significant improvements, is stated at cost. Depreciation is computed using the straight-line method using estimated useful lives of 3 to 20 years for support equipment and 10 to 40 years for buildings and improvements. Excess Cost Over Acquired Net Assets Excess cost over acquired net assets consists of the difference between the cost of acquiring non-cable entities and amounts assigned to their tangible assets. Such amounts are amortized using the straight-line method over periods ranging from 5 to 20 years. Franchise Costs Franchise costs generally include the difference between the cost of acquiring cable companies and amounts allocated to their tangible assets. Such amounts are amortized using the straight-line method over 20 years. Impairment of Long-lived Assets The Company periodically reviews the carrying amounts of its property and equipment and its intangible assets to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment adjustment is to be recognized. Such adjustment is measured by the amount that the carrying value of such assets exceeds their fair value. The Company generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows using an appropriate discount rate. Considerable management judgment is necessary to estimate the fair value of assets, accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued As a result of the weakness in the economy in 2001 certain subsidiaries of the Company did not meet their 2001 operating objectives and have reduced their 2002 expectations. Accordingly, the subsidiaries assessed the recoverability of their property and equipment and intangible assets and determined that impairment adjustments were necessary. In addition, in the fourth quarter, a subsidiary made the decision to consolidate certain of its operations and close certain facilities. In connection with these initiatives, the subsidiary recorded a restructuring charge related to lease cancellation fees and an additional impairment charge related to its property and equipment. All of the foregoing charges are included in impairment of long-lived assets in the Company's statement of operations. Minority Interests Recognition of minority interests' share of losses of subsidiaries is generally limited to the amount of such minority interests' allocable portion of the common equity of those subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of subsidiaries have the right to cause the Company to repurchase such holders' common equity. Preferred stock (and accumulated dividends thereon) of subsidiaries are included in minority interests in equity of subsidiaries. Dividend requirements on such preferred stocks are reflected as minority interests in earnings of subsidiaries in the accompanying consolidated statements of operations and comprehensive earnings. Foreign Currency Translation The functional currency of the Company is the United States ("U.S.") dollar. The functional currency of the Company's foreign operations generally is the applicable local currency for each foreign subsidiary and foreign equity method investee. Assets and liabilities of foreign subsidiaries and foreign equity investees are translated at the spot rate in effect at the applicable reporting date, and the consolidated statements of operations and the Company's share of the results of operations of its foreign equity affiliates are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment, net of applicable income taxes, is recorded as a component of accumulated other comprehensive earnings in stockholder's equity. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in the accompanying consolidated statements of operations and comprehensive earnings as unrealized (based on the applicable period end exchange rate) or realized upon settlement of the transactions. Unless otherwise indicated, convenience translations of foreign currencies into U.S. dollars are calculated using the applicable spot rate at December 31, 2001, as published in The Wall Street Journal. Derivative Instruments and Hedging Activities The Company uses various derivative instruments including equity collars, put spread collars, bond swaps and foreign exchange contracts to manage fair value and cash flow risk associated with many of its investments, some of its variable rate debt and forecasted transactions to be denominated in foreign currencies. Each of these derivative instruments is executed with a counterparty, generally well known major financial institutions. While Liberty believes these derivative instruments effectively manage the risks highlighted above, they are subject to counterparty credit risk. Counterparty credit risk is the risk that the counterparty is unable to perform under the terms of the derivative instrument upon settlement of the derivative LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued instrument. To protect itself against credit risk associated with these counterparties the Company: - Executes its derivative instruments with several different counterparties, and - Executes derivative instrument agreements which contain a provision that requires the counterparty to post the "in the money" portion of the derivative instrument into a cash collateral account for the Company's benefit, if the respective counterparty's credit rating were to reach certain levels, generally a rating that is below Standard & Poor's rating of A- or Moody's rating of A3. Due to the importance of these derivative instruments to its risk management strategy, Liberty actively monitors the creditworthiness of each of these counterparties. Based on its analysis, the Company considers nonperformance by any of its counterparties to be unlikely. Effective January 1, 2001, Liberty adopted Statement 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive earnings and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is not designated as a hedge, changes in the fair value of the derivative are recognized in earnings. Currently, the only instruments designated as hedges are the Company's equity collars, which are designated as fair value hedges. The fair value of derivative instruments is estimated using the Black-Scholes model. The Black-Scholes model incorporates a number of variables in determining such fair values, including expected volatility of the underlying security and an appropriate discount rate. The Company selects a volatility rate at the inception of the derivative instrument based on the historical volatility of the underlying security and on the term of the derivative instrument. The volatility assumption is generally not changed during the term of the derivative instrument unless there is an indication that the historical volatility is no longer appropriate. Considerable management judgment is required in estimating the Black-Scholes variables. Actual results upon settlement or unwinding of derivative instruments may differ materially from these estimates. Derivative gains and losses included in other comprehensive earnings are reclassified into earnings at the time the sale of the hedged item or transaction is recognized. Prior to the adoption of Statement 133, changes in the fair value of the Company's equity collars were reported as a component of comprehensive earnings (in unrealized gains) along with changes in the fair value of the underlying securities. Changes in the fair value of put spread collars were recorded as unrealized gains (losses) on financial instruments in the consolidated statements of operations. The adoption of Statement 133 on January 1, 2001, resulted in a cumulative increase in net earnings of $545 million, or $0.21 per common share, (after tax expense of $356 million) and an increase in other comprehensive loss of $87 million. The increase in net earnings was mostly attributable to separately recording the fair value of the embedded call option obligations associated with the Company's senior exchangeable debentures. The increase in other comprehensive loss relates primarily to changes in the fair value of the Company's warrants and options to purchase certain available-for-sale securities. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued The Company assesses the effectiveness of equity collars by comparing changes in the intrinsic value of the equity collar to changes in the fair value of the underlying security. For derivatives designated as fair value hedges, changes in the time value of the derivatives, which are excluded from the assessment of hedge effectiveness, are recognized currently in earnings as a component of realized and unrealized gains (losses) on financial instruments. Hedge ineffectiveness, determined in accordance with Statement 133, had no impact on earnings for the year ended December 31, 2001. For the year ended December 31, 2001, realized and unrealized gains on financial instruments included a $167 million unrealized gain related to call option obligations, a $616 million unrealized net loss for changes in the fair value of derivative instruments related to available-for-sale securities and other derivatives not designed as hedging instruments, and a $275 million unrealized net gain for changes in the time value of options for fair value hedges. During the year ended December 31, 2001, the Company received cash proceeds of $329 million as a result of unwinding certain of its equity collars. Pursuant to Statement 133, the proceeds received less the offsetting impact of hedge accounting on the underlying securities resulted in $162 million of realized and unrealized gains on financial instruments in the consolidated statement of operations for the year ended December 31, 2001. Revenue Recognition Programming revenue is recognized in the period during which programming is provided, pursuant to affiliation agreements. Advertising revenue is recognized, net of agency commissions, in the period during which underlying advertisements are broadcast. Revenue from post-production services is recognized in the period the services are rendered. Cable and other distribution revenue is recognized in the period that services are rendered. Cable installation revenue is recognized in the period the related services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution system. Advertising Costs Advertising costs generally are expensed as incurred. Advertising expense aggregated $43 million, $35 million, $18 million and $4 million for the years ended December 31, 2001 and 2000, the ten months ended December 31, 1999 and the two months ended February 28, 1999, respectively. Stock Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. As allowed by Statement 123, Liberty continues to account for stock-based compensation pursuant to Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25"). Agreements that may require Liberty to reacquire interests in subsidiaries held by officers and employees in the future are marked-to-market at the end of each reporting period with corresponding adjustments being recorded to stock compensation expense. Pro Forma Earnings (Loss) Per Common Share Pro forma basic earnings (loss) per common share is computed by dividing net earnings (loss) by the pro forma number of common shares outstanding. The pro forma number of outstanding common shares for periods prior to the Split Off Transaction is based upon the number of shares of Series A and Series B Liberty common stock issued upon consummation of the Split Off LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Transaction. Pro forma diluted earnings (loss) per common share presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Excluded from diluted earnings per share for the year ended December 31, 2001, are 76 million potential common shares because their inclusion would be anti-dilutive. Reclassifications Certain prior period amounts have been reclassified for comparability with the 2001 presentation. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement No. 141, Business Combinations ("Statement 141"), and Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142"). Statement 141 requires that the purchase method of accounting be used for all business combinations. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted the provisions of Statement 141 effective July 1, 2001, and is required to adopt Statement 142 effective January 1, 2002. Statement 141 requires upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with Statement 142's transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill and equity-method goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. As of the date of adoption, the Company will have unamortized goodwill in the amount of $9,191 million, unamortized identifiable intangible assets in the amount of $831 million, and unamortized equity-method excess costs in the amount of $7,766 million, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $617 million and $587 million for the years ended December 31, 2001 and 2000, respectively; and amortization of equity-method excess costs (included in share of losses of affiliates) aggregated $798 million and $1,058 million for the years ended December 31, 2001 and 2000, respectively. The Company currently estimates that upon adoption of Statement 142, it will be required to recognize a $1.5 - $2.0 billion transitional impairment loss as the cumulative effect of a change in accounting principle. The foregoing estimate does not include an adjustment for the Company's proportionate share of any transition adjustments that its equity method affiliates may record, as the Company is currently unable to estimate the amount of such adjustment. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes prior statements that address the disposal of a segment of a business, and eliminates the exception to consolidation for subsidiaries for which control is likely to be temporary. This statement retains the prior statement's fundamental provisions for the recognition and measurement of impairment of long-lived assets to be held and used, as well as the measurement of long-lived assets to be disposed of by sale. The statement is effective for fiscal years beginning after December 15, 2001. The Company has not determined the impact that adoption of this statement will have on its financial position, results of operations or cash flow. (4) Supplemental Disclosures to Consolidated Statements of Cash Flows
