-----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, UzK4WurRKaBIaEpxJEjIPM97DxfcEEkc4jSAoyUgygXdc3UIxU1sYwaX5AogV1M8 iCSFvjQxm2KUgosBzfZ/AQ== 0000950123-03-003510.txt : 20030331 0000950123-03-003510.hdr.sgml : 20030331 20030328192852 ACCESSION NUMBER: 0000950123-03-003510 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 28 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 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: 03626846 BUSINESS ADDRESS: STREET 1: 900 ROUTE 202/206 NORTH CITY: BEDMINSTER STATE: NJ ZIP: 07921 BUSINESS PHONE: 9085321900 MAIL ADDRESS: STREET 1: 900 ROUTE 202/206 NORTH CITY: BEDMINSTER STATE: NJ ZIP: 07921 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 10-K 1 e84804e10vk.txt AT&T CORP - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AS FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH , 2003 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-1105 AT&T CORP. A NEW YORK I.R.S. EMPLOYER CORPORATION NO. 13-4924710
ONE AT&T WAY, BEDMINSTER, NEW JERSEY 07921 TELEPHONE NUMBER 908-221-2000 INTERNET ADDRESS: ATT.COM/IR 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of voting common stock held by non-affiliates was approximately $16.9 billion (based on closing price of those shares as of the last business day of the registrant's most recently completed second fiscal quarter). At February 28, 2003, 784,731,748 shares of AT&T common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement relating to the 2003 Annual Meeting of Shareowners (Part III) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SCHEDULE A Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Shares New York, Boston, Chicago, (Par Value $1 Per Share) Philadelphia and Pacific Stock Exchanges
Five Year 5 5/8% Notes due March 15, 2004 Five Year 6 3/8% Notes due March 15, 2004 Ten Year 6 3/4% Notes, due April 1, 2004 Ten Year 7 1/2% Notes, due April 1, 2004 Ten Year 7% Notes, due May 15, 2005 Twelve Year 7 1/2% Notes, due June 1, 2006 Twelve Year 7 3/4% Notes, due March 1, 2007 New York Stock Exchange Ten Year 6% Notes due March 15, 2009 6 1/2% Notes due March 15, 2013 Thirty Year 8 1/8% Debentures, due January 15, 2022 Thirty Year 8.35% Debentures, due January 15, 2025 Thirty-Two Year 8 1/8% Debentures, due July 15, 2024 Thirty Year 6 1/2% Notes due March 15, 2029 Forty Year 8 5/8% Debentures, due December 1, 2031
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 One AT&T Way, Bedminster, New Jersey, 07921 (telephone number, 908-221-2000; internet address, att.com/ir). AT&T is among the world's communications leaders, providing voice and data communications services to large and small businesses, consumers and government entities. AT&T and its subsidiaries furnish domestic and international long distance, regional, local and Internet communications services. AT&T's primary lines of business are AT&T Business Services and AT&T Consumer 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 then four major operating units: Broadband Services, Business Services, Consumer Services and Wireless Services. 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 (1.609 as adjusted for AT&T's November 18, 2002 one-for-five reverse stock split) of AT&T Wireless for each AT&T share outstanding. 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 tracking stock for one share of Liberty Media Corporation's Series A and Series B common stock, respectively. On November 18, 2002, AT&T completed the spin-off of AT&T Broadband and simultaneously merged it with Comcast Corporation. Each AT&T shareowner received a distribution of 0.3235 of a share (1.6175 shares reverse split adjusted) of Comcast Class A common stock for each share of AT&T common stock outstanding. On July 10, 2002, AT&T shareholders approved an amendment to AT&T's charter to create a new class of AT&T common stock, the AT&T Consumer Services Group tracking stock. AT&T has not determined when or whether these shares would be issued, which would be dependent on sufficient market receptivity and support. On July 10, 2002, AT&T shareowners approved a one-for-five reverse stock split of AT&T common stock. The reverse stock split was effected on November 18, 2002 immediately after the completion of the spin-off of AT&T Broadband. 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, provides an array of services and customized solutions in 60 countries and 850 cities worldwide. 1 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 voice 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. 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 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. Furthermore, the introduction and growth of wireless carriers has also put additional competitive pressure on traditional voice long distance business services, particularly in the "dial 1" long distance, card and operator services segments. 2 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) 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 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 Services' local services 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, pay phone and video services. AT&T Business Services typically offers local service as part of a package of services that can include combinations 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(R) 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, Asynchronous Transfer Mode, or ATM and IP connectivity services. Packet services enable 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. 3 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-up 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 also works selectively with qualified partners to offer enhanced services to customers. Enterprise Networking Services. With a presence in 60 countries and 850 different cities, AT&T Business Services' enterprise networking services 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 include applications such as e-mail, voice over IP, order entry systems, employee directories, human resource transaction and other database applications. Web Services. AT&T Business Services' managed web hosting services support clients' hosted infrastructure needs from the network layer up to 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 flexible, managed environment of network, server and security infrastructure as well as built-in data storage. AT&T's 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 integrated solutions to ensure the continuous operations of clients' critical business processes and availability of critical data and includes business continuity and disaster recovery services. Outsourcing Solutions. AT&T Business Services provides customers consulting, outsourcing and management services for their highly complex global data networks, including networking-based electronic commerce applications. TRANSPORT AT&T Business Services provides wholesale networking capacity and switched services to other carriers. 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 Internet Service Providers (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. AT&T Business Services also has sold dedicated network capacity through indefeasible rights-of-use agreements under which capacity is furnished for contract terms as long as 25 years. 4 SALES AND MARKETING AT&T Business Services markets its voice and data communications services through its global sales and marketing organization of approximately 6,800 sales representatives. The sales and marketing group also uses several outside telemarketing firms. In addition, the AT&T Solution Center provides a centralized resource for complex customer requirements. CUSTOMER CARE AND SUPPORT AT&T Business Services' customer care handles contracting, collections, ordering, provisioning and maintenance processes worldwide. In the U.S. there are 12,133 customer care associates at 47 customer care centers, of which 41 are company-owned and 6 are operated by outside customer care firms. For larger and multinational customers and government agencies, AT&T Business Services provides customer care services and support through dedicated account teams. Through a dedicated customer care website customers may submit questions or initiate service requests, including ordering new services or submitting maintenance requests. 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 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. Customers 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. NETWORK AT&T Business Services' U.S. network comprises 54,000 route miles of long-haul backbone fiber-optic cable, plus another 19,600 route miles of local metropolitan fiber, capable of carrying high speed (10 billion bits or 10 gigabits per second) of traffic. AT&T Business Services upgrades this fiber network, recently completing the installation of over 12,000 new route miles of the latest generation fiber-optic cable capable of carrying 40 gigabits per second when that technology is commercially available. This new fiber capacity provides AT&T substantial capacity for potential future growth of network traffic with low incremental capital expenditure requirements. In addition, AT&T Business Services also has over 700 points-of-presence in the continental U.S. with the majority served by high-speed fiber-based technology offering high-speed data connectivity to the majority of U.S. business centers. The AT&T Business Services' network also supports AT&T Consumer Services. On an average business day, the network handles more than 300 million voice calls, as well as 3,000 trillion bytes (terabytes) of data. 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 following a network failure within 50 to 60 milliseconds by reversing the flow of traffic on the ring. On other routes, AT&T uses its patented FASTAR technology to route traffic around a fiber-optic cable cut using spare transport capacity elsewhere on the network. Most recently, AT&T has deployed Intelligent Optical Switches across the network to expand AT&T's ability to rapidly and automatically restore network traffic that might be otherwise affected by cable cut or equipment failure. AT&T Business Services has been deploying Dense Wavelength Division Multiplexing (DWDM) technology that divides an optical fiber into multiple wavelengths, each now carrying up to 10 gigabits per second of information. When DWDM was introduced in 1996, the technology could transmit only eight 5 different wavelengths on a fiber strand. AT&T Business Services is currently deploying 64- and 80-wavelength DWDM systems, as well as systems capable of carrying 160 wavelengths per strand. Since digital switching was introduced in the late 1970s, the basic element of the AT&T long-distance voice network has been a circuit switch which was specifically designed for long-haul use. Currently AT&T Business Services employs 143 of these switches in the network. AT&T Business Services has recently installed more than 60 of the latest high-performance carrier-grade voice switches that allow AT&T to accommodate the transition from circuit-switched to packet networks. AT&T Business Services will continue to have both circuit and packet switching technologies for some time. In addition to its long distance network, AT&T Business Services has an extensive local network serving business customers in 90 U.S. cities. AT&T Business Services' local network now includes 155 local switches and reaches more than 6,300 buildings with approximately 7,500 miles of fiber. This network provides voice service and high-speed data connections to business users. 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. AT&T Business Services also operates one of the largest IP networks in the United States. As a tier-one provider, AT&T has direct peering relationships with other tier-one providers, providing service to carriers that route through public peering sites. AT&T offers multiple access choices to the IP network, including dial-up, dedicated private line, and digital subscriber loop (DSL), as well as IP-enabled access through ATM and frame relay networks. AT&T Business Services has deployed Internet Data Centers across the U.S., offering web-hosting services. 