New Liberty Old Liberty ---------------------------------------------- ------------- Year Year Ten months Two months ended ended ended ended December 31, December 31, December 31, February 28, 2001 2000 1999 1999 ------------ ------------ ------------ ------------ amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ 264 3,733 122 -- Net liabilities assumed (136) (1,208) (13) -- Deferred tax liability (7) (281) -- -- Minority interest (8) (445) -- -- Contribution to equity for acquisitions -- (1,064) -- -- ------------ ------------ ------------ ------------ Cash paid for acquisitions $ 113 735 109 -- ============ ============ ============ ============ Cash paid for interest $ 451 335 93 32 ============ ============ ============ ============ Cash paid for income taxes $ 9 2 1 -- ============ ============ ============ ============
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued During the ten months ended December 31, 1999, certain subsidiaries with a carrying value of $135 million were exchanged for a cost method investment in an online music venture. The following table reflects the change in cash and cash equivalents resulting from the AT&T Merger and related restructuring transactions (amounts in millions): Cash and cash equivalents prior to the AT&T Merger $ 31 Cash contribution in connection with the AT&T Merger 5,464 Cash paid to TCI for certain warrants (176) -------- Cash and cash equivalents subsequent to the AT&T Merger $ 5,319 ========
(5) Investments in Affiliates Accounted for Using the Equity Method Liberty has various investments accounted for using the equity method. The following table includes Liberty's carrying amount and percentage ownership of the more significant investments in affiliates at December 31, 2001 and the carrying amount at December 31, 2000:
December 31, December 31, 2001 2000 ------------ ------------ Percentage Carrying Carrying Ownership Amount Amount ---------- -------- -------- dollar amounts in millions Discovery Communications, Inc. ("Discovery") 50% $ 2,900 3,133 QVC, Inc. ("QVC") 42% 2,543 2,508 USA Networks, Inc. ("USAI") and related investments 20% 2,857 2,824 UnitedGlobalCom, Inc. ("UnitedGlobalCom") 20% (418) 314 Telewest Communications plc ("Telewest") 25% 97 2,712 Jupiter Telecommunications Co., Ltd. ("Jupiter") 35% 407 575 Gemstar-TV Guide International, Inc. ("Gemstar") N/A -- 5,855 Other various 1,690 2,543 -------- ------ $ 10,076 20,464 ======== ======
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued The following table reflects Liberty's share of earnings (losses) of affiliates including excess basis amortization and nontemporary declines in value:
New Liberty Old Liberty ---------------------------------------------- ------------- Year Year Ten months Two months ended ended ended ended December 31, December 31, December 31, February 28, 2001 2000 1999 1999 ------------ ------------ ------------ ------------ amounts in millions Discovery $ (293) (293) (269) (8) QVC 36 (12) (11) 13 USAI and related investments 35 (36) (20) 10 UnitedGlobalCom (751) (211) 23 -- Telewest (2,538) (441) (222) (38) Jupiter (90) (114) (54) (7) Cablevision S.A. ("Cablevision") (476) (49) (28) (3) ASTROLINK International LLC ("Astrolink") (417) (8) -- -- Teligent, Inc. ("Teligent (85) (1,269) -- -- Gemstar (133) (254) -- -- Other (194) (798) (323) (33) ------------ ------------ ------------ ------------ $ (4,906) (3,485) (904) (66) ============ ============ ============ ============
At December 31, 2001, the aggregate carrying amount of Liberty's investments in its affiliates exceeded Liberty's proportionate share of its affiliates' net assets by $7,766 million. Such excess is being amortized over estimated useful lives of up to 20 years. Such amortization was $798 million, $1,058 million, $463 million and $9 million for the years ended December 31, 2001 and 2000, the ten months ended December 31, 1999 and the two months ended February 28, 1999, respectively, and is included in share of losses of affiliates. Certain of Liberty's affiliates are general partnerships and, as such, Liberty is liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. USAI USAI owns and operates businesses in network and television production, electronic retailing, ticketing operations, and internet services. At December 31, 2001, Liberty held 74.4 million shares of USAI's common stock. In addition, at December 31, 2001, Liberty held shares and other equity interests in certain subsidiaries of USAI that are exchangeable for an aggregate of 79.0 million shares of USAI common stock. The exchange of such shares and interests is subject to certain conditions including that Liberty's ownership of USAI's common stock issuable upon such exchange not being restricted by Federal Communications Commission ("FCC") regulations. On August 28, 2001, USAI gave Liberty notice that on August 21, 2001 USAI had sold its television broadcast stations and associated broadcast licenses and as a result of such sale, FCC regulations no longer restricted Liberty's ownership of shares of USAI's common stock issuable upon such exchange and, accordingly, that USAI was exercising its right to require that Liberty exchange such stock and other interests of such subsidiaries for shares of USAI common stock (the "USAI Exchange"). If the USAI Exchange had been completed at December 31, 2001, Liberty would have owned 153.4 million shares or approximately 20% (on a fully-diluted basis) of USAI common stock. The closing price of USAI's common stock on December 31, 2001 was $27.31 per share. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued In December 2001, Liberty entered into an agreement with USAI and Vivendi Universal, S.A. ("Vivendi"), pursuant to which USAI will contribute substantially all of its entertainment assets to a partnership controlled by Vivendi. In connection with the transaction, Liberty entered into a separate agreement with Vivendi, pursuant to which Vivendi will acquire from Liberty 25 million shares of common stock of USAI, approximately 38.7 millions shares of USANi LLC, which are exchangeable, on a one-for-one basis, for shares of USAI common stock, and all of its approximate 30% interest in multiThematiques S.A., together with certain liabilities with respect thereto, in exchange for ADSs representing approximately 37.4 million Vivendi ordinary shares, subject to adjustment. The closing of Liberty's transaction with Vivendi and the closing of Vivendi's transaction with USAI are conditioned on one another. Subsequent to the Vivendi transaction with USAI, USAI will be renamed USA Interactive. The Company anticipates that the Vivendi transaction will be consummated in the second quarter of 2002. Upon completion Liberty will own approximately 3% of Vivendi and 20% of USA Interactive. UnitedGlobalCom UnitedGlobalCom is a global broadband communications provider of video, voice and data services with operations in over 25 countries throughout the world. At December 31, 2001, Liberty owned an approximate 20% economic ownership interest representing an approximate 40% voting interest in UnitedGlobalCom. Liberty owns 9.9 million shares of UnitedGlobalCom Class B common stock and 13.1 million shares of UnitedGlobalCom Class A common stock. The UnitedGlobalCom Class B common stock is convertible, on a one - for-one basis, into UnitedGlobalCom Class A common stock. The closing price of UnitedGlobalCom's Class A common stock on December 31, 2001 was $5.00 per share. On January 30, 2002, the Company and UnitedGlobalCom completed a transaction (the "New United Transaction") pursuant to which a new holding company ("New United") was formed to own UnitedGlobalCom, and all shares of UnitedGlobalCom common stock were exchanged for shares of common stock of New United. In addition, the Company contributed (i) cash consideration of $200 million; (ii) a note receivable from Belmarken Holding B.V., a subsidiary of UnitedGlobalCom, with an accreted value of $892 million and (iii) Senior Notes and Senior Discount Notes of United-Pan Europe Communications N.V., a subsidiary of UnitedGlobalCom, comprised of U.S. dollar denominated notes with a face amount of $1,435 million and euro denominated notes with a face amount of euro 263 million to New United in exchange for 281.3 million shares of Class C common stock of New United. Upon consummation of the New United Transaction, Liberty owns an approximate 72% economic interest and a 94% voting interest in New United. Pursuant to certain voting and standstill arrangements entered into at the time of closing, Liberty is unable to exercise control of New United, and accordingly, Liberty will continue to use the equity method of accounting for its investment. Due to the Company's commitment to increase its investment in UnitedGlobalCom, as evidenced by the New United Transaction, the Company recognized its share of UnitedGlobalCom's losses such that its investment in UnitedGlobalCom was less than zero at December 31, 2001. As the Company's investment in United Pan-Europe Communications, N.V., a subsidiary of UnitedGlobalCom, has a carrying value of $718 million at December 31, 2001, the Company continues to include the negative carrying value of its UnitedGlobalCom investment in investments accounted for using the equity method. Also on January 30, 2002, New United acquired from Liberty its debt and equity interests in IDT United, Inc. and $751 million principal amount at maturity of UnitedGlobalCom's $1,375 million 10-3/4% senior secured discount notes due 2008 (the "2008 Notes"), which had been distributed to Liberty in redemption of a portion of its interest in IDT United. IDT United was formed as an indirect subsidiary of IDT Corporation for purposes of effecting a tender offer for all outstanding 2008 Notes at a purchase price of $400 per $1,000 principal amount at maturity, which tender offer expired on February 1, 2002. The aggregate purchase price for the Company's interest in IDT United of approximately $449 million was equal to the aggregate amount Liberty had invested in IDT United, plus interest. Approximately $305 million of the purchase paid was paid by the assumption by New United of LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued debt owed by Liberty to a subsidiary of UnitedGlobalCom, and the remainder was credited against the $200 million cash contribution by Liberty to New United described above. In connection with the New United Transaction, a subsidiary of Liberty agreed to loan to a subsidiary of New United up to $105 million. As of February 28, 2002, such subsidiary of New United has borrowed $103 million from the Liberty subsidiary to acquire additional shares of preferred stock and promissory notes issued by IDT United. The 2008 Notes owned by IDT United, together with 2008 Notes acquired by New United directly from Liberty referred to above, all of which remain outstanding, represent approximately 98.2% of the outstanding 2008 Notes. Telewest Telewest currently operates and constructs cable television and telephone systems in the UK. In April 2000, Telewest acquired Flextech p.l.c. ("Flextech") which develops and sells a variety of television programming in the UK. Prior to the acquisition, Liberty owned an approximate 37% equity interest in Flextech and a 22% equity interest in Telewest. As a result of the acquisition, Liberty owns an approximate 25% equity interest in Telewest. Liberty recognized a $649 million gain (excluding related tax expense of $227 million) on the acquisition based on the difference between the carrying value of Liberty's interest in Flextech and the fair value of the Telewest shares received. At December 31, 2001 Liberty indirectly owned 744.4 million of the issued and outstanding Telewest ordinary shares. The closing price of Telewest's ordinary shares on December 31, 2001 was $0.94 per share. During the year ended December 31, 2001, Liberty determined that its investment in Telewest experienced a nontemporary decline in value. As a result, the carrying value of Telewest was adjusted to its estimated fair value, and the Company recorded a charge of $1,801 million. Such charge is included in share of losses of affiliates. Summarized financial information for Telewest is as follows:
December 31, ------------------- 2001 2000 ------ ------ amounts in millions Financial Position Investments $ 795 377 Property and equipment, net 5,051 5,078 Intangibles, net 2,752 4,666 Other assets, net 611 586 ------ ------ Total assets $9,209 10,707 ====== ====== Debt $7,122 6,360 Other liabilities 1,431 1,080 Owners' equity 656 3,267 ------ ------ Total liabilities and equity $9,209 10,707 ====== ======
Years ended December 31, --------------------------------- 2001 2000 1999 ------- ------ ------ amounts in millions Results of Operations Revenue $ 1,811 1,623 1,064 Operating expenses (1,380) (1,293) (777) ------- ------ ------ Operating cash flow (as defined by Liberty) 431 330 287 Depreciation and amortization (941) (863) (475) Impairment of long-lived assets (1,112) -- -- Interest expense (681) (585) (350) Other, net (217) (27) (155) ------- ------ ------ Net loss $(2,520) (1,145) (693) ======= ====== ======