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. INTERNATIONAL AT&T Business Services has entered into a number of agreements and alliances with international communications companies in order to provide customers end-to-end network management capabilities and highly customized solutions. AT&T also has investments with international operations including foreign communications companies. AT&T is also building out its Global Network (AGN) in over one hundred cities in various countries. AT&T Latin America Corp. On August 28, 2000, AT&T established AT&T Latin America in connection with the merger of Netstream, a competitive local exchange carrier in Brazil, followed by the merger of FirstCom Corporation. AT&T Latin America provides voice, data and Internet access services in five countries, Argentina, Brazil, Chile, Colombia and Peru. AT&T owns an approximately 69% economic interest (approximately 95% voting interest) in AT&T Latin America. AT&T and the Southern Cross Group, LLC have entered into a non-binding letter of intent, effective as of December 31, 2002, pursuant to which AT&T has agreed to sell to the Southern Cross Group, LLC AT&T's entire common equity interest in AT&T Latin America subject to the negotiation and execution of definitive documents and receipt of any necessary approvals. Alestra. S. de R.L. de C.V. AT&T also owns a 49% economic interest in Alestra S. de R.L. de C.V., a competitive telecommunications company in Mexico. Alestra offers domestic and international voice, data and Internet services throughout Mexico to business and residential customers. Alestra's network comprises 3,500 route miles, with four interconnection points to AT&T Business Services' network at the U.S.-Mexico border. Alestra is currently in a liquidity crises and is overdue in making its November interest payment on its existing notes. To address this liquidity crises and maintain its viability, Alestra is seeking to restructure its existing indebtedness to reduce the outstanding aggregate amount of the notes, to lower interest payments and extend the maturity on the notes. If Alestra's current restructuring proposal is consummated, the restructuring will be financed by a capital contribution from Alestra's shareholders in the amount of $80 million, with AT&T's pro rata share being approximately $39 million. 6 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; advanced network design and architecture; network operations systems; data mining technologies and advanced speech technologies. AT&T Labs works with the 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, TRADEMARKS AND SERVICE MARKS AT&T actively pursues patents, trademarks and service marks to protect its intellectual property within the United States and abroad. AT&T received over 300 patents in 2002 and maintains a global portfolio of over 3,500 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 communications services to residential consumers in the United States with approximately 50 million customer relationships. AT&T Consumer Services provides a broad range of communications services to consumers individually and in combination with other services, including: - domestic and international long distance; - transaction-based communications services, such as operator-assisted calling services and prepaid phone cards; - local calling offers; and - Internet service through its AT&T Worldnet(R) Service. 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. 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 offers franchise. In addition, prices for long distance minutes and other basic communications services have declined as a result of competitive pressures, excess network capacity, 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. 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 Federal Communications Commission (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 February, 2003, regional phone companies have received approval to offer long distance in thirty-five states and AT&T expects that regional phone companies will be successful in obtaining approval to offer long distance in most or all of the remaining states during 2003. The incumbent local exchange carriers presently have numerous competitive advantages as a result of their historic monopoly control over local exchanges. While these dynamics are creating downward 7 pressure on stand-alone long distance services, new opportunities are being created in the consumer market, 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. AT&T Consumer's ability to remain in its current local voice markets and to enter and offer local voice services in new markets is dependent upon the continuation, or in some cases the implementation, of fair regulatory rules and prices for AT&T Consumer to purchase certain network capabilities from incumbent local exchange carriers. The data services market in the consumer segment is comprised primarily of Internet access, utilizing either dial-up or broadband access technologies. Currently, AT&T Consumer Services offers both dial-up and AT&T-branded DSL internet access 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. In the continental U.S., AT&T Consumer Services provides long distance telecommunications services over AT&T's backbone network. BUNDLED LOCAL AND LONG DISTANCE (ALL DISTANCE) At the end of 2002, AT&T Consumer Services offered customers combined local and long distance services in portions of eight states. AT&T Consumer Services handles all aspects of the phone service for the customer, including ordering, customer service, billing, repair and maintenance. 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. CALLING CARD The AT&T calling card can be used to place domestic and international calls in the U.S. and Canada and to place calls from other countries to the United States via AT&T Direct(R) Service and country to country via AT&T Direct Worldconnect Services. Features include purchase limits, geographic restrictions, native language preference, voice messaging and sequence dialing. Customers can also place calls over the AT&T network by using regional phone company 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. AT&T PrePaid Card. AT&T is the leading provider of domestic prepaid card services. 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. AT&T PrePaid cards are available in over 60,000 retail locations. The majority of AT&T Consumer's prepaid card sales in 2002 were to Wal-Mart Stores, Inc. under an agreement with a one-year term, and the sales to that customer comprised approximately 5% of AT&T 8 Consumer Services' revenue and 67% of prepaid card revenue. The agreement is currently scheduled to expire in January 2004 but could be subject to early termination if certain events occur. Operator Services. Operator-assisted calling services include traditional collect calls, third party billing, person to person and long distance pay phone service. 1-800CALLATT(R) (Collect). 1-800CALLATT for collect calls is AT&T Consumer Services' lead discounted collect calling offer. 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 storing and forwarding 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. Easy reach 800. AT&T Consumer Services offers a personal 800 number that lets people call home from virtually any phone, anytime, anywhere in the U.S. as an option to collect calling. 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. 10-10-345(SM). 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. Charges made for calls using 10-10-345 are billed through the local exchange carrier. AT&T WORLDNET SERVICE AT&T offers dial-up and DSL Internet access to consumer with its AT&T Worldnet Service, a leading provider of Internet access services in the United States. AT&T Worldnet Service offers internet-based communications services such as e-mail, content, personal web pages, and instant messaging. This product line was broadened in 2002 with the addition of a pre-paid Internet product and the Any Connection Plan, a "Bring Your Own Access" product for users of AT&T Worldnet on broadband connections where the AT&T DSL product is not available. On January 6, 2003, AT&T announced an extension of an existing agreement with data services provider Covad Communications Group, Inc. ("Covad") to broaden availability of consumer broadband AT&T DSL Service. Under this arrangement, AT&T expects to pursue offering DSL services to residential customers throughout the U.S., using Covad's nationwide network. Covad's network covers more than 40 million homes and businesses in 96 of the largest Metropolitan Statistical Areas (MSAs) throughout the U.S. MARKETING, SALES AND CUSTOMER CARE AT&T Consumer Services markets its products and services to a broad spectrum of customers. AT&T Consumer Services markets under the AT&T brand, with the exception of its 10-10-345 service and certain prepaid card offerings. AT&T Consumer Services extensively utilizes direct marketing channels to communicate with its existing customer base as well as to market to prospective customers. 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. 9 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 22 service centers, of which 10 are operated by AT&T and 12 are outsourced to outside 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 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, including 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 also pursuing the use of e-mail to create a more convenient, interactive relationship with the consumer, while streamlining its existing processes and reducing the costs of providing services. In January 2002, AT&T entered into a five-year agreement with Accenture which requires Accenture to provide new technology development and ongoing management direction to improve AT&T Consumer Services' customer care and sales operations, with goals of reducing costs, raising productivity, and improving sales and customer service. CUSTOMER OFFERS AT&T Consumer Services offers long distance customers a family of calling plans. Currently, there are two leading long distance offers. The first is the AT&T One Rate(R) 7c Plan. For a monthly plan fee of $4.95, customers pay 7c per minute for direct dialed state-to-state long distance calls from home, at all times. The second is the AT&T Unlimited(SM) Plan, 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 AT&T 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 third parties provide customers with options ranging from airline miles to hotel nights to premium cable channel upgrades to college education savings accounts. AT&T Worldnet Service seeks to build brand recognition and customer loyalty. 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 thorugh which 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 affiliation with AT&T. 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. 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 10 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 usually 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. AT&T Consumer Services generally provides billing via traditional paper copy or on-line billing. LEGISLATIVE AND REGULATORY DEVELOPMENTS Telecommunications Act of 1996. The Telecommunications Act of 1996 (Telecommunications Act) became law on February 8, 1996. Among other things, the Telecommunications Act was designed to foster local exchange competition by establishing a regulatory framework to govern new competitive entry in local and long distance telecommunications services. In August 1996, the FCC adopted rules and regulations, including pricing rules, to implement the local competition provisions of the Telecommunications Act. These rules and regulations rely on state public utility commissions (PUCs) to develop the specific rates and procedures applicable to particular states within the framework prescribed by the FCC. Numerous parties sought appeal of the FCC's order. In July 1997, the Eighth Circuit Court of Appeals (Eighth Circuit) issued a decision holding that the FCC lacked authority to establish pricing rules under the Telecommunications Act applicable to interconnection with, and the purchase of unbundled network elements and wholesale services from, incumbent local exchange carriers. The Eighth Circuit accordingly vacated the rules that the FCC had adopted in August 1996. 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 November 1999, the FCC completed its reexamination of the unbundled network elements that incumbent local exchange carriers are required to make available to new entrants, and released an order (UNE Remand Order) that re-adopted the original list of elements, with certain limited exceptions. This order was appealed to the District of Columbia Circuit Court of Appeals (D.C. Circuit). In December 2001 the FCC opened a proceeding to review the availability of unbundled network elements based on current market conditions (Triennial Review). On May 13, 2002, the Supreme Court held that a prior Eighth Circuit Court ruling had erred by invalidating the FCC rule that the prices for network elements should be based on the most efficient alternatives. It also rejected the claim by the incumbent local exchange carriers that the Eighth Circuit erred by not requiring prices to be based on their historical cost. It further reinstated the FCC's rules requiring incumbent local exchange carriers to provide competitors with "new" combinations of network elements. On May 24, 2002, the D.C. Circuit ruled on the appeal from the FCC's 1999 UNE Remand Order. The D.C. Circuit held that the FCC had not properly justified its holding that competitive carriers were impaired without access to the network elements of incumbent LECs. AT&T and others have asked the Supreme Court to review this decision. The FCC stated that it would address the D.C. Circuit's decision in the FCC's Triennial Review proceeding. On February 20, 2003, in a 3-2 vote, the FCC adopted a new unbundling framework. Under the new framework, each State Commission is authorized to conduct a granular analysis of local market conditions, using criteria provided by the FCC, to make final unbundling determinations. In the same Order, the FCC also granted the incumbent local exchange companies significant broadband deregulation, concluding that the incumbent LECs are no longer required to unbundle fiber-to-the-home loops or bandwidth in hybrid copper-fiber loops for the provision of competitive broadband services. The FCC also eliminated all line-sharing obligations. The FCC's new rules were announced in a detailed news release, but the final written 11 order is not expected until at least March 2003. Therefore, final details cannot be known until that time. It is highly likely that several decisions in this order will be appealed by certain carriers to the relevant federal Court of Appeals, and some parties may seek to stay the effectiveness of the new rules. It is likely that the United States House of Representatives will consider legislation in 2003 that would further deregulate the incumbent local exchange carriers; however, the prospects that the United States Senate will pass any such legislation remains uncertain. The FCC also opened proceedings in December 2001 and in February 2002 that could further reduce the level of federal oversight of the regional phone companies' broadband offerings. In view of the proceedings pending before the courts, the FCC and state PUCs, and possible legislation, there can be no assurance that the prices and other conditions established by the FCC and in the various states 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. 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. 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, state public utility commissions 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. 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, which, over the subsequent two years, resulted 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. Also, under the CALLS order, the caps on certain line-based charges to end users have been increased so that these costs increasingly are recovered from end user customers rather than long distance carriers. 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. 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 reversed and remanded in part, and is the subject of ongoing remand proceedings before the FCC. In November 2001, the FCC adopted various measures that reduced per-minute interstate access charges that AT&T pays to the remaining local exchange carriers that operate under rate of return regulation and provide about 8% of the nation's phone lines. Once these changes are fully implemented by July 2003, it is expected that long distance carriers will be paying about $900 million (or roughly 50%) per year less in access charges to these generally small, rural local exchange carriers. The FCC did not require long distance carriers, 12 such as AT&T, to pass on their savings to end users, but expected competition to force them to do so. To offset the reductions in access charges paid by long distance carriers, the local exchange carriers were allowed to increase their line-based charges to end users to the same levels established for the price cap carriers, and were granted additional subsidies from a new universal service mechanism. As part of this ongoing proceeding, the FCC is considering further measures that would give these carriers additional pricing flexibility and possibly the option to operate under some form of price cap regulation. Under its August 1999 local exchange carrier pricing flexibility order, which was affirmed by the U.S. Court of Appeals for the District of Columbia Circuit 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 purportedly indicate a competitive presence, they allow for premature deregulation that could force access rates upwards. Sprint PCS, a wireless carrier, sued AT&T for access charges for AT&T long distance calls terminated on Sprint PCS' network and for toll-free calls that Sprint PCS customers originated and which were terminated on AT&T's network. AT&T refused to pay Sprint PCS based on longstanding industry practice that wireless carrier-long distance carrier interconnection is on a bill and keep basis and that wireless carriers had charged their customers for calls they received. In July 2002, the FCC ruled that wireless carriers such as Sprint PCS are not prohibited from charging AT&T access charges, but that AT&T was not required to pay such charges absent a contractual obligation to do so. The FCC further held that the question whether the parties entered into a contract concerning an access payment obligation is not a matter of federal communications law but rather should to be determined by the district court that had referred the issue to the FCC. AT&T has petitioned for review of the FCC's ruling in the U.S. Court of Appeals for the District of Columbia Circuit, AT&T Corp. v. FCC et al., (D.C. Circuit filed Aug. 1, 2002). Because there was no express contract between the AT&T and Sprint PCS, if the appeal is unsuccessful, the district court will need to determine whether an implied-in-fact contract can be inferred from the parties' conduct and their tacit understanding. An adverse decision in this litigation may result in additional wireless carriers seeking similar compensation from AT&T. AT&T believes the case is without merit and intends to defend vigorously, but cannot predict the outcome of any such proceeding. Finally, in the May 1997 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 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. In December 2002, the FCC reformed the universal service assessment mechanism so that, effective April 2003, it will be based on projected revenues, which eliminates the disadvantage that AT&T previously experienced. The December 2002 order also limited how carriers would be able to reflect universal service fees on their end-user customers' bills and permitted alternative recovery mechanisms for administrative costs. COMPETITION 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, Sprint and regional phone companies. AT&T also 13 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. 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 plus entrants from other segments of the communications and information services industry. Many of these new competitors are likely to enter with a strong market presence, well-recognized names and pre-existing direct customer relationships. 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 obtained permission from the FCC to provide interLATA interexchange services in thirty five states. AT&T expects that the regional phone companies will be successful in obtaining approval to offer long distance in most or all of the remaining states during 2003. 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 substantial numbers of long distance customers 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 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, local conditions and obstacles, and changes in regulations that grant to AT&T access to regional phone companies' infrastructure, 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. EMPLOYEES At December 31, 2002 AT&T employed approximately 71,000 persons in its operations, approximately 93% of whom are located domestically. About 37% of the domestically located employees of AT&T are represented by unions. Of those so represented, about 95% are represented by the Communications Workers of America (CWA), which is affiliated with the AFL-CIO; about 4% 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 covering most of these employees extend through November 2003. 14 At December 31, 2002, AT&T Business Services employed approximately 54,100 individuals in its operations. Of those employees, approximately 49,300 are located domestically. About 26% of the domestically located employees of AT&T Business Services are represented by unions. At December 31, 2002, AT&T Consumer Services employed approximately 13,200 individuals in its operations, virtually all of whom are located in the United States. About 73% of the domestically located employees of AT&T Consumer Services are represented by unions. SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION For information about the Company's research and development expense, see Note 4 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. AVAILABLE INFORMATION Shareowners may access and download free of charge via a hyperlink on AT&T's website at att.com/ir copies of the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports. These documents are generally available on the same day they are filed or furnished electronically by AT&T with the Securities and Exchange Commission. CONTINUING IMPLICATIONS OF SPLIT-OFFS AND SPIN-OFFS Since 1997 AT&T has split-off or spun-off a number of operating units including Lucent Technologies Inc., NCR Corp., AT&T Wireless Services, Inc., Liberty Media Corporation and AT&T Broadband. In connection with these transactions, AT&T has retained various potential obligations and liabilities relating to these former units; for example, AT&T has entered into various agreements which contain allocations or sharing of certain potential costs or liabilities or otherwise contain continuing potential burdens or restrictions on AT&T. These potential obligations and liabilities include potential tax liabilities and restrictions, potential litigation liabilities and the potential for liability in connection with AT&T guarantees to third parties of obligations of its former units. Tax Considerations. If AT&T, AT&T Wireless Services, Inc., Liberty Media Corporation or AT&T Broadband Corp./Comcast were to engage in certain issuances of shares or change of control transactions occurring generally within the two-year period following the date of each split-off or spin-off, AT&T could incur material federal income tax liabilities with respect to the applicable split-off or spin-off. AT&T Wireless and AT&T Broadband/Comcast have generally agreed not to undertake such actions without a counsel's opinion or a ruling from the Internal Revenue Service (IRS), in each case in form and substance reasonably satisfactory to AT&T. Moreover, under separate agreements between AT&T and each of the split-off or spun-off companies, AT&T generally will be entitled to indemnification 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 Broadband/Comcast, the tax liability was caused by post split-off or spin-off transactions of AT&T. AT&T Broadband/Comcast's indemnification obligation is generally limited to 50% of any tax liability that results from the spin-off failing to qualify as tax free, unless such