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Gemstar Gemstar is a global technology and media company focused on consumer entertainment. The common stock of Gemstar is publicly traded. On July 12, 2000, Gemstar acquired TV Guide, Inc. ("TV Guide"). TV Guide shareholders received .6573 shares of Gemstar common stock in exchange for each share of TV Guide. As a result of this transaction, 133 million shares of TV Guide held by Liberty were exchanged for 87.5 million shares or 21% of Gemstar common stock. Liberty recognized a $4,391 million gain (before deferred tax expense of $1,737 million) on such transaction during the third quarter of 2000 based on the difference between the carrying value of Liberty's interest in TV Guide and the fair value of the Gemstar securities received. In May 2001, Liberty consummated a transaction ("Exchange Transaction") with The News Corporation Limited ("News Corp.") whereby Liberty exchanged 70.7 million shares of Gemstar for 121.5 million News Corp. American Depository Shares ("ADSs") representing preferred, limited voting, ordinary shares of News Corp. Liberty recorded a loss of $764 million in connection with the Exchange Transaction as the fair value of the securities received by Liberty was less than the carrying value of the Gemstar shares. In December 2001, Liberty exchanged its remaining Gemstar shares for 28.8 million additional News Corp. ADSs and recorded an additional loss of $201 million. Cablevision Cablevision provides cable television and high speed data services in Argentina. At December 31, 2001, the Company has a 50% ownership in Cablevision. The Argentine government has historically maintained an exchange rate of one Argentine peso to one U.S. dollar (the "peg rate"). Due to deteriorating economic and political conditions in Argentina in late 2001, the Argentine government eliminated the peg rate effective January 11, 2002. The value of the Argentine peso dropped significantly on the day the peg rate was eliminated. In addition, the Argentine government placed restrictions on the payment of obligations to foreign creditors. As a result of the devaluation of the Argentine peso, Cablevision recorded foreign currency translation losses of $393 million in the fourth quarter of 2001. At December 31, 2001, the Company determined that its investment in Cablevision had experienced a nontemporary decline in value, and accordingly, recorded an impairment charge of $195 million. Such charge is included in share of losses of affiliates. The Company's share of losses in 2001, when combined with foreign currency translation losses recorded in other comprehensive loss at December 31, 2001, reduced the carrying value of its investment in Cablevision to zero as of December 31, 2001. Included in accumulated other comprehensive earnings at December 31, 2001 is $257 million of unrealized foreign currency translation losses related to the Company's investment in Cablevision. Astrolink Astrolink, a developmental stage entity, originally intended to build a global telecom network using Ka-band geostationary satellites to provide broadband data communications services. Astrolink's original business plan required significant additional financing over the next several years. During the fourth quarter of 2001, two of the members of Astrolink informed Astrolink that they do not intend to provide any of Astrolink's required financing. In light of this decision, Astrolink is considering several alternatives with respect to its proposed business plan, including, but not limited to, seeking alternative funding sources, scaling back their proposed business plan, and liquidating the venture entirely. There can be no assurance that Astrolink will be able to obtain the necessary financing on acceptable terms, or that it will be able to fulfill the business plan as originally proposed, or at all. During the second quarter of 2001, the Company determined that its investment in Astrolink experienced a nontemporary decline in value. Accordingly, the carrying amount of such investment was adjusted to its then estimated fair value resulting in a recognized loss of $155 million. Such loss is included in share of losses of affiliates. Based on a fourth quarter 2001 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued assessment of Astrolink's remaining sources of liquidity and Astrolink's inability to obtain financing for its business plan, the Company concluded that the carrying value of its investment in Astrolink should be further reduced to reflect a fair value that assumes the liquidation of Astrolink. Accordingly, the Company wrote-off all of its remaining investment in Astrolink during the fourth quarter of 2001. The aggregate amount required to reduce its investment in Astrolink to zero was $250 million. Including such fourth quarter amount, the Company recorded losses and charges relating to its investment in Astrolink aggregating $417 million during the year ended December 31, 2001. Teligent In January 2000, the Company acquired a 40% equity interest in Teligent, a full-service facilities based communications company. During the nine months ended September 30, 2000, the Company determined that its investment in Teligent experienced a nontemporary decline in value. As a result, the carrying amount of this investment was adjusted to its estimated fair value resulting in a charge of $839 million. This impairment charge is included in share of losses of affiliates. In April 2001, the Company exchanged its investment in Teligent for shares of IDT Investments, Inc., a subsidiary of IDT Corporation. As the fair value of the consideration received in the exchange approximated the carrying value of the Company's investment in Teligent, no gain or loss was recognized on the transaction. The Company accounts for its investment in IDT Investments, Inc. using the cost method. Summarized unaudited combined financial information for affiliates other than Telewest is as follows:
December 31, ------------------- 2001 2000 ------- ------ amounts in millions Combined Financial Position Investments $ 872 1,776 Property and equipment, net 7,060 8,294 Intangibles, net 15,183 26,763 Other assets, net 10,837 11,603 ------- ------ Total assets $33,952 48,436 ======= ====== Debt $17,262 18,351 Other liabilities 14,075 15,904 Owners' equity 2,615 14,181 ------- ------ Total liabilities and equity $33,952 48,436 ======= ======
Years ended December 31, -------------------------------------- 2001 2000 1999 -------- ------ ------ amounts in millions Combined Operations Revenue $ 15,132 14,626 10,787 Operating expenses (13,381) (13,511) (9,401) Depreciation and amortization (2,703) (2,718) (1,087) Impairment charges (1,426) -- -- -------- ------ ------ Operating income (loss) (2,378) (1,603) 299 Interest expense (1,639) (1,616) (599) Other, net (685) 174 (75) -------- ------ ------ Net loss $ (4,702) (3,045) (375) ======== ====== ======
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued (6) Investments in Available-for-Sale Securities and Other Cost Investments Investments in available-for-sale securities and other cost investments are summarized as follows:
December 31, ------------------- 2001 2000 -------- ------ amounts in millions Sprint Corporation ("Sprint") $ 5,697 5,192 AOL Time Warner Inc. ("AOL Time Warner") 6,236 -- News Corp. 6,118 2,342 Motorola, Inc. ("Motorola") 1,773 1,982 Viacom, Inc. ("Viacom") 670 -- United Pan-Europe Communications N.V. ("UPC") 718 203 Time Warner Inc. ("Time Warner") -- 6,325 Other available-for-sale securities 2,386 2,989 Other investments, at cost, and related receivables 343 502 -------- ------ 23,941 19,535 Less short-term investments (397) (500) -------- ------ $ 23,544 19,035 ======== ======
Sprint PCS Liberty and certain of its consolidated subsidiaries collectively are the beneficial owners of approximately 197 million shares of Sprint PCS Group Stock and certain other instruments convertible into such securities (the "Sprint Securities"). The Sprint PCS Group Stock is a tracking stock intended to reflect the performance of Sprint's domestic wireless PCS operations. Liberty accounts for its investment in the Sprint Securities as an available-for-sale security. Pursuant to a final judgment (the "Final Judgment") agreed to by Liberty, AT&T and the United States Department of Justice (the "DOJ") on December 31, 1998, Liberty transferred all of its beneficially owned Sprint Securities to a trustee (the "Trustee") prior to the AT&T Merger. The Final Judgment, which was entered by the United States District Court of the District of Columbia on August 23, 1999, requires the Trustee, on or before May 23, 2002, to dispose of a portion of the Sprint Securities sufficient to cause Liberty to beneficially own no more than 10% of the outstanding Sprint PCS Group common stock - Series 1 on a fully diluted basis on such date. On or before May 23, 2004, the Trustee must divest the remainder of the Sprint Securities beneficially owned by Liberty. As of December 31, 2001, Liberty beneficially owned approximately 19% of Sprint PCS Group common stock - Series 2. The Final Judgment requires that the Trustee vote the Sprint Securities beneficially owned by Liberty and its consolidated subsidiaries in the same proportion as other holders of Sprint Securities so long as such securities are held by the trust. The Final Judgment also prohibits the acquisition by Liberty of additional Sprint Securities, with certain exceptions, without the prior written consent of the DOJ. At Liberty's request, the Department of Justice has joined Liberty and AT&T in a joint motion to terminate the Final Judgment which was filed in the District Court in February 2002. Under the terms of the Final Judgment, the obligation of the trustee to dispose of the first tranche of shares by May 23, 2002 will be stayed while the District Court considers the joint motion. Liberty is also seeking the approval of the Federal Communications Commission to the stay of the trustee's obligation to dispose of the first tranche of shares pending the District Court's determination of the joint motion. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued AOL Time Warner On January 11, 2001, America Online, Inc. completed its merger with Time Warner to form AOL Time Warner. In connection with the merger, each share of Time Warner common stock held by Liberty was converted into 1.5 shares of an identical series of AOL Time Warner stock. Upon completion of this transaction, Liberty holds a total of 171 million shares in AOL Time Warner. Liberty recognized a $253 million gain (before deferred tax expense of $100 million) based upon the difference between the carrying value of Liberty's interest in Time Warner and the fair value of the AOL Time Warner securities received. News Corp. In May and December of 2001, Liberty acquired an aggregate of 154 million News Corp. ADSs in exchange for its shares of Gemstar common stock and another equity investment. Liberty recorded a loss of $965 million in connection with these exchanges based on the difference between the fair value of the News Corp. ADSs received and the carrying value of the Gemstar investment. In connection with this transaction, the Company agreed to restrictions on its ability to transfer certain of the ADSs prior to May 2003. Liberty had previously acquired 51.8 million News Corp. ADSs in 1999 in exchange for Liberty's 50% interest in Fox/Liberty Networks, and had acquired 28.1 million ADSs for $695 million in cash. Liberty recognized a $13 million gain on the 1999 exchange. At December 31, 2001, Liberty owned 236 million ADSs or approximately 18% of the outstanding equity of News Corp. Liberty accounts for its investment in News Corp. as an available-for-sale security. Motorola On January 5, 2000, Motorola acquired General Instrument Corporation ("General Instrument"). In connection with such acquisition, Liberty received 54 million shares of Motorola common stock and warrants to purchase an additional 37 million shares in exchange for its holdings in General Instrument. Liberty recognized a $2,233 million gain (before deferred tax expense of $883 million) on such transaction during the first quarter of 2000 based on the difference between the carrying value of Liberty's interest in General Instrument and the fair value of the Motorola securities received. At December 31, 2001 Liberty holds approximately 71 million shares of Motorola common stock and vested warrants to purchase an additional 18 million shares of such common stock at $8.26 per share. Such warrants expire on June 30, 2002. Viacom On January 23, 2001, BET Holdings II, Inc. ("BET") was acquired by Viacom in exchange for shares of Class B common stock of Viacom. As a result of the merger, Liberty received 15.2 million shares of Viacom's Class B common stock (less than 1% of Viacom's common equity) in exchange for its 35% ownership interest in BET, which investment had been accounted for using the equity method. Liberty accounts for its investment in Viacom as an available-for-sale security. Liberty recognized a gain of $559 million (before deferred tax expense of $221 million) in the first quarter of 2001 based upon the difference between the carrying value of Liberty's interest in BET and the value of the Viacom securities received. UPC In May 2001, the Company entered into a loan agreement with UPC and Belmarken Holding B.V. ("Belmarken"), a subsidiary of UPC, pursuant to which the Company loaned Belmarken $857 million, which represented a 30% discount to the face amount of the loan of $1,225 million (the "Belmarken Loan"). UPC is a consolidated subsidiary of UnitedGlobalCom. The loan accrues interest at 6% per annum, and all principal and interest are due in May 2007. After May 29, 2002, the loan is exchangeable, at the option of the Company, into shares of ordinary common stock of UPC at a rate of $6.85 per share. At inception, Liberty recorded the conversion feature of the loan at its estimated fair value of $420 million, and the $437 million remaining balance as a LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued loan receivable. Liberty accounts for the convertible feature of the Belmarken Loan as a derivative security under Statement 133, and records the convertible feature at fair value with periodic market adjustments recorded in the statement of operations as unrealized gains or losses. The discounted loan receivable is being accreted up to the $1,225 million face amount over its term. Such accretion, which includes the stated interest of 6%, is being recognized in interest income over the term of the loan. Upon consummation of the New United Transaction, the Company contributed the Belmarken Loan to New United in exchange for Class C shares of New United. Liberty had previously purchased exchangeable preferred stock and warrants of UPC in December 2000 for $203 million. During 2001, the Company acquired certain outstanding senior notes and senior discount notes of UPC. Liberty acquired approximately $1,435 million face amount of U.S. dollar denominated notes and euro 263 million face amount of euro denominated notes for an aggregate purchase price of $358 million. Such notes were contributed to New United in connection with the New United Transaction on January 30, 2002. Nontemporary Decline in Fair Value of Investments During the years ended December 31, 2001 and 2001, Liberty determined that certain of its AFS Securities and cost investments experienced nontemporary declines in value. As a result, the cost bases of such investments were adjusted to their respective fair values based primarily on recent quoted market prices. These adjustments are reflected as nontemporary declines in fair value of investments in the consolidated statements of operations. The following table identifies the realized losses attributable to each of the individual investments as follows:
Year ended December 31, ------------------- 2001 2000 ------ ----- Investments amounts in millions AOL Time Warner $2,052 -- News Corp. 915 -- Viacom 201 -- UPC preferred stock 195 -- Antec Corporation 127 -- Motorola 232 1,276 Primedia -- 103 Others 379 84 ------ ----- $4,101 1,463 ====== =====
Equity Collars and Put Spread Collars The Company has entered into equity collars, put spread collars and other financial instruments to manage market risk associated with its investments in certain marketable securities. These instruments are recorded at fair value based on option pricing models. Equity collars provide the Company with a put option that gives the Company the right to require the counterparty to purchase a specified number of shares of the underlying security at a specified price (the "Company Put Price") at a specified date in the future. Equity collars also provide the counterparty with a call option that gives the counterparty the right to purchase the same securities at a specified price at a specified date in the future. The put option and the call option generally are equally priced at the time of origination resulting in no cash receipts or payments. The Company's equity collars are accounted for as fair value hedges. Put spread collars provide the Company and the counterparty with put and call options similar to equity collars. In addition, put spread collars provide the counterparty with a put option that gives it the right to require the Company to purchase the underlying securities at a price that is lower than the Company Put Price. The inclusion of the secondary put option allows the LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Company to secure a higher call option price while maintaining net zero cost to enter into the collar. The Company's put spread collars have not been designated as fair value hedges. Investments in available-for-sale securities at December 31, 2001 and 2000 are summarized as follows:
December 31, 2001 ------------------------------------------------------------------- Put Equity Equity spread Debt securities collars collars securities Total ---------- ------- ------- ---------- ------- amounts in millions Cost basis $ 19,310 -- -- 1,457 20,767 Gross gains recognized in earnings 84 1,800 263 -- 2,147 Gross losses recognized in earnings (1,542) -- -- -- (1,542) Gross unrealized holding gains 2,185 -- -- 94 2,279 Gross unrealized holding losses (500) -- -- (46) (546) ---------- ------- ------- ---------- ------- Fair value $ 19,537 1,800 263 1,505 23,105 ========== ======= ======= ========== ======
December 31, 2000 ------------------------------------------------------------------- Put Equity Equity spread Debt securities collars collars securities Total ---------- ------- ------- ---------- ------- amounts in millions Cost basis $ 17,640 -- -- 1,533 19,173 Gross gains recognized in earnings -- -- 188 -- 188 Gross unrealized holding gains 1,003 1,080 -- 86 2,169 Gross unrealized holding losses (2,636) -- -- (64) (2,700) ---------- ------- ------- ---------- ------- Fair value $ 16,007 1,080 188 1,555 18,830 ========== ======= ======= ========== ======
Management estimates that the fair market value of all of its investments in available-for-sale securities and others aggregated $23,760 million and $19,664 million at December 31, 2001 and December 31, 2000, respectively. Management calculates market values using a variety of approaches including multiple of cash flow, per subscriber value, a value of comparable public or private businesses or publicly quoted market prices. No independent appraisals were conducted for those assets. Forward Foreign Exchange Contracts The Company does not hedge the majority of its foreign currency exchange risk because of the long term nature of its interests in foreign affiliates. During 2001, the Company entered into a definitive agreement to acquire six regional cable television systems in Germany. A portion of the consideration for such acquisition was to be denominated in euros. In order to reduce its exposure to changes in the euro exchange rate, Liberty had entered into forward purchase contracts with respect to euro 3,243 million as of December 31, 2001. Such contracts generally have terms ranging from 90 to 120 days and can be renewed at their expiration at Liberty's option. Liberty is not accounting for the forward purchase contracts as hedges. At December 31, 2001, the Company had recorded a liability of $24 million representing unrealized losses related to these contracts due to a decrease in the value of the euro compared to the U.S. dollar. Total Return Debt Swaps From time to time the Company enters into total return debt swaps in connection with its purchase of its own or third-party public and private indebtedness. Under these arrangements, Liberty directs a counterparty to purchase a specified amount of the underlying debt security for the benefit of the Company. The Company posts collateral with the counterparty equal to 10% of the value of the purchased securities. The Company earns interest income based upon the face amount and stated interest rate of the debentures, and LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued pays interest expense at market rates on the amount funded by the counterparty. In the event the fair value of the underlying debentures declines, the Company is required to post cash collateral for the decline, and the Company records an unrealized loss on financial instruments. Liberty has the contractual right to net settle the total return debt swaps, and currently, intends to do so. Accordingly, Liberty records the net asset related to the total return debt swaps. At December 31, 2001, the aggregate purchase price of debt securities underlying Liberty's total return debt swap arrangements was $118 million. As of such date, the Company had posted cash collateral equal to $59 million. In the event the fair value of the purchased debt securities were to fall to zero, the Company would be required to post additional cash collateral of $59 million. (7) Acquisitions and Dispositions 2000 Associated Group, Inc. ("Associated Group") On January 14, 2000, Liberty completed its acquisition of Associated Group pursuant to a merger agreement among AT&T, Liberty and Associated Group. Under the merger agreement, each share of Associated Group's Class A common stock and Class B common stock was converted into 0.49634 shares of AT&T common stock and 2.41422 shares of AT&T Class A Liberty Media Group common stock. Prior to the merger, Associated Group's primary assets were (1) 19.7 million shares of AT&T common stock, (2) 46.8 million shares of AT&T Class A Liberty Media Group common stock, (3) 10.6 million shares of AT&T Class B Liberty Media Group common stock, (4) 21.4 million shares of common stock of Teligent, and (5) all of the outstanding shares of common stock of TruePosition, Inc., which provides location services for wireless carriers and users designed to determine the location of any wireless transmitter, including cellular and PCS telephones. Immediately following the completion of the merger, all of the assets and businesses of Associated Group were transferred to Liberty. All of the shares of AT&T common stock, AT&T Class A Liberty Media Group common stock and AT&T Class B Liberty Media Group common stock previously held by Associated Group were retired by AT&T. The acquisition of Associated Group was accounted for as a purchase, and the $17 million excess of the fair value of the net assets acquired over the purchase price is being amortized over ten years. As a result of the issuance of AT&T Class A Liberty Media Group common stock, net of the shares of AT&T Class A Liberty Media Group common stock acquired in this transaction, Liberty recorded a $778 million increase to additional paid-in-capital, which represents the total purchase price of this acquisition. Liberty Satellite & Technology, Inc. On March 16, 2000, Liberty purchased shares of preferred stock in TCI Satellite Entertainment, Inc. in exchange for Liberty's economic interest in approximately 5 million shares of Sprint PCS Group stock, which had a fair value of $300 million. During the third quarter of 2000, TCI Satellite Entertainment, Inc. changed its name to Liberty Satellite & Technology, Inc. ("LSAT"). Liberty received 150,000 shares of LSAT Series A 12% Cumulative Preferred Stock and 150,000 shares of LSAT Series B 8% Cumulative Convertible Voting Preferred Stock. The Series A preferred stock does not have voting rights, while the Series B preferred stock gives Liberty approximately 85% of the voting power of LSAT. In connection with this transaction, Liberty realized a $211 million gain (before related tax expense of $84 million) based on the difference between the cost basis and fair value of the economic interest in the Sprint PCS Group stock exchanged. Ascent Entertainment Group, Inc. ("Ascent") On March 28, 2000, Liberty completed its cash tender offer for the outstanding common stock of Ascent at a price of $15.25 per share. Approximately 85% of the outstanding shares of common LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued stock of Ascent were tendered in the offer and Liberty paid approximately $385 million. On June 8, 2000, Liberty completed its acquisition of 100% of Ascent for an additional $67 million. The total purchase price for the acquisition was $452 million. Such transaction was accounted for as a purchase, and the $228 million excess of the purchase price over the fair value of the net assets acquired is being amortized over five years. Liberty Livewire Corporation ("Liberty Livewire") On April 10, 2000, Liberty acquired all of the outstanding common stock of Four Media Company ("Four Media") for total consideration of $462 million comprised of $123 million in cash, $194 million of assumed debt, 6.4 million shares of AT&T Class A Liberty Media Group common stock and a warrant to purchase approximately 700,000 shares of AT&T Class A Liberty Media Group common stock at an exercise price of $23 per share. Four Media provides technical and creative services to owners, producers and distributors of television programming, feature films and other entertainment products both domestically and internationally. On June 9, 2000, Liberty acquired a controlling interest in The Todd-AO Corporation ("Todd-AO"), in exchange for approximately 5.4 million shares of AT&T Class A Liberty Media Group common stock valued at $106 million. Todd-AO provides sound, video and ancillary post production and distribution services to the motion picture and television industries in the United States and Europe. Immediately following the closing of such transaction, Liberty contributed to Todd-AO 100% of the capital stock of Four Media, in exchange for approximately 16.6 million shares of the Class B Common Stock of Todd-AO increasing Liberty's ownership interest in Todd-AO to approximately 84% of the equity and approximately 98% of the voting power. Following Liberty's acquisition of Todd-AO, and the contribution by Liberty to Todd-AO of Liberty's ownership in Four Media, Todd-AO changed its name to Liberty Livewire. On July 19, 2000, Liberty purchased all of the assets relating to the post production, content and sound editorial businesses of SounDelux Entertainment Group for $90 million in cash, and contributed such assets to Liberty Livewire in exchange for approximately 8.2 million additional shares of Liberty Livewire Class B Common Stock. Following this contribution, Liberty's ownership in Liberty Livewire increased to approximately 88% of the equity and approximately 99% of the voting power of Liberty Livewire. Each of the foregoing acquisitions was accounted for as a purchase. In connection therewith, Liberty recorded an aggregate increase to additional paid-in-capital of $251 million. The $452 million excess purchase price over the fair value of the net assets acquired is being amortized over 20 years. 1999 TV Guide On March 1, 1999, United Video Satellite Group, Inc. ("UVSG"), a consolidated subsidiary of Liberty, and News Corp. completed a transaction whereby UVSG acquired News Corp.'s TV Guide properties and UVSG was renamed TV Guide. Upon completion of this transaction, and another transaction completed by TV Guide on the same date, Liberty owned an economic interest of approximately 44% and controlled approximately 49% of the voting power of TV Guide. In connection with the increase in TV Guide's equity, net of dilution of Liberty's ownership interest in TV Guide, Liberty recognized a gain of $372 million (before deducting deferred income taxes of $147 million). Upon consummation, Liberty began accounting for its interest in TV Guide under the equity method of accounting. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Pro Forma Information The following unaudited pro forma information for the year ended December 31, 2000 was prepared assuming the 2000 acquisitions discussed above occurred on January 1, 2000. These pro forma amounts are not necessarily indicative of operating results that would have occurred if the acquisitions discussed above had occurred on January 1, 2000. Revenue $ 1,769 Net earnings $ 1,413 Pro forma basic and diluted earnings per common share $ 0.55
(8) Long-Term Debt Debt is summarized as follows:
Weighted average interest December 31, rate ------------------- 2001 2001 2000 ---- ---- ---- amounts in millions Parent company debt: Senior notes 7.8% $ 982 742 Senior debentures 8.3% 1,486 1,486 Senior exchangeable debentures 3.7% 858 1,679 Bank credit facilities 2.6% 675 475 Other debt 8.0% 288 580 ------- ----- 4,289 4,962 Debt of subsidiaries: Bank credit facilities 4.3% 1,310 1,129 Senior notes N/A -- 179 Other debt, at varying rates 308 93 ------- ----- 1,618 1,401 ------- ----- Total debt 5,907 6,363 Less current maturities 4.5% (1,143) (1,094) ------- ----- Total long-term debt $ 4,764 5,269 ======= =====