liability was caused by a post spin-off transaction of AT&T Broadband/Comcast. To the extent AT&T were entitled to an indemnity with respect to such tax liability, AT&T would be required to collect the claim on an unsecured basis. Because of restrictions imposed by Section 355(e) of the Internal Revenue Code, AT&T's ability to enter into certain transactions involving the issuance of significant amounts of its stock may be limited. Under agreements between AT&T and AT&T Broadband/Comcast, AT&T generally has agreed not to engage in such transactions for a period of 25 months following the spin-off of AT&T Broadband without a counsel's 15 opinion or ruling from the IRS, in each case in form and substance reasonably satisfactory to AT&T Broadband/Comcast. AT&T believes that the practical impact of these restrictions will diminish significantly with the passage of time. Litigation. Pursuant to agreements entered into with its former units, AT&T shares in the cost of certain litigation (relating to matters arising while the units were affiliated with AT&T) if the settlement exceeds certain thresholds. For example, in connection with a settlement in 2002 of Sparks v. AT&T, a class action against AT&T, Lucent Technologies and other defendants filed in 1996, pursuant to agreements between AT&T and Lucent Technologies, AT&T was responsible for its proportionate share of the settlement and estimated legal costs. This amount totaled up to $33 million, net of tax. With the exception of the Sparks matter, as of December 31, 2002, AT&T has made the assessment that none of the potential litigation liabilities relating to matters arising while the units were affiliated with AT&T were probable of incurring costs in excess of the threshold above which AT&T would be required to share in the costs. However, in the event these former units were unable to meet their obligations with respect to these liabilities due to financial difficulties, AT&T could be held responsible for all or a portion of the costs, irrespective of the sharing agreements. Guarantees. From time to time AT&T had guaranteed to third parties the debt or other obligations of its former units, and in some cases may remain secondarily liable with respect to such obligations. In addition, in connection with the split-off or spin-off of its former units, AT&T has issued guarantees to third parties for certain debt or other obligations of its former units. For example, in connection with the split-off of AT&T Wireless, AT&T issued a guarantee in the amount of $3.6 billion plus interest of a put right held by a third party in the event that AT&T Wireless failed to achieve certain technical milestones by June 30, 2004. In the event AT&T's former units are unable to meet obligations which AT&T has guaranteed, the third parties could look to AT&T for payment. SPECIAL CONSIDERATIONS Investors should carefully consider the following factors regarding their investment in AT&T Corp. securities. We Expect There to be a Continued Decline in the Voice 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 deregulation. AT&T expects these trends to continue, and AT&T may need to continue to reduce its prices in the future. In addition, AT&T does not expect that it will be able to achieve increased traffic volumes in the near future to sustain current revenue levels. The extent to which each of AT&T's 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. We Face Substantial Competition that May Materially Adversely Impact Both Market Share and Margins. AT&T 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. 16 We Face Competition from a Variety of Sources. - AT&T traditionally has competed with other long distance carriers. In recent years, AT&T has begun to compete with regional phone companies, which own their own access facilities and historically have dominated local telecommunications, and with other competitive local exchange carriers, for the provision of local and long distance services. Regional phone companies have already been permitted to offer long distance services in many states within their regions and AT&T expects that they will obtain permission to offer long distance services in most or all remaining states throughout their regions during 2003. The regional phone companies presently have numerous advantages as a result of their historic monopoly control over local exchanges and facilities. Some of the regional phone companies have financial, personnel and other resources significantly greater than those of AT&T. - Competition as a result of technological change. AT&T is also 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. 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 and e-mail services has contributed to an overall decline in traffic volume on traditional wireline networks. - Competition as a result of excess capacity. AT&T faces competition as a result of excess capacity resulting from substantial network build out by competitors that had access to inexpensive capital. The Regulatory and Legislative Environment Creates Challenges for AT&T. AT&T 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 AT&T's cost structure, and ability to create and market desirable and competitive end-to-end products for customers. In addition, regional phone companies are entering the long distance business while they still control substantially all the access facilities in their regions. This has resulted in an increased level of competition for long distance or end-to-end services as the services offered by regional phone companies expand. In the Consumer Business Substantially All of the Telephone Calls Made by AT&T's Customers are Connected Using Other Companies' Networks, Including Those of Competitors, which Makes Competition More Difficult for AT&T. AT&T provides long distance and, to a limited extent, local telecommunications over its own transmission facilities. Because AT&T's network does not extend to homes, AT&T route calls through a local telephone company to reach AT&T's 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 leases 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 with new market opportunities. 17 The Financial Condition and Prospects of AT&T May be Materially Adversely Affected by Further Ratings Downgrades. On May 29, 2002, Moody's lowered its rating of long-term debt issued or guaranteed by AT&T to Baa2 from A3. Moody's also confirmed AT&T's short-term rating as Prime-2. On October 8, 2002, Moody's confirmed AT&T's Baa2 rating on senior long term debt with a negative outlook. Moody's ratings outlook for AT&T remains negative but AT&T is not currently on review for any additional downgrade by Moody's. On June 3, 2002, Fitch Ratings also downgraded AT&T's long-term debt rating to BBB+ from A-, with the rating remaining on Rating Watch Negative pending completion of the AT&T Comcast transaction. On November 18, 2002, Fitch affirmed the BBB+ rating on AT&T, removed the ratings from Rating Watch Negative and assigned an outlook of stable. On January 31, 2003 Fitch affirmed the ratings at BBB+ but revised the rating outlook to negative. On November 18, 2002, Standard & Poor's affirmed AT&T's long-term debt ratings at BBB+, removed the ratings from Credit Watch and assigned a stable outlook. On January 27, 2003, Standard & Poor's affirmed AT&T's credit rating at BBB+ but revised the outlook to negative from stable. Additional debt rating downgrades could require AT&T to pay higher rates on certain existing debt and pay higher rates or prepay certain operating leases. If AT&T's ratings are downgraded below investment grade by Standard & Poors or Moody's, there are provisions in AT&T's securitization programs which could require the outstanding balances to be paid by the collection of the receivables. Further ratings actions could occur at any time. As a result, the cost of any new financings may be higher. AT&T's Labor Agreements Expire in November 2003. At December 31, 2002 AT&T employed approximately 71,000 persons. About 37% of the domestically located employees of AT&T are represented by unions. Of those so represented, about 95% are represented by the Communications Workers of America (CWA) and about 4% by the International Brotherhood of Electrical Workers (IBEW), both of which are affiliated with the AFL-CIO. Approximately 93% 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 expire on November 8, 2003 and AT&T expects to begin formal negotiations with the CWA and IBEW in September 2003. 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 date of the labor agreements. Union employees may take labor actions prior to the expiration of the labor agreements, or, if no agreement is reached, thereafter, including work stoppages or work slowdowns. Such actions 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. 18 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: -- financial condition, -- results of operations, -- cash flows, -- dividends, -- financing plans, -- business strategies, -- operating efficiencies, -- capital and other expenditures, -- competitive positions, -- availability of capital, -- growth opportunities for new and existing products, -- benefits from new technologies, -- availability and deployment of new technologies, -- plans and objectives of management, 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 with respect to the matters referred to above. These forward looking statements are necessarily estimates reflecting the best judgment of senior management that rely on a number of assumptions concerning future events, many of which are outside of 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 impact of existing and new competitors in the markets in which we compete, including competitors that may offer less expensive products and services, desirable or innovative products, technological substitutes, or have extensive resources or better financing, - the impact of oversupply of capacity resulting from excessive deployment of network capacity, - the ongoing global and domestic trend 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 and change customer mix and profitability, - the ability to establish a significant market presence in new geographic and service markets, 19 - the availability and cost of capital, - 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 FCC or state regulatory commissions under the Telecommunications Act or other applicable laws and regulations, - the risks associated with technological requirements; wireless, Internet or other technology substitution and changes; and other technological developments, - the results of litigation filed or to be filed against the company, and - 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 the Company has no control. 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 AT&T's properties consist primarily of plant and equipment used to provide long distance and local telecommunications 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. 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. ITEM 3. LEGAL PROCEEDINGS In the normal course of business, AT&T 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 is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 2002. 