Senior Notes and Debentures In July 1999, Liberty issued $750 million of 7-7/8% Senior Notes due 2009 and issued $500 million of 8-1/2% Senior Debentures due 2029 for aggregate cash proceeds of $741 million and $494 million, respectively. Interest on both issuances is payable on January 15 and July 15 of each year. In February 2000, Liberty issued $1 billion of 8-1/4% Senior Debentures due 2030 for aggregate cash proceeds of $983 million. Interest on these debentures is payable on February 1 and August 1 of each year. In December 2001, the Company issued $237.8 million of 7-3/4% Senior Notes due 2009 for cash proceeds of $238.4 million. Interest on these notes is payable on January 15 and July 15 of each year. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued The senior notes and debentures are stated net of an aggregate unamortized discount of $19 million and $22 million at December 31, 2001 and 2000, respectively, which is being amortized to interest expense in the consolidated statements of operations. Senior Exchangeable Debentures In November 1999, Liberty issued $869 million of 4% Senior Exchangeable Debentures due 2029. Interest is payable on May 15 and November 15 of each year. Each $1,000 debenture is exchangeable at the holder's option for the value of 22.9486 shares of Sprint PCS Group stock. After the later of December 31, 2001 or the date Liberty's ownership level in the Sprint PCS Group falls below a specified level, Liberty may, at its election, pay the exchange value in cash, Sprint PCS Group stock or a combination thereof. Prior to such time, the exchange value must be paid in cash. In February and March 2000, Liberty issued an aggregate of $810 million of 3-3/4% Senior Exchangeable Debentures due 2030. Interest is payable on February 15 and August 15 of each year. Each $1,000 debenture is exchangeable at the holder's option for the value of 16.7764 shares of Sprint PCS Group stock. After the later of February 15, 2002 or the date Liberty's ownership level in the Sprint PCS Group falls below a specified level, Liberty may, at its election, pay the exchange value in cash, Sprint PCS Group stock or a combination thereof. Prior to such time, the exchange value must be paid in cash. In January 2001, Liberty issued $600 million of 3-1/2% Senior Exchangeable Debentures due 2031. Interest is payable on January 15 and July 15 of each year. Each $1,000 debenture is exchangeable at the holder's option for the value of 36.8189 shares of Motorola common stock. Such exchange value is payable, at Liberty's option, in cash, Motorola stock or a combination thereof. On or after January 15, 2006, Liberty, at its option, may redeem the debentures for cash. In March 2001, Liberty issued $817.7 million of 3-1/4% Senior Exchangeable Debentures due 2031. Interest is payable on March 15 and September 15 of each year. Each $1,000 debenture is exchangeable at the holder's option for the value of 18.5666 shares of Viacom Class B common stock. After January 23, 2003, such exchange value is payable at Liberty's option in cash, Viacom stock or a combination thereof. Prior to such date, the exchange value must be paid in cash. On or after March 15, 2006, Liberty, at its option, may redeem the debentures for cash. Prior to the adoption of Statement 133, the carrying amount of the senior exchangeable debentures was adjusted based on the fair value of the underlying security. Increases or decreases in the value of the underlying security above the principal amount of the senior exchangeable debentures were recorded as unrealized gains or losses on financial instruments in the consolidated statements of operations. If the value of the underlying security decreased below the principal amount of the senior exchangeable debentures there was no effect on the principal amount of the debentures. Upon adoption of Statement 133, the call option feature of the exchangeable debentures is reported separately in the consolidated balance sheet at fair value. Accordingly, at January 1, 2001, Liberty recorded a transition adjustment to reflect the call option obligations at fair value ($459 million) and to recognize in net earnings the difference between the fair value of the call option obligations at issuance and the fair value of the call option obligations at January 1, 2001. Such adjustment to net earnings aggregated $757 million (before tax expense of $299 million) and is included in cumulative effect of accounting change. Changes in the fair value of the call option obligations subsequent to January 1, 2001 are recognized as unrealized gains (losses) on financial instruments in Liberty's consolidated statements of operations. During the year ended December 31, 2001, Liberty recorded unrealized gains of $167 million related to the call option obligations. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Under Statement 133, the reported amount of the long-term debt portion of the exchangeable debentures is calculated as the difference between the face amount of the debentures and the fair value of the call option feature on the date of issuance. The fair value of the call option obligations related to the $1,418 million of exchangeable debentures issued during the year ended December 31, 2001, aggregated $1,028 million on the date of issuance. Accordingly, the long-term debt portion was recorded at $390 million. The long-term debt is accreted to its face amount over the term of the debenture using the effective interest method. Such accretion aggregated $6 million during the year ended December 31, 2001, and is included in interest expense. The transition adjustment noted above resulted in a decrease in the carrying value of the long-term debt portion of the senior exchangeable debentures of $1,216 million on January 1, 2001. Bank Credit Facilities At December 31, 2001, Liberty and its subsidiaries had approximately $217 million in unused lines of credit under their respective bank credit facilities. The bank credit facilities generally contain restrictive covenants which require, among other things, the maintenance of certain financial ratios, and include limitations on indebtedness, liens, encumbrances, acquisitions, dispositions, guarantees and dividends. The borrowers were in compliance with their debt covenants at December 31, 2001. Additionally, the bank credit facilities require the payment of fees ranging from .15% to .375% per annum on the average unborrowed portions of the total commitments. The U.S. dollar equivalent of the annual maturities of Liberty's debt for each of the next five years are as follows (amounts in millions): 2002 $ 1,143 2003 211 2004 121 2005 435 2006 589
Liberty estimates the fair value of its debt based on the quoted market prices for the same or similar issues or on the current rate offered to Liberty for debt of the same remaining maturities. The fair value of Liberty's publicly traded debt at December 31, 2001 is as follows (amounts in millions): Senior notes of parent company $1,024 Senior debentures of parent company 1,438 Senior exchangeable debentures of parent company, including call option liability 2,323
Liberty believes that the carrying amount of the remainder of its debt, which is comprised primarily of variable rate debt, approximated its fair value at December 31, 2001. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued A reconciliation of the carrying value of the Company's debt to the face amount at maturity is as follows (amounts in millions): Carrying value at December 31, 2001 $ 5,907 Add: Unamortized issue discount on Senior Notes and Debentures 19 Unamortized discount attributable to call option feature of exchangeable debentures 2,238 ---------- Face amount at maturity $ 8,164 ==========
(9) Income Taxes During the period from March 9, 1999 to August 10, 2001, Liberty was included in the consolidated federal income tax return of AT&T and was a party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement"). Liberty calculated its respective tax liability on a separate return basis. The income tax provision for Liberty was calculated based on the increase or decrease in the tax liability of the AT&T consolidated group resulting from the inclusion of those items in the consolidated tax return of AT&T which were attributable to Liberty. Under the AT&T Tax Sharing Agreement, Liberty received a cash payment from AT&T in periods when it generated taxable losses and such taxable losses were utilized by AT&T to reduce the consolidated income tax liability. This utilization of taxable losses was accounted for by Liberty as a current federal intercompany income tax benefit. To the extent such losses were not utilized by AT&T, such amounts were available to reduce federal taxable income generated by Liberty in future periods, similar to a net operating loss carryforward, and were accounted for as a deferred federal income tax benefit. In periods when Liberty generated federal taxable income, AT&T agreed to satisfy such tax liability on Liberty's behalf up to a certain amount. Thereafter, Liberty was required to make cash payments to AT&T for federal tax liabilities of Liberty. The reduction of such computed tax liabilities was accounted for by Liberty as an increase to additional paid-in-capital. To the extent AT&T utilized existing net operating losses of Liberty, such amounts were accounted for by Liberty as a reduction of additional paid-in-capital. Net operating losses of Liberty with a tax effected carrying value of $2 million, $38 million and $88 million were recorded as a reduction to additional paid-in-capital during the seven months ended July 31, 2001, the year ended December 31, 2000 and the ten months ended December 31, 1999, respectively. Liberty generally made cash payments to AT&T related to states where it generated taxable income and received cash payments from AT&T in states where it generates taxable losses. Prior to the AT&T Merger, Liberty was included in TCI's consolidated tax return and was a party to the TCI tax sharing agreements. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Income tax benefit (expense) consists of:
New Liberty Old Liberty ---------------------------------------------- ------------- Year Year Ten months Two months ended ended ended ended December 31, December 31, December 31, February 28, 2001 2000 1999 1999 ------------ ------------ ------------ ------------ amounts in millions Current: Federal $ 297 277 75 1 State and local (2) 10 (3) -- ------------ ------------ ------------ ------------ 295 287 72 1 ------------ ------------ ------------ ------------ Deferred: Federal 3,166 (1,490) 873 (168) State and local 447 (331) 152 (44) ------------ ------------ ------------ ------------ 3,613 (1,821) 1,025 (212) ------------ ------------ ------------ ------------ Income tax benefit (expense) $3,908 (1,534) 1,097 (211) ============ ============ ============ ============
Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:
New Liberty Old Liberty ---------------------------------------------- ------------- Year Year Ten months Two months ended ended ended ended December 31, December 31, December 31, February 28, 2001 2000 1999 1999 ------------ ------------ ------------ ------------ amounts in millions Computed expected tax benefit (expense) $ 3,809 (1,035) 1,107 (49) Dividends excluded for income tax purposes 18 22 11 2 Amortization not deductible for income tax purposes (260) (187) (122) (4) State and local income taxes, net of federal income taxes 289 (204) 102 (29) Recognition of difference in income tax basis of investments in subsidiaries 21 (69) -- (130) Effect of change in estimated state tax rate 91 -- -- -- Change in valuation allowance (71) (50) -- -- Other, net 11 (11) (1) (1) ------------ ------------ ------------ ------------ $ 3,908 (1,534) 1,097 (211) ============ ============ ============ ============
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below:
December 31, ------------------- 2001 2000 ------- ------ amounts in millions Deferred tax assets: Net operating and capital loss carryforwards $ 370 363 Accrued stock compensation 296 247 Other future deductible amounts 31 -- ------- ------ Deferred tax assets 697 610 Valuation allowance (273) (202) ------- ------ Net deferred tax assets 424 408 ------- ------ Deferred tax liabilities: Investments 8,422 11,255 Intangible assets 164 218 Discount on exchangeable debentures 455 -- Other 49 30 ------- ------ Deferred tax liabilities 9,090 11,503 ------- ------ Net deferred tax liabilities $ 8,666 11,095 ======= ======
At December 31, 2001, Liberty had net operating and capital loss carryforwards for income tax purposes aggregating approximately $1,016 million which, if not utilized to reduce taxable income in future periods, will expire as follows: 2004: $1 million; 2005: $16 million; 2006: $14 million; 2007: $16 million; 2008: $12 million; 2009: $27 million; 2010: $6 million; and beyond 2010: $924 million. These net operating losses are subject to certain rules limiting their usage. AT&T, as the successor to TCI, is the subject of an Internal Revenue Service ("IRS") audit for the 1993-1995 tax years. The IRS has notified AT&T and Liberty that it is considering proposing income adjustments and assessing certain penalties in connection with TCI's 1994 tax return. The IRS's position could result in recognition of up to approximately $305 million of additional income, resulting in as much as $107 million of additional tax liability, plus interest. In addition, the IRS may assert certain penalties. AT&T and Liberty do not agree with the IRS's proposed adjustments and penalties, and AT&T and Liberty intend to vigorously defend their position. Pursuant to the AT&T Tax Sharing Agreement, Liberty may be obligated to reimburse AT&T for any tax that AT&T is ultimately assessed as a result of this audit. Liberty is currently unable to estimate a range of any such reimbursement, but believes that any such reimbursement would not be material to its financial position. (10) Stockholder's Equity Preferred Stock The Preferred Stock is issuable, from time to time, with such designations, preferences and relative participating, option or other special rights, qualifications, limitations or restrictions thereof, as shall be stated and expressed in a resolution or resolutions providing for the issue of such Preferred Stock adopted by the Board. As of December 31, 2001, no shares of preferred stock were issued. Common Stock Prior to the Split Off Transaction, Liberty had 1,000 shares of each of Class A, Class B and Class C common stock outstanding. In connection with the Split Off Transaction, the Class A and Class B common stock were reclassified into Series A common stock and the Class C common LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued stock was reclassified into Series B common stock. The Series A common stock has one vote per share, and the Series B common stock has ten votes per share. Each share of the Series B common stock is exchangeable at the option of the holder for one share of Series A common stock. As of December 31, 2001, there were 75 million shares of Liberty Series A common stock reserved for issuance under exercise privileges of outstanding stock options. Stock Issuances of Subsidiaries and Equity Affiliates Certain consolidated subsidiaries and equity affiliates of Liberty have issued shares of common stock in connection with acquisitions and the exercise of employee stock options. In connection with the increase in the issuers' equity, net of the dilution of Liberty's ownership interest, that resulted from such stock issuances, Liberty recorded increases (decreases) to additional paid-in-capital as follows:
Ten months Year ended Year ended ended December 31, December 31, December 31, 2001 2000 1999 ------------ ------------ ------------ amounts in millions Stock issuances by consolidated subsidiaries $ (8) 212 107 Stock issuances by equity affiliates (net of deferred income taxes of $75 million and $1 million, respectively) -- 143 1 ------------ ------------ ------------ $ (8) 355 108 ============ ============ ============
Transactions with Officers and Directors During the second quarter of 2001, Liberty purchased 2,245,155 shares of common stock of On Command Corporation ("On Command"), a consolidated subsidiary of Liberty, from an executive officer and director of On Command, who is also a director of Liberty, for aggregate cash consideration of $25.2 million. Such purchase price represents a per share price of $11.22. The closing market price for On Command common stock on the day the transaction was signed was $7.77. The Company has included the difference between the aggregate market value of the shares purchased and the cash consideration paid in selling, general and administrative expenses in the accompanying consolidated statement of operations. In November 2000, Liberty granted certain officers, a director of Liberty (the "Liberty Director"), and a board member of Liberty Livewire an aggregate 4.0725% common stock interest in Liberty LWR, Inc. ("LWR"), which owned a direct interest in Liberty Livewire. The common stock interest granted to these individuals had a value of approximately $400,000. LWR also awarded the Liberty Director a deferred bonus in the initial total amount of approximately $3.4 million, which amount will decrease by an amount equal to any increase over the five-year period from the date of the award in the value of certain of the common shares granted to the Liberty Director. Liberty and the individuals entered into a stockholders' agreement in which the individuals could require Liberty to repurchase, after five years, all or part of their common stock interest in exchange for Series A Liberty stock at its then fair market value. In addition, Liberty has the right to repurchase, in exchange for Series A Liberty common stock, the common stock interests held by the individuals at fair market value at any time. In July 2001, LWR formed Liberty Livewire Holdings, Inc. ("Livewire Holdings") as a wholly owned subsidiary. LWR then sold to certain officers and the Liberty Director an aggregate 19.872% common stock interest in Livewire Holdings with an aggregate value of $600. Liberty, LWR and LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued these individuals entered into a stockholders agreement pursuant to which the individuals can require Liberty to purchase, after five years, all or part of their common stock interest in Livewire Holdings, in exchange for Liberty common stock, at its then-fair market value. In addition, Liberty has the right to purchase, in exchange for its common stock, their common stock interests in Livewire Holdings for fair market value at any time. In August 2001, in connection with the termination of Liberty Livewire's director and chief executive officer, LWR purchased his common stock interest in LWR. In October 2001, LWR purchased from the Liberty officers and the Liberty Director their respective common stock interests in LWR. In connection with the purchase of his common stock interest in LWR, the Liberty Director waived the right to receive his deferred bonus. Upon the completion of these purchases, LWR became a wholly owned subsidiary of the Company. In October 2000, Liberty restructured its ownership interests in certain assets into a new consolidated subsidiary. Liberty then sold a preferred interest in such subsidiary to Liberty's Chairman of the Board of Directors in exchange for approximately 540,000 shares of LSAT Series A common stock, approximately 3.3 million shares of LSAT Series B common stock and cash consideration of approximately $88 million. No gain or loss was recognized due to the related party nature of such transaction. The preferred interest has a liquidation value of $106 million and accrues dividends at 9% per annum payable quarterly in cash. In September 2000, certain officers of Liberty purchased a 6% common stock interest in a subsidiary for $1.3 million. Such subsidiary owns an indirect interest in an entity that holds certain of Liberty's investments in satellite and technology related assets. Liberty and the officers entered into a shareholders agreement in which the officers could require Liberty to purchase, after five years, all or part of their common stock interest in exchange for Series A Liberty stock at the then fair market value. In addition, Liberty has the right to purchase, in exchange for Series A Liberty common stock, the common stock interests held by the officers at fair market value at any time. During 2001, two of the officers resigned their positions with the Company, and the Company purchased their respective interests in the subsidiary for the original purchase price plus 6% interest. In August 2000, a subsidiary of Liberty sold shares of such subsidiary's Series A Convertible Participating Preferred Stock (the "Preferred Shares") to a director of Liberty, who was also the Chairman and Chief Executive Officer of such subsidiary, for a $21 million note. The Preferred Shares are convertible into 1.4 million shares of the subsidiary's common stock. The note is secured by the Preferred Shares or the proceeds from the sale of such shares and the director's personal obligations under such loan are limited. The note, which matures on August 1, 2005, may not be prepaid and interest on the note accrues at a rate of 7% per annum. In May 2000, Liberty's President and Chief Executive Officer, certain officers of a subsidiary and another individual purchased an aggregate 20% common stock interest in a subsidiary for $800,000. This subsidiary owns a 7% interest in Jupiter Telecommunications Co., Inc. Liberty and the individuals entered into a shareholders agreement in which the individuals could require Liberty to purchase, after five years, all or part of their common stock interest in exchange for Series A Liberty common stock at its then fair market value. In addition, Liberty has the right to purchase, in exchange for Series A Liberty common stock, the common stock interests held by the officers at fair market value at any time. Liberty recognized $ 4 million and $3 million of compensation expense related to changes in the market value of its contingent liability to reacquire the common stock interests held by these officers during the years ended December 31, 2001 and 2000, respectively. In connection with the AT&T Merger, Liberty paid two of its directors and one other individual, all three of whom were directors of TCI, an aggregate of $12 million for services rendered in connection with the AT&T Merger. Such amount is included in operating, selling, general and administrative expenses for the two months ended February 28, 1999 in the accompanying consolidated statements of operations. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Liberty is party to a call agreement with certain shareholders of Series B Liberty common stock, including the Chairman of the Board of Directors, which grants Liberty a right to acquire all of the Series B Liberty common stock held by such shareholders in certain circumstances. The price of acquiring such shares is generally limited to the market price of the Series A Liberty common stock, plus a 10% premium. Transactions with AT&T and Other Related Parties Certain subsidiaries of Liberty produce and/or distribute programming and other services to cable distribution operators (including AT&T) and others pursuant to long term affiliation agreements. Charges to AT&T are based upon customary rates charged to others. Amounts included in revenue for services provided to AT&T were $210 million, $243 million, $180 million and $43 million for the seven months ended July 31, 2001, the year ended December 31, 2000, the ten months ended December 31, 1999 and the two months ended February 28, 1999, respectively. Prior to the Split Off Transaction, AT&T allocated certain corporate general and administrative costs to Liberty pursuant to an intergroup agreement. Management believes such allocation methods were reasonable and materially approximated the amount that Liberty would have incurred on a stand-alone basis. In addition, there are arrangements between subsidiaries of Liberty and AT&T and its other subsidiaries for satellite transponder services, marketing support, programming, and hosting services. These expenses aggregated $20 million, $37 million, $24 million and $6 million during the seven months ended July 31, 2001 (the period immediately prior to the Split Off Transaction), the year ended December 31, 2000, the ten months ended December 31, 1999 and the two months ended February 28, 1999, respectively. On April 8, 1999, Liberty redeemed all of its outstanding 4-1/2% convertible subordinated debentures. The debentures were convertible into shares of AT&T Liberty Media Group Class A common stock at a conversion price of $11.77, or 84.96 shares per $1,000 principal amount. Certain holders of the debentures had exercised their rights to convert their debentures and 29.2 million shares of AT&T Liberty Media Group tracking stock were issued to such holders. In connection with such issuance of AT&T Liberty Media Group tracking stock, Liberty recorded an increase to additional paid-in-capital of $354 million. (11) Stock Options and Stock Appreciation Rights Liberty Effective with the Split Off Transaction, Liberty assumed from AT&T the Amended and Restated AT&T Corp. Liberty Media Group 2000 Incentive Plan and renamed it the Liberty Media Corporation 2000 Incentive Plan (the "Liberty Incentive Plan"). Grants by TCI of options and options with tandem stock appreciation rights ("SARs") with respect to shares of Liberty Media Group stock prior to 1999 were assumed by Liberty under the Liberty Incentive Plan. Grants of free standing SARs made under the Plan in 2000 and in 2001 prior to the Split Off Transaction were converted into options upon assumption by Liberty. The Liberty Incentive Plan provides for awards to be made in respect of a maximum of 160 million shares of common stock of Liberty. Awards may be made as grants of stock options, SARs, restricted shares, stock units, cash or any combination thereof. Effective February 28, 2001 (the "Effective Date"), the Company restructured the options and options with tandem SARs to purchase AT&T common stock and AT&T Liberty Media Group tracking stock (collectively the "Restructured Options") held by certain executive officers of the Company. Pursuant to such restructuring, all Restructured Options became exercisable on the Effective Date, and each executive officer was given the choice to exercise all of his Restructured LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Options. Each executive officer who opted to exercise his Restructured Options received consideration equal to the excess of the closing price of the subject securities on the Effective Date over the exercise price. The exercising officers received (i) a combination of cash and AT&T Liberty Media Group tracking stock for Restructured Options that were vested prior to the Effective Date and (ii) cash for Restructured Options that were previously unvested. The executive officers used the cash proceeds from the previously unvested options to purchase restricted shares of AT&T Liberty Media Group tracking stock. Such restricted shares are subject to forfeiture upon termination of employment. The forfeiture obligation will lapse according to a schedule that corresponds to the vesting schedule applicable to the previously unvested options. In addition, each executive officer was granted free-standing SARs equal to the total number of Restructured Options exercised. The free-standing SARs were tied to the value of AT&T Liberty Media Group tracking stock and will vest as to 30% in year one and 17.5% in years two through five. The free-standing SARs have an exercise price of $14.70 and had a fair value of $9.56 on the date of the grant. Upon completion of the Split Off Transaction, the free-standing SARs automatically converted to options to purchase Liberty Series A common stock. Prior to the Effective Date, the Restructured Options were accounted for using variable plan accounting pursuant to APB Opinion No. 25. Accordingly, the above-described transaction did not have a significant impact on Liberty's results of operations. The following table presents the number and weighted average exercise price ( "WAEP ") of certain options and options with tandem SARs to purchase Liberty Series A common stock granted to certain officers and other key employees of the Company.