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 beyond that provided for at year-end would not be material to AT&T'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 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 20 misleading statements and omitted to state material facts concerning its future business prospects. The complaints seek unspecified damages. Similar claims have been asserted by plaintiffs against the Company in two derivative actions, which are pending in New Jersey federal court. These class actions have been consolidated and were, until recently, stayed by the Court. The complaints seek unspecified damages. The Company believes that the lawsuits are without merit and intends to defend them vigorously. Recently, two participants in AT&T's Long Term Savings Plan for Management Employees (the "Plan") filed purported class actions in New Jersey federal court on behalf of all Plan participants who purchased or held shares of AT&T Stock Fund, AT&T stock, AT&T Wireless Stock Fund or AT&T Wireless stock between September 30, 1999 and May 1, 2000. The complaint asserts claims similar to those made in the securities class action lawsuit described above, alleging that AT&T made materially false and misleading statements and omitted to state material facts concerning its future business prospects. As a result of this purported conduct, AT&T is alleged to have breached its fiduciary duties to the Plan and the Plan's participants. The plaintiffs seek unspecified damages. The Company believes that the lawsuits are without merit and intends to defend them vigorously. Through a former subsidiary, AT&T owned approximately 23% of the outstanding common stock and 74% of the voting power of the outstanding common stock of At Home Corporation ("At Home"), which filed for bankruptcy protection on September 28, 2001. Until October 1, 2001, AT&T appointed a majority of At Home's directors and thereafter AT&T appointed none. On November 7, 2002, the trustee for the bondholders' liquidating trust of At Home ("Bondholders") filed a lawsuit in California state court asserting claims for breach of fiduciary duty relating to the conduct of AT&T and its designees on the At Home board of directors in connection with At Home's declaration of bankruptcy and subsequent efforts to dispose of some of its businesses or assets, as well as in connection with other aspects of AT&T's relationship with At Home. On November 15, 2002, the Bondholders filed a lawsuit in California federal court asserting a claim for patent infringement relating to AT&T's broadband distribution and high-speed Internet backbone networks and equipment. The Bondholders seek unspecified damages in these lawsuits. The Company believes that these lawsuits are without merit and intends to defend them vigorously. Any liabilities AT&T may have resulting from these suits would be shared equally between AT&T and Comcast. In addition, purported class action lawsuits have been filed in California state court on behalf of At Home shareholders against AT&T, At Home, and 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. AT&T's liability for any such suits would be shared equally between AT&T and Comcast. 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. The Company believes that these lawsuits are without merit and intends to defend them vigorously. Any liabilities AT&T may have resulting from this suit would be shared equally between AT&T and Comcast. Two putative class actions have been filed in Delaware state court on behalf of shareholders of AT&T Latin America ("ATTLA"). The complaints allege that AT&T and its designees to the ATTLA board of directors violated their fiduciary duties to ATTLA as a result of purported changes in AT&T's relationship with ATTLA, including AT&T's decision to discontinue funding to ATTLA and an alleged change in AT&T's plan to enter into a tax sharing agreement with ATTLA. The plaintiffs seek unspecified damages. The Company believes that these lawsuits are without merit and intends to defend them vigorously. Thirty putative class actions have been filed in various jurisdictions around the country challenging the manner in which AT&T discloses FCC-imposed universal service fund charges to its customers and recoups those charges from its customers. The plaintiffs in each lawsuit seek unspecified damages. The Company believes that these lawsuits are without merit and intends to defend them vigorously. 21 The Company has been named as a defendant in an action pending in Maryland federal court in which the plaintiff alleges that the Company misappropriated the plaintiff's purported trade secrets and proprietary intellectual property used in the process of analyzing large sets of data, a process which is referred to as "data mining." The action is scheduled for trial in May 2003. The Company believes the lawsuit is without merit and is defending it vigorously. Numerous class actions have been brought against the Company throughout the country in which the plaintiffs have asserted superior property rights to the Company with respect to railroad right of way corridors on which the Company has installed fiber optic cable under agreements with the various railroads. Although the Company denies any liability, it has engaged in settlement negotiations concerning the so-called "active line" claims that have been consolidated and are pending in Indiana federal court. The Company has settled claims on a state-by-state basis and recently obtained preliminary approval for separate settlements of claims in Ohio, Connecticut, Wisconsin and Maryland and concluded negotiations for a similar settlement for Virginia claims. The Company anticipates using these settlements as a template for settling other "active line" claims and doing so in similar groupings of four to six states. However, these settlements do not involve "active line" claims along railroad right of way obtained under federal land grant statutes nor do they address claims that are based upon the installation of fiber optic cable in pipeline or other utility right of way. 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 determined but which would 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 PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER 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, 2002, AT&T had approximately 783 million shares outstanding, held by more than 3.3 million shareowners. For additional information about the market price and dividends related to the Company's common equity, see Note 17 to the Consolidated Financial Statements included in Item 8 to this Annual Report. 22 ITEM 6. SELECTED FINANCIAL DATA AT&T CORP. AND SUBSIDIARIES SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA(1)
2002 2001 2000 1999 1998 1997 1996 ------- -------- -------- -------- ------- -------- -------- (UNAUDITED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS AND EARNINGS PER SHARE Revenue........................ $37,827 $ 42,197 $ 46,850 $ 49,609 $47,287 $ 46,226 $ 45,716 Operating income............... 4,361 7,832 12,793 12,544 7,632 6,835 8,341 Income (loss) from continuing operations................... 963 (2,640) 9,532 6,019 4,915 4,088 5,064 INCOME FROM CONTINUING OPERATIONS AT&T Common Stock Group:(2) Income....................... 963 71 8,044 8,041 4,915 4,088 5,064 Earnings (loss) per basic share...................... 1.29 (0.91) 11.54 13.04 9.18 7.65 9.60 Earnings (loss) per diluted share...................... 1.26 (0.91) 11.01 12.61 9.10 7.65 9.60 Cash dividends declared per share...................... 0.75 0.75 3.4875 4.40 4.40 4.40 4.40 Liberty Media Group:(2) (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.......................... $25,604 $ 26,803 $ 26,083 $ 25,587 $21,780 $ 19,177 $ 16,871 Total assets -- continuing operations................... 55,272 62,329 90,293 89,554 40,134 41,029 38,229 Total assets................... 55,272 165,481 242,802 169,499 59,550 67,690 63,669 Long-term debt................. 18,812 24,025 13,572 13,543 5,555 7,840 8,861 Total debt..................... 22,574 34,159 42,338 25,091 6,638 11,895 11,334 Shareowners' equity............ 12,312 51,680 103,198 78,927 25,522 23,678 21,092 Debt ratio(3).................. 64.7% 86.3% 122.1% 83.7% 36.7% 57.2% 61.6% OTHER INFORMATION Employees -- continuing operations(4)................ 71,000 77,700 84,800 96,500 94,500 116,800 117,100 AT&T year-end stock price per share........................ $ 26.11 $ 37.19 $ 27.57 $ 80.81 $ 79.88 $ 65.02 $ 43.91
- --------------- (1) Prior period amounts have been restated to reflect the spin-off of AT&T Broadband and the 1-for-5 reverse stock split, as applicable, both of which occurred on November 18, 2002. (2) In connection with the March 9, 1999 merger with Tele-Communications, Inc., AT&T issued separate tracking stock for Liberty Media Group (LMG). LMG was accounted for as an equity investment prior to its split-off from AT&T on August 10, 2001. There were no dividends declared for LMG tracking stock. AT&T Common Stock Group results exclude LMG. (3) Debt ratio reflects debt from continuing operations as a percent of total capital, excluding discontinued operations and LMG, (debt plus equity, excluding LMG and discontinued operations). (4) Data provided excludes LMG. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AT&T Corp. (AT&T or the "Company") is among the world's communications leaders, providing voice and data communications services to large and small businesses, consumers and government agencies. We provide domestic and international long distance, regional and local communications services, and data and Internet communications services. RESTRUCTURING OF AT&T In conjunction with the restructuring of AT&T announced on October 25, 2000, AT&T Broadband, AT&T Wireless, and Liberty Media Corporation have all been separated from AT&T. On November 18, 2002, AT&T spun-off AT&T Broadband (which was primarily comprised of the AT&T Broadband segment) to AT&T shareowners. Simultaneously, AT&T Broadband combined with Comcast Corporation (Comcast). The combination was accomplished through a distribution of stock to AT&T shareowners, who received 0.3235 of a share (1.6175 shares adjusted for the 1-for-5 reverse stock split) of Comcast Class A common stock for each share of AT&T they owned at market close on November 15, 2002, the record date. 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. Approximately 1.2 billion new Comcast shares were issued to AT&T shareowners at a value of approximately $31.1 billion, based on the Comcast stock price on November 18, 2002. AT&T shareowners received a 56% economic stake and a 66% voting interest in new Comcast. In connection with the non-pro rata spin-off of AT&T Broadband, AT&T wrote up the net assets of AT&T Broadband to fair value. This resulted in a noncash gain of $1.3 billion, which represented the difference between the fair value of the AT&T Broadband business at the date of the spin-off and AT&T's book value in AT&T Broadband, net of certain charges triggered by the spin-off and their related income tax effect. These charges included compensation expense due to the accelerated vesting of stock options as well as the enhancement of certain incentive plans. The gain was recorded in 2002 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 the time of disposition, 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 Liberty Media Group (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. The operating results from August 1, 2001, through August 10, 2001, were deemed immaterial to our consolidated results. The LMG tracking stock, which had reflected 100% of the performance of LMG, was issued in 1999 in connection with AT&T's acquisition of Tele-Communications, Inc. (TCI). AT&T did not have a controlling financial interest in LMG for financial accounting purposes; therefore, AT&T's 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 Statements of Operations as "Equity (losses) earnings from Liberty Media Group" prior to its split-off from AT&T. 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 (1.609 shares adjusted for the 1-for-5 reverse stock split) 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 purposes, the deemed effective split-off date was June 30, 2001. The impact of operating results from July 1, 2001 through July 9, 2001, were deemed immaterial to our 24 consolidated results. 