Liberty Series A common stock WAEP ----- ---- amounts in thousands, except for WAEP Outstanding at January 1, 1999 78,158 $ 23.19 Granted 1,244 18.43 Exercised (7,510) 5.02 Adjustment for transfer of employees (1,158) 6.70 ------ Outstanding at December 31, 1999 70,734 6.97 Granted 2,341 21.73 Exercised (7,214) 5.69 Canceled (479) 9.45 Options issued in mergers 12,134 4.75 ------ Outstanding at December 31, 2000 77,516 7.20 Granted 49,087 14.72 Exercised (50,315) 7.62 Canceled (1,167) 16.88 ------ Outstanding at December 31, 2001 75,121 11.69 ====== Exercisable at December 31, 1999 14,341 ====== Exercisable at December 31, 2000 52,856 ====== Exercisable at December 31, 2001 23,494 ====== Vesting period 5 yrs
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued The following table provides certain information about the Company's outstanding options at December 31, 2001.
No. of Weighted No. of WAEP outstanding Range of WAEP of average exercisable of options exercise outstanding remaining options exercisable (000's) prices options life (000's) options ----------- ---------------- ---------- ------- ----------- ------------ 17,566 $ 1.08 - $ 5.00 $ 2.04 4.0 yrs 17,534 $ 2.04 1,180 $ 6.30 - $ 9.95 $ 7.05 5.1 yrs 1,043 $ 7.00 53,336 $ 10.81 -$ 14.75 $ 14.47 8.9 yrs 4,126 $ 12.25 3,039 $ 16.35 -$ 28.40 $ 20.59 8.6 yrs 791 $ 20.11 ------ ------ 75,121 23,494 ====== ======
As permitted by Statement 123, the Company accounts for stock-based compensation pursuant to the intrinsic value method prescribed by APB Opinion No. 25 and its interpretations. In accordance with APB Opinion No. 25, Liberty accounts for stock options with tandem SARs granted to its employees as variable plan awards. Liabilities and the related compensation expense under these awards are subject to future adjustment based upon vesting provisions and the market value of the underlying security and, ultimately, on the final determination of market value when the rights are exercised. The Company accounts for stand-alone options as fixed plan awards, and accordingly, no compensation is recognized for these awards. If the Company had determined compensation expense based upon the grant-date fair value method pursuant to Statement 123, the Company's 2001 net loss and pro forma net loss per common share would have been $6,335 million and $2.45, respectively. The Company's net earnings (loss) and pro forma net earnings (loss) per share for 2000 and 1999 would not have been significantly different from what has been reflected in the accompanying consolidated financial statements as substantially all of Liberty's stock option awards had tandem SARs in 2000 and 1999. In addition to the SARs issued in the aforementioned option restructuring, during 2001 and pursuant to the Liberty Incentive Plan, Liberty awarded 2,104,000 options to purchase Liberty Series A common stock to certain officers and key employees of the Company. Such options have exercise prices ranging from $12.40 to $16.35, vest as to 25% in each of years 2 through 5 after the date of grant, and had a weighted-average grant date fair value of $9.40. The estimated fair values of the options noted above are based on the Black-Scholes model and are stated in current annualized dollars on a present value basis. The key assumptions used in the model for purposes of these calculations generally include the following: (a) a discount rate equal to the 10-year Treasury rate on the date of grant; (b) a 45% volatility factor, (c) the 10-year option term; (d) the closing price of the respective common stock on the date of grant; and (e) an expected dividend rate of zero. Liberty Digital, Inc. Deferred Compensation and Stock Option Plan. On September 8, 1999, Liberty Digital adopted the Deferred Compensation and Stock Appreciation Rights Plan for key executives. This plan is comprised of a deferred compensation component and SARs grants. The deferred compensation component provides participants with the right to receive an aggregate of nine and one half percent of the appreciation in the Liberty Digital Series A common stock market price over $2.46 subject to a maximum amount of $19.125. The SARs provide participants with the appreciation in the market price of the Liberty Digital Series A common stock above the maximum amount payable under the deferred compensation component. Obligations to the executives under both the deferred compensation and SAR elements of this plan are accounted for as variable award plans. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued There are 19,295,193 shares subject to this plan all of which were granted in 1999 at an effective exercise price of $2.46 and a weighted average remaining life of 3 years at year end. The deferred compensation and SARs components vest 20% annually beginning with the first vesting date of December 15, 1999. Fully vested unexercised SARs total 3,046,188 at year-end. During the year ended December 31, 1999, there were no exercises, cancellations or expirations. During 2000 there were 3,859,038 options exercised, and 3,251,401 options cancelled. This plan terminates on December 15, 2003. Subsequent to December 31, 2001, Liberty effected a short form merger with Liberty Digital whereby Liberty Digital shareholders received 0.25 shares of Liberty Series A common stock for each share of Liberty Digital Series A common stock held. Subsequent to this merger Liberty owns 100% of Liberty Digital. In connection with this merger, all outstanding Liberty Digital SARs were converted to Liberty SARs at the rate of 0.25 for 1. In addition, all amounts accrued under the deferred compensation plan were paid, and the deferred compensation plan was terminated. During the first quarter of 2000, an executive officer of Liberty Digital elected to exercise certain of his SARs that had been granted by Liberty Digital. In order to satisfy Liberty Digital's obligations under the stock option agreement, LDIG and Liberty offered to issue, and the executive agreed to accept, a combination of cash and AT&T Liberty Media Group tracking stock in lieu of a cash payment. Accordingly, Liberty paid cash of $50 million and issued 5.8 million shares to the executive officer in the first quarter of 2001. STARZ ENCORE GROUP Starz Encore Group Phantom Stock Appreciation Rights Plan. During 2000 and 1999 Starz Encore Group granted Phantom Stock Appreciation Rights (PSARS) to certain of its officers under this plan. PSARS granted under the plan generally vest over a five year period. Compensation under the PSARS is computed based upon a formula derived from the appraised fair value of the net assets of Starz Encore Group. All amounts earned under the plan are payable in cash. OTHER Certain of the Company's subsidiaries have stock based compensation plans under which employees and non-employees are granted options or similar stock based awards. Awards made under these plans vest and become exercisable over various terms. The awards and compensation recorded, if any, under these plans is not significant to Liberty. (12) Employee Benefit Plans Liberty is the sponsor of the Liberty Media 401(k) Savings Plan (the "Liberty 401(k) Plan"), which provides employees an opportunity for ownership in the Company and creates a retirement fund. The Liberty 401(k) Plan provides for employees to contribute up to 10% of their compensation to a trust for investment in Liberty common stock, as well as several mutual funds. The Company, by annual resolution of the Board, generally contributes up to 100% of the amount contributed by employees. Certain of the Company's subsidiaries have their own employee benefit plans. Contributions to all plans aggregated $10 million, $7 million, $3 million and $1 million for the years ended December 31, 2001 and 2000, the ten months ended December 31, 1999 and the two months ended February 28, 1999, respectively. (13) Other Comprehensive Earnings Accumulated other comprehensive earnings included in Liberty's consolidated balance sheets and consolidated statements of stockholder's equity reflect the aggregate of foreign currency LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued translation adjustments and unrealized holding gains and losses on securities classified as available-for-sale. The change in the components of accumulated other comprehensive earnings, net of taxes, is summarized as follows:
Accumulated Foreign other currency Unrealized comprehensive translation gains on earnings (loss), net adjustments securities of taxes ----------- ---------- -------------------- amounts in millions Balance at January 1, 1999 $ 5 3,181 3,186 Other comprehensive earnings (loss) (15) 885 870 ------ ----- ----- Balance at February 28, 1999 $ (10) 4,066 4,056 ====== ===== ===== ------------------------------------------------------------------------------------------------- Balance at March 1, 1999 $ -- -- -- Other comprehensive earnings 60 6,495 6,555 ------ ----- ----- Balance at December 31, 1999 60 6,495 6,555 Other comprehensive loss (202) (6,750) (6,952) ------ ----- ----- Balance at December 31, 2000 (142) (255) (397) Other comprehensive loss (359) 1,596 1,237 Balance at December 31, 2001 $ (501) 1,341 840 ====== ===== =====
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued The components of other comprehensive earnings are reflected in Liberty's consolidated statements of comprehensive earnings, net of taxes. The following table summarizes the tax effects related to each component of other comprehensive earnings.