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 2001 as a "Gain on disposition of discontinued operations." At the time of split-off, AT&T retained approximately $3 billion, or 7.3%, of AT&T Wireless common stock. AT&T issued the AT&T Wireless tracking stock in April 2000, 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. The earnings attributable to AT&T Wireless Group are excluded from the earnings available to AT&T Common Stock Group and are included in "Net (loss) from discontinued operations." Similarly, the earnings and losses related to LMG are excluded from the earnings available to AT&T Common Stock Group. The remaining results of operations of AT&T, including the financial performance of AT&T Wireless Group not represented by the tracking stock, is referred to as the AT&T Common Stock Group and is represented by AT&T common stock. FORWARD-LOOKING STATEMENTS This document may contain forward-looking statements with respect to AT&T's 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 necessary estimates reflecting the best judgment of senior management that rely on a number of assumptions concerning future events, many of which are outside 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 that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements including, without limitation: - the impact of existing and new competitors in the markets in which AT&T competes, 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 and profitability, - the ability to establish a significant market presence in new geographic and service markets, - the availability and cost of capital, - the impact of any unusual items resulting from ongoing evaluations of 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, 25 - the risks associated with technological requirements, wireless, Internet or other technology substitution and changes and other technological developments, - the results of litigation filed or to be filed against the Company, and - 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 the Company has no control. 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 this document is filed. 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, 2002, 2001, and 2000, and financial condition as of December 31, 2002 and 2001. CRITICAL ACCOUNTING 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 useful lives of plant and equipment, pension and other postretirement benefits, income taxes and legal contingencies. 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 (see note 2 to the consolidated financial statements for a complete discussion of AT&T's significant accounting policies): Estimated useful lives of plant and equipment -- We estimate the useful lives of plant and equipment in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The majority of our telecommunications plant and equipment is depreciated using the group method, which develops a depreciation rate (annually) based on the average useful life of a specific group of assets, rather than the individual asset as would be utilized under the unit method. Such estimated life of the group changes as the composition of the group of assets changes and their related lives. The estimated life of the group is 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. Likewise, if the anticipated technological or other changes occur more slowly than anticipated, the life of the group could be extended based on the life assigned to new assets added to the group. This could result in a reduction of depreciation and amortization expense in future periods. A one-year decrease or increase in the useful life of these assets would increase or decrease depreciation and amortization expense by approximately $0.5 billion. 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 follow the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," utilizing cash flows which take into account management's estimates of future operations. Pension and postretirement benefits -- The amounts recognized in the financial statements related to pension and postretirement benefits are determined on an actuarial basis utilizing several different assumptions. A significant assumption used in determining our net pension credit (income) and postretirement benefit expense is the expected long-term rate of return on plan assets. In 2002, we used an expected long- 26 term rate of return of 9.0%. For 2003, we will lower this expected rate of return to 8.5%. In determining this revised rate, we considered the current and projected investment portfolio mix and estimated long-term investment returns for each asset class. The projected portfolio mix of the plan assets is developed in consideration of the expected duration of related plan obligations and as such is more heavily weighted toward equity investments, including public and private equity positions. Plan assets also include fixed income and real estate investments. The actual return on pension plan assets over the last 10 and 15 years has been 10.4% and 10.9%, respectively, although the return for the last two years has been negative. The expected return on plan assets is determined by applying the expected long-term rate of return to the market-related value of plan assets. The market-related value is a calculated value that amortizes the difference between actual and expected returns evenly over a five-year period. The combined market-related value of plan assets of the pension and postretirement benefit plans as of December 31, 2002, was approximately $19.5 billion; about $2 billion higher than the related fair value of plan assets. The expected return on assets of the pension and postretirement benefit plans included in 2002 operating income was income of $1.7 billion. The reduction in the expected long-term rate of return to 8.5% will reduce the expected return credit by approximately $0.1 billion in 2003. Another significant estimate is the discount rate used in the annual actuarial valuation of pension and postretirement benefit plan obligations. In determining the appropriate discount rate at year-end, we considered the current yields on high quality corporate fixed-income investments with maturities corresponding to the expected duration of the benefit obligations. As of December 31, 2002, we reduced the discount rate by 75 basis points to 6.5%. Changes in the discount rate do not have a material impact on our results of operations. Income taxes -- Deferred income taxes are provided for the effect of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. We measure deferred tax assets and liabilities using enacted tax rates that, if changed, would result in either an increase or decrease in the provision for income taxes in the period of change. A one-percentage point increase in the enacted federal income tax rate as of December 31, 2002, would decrease net income by approximately $0.1 billion. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. In assessing the likelihood of realization, management considers estimates of future taxable income, the character of income needed to realize future tax benefits, and all available evidence. Legal Contingencies -- We are currently involved in certain legal proceedings and have accrued amounts that represent our estimate of the probable outcome of these matters. Such estimates of outcome are derived from consultation with outside counsel, as well as an assessment of litigation and settlement strategies. In addition, we may be responsible for a portion of certain legal proceedings associated with former affiliates pursuant to separation and distribution agreements. Such agreements provide AT&T to share in the cost of certain litigation (relating to matters while affiliated with AT&T) if a judgment or settlement exceeds certain thresholds. With the exception of the Sparks matter (see Discontinued Operations discussion), as of December 31, 2002, we are not aware of, and have not been advised of, any matters in which it is probable that costs would be incurred in excess of the thresholds above which we would be required to share in the costs. However, in the event these former subsidiaries were unable to meet their obligations with respect to these liabilities due to financial difficulties, AT&T could be held responsible for all or a portion of these costs, irrespective of the sharing agreements. Depending on how these matters are resolved, these costs could be material. CONSOLIDATED RESULTS OF OPERATIONS The comparison of 2002 results with 2001 results was impacted by the April 1, 2002, unwind of Concert, our joint venture with British Telecommunications plc (BT). The venture's assets and customer accounts were distributed back to the parent companies. Under the partnership termination agreement, each of the partners generally reclaimed the customer contracts and assets that were initially contributed to the joint venture, including international transport facilities and gateway assets. In addition, AT&T assumed certain other assets that BT originally contributed to the joint venture. As a result, 2002 results include revenue and 27 expenses associated with these customers and businesses for the period April 1, 2002 through December 31, 2002, while 2001 and the first quarter of 2002 includes our proportionate share of Concert's earnings and related charges in "Net losses related to other equity investments." In addition, the assets reclaimed are consolidated in each line item of the Consolidated Balance Sheet at December 31, 2002, versus an equity investment in Concert at December 31, 2001, included in "Other assets." For the period August 28, 2000, through December 31, 2002, AT&T's interest in AT&T Latin America was fully consolidated in AT&T's results. In December 2002, AT&T signed a non-binding term-sheet for the sale of its 69% economic interest (95% voting interest) in AT&T Latin America and began accounting for AT&T Latin America as an asset held for sale (the operations of AT&T Latin America did not qualify for treatment as a discontinued operation). As a result of this action, as well as our belief that no changes to the plan will be made and that a sale will be completed within one year, we recorded an impairment charge of $1.0 billion to write down AT&T Latin America's assets and liabilities to fair value, and reclassified these assets and liabilities to "Other current assets" and "Other current liabilities" at December 31, 2002. The consolidated financial statements of AT&T reflect AT&T Broadband and AT&T Wireless as discontinued operations. AT&T Broadband was spun-off on November 18, 2002, and AT&T Wireless was split-off on July 9, 2001. Accordingly, the revenue, costs and expenses and cash flows of AT&T Broadband and AT&T Wireless have been excluded from the respective captions in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows, and have been reported through their respective dates of separation as "Net (loss) from discontinued operations" and as "Net cash (used in) provided by discontinued operations." In addition, the assets and liabilities of AT&T Broadband have been excluded from the respective captions in the Consolidated Balance Sheet at December 31, 2001, and have been reported as "Current assets of discontinued operations," "Non-current assets of discontinued operations," "Current liabilities of discontinued operations," "Non-current liabilities of discontinued operations," "Minority Interest of Discontinued Operations," and "Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T of Discontinued Operations." A 1-for-5 reverse stock split of AT&T common stock was effected on November 18, 2002. Shares (except shares authorized), per share amounts and stock prices were restated to reflect the stock split on a retroactive basis. In addition, our stock prices were restated to reflect the AT&T Broadband disposition. 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 long distance 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. REVENUE
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) AT&T Business Services.................................. $26,558 $27,705 $28,559 AT&T Consumer Services.................................. 11,527 14,843 18,643 Corporate and Other..................................... (258) (351) (352) ------- ------- ------- Total Revenue........................................... $37,827 $42,197 $46,850 ======= ======= =======