Tax Before-tax (expense) Net-of-tax amount benefit amount ---------- --------- ---------- amounts in millions Year ended December 31, 2001: ----------------------------- Foreign currency translation adjustments $ (588) 229 (359) Unrealized holding losses on securities arising during period (1,661) 648 (1,013) Reclassification adjustment for losses realized in net loss 4,420 (1,724) 2,696 Cumulative effect of accounting change (143) 56 (87) -------- ----- ------ Other comprehensive earnings $ 2,028 (791) 1,237 ======== ===== ====== Year ended December 31, 2000: ----------------------------- Foreign currency translation adjustments $ (334) 132 (202) Unrealized holding losses on securities arising during period (10,116) 4,001 (6,115) Reclassification adjustment for gains realized in net earnings (1,050) 415 (635) -------- ----- ------ Other comprehensive loss $(11,500) 4,548 (6,952) ======== ===== ====== Ten months ended December 31, 1999: ----------------------------------- Foreign currency translation adjustments $ 99 (39) 60 Unrealized holding gains on securities arising during period 10,733 (4,245) 6,488 Reclassification adjustment for losses realized in net loss 12 (5) 7 -------- ----- ------ Other comprehensive earnings $ 10,844 (4,289) 6,555 ======== ===== ====== ---------------------------------------------------------------------------------------------------------------------- Two months ended February 28, 1999: Foreign currency translation adjustments $ (25) 10 (15) Unrealized holding gains arising during period 1,464 (579) 885 -------- ----- ------ Other comprehensive earnings $ 1,439 (569) 870 ======== ===== ======
(14) Commitments and Contingencies Starz Encore Group LLC, a wholly owned subsidiary of Liberty, provides premium programming distributed by cable, direct satellite, TVRO and other distributors throughout the United States. Starz Encore Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2014 (the "Film Licensing Obligations"). The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. Starz Encore Group's estimate, based on customer levels at December 31, 2001, of the future minimum obligation related to the Film Licensing Obligations for the five years after 2001 and thereafter are as follows (amounts in millions): 2002 $ 405 2003 224 2004 154 2005 88 2006 103 Thereafter 388
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Liberty has guaranteed $619 million of the bank debt of Jupiter, an equity affiliate that provides broadband services in Japan. Approximately $343 million of such guaranteed amount is due and payable by Jupiter during the first quarter of 2002. Jupiter is currently negotiating the refinancing of substantially all of its long-term and short-term debt. Liberty anticipates that it and the other Jupiter shareholders will make equity contributions to Jupiter in connection with such refinancing, and that Liberty's share of such equity contributions will be approximately $450 million. Upon such refinancing, Liberty anticipates that its guarantee of Jupiter debt would be cancelled. Liberty has also guaranteed various loans, notes payable, letters of credit and other obligations (the "Guaranteed Obligations") of certain other affiliates. At December 31, 2001, the Guaranteed Obligations aggregated approximately $170 million. Currently, Liberty is not certain of the likelihood of being required to perform under such guarantees. Liberty leases business offices, has entered into pole rental and transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounts to $76 million, $50 million, $30 million and $9 million for the years ended December 31, 2001 and 2000, for the ten months ended December 31, 1999 and the two months ended February 28, 1999, respectively. A summary of future minimum lease payments under noncancelable operating leases as of December 31, 2001 follows (amounts in millions):
Years ending December 31: 2002 $ 70 2003 63 2004 52 2005 40 2006 31 Thereafter 115
It is expected that in the normal course of business, leases that expire generally will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amount shown for 2001. Starz Encore Group LLC v. AT&T Broadband LLC and Satellite Services, Inc. Starz Encore Group entered into a 25-year affiliation agreement in 1997 with TCI. TCI cable systems subsequently acquired by AT&T in the TCI merger operate under the name AT&T Broadband. Starz Encore Group receives fixed monthly payments in exchange for unlimited access to all of the existing Encore and STARZ! services. The payment from AT&T Broadband can be adjusted if AT&T acquires or disposes of cable systems. The affiliation agreement further provides that to the extent Starz Encore Group's programming costs increase above or decrease below amounts specified in the agreement, then AT&T Broadband's payments under the affiliation agreement will be increased or decreased in an amount equal to a proportion of the excess or shortfall. Starz Encore Group requested payment from AT&T Broadband of its proportionate share of excess programming costs during the first quarter of 2001 (which amount aggregated approximately $32 million for the year 2001). Excess programming costs payable by AT&T Broadband could be significantly larger in future years. By letter dated May 29, 2001, AT&T Broadband has disputed the enforceability of the excess programming costs pass through provisions of the affiliation agreement and questioned whether the affiliation agreement, as a whole, is "voidable." In addition, AT&T Broadband raised certain issues concerning interpretations of the contractual requirements associated with the treatment of acquisitions and dispositions. Starz Encore Group believes the position expressed by AT&T Broadband to be without merit. On July 10, 2001, Starz Encore Group initiated a lawsuit against LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued AT&T Broadband and Satellite Services, Inc., a subsidiary of AT&T Broadband that is also a party to the affiliation agreement, in Arapahoe County District Court, Colorado for breach of contract. Starz Encore Group is seeking a judgment of specific performance of the contract, damages and costs. On October 19, 2001, Starz Encore Group entered into a standstill and tolling agreement whereby the parties agreed to move the court to stay the lawsuit until August 31, 2002 to permit the parties an opportunity to resolve their dispute. This agreement provides that either party may unilaterally petition the court to lift the stay after April 30, 2002 and proceed with the litigation. The court granted the stay on October 30, 2001. In conjunction with this agreement, AT&T Broadband and the Company entered into various agreements whereby Starz Encore Group will indirectly receive payment for AT&T Broadband's proportionate share of the programming costs pass through for 2001. Liberty has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible Liberty may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. (15) Information about Liberty's Operating Segments Liberty is a holding company with a variety of subsidiaries and investments operating in the media, communications and entertainment industries. Each of these businesses is separately managed. Liberty identifies its reportable segments as those consolidated subsidiaries that represent 10% or more of its combined revenue and those equity method affiliates whose share of earnings or losses represent 10% or more of its pre-tax earnings or loss. Subsidiaries and affiliates not meeting this threshold are aggregated together for segment reporting purposes. The segment presentation for prior periods has been conformed to the current period segment presentation. For the year ended December 31, 2001, Liberty had five operating segments: Starz Encore Group, Liberty Livewire, On Command Corporation ("On Command"), Telewest and Other. Starz Encore Group provides premium programming distributed by cable, direct-to-home satellite and other distribution media throughout the United States and is wholly owned and consolidated by Liberty. Liberty Livewire provides sound, video and ancillary post production and distribution services to the motion picture and television industries in the United States and Europe and is majority owned and consolidated by Liberty. On Command provides in-room, on-demand video entertainment and information services to hotels, motels and resorts primarily in the United States and is majority owned and consolidated by Liberty. Telewest, an equity method affiliate, operates and constructs cable television and telephone systems in the UK. Other includes Liberty's non-consolidated investments, corporate and other consolidated businesses not representing separately reportable segments. The accounting policies of the segments that are also consolidated subsidiaries are the same as those described in the summary of significant accounting policies. Liberty evaluates performance based on the measures of revenue and operating cash flow (as defined by Liberty), appreciation in stock price and non-financial measures such as average prime time rating, prime time audience delivery, subscriber growth and penetration, as appropriate. Liberty believes operating cash flow is a widely used financial indicator of companies similar to Liberty and its affiliates, which should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with generally accepted accounting principles. Liberty generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Liberty's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technology, distribution channels and marketing strategies. Liberty utilizes the following financial information for purposes of making decisions about allocating resources to a segment and assessing a segment's performance:
Consolidated Subsidiaries ---------------------------- Equity method Starz affiliate Encore Liberty On --------- Group Livewire Command Other Telewest Eliminations Total ----- -------- ------- ----- -------- ------------ ----- amounts in millions Performance Measures: Year ended December 31, 2001 Revenue $ 863 593 239 364 1,811 (1,811) 2,059 Operating cash flow 313 89 44 (69) 431 (431) 377 Year ended December 31, 2000 Revenue 733 295 200 298 1,623 (1,623) 1,526 Operating cash flow 235 44 49 12 330 (330) 340 Ten months ended December 31, 1999 Revenue 539 -- -- 190 857 (857) 729 Operating cash flow 124 -- -- 9 235 (235) 133 Two months ended February 28, 1999 Revenue 101 -- -- 134 207 (207) 235 Operating cash flow 41 -- -- 6 52 (52) 47 Balance Sheet Information: As of December 31, 2001 Total assets 2,861 915 433 44,330 9,209 (9,209) 48,539 Investments in affiliates 138 -- -- 9,938 795 (795) 10,076 As of December 31, 2000 Total assets 2,754 1,141 439 49,934 10,707 (10,707) 54,268 Investments in affiliates 155 8 2 20,299 377 (377) 20,464
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued The following table provides a reconciliation of segment operating cash flow to earnings before income taxes:
New Liberty Old Liberty ---------------------------------------------- ------------- Year Year Ten months Two months ended ended ended ended December 31, December 31, December 31, February 28, 2001 2000 1999 1999 ------------ ------------ ------------ ------------ amounts in millions Segment operating cash flow $ 377 340 133 47 Stock compensation (132) 950 (1,785) (183) Depreciation and amortization (984) (854) (562) (22) Impairment of long-lived assets (388) -- -- -- Interest expense (525) (399) (135) (26) Share of losses of affiliates (4,906) (3,485) (904) (66) Nontemporary declines in fair value of investments (4,101) (1,463) -- -- Gains (losses) on dispositions, net (310) 7,340 4 14 Other, net 87 527 85 373 -------- ------ ------ ---- Earnings (loss) before income taxes and minority interest $(10,882) 2,956 (3,164) 137 ======== ====== ====== ====
During the year ended December 31, 2001, Liberty derived 13.6% its total revenue from a single customer. Such revenue is attributable to the Starz Encore Group segment and the Other segment. (16) Quarterly Financial Information (Unaudited)
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- amounts in millions 2001: Revenue $ 504 513 521 521 ======= ======= ======= ======= Operating loss $ (207) (195) (51) (674) ======= ======= ======= ======= Loss before cumulative effect of accounting change $ (697) (2,125) (215) (3,711) ======= ======= ======= ======= Net loss $ (152) (2,125) (215) (3,711) ======= ======= ======= ======= Pro forma basic and diluted loss before cumulative effect of accounting change per common share $ (.27) (.82) (.08) (1.43) ======= ======= ======= ======= Pro forma basic and diluted net loss per common share $ (.06) (.82) (.08) (1.43) ======= ======= ======= ======= 2000: Revenue $ 235 382 436 473 ======= ======= ======= ======= Operating income (loss) $ (83) 67 147 305 ======= ======= ======= ======= Net earnings (loss) $ 939 267 1,756 (1,477) ======= ======= ======= ======= Pro forma basic and diluted net earnings (loss) per common share $ .36 .10 .68 (.57) ======= ======= ======= =======
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued -----END PRIVACY-ENHANCED MESSAGE-----