Total revenue decreased 10.4%, or $4.4 billion, in 2002 compared with 2001, and decreased 9.9%, or $4.7 billion, in 2001 compared with 2000. The decrease in both years was largely driven by continued declines in long distance voice revenue of approximately $5.2 billion in 2002 and $5.5 billion in 2001. In addition, 2001 revenue declined by $0.5 billion due to the elimination of PICC. The long distance voice decline reflects the impact of pricing pressures and substitution, including a shift from higher-priced products such as business retail to lower-priced products such as business wholesale and prepaid cards. Partially offsetting the declines was growth in data/Internet Protocol(IP)/managed services within AT&T Business Services and local voice services within both AT&T Consumer Services and AT&T Business Services of approximately $0.8 billion in 28 2002, and $1.4 billion in 2001. The 2002 variances include a positive impact attributable to the reintegration of customers and assets from the unwind of Concert. In 2003, we expect our long distance voice revenue to continue to decline due to ongoing competition and product substitution. This decline in revenue is expected to be partially offset by growth in our local voice services and data/IP/managed services. Revenue by segment is discussed in greater detail in the segment results section.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) Access and other connection............................. $10,790 $12,085 $13,139 Costs of services and products.......................... 8,363 8,621 8,235 Selling, general and administrative..................... 7,988 8,064 7,387 Depreciation and amortization........................... 4,888 4,559 4,538 Net restructuring and other charges..................... 1,437 1,036 758 ------- ------- ------- Total operating expenses................................ $33,466 $34,365 $34,057 ======= ======= ======= Operating income........................................ $ 4,361 $ 7,832 $12,793 Operating margin........................................ 11.5% 18.6% 27.3%
Included within access and other connection expenses are costs we pay to connect calls using the facilities of other service providers, as well as the Universal Service Fund contributions and per-line charges mandated by the FCC. Costs paid to telephone companies outside of the United States to connect international calls are also included within access and other connection expenses. Access and other connection expenses decreased 10.7%, or $1.3 billion, in 2002 compared with 2001. Approximately $0.5 billion of this decrease was due to lower Universal Service Fund contributions and lower per-line charges, which were primarily driven by the decline in long distance voice revenue. In addition, domestic access charges decreased by $0.5 billion primarily due to product mix and FCC-mandated access-rate reductions. International connection charges decreased by approximately $0.4 billion driven primarily by lower rates and the reintegration of customers and assets from the unwind of Concert. These reductions were partially offset by an increase in local connectivity costs. Since most of the Universal Service Fund contributions, per-minute access-rate reductions and per-line charges are passed through to the customer, these reductions generally result in a corresponding reduction in revenue. In 2003, we expect access rates to be flat or slightly lower than 2002 as most of the FCC-mandated rate reductions have been implemented. We also expect our local connectivity costs to continue to increase as we continue to grow our local voice business. Access and other connection expenses decreased 8.0%, or $1.1 billion, in 2001 compared with 2000. 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. Costs of services and products include the costs of operating and maintaining our networks, costs to support our outsourcing contracts, the provision for uncollectible receivables and other service-related costs, including the cost of equipment sold. Costs of services and products decreased $0.3 billion, or 3.0%, in 2002 compared with 2001. Approximately $0.5 billion of the decrease was due to the overall impact of lower revenue and related costs at AT&T Consumer Services and AT&T Business Services. In addition, costs decreased approximately $0.2 billion due to losses on certain long-term contracts recorded in 2001 by AT&T Business Services. These decreases were partially offset by an increase of $0.1 billion in AT&T Business Services' provision for uncollectible receivables 29 primarily attributable to the weak economy. Cost of services and products also increased as a result of the reintegration of customers and assets from the unwind of Concert. In 2001, these costs increased $0.4 billion, or 4.7%, compared with 2000. The increase was driven by approximately $0.6 billion of higher costs associated with our growth businesses, primarily at AT&T Business Services, including the cost of equipment sold. 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) primarily due to the lower expected long-term rate of return on plan assets and the effects of lower actual plan assets. These increases were partially offset by approximately $0.4 billion of lower costs associated with decreased revenue, primarily lower volumes at AT&T Business Services, including our international operations, and lower payphone compensation costs. Selling, general and administrative (SG&A) expenses decreased $76 million, or 0.9%, in 2002 compared with 2001. This decrease was driven by a reduction in the number of residential customers as well as cost control efforts of $0.7 billion, and lower transaction costs of $0.2 billion associated with the AT&T restructuring. Partially offsetting these decreases was $0.3 billion of lower pension credits (income) primarily due to the lower expected long-term rate of return on plan assets and the effects of lower actual plan assets, and $0.3 billion associated with increased marketing and sales expenses for new local consumer service offerings and increased investment for business sales and customer care development. SG&A expenses also increased as a result of the reintegration of customers and assets from the unwind of Concert. We expect SG&A expenses, and to a lesser extent costs of services and products, will be unfavorably impacted in the future due to lower pension credits (income) and higher post-retirement expenses resulting from a lower expected long-term rate of return on plan assets in 2003 of 8.5% compared with the 9% rate used in 2002 and the effects of lower actual plan assets. We also expect SG&A expenses to be impacted by higher compensation costs associated with stock options reflecting the decision to expense stock option grants, commencing with options granted in 2003. SG&A expenses increased $0.7 billion, or 9.2%, in 2001 compared with 2000. Increased expenses in support of growth businesses, primarily data/IP/managed services, and local voice services, drove approximately $0.5 billion of the increase. These expenses included infrastructure development costs associated with increased sales headcount, advertising, and other general and administrative expenses. 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. 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. Partially offsetting these increases was the impact of cost control efforts as well as decreased customer care and billing expenses of approximately $0.7 billion, primarily from AT&T Consumer Services. Depreciation and amortization expenses increased $0.3 billion, or 7.2%, in 2002 compared with 2001. The increase was primarily due to a larger asset base resulting from continued infrastructure investment supporting our growth business. The increase was partially offset by the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" as of January 1, 2002, which eliminated the amortization of goodwill. In 2001, we recorded $0.2 billion of amortization expense on goodwill. In 2003, the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires that obligations associated with the retirement of tangible long-lived assets be recorded as liabilities only if such liability is unavoidable and legally enforceable, will have a favorable impact on depreciation expense. (See "New Accounting Pronouncements" for a further discussion of SFAS No. 143.) However, we continue to invest in our asset base, which will increase depreciation expense in 2003. Depreciation and amortization expenses increased $21 million in 2001 compared with 2000. The increase was primarily due to a larger asset base resulting from continued infrastructure investment. Certain infrastructure assets placed in service in 2001 extended the average life of the overall assets, partially mitigating the impact of the larger asset base. 30 Total capital expenditures were $3.9 billion, $5.6 billion and $6.8 billion for 2002, 2001 and 2000, respectively. The decrease in spending was primarily due to cost containment efforts. We continue to focus the majority of our capital spending on our growth businesses of data/IP/managed services. In 2002, net restructuring and other charges were $1,437 million. The net charge included $1,203 million related to AT&T Business Services, $211 million related to AT&T Consumer Services and $23 million related to the Corporate and Other group. Included in the $1,437 million was a $1,029 million charge for the impairment of the net assets of our consolidated subsidiary, AT&T Latin America. In December 2002, the AT&T Board of Directors approved a plan for AT&T to sell its approximate 95% voting stake in AT&T Latin America in its current condition. On December 31, 2002, AT&T signed a non-binding term sheet for the sale of our shares within one year for a nominal amount. As a result of this plan, we classified AT&T Latin America as an asset "held for sale" at fair market value, in accordance with SFAS No. 144. Consequently, there are approximately $160 million of assets (principally cash and accounts receivable) included in Other Current Assets and approximately $160 million of liabilities (principally secured short-term debt) included in Other Current Liabilities. The $1,029 million charge to write the assets and liabilities down to their fair values was reported within our AT&T Business Services segment. Also included in net restructuring and other charges was a $204 million impairment charge related to certain Digital Subscriber Line (DSL) assets (including internal-use software, licenses, and property, plant & equipment) that will not be utilized by AT&T as result of changes to our "DSL build" strategy. Instead of building DSL capabilities in all geographic areas initially targeted, we have signed an agreement with Covad Communications to offer DSL services over their network. As a result, the assets in these areas were impaired. This charge was reported within our AT&T Consumer Services segment. In 2002, AT&T recorded net business restructuring charges of $204 million. These activities consisted of new exit plans totaling $377 million and reversals of $173 million. The new plans primarily consisted of $334 million for employee separation costs primarily in AT&T Business Services, and $39 million of facility closing reserves. Slightly more than 4,800 employees will be separated in conjunction with these exit plans, approximately one-half of which are management employees and one-half are non-management employees. The majority of these employee separations will be involuntary and are largely the result of improved processes and automation in provisioning and maintenance of services for business customers. Due to the timing of these separations, these exit plans did not yield cash savings in 2002, nor did we realize a benefit to operating income in 2002. Future cash and expense savings is dependent upon the timing of actual separations and associated payments. In the first full year following the completion of these exit plans, we expect to realize approximately $300 million of cash savings and benefit to operating income. Approximately 14% of the employees affected by these exit plans had left their positions by December 31, 2002, and we expect those remaining to leave their positions by the end of 2003. Termination benefits of approximately $328 million were paid throughout 2002 for the current and prior year's separation plans. The $173 million reversal primarily consisted of $124 million of employee separation costs and $26 million related to prior plan facility closings no longer deemed to be necessary. The reversals were primarily due to management's determination that the restructuring plan established in the fourth quarter of 2001 for certain areas of AT&T Business Services, including network services, needed to be modified given current industry conditions, as well as the redeployment of certain employees to different functions within the Company. During 2001, net restructuring and other charges were $1,036 million which were primarily comprised of $862 million for employee separations, of which $388 million related to benefits to be paid from pension assets as well as pension and postretirement curtailment losses, and $166 million for facility closings. 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. These charges were slightly offset by the reversal of $33 million related to business restructuring plans announced in the fourth quarter 1999 and the first quarter 2000 (of which $15 million related to employee separations and $18 million related to contract terminations). The net charge consisted of $570 million related 31 to AT&T Business Services, $31 million related to AT&T Consumer Services and $435 million related to the Corporate and Other group. The charge covered separation costs for approximately 10,000 employees, approximately one-half of whom were management and one-half were non-management employees. More than 9,000 employee separations related to involuntary terminations and the remaining 1,000 were voluntary. During 2000, we recorded $758 million of net restructuring and other charges which included $586 million for employee separations associated with AT&T's initiative to reduce costs, of which $144 million primarily related to pension and postretirement curtailment losses. The charge also included $91 million related to the government-mandated disposition of AT&T Communications (U.K.) Ltd., which would have competed directly with Concert, and $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. The net charge consisted of $395 million related to AT&T Business Services, $97 million related to AT&T Consumer Services and $266 million related to the Corporate and Other group. These plans covered separation costs for approximately 6,100 employees, mainly in AT&T Business Services, including network operations, primarily for the consolidation of customer-care and call centers. Approximately one-half of whom were management employees and one-half were non-management employees. Approximately 5,500 of the employee separations related to involuntary terminations and approximately 600 related to voluntary terminations. AT&T's operating income in 2002 decreased $3.5 billion, or 44.3%, compared with 2001 and decreased $5.0 billion, or 38.8%, in 2001 compared with 2000. AT&T's operating margin was 11.5% in 2002 compared with 18.6% in 2001 and 27.3% in 2000. The decline in 2002 was primarily due to the decline in revenue combined with increased net restructuring and other charges and increased depreciation and amortization expenses. Also contributing to the decline was a lower rate of decline in selling, general and administrative expenses and costs of services and products compared with the revenue rate of decline. The decline in operating margin in 2001 was primarily due to a decline in revenue combined with increased selling, general and administrative expenses, costs of services and products, net restructuring and other charges, and depreciation and amortization expenses. The operating margin declines in both years reflect pricing pressures and a shift from higher-margin retail long distance services to lower-margin wholesale long distance service and other lower-margin services such as lower-priced optional calling plans and prepaid cards. We expect the operating margin to continue to decline in 2003 despite the expected benefit from lower net restructuring and other charges. The expected decline is primarily due to a continued decline in the long distance business reflecting the impact of accelerating growth in wholesale services as well as a shift to lower-margin services such as lower-priced optional calling plans and prepaid cards.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 2000 ------ -------- -------- (DOLLARS IN MILLIONS) Other (expense) income.................................... $(77) $1,327 $1,190
Other (expense) income in 2002 was expense of $77 million compared with income of $1.3 billion in 2001. The unfavorable variance of $1.4 billion was primarily due to $1.2 billion of higher net gains on sales of businesses and investments in 2001, including gains on the sale of AT&T's retained interest in AT&T Wireless and Japan Telecom. The unfavorable variance was also due to impairments of $0.2 billion recorded in 2002 related to certain leases of aircraft which are accounted for as leveraged leases, $0.2 billion of lower income related to mark-to-market adjustments on derivative instruments and lower investment-related income of $0.2 billion. Favorably impacting other (expense) income were lower investment impairment charges of $0.4 billion in 2002, primarily driven by lower impairment charges for Time Warner Telecom. At December 31, 2002, we had investments in leveraged leases of aircraft of $601 million [$(185) million net of deferred taxes], which we lease to airlines as well as aircraft related companies. Several airline carriers who have leases have recently experienced financial difficulties. While these airlines are current on their lease rental payments, we could record additional impairment charges in 2003 if any of these carriers declare 32 bankruptcy or renegotiate their lease terms with us. In addition, in the event of bankruptcy or a renegotiation of lease terms, if any portion of the non-recourse debt is canceled, such amounts would result in taxable income to AT&T and accordingly a cash tax expense. Other (expense) income in 2001 was income of $1.3 billion compared with income of $1.2 billion in 2000. The favorable variance of $0.1 billion was driven primarily by higher net gains on the sales of businesses and investments of $0.5 billion which reflect the gains on the sales of AT&T's retained interest in AT&T Wireless and Japan Telecom in 2001, $0.2 billion related to the settlement, in 2001, of disputes relating to the buyer's obligations resulting from the sale of AT&T Universal Card Services, and higher income related to mark-to-market adjustments on derivative instruments of $0.2 billion. Partially offsetting these increases was investment impairment charges of $0.5 billion, primarily consisting of the impairment of Time Warner Telecom, and lower interest income of $0.2 billion.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) Interest (expense)...................................... $(1,448) $(1,493) $(1,503)
Interest expense decreased $45 million, or 3.0%, in 2002 compared with 2001, and decreased $10 million, or 0.6%, in 2001 compared with 2000. The decrease in both periods was primarily due to lower average debt balances, reflecting our debt reduction efforts, partially offset by higher average interest rates. Average interest rates were higher in both periods due to the mix of short-term and long-term debt. The 2002 average rate was adversely affected by the $10 billion bond offering in November 2001. We expect interest expense to be lower in future periods as a result of our debt reduction efforts.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) (Provision) for income taxes............................ $(1,587) $(2,890) $(4,487) Effective tax rate...................................... 56.0% 37.7% 35.9%
The effective tax rate is the provision for income taxes as a percent of income from continuing operations before income taxes. The 2002 rate was adversely impacted by approximately 14.9 percentage points due to the $1.0 billion impairment charge recorded in 2002 relating to AT&T's interest in AT&T Latin America for which no tax benefit was recorded. Also negatively impacting the 2002 rate was the impact of AT&T Latin America's losses from operations for which no tax benefit was recorded because realization of a tax benefit was not likely to occur and the losses were not includable in AT&T's consolidated income tax return. In 2001, the effective tax rate was positively impacted by tax benefits 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, partially offset by the consolidation of AT&T Latin America's pretax losses for which no tax benefit was provided. In 2000, the effective tax rate was positively impacted by the tax benefits associated with certain legal entity restructurings and investments.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 2000 ------ ------ ------ (DOLLARS IN MILLIONS) Minority interest income................................. $114 $131 $41
Minority interest income represents an adjustment to AT&T's income to reflect the less than 100% ownership of consolidated subsidiaries. Minority interest income decreased $17 million in 2002 compared with 2001 as a result of lower net losses of AT&T Latin America in 2002. In December 2002, AT&T fully utilized the minority interest balance related to AT&T Latin America; therefore, we will no longer record minority interest income related to AT&T Latin America. 33 Minority interest income increased $0.1 billion in 2001 compared with 2000 primarily due to AT&T Latin America, which we acquired on August 28, 2000; therefore, 2001 includes a full year of results, compared with a partial year in 2000.
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 ------- --------- -------- (DOLLARS IN MILLIONS) Equity (losses) earnings from Liberty Media Group........ $ -- $(2,711) $1,488
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.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 2000 ------- --------- ------ (DOLLARS IN MILLIONS) Net (losses) earnings related to other equity investments............................................ $(400) $(4,836) $10
Net (losses) related to other equity investments, which are recorded net of income taxes, declined $4.4 billion in 2002 compared with 2001 due to lower net losses of $2.1 billion for Concert, $1.5 billion for AT&T Canada and $0.8 billion for Net2Phone, primarily resulting from impairment charges recorded in 2001. Net (losses) related to other equity investments, net of income taxes, were $4.8 billion in 2001 compared with income of $10 million in 2000. The unfavorable variance of $4.8 billion was primarily due to greater losses of $2.2 billion for Concert, $1.8 billion for AT&T Canada and $0.8 billion for Net2Phone primarily due to impairment charges recorded in 2001. The after-tax amortization of excess basis associated with nonconsolidated investments, recorded as a reduction of income, totaled $36 million in 2001, and $37 million in 2000. Effective January 1, 2002, in accordance with the provisions of SFAS No. 142, we no longer amortize excess basis related to nonconsolidated investments.
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 ---------- --------- --------- (DOLLARS IN MILLIONS) Net (loss) from discontinued operations, net of income taxes................................................ $(14,513) $(4,052) $(4,863) Gain on disposition of discontinued operations......... 1,324 13,503 --
Net (loss) from discontinued operations, net of income taxes, primarily represents the operating results of AT&T Broadband and AT&T Wireless, which AT&T disposed of and accounted for as discontinued operations. Accordingly, the revenue, costs and expenses of AT&T Broadband and AT&T Wireless have been excluded from the respective captions in the Consolidated Statements of Operations. In 2002, the net (loss) from discontinued operations included a loss of $14.5 billion from the discontinued operations of AT&T Broadband, and an estimated loss on the litigation settlement associated with the business of Lucent Technologies Inc., which was spun-off from AT&T in 1996 and accounted for as a discontinued operation. Sparks, et al. v. AT&T and Lucent Technologies Inc. et al., was a class action lawsuit filed in 1996 in Illinois state court. On August 9, 2002, a settlement proposal was submitted to and accepted by the court. In accordance with the separation and distribution agreement between AT&T and Lucent Technologies Inc., AT&T recorded its proportionate share of the settlement and estimated legal costs, which totaled $33 million, net of tax. Depending upon the number of claims submitted and accepted, the actual cost of the settlement to AT&T may be less than stated amounts, but it is not possible to estimate the amount at this time. 34 In 2002, we realized a noncash gain on the disposition of AT&T Broadband of $1.3 billion, which represented the difference between the fair value of AT&T Broadband at the date of the spin-off and AT&T's book value, net of certain charges triggered by the spin-off of $159 million, and the related income tax effect of $61 million. These charges included compensation expense due to the accelerated vesting of stock options as well as the enhancement of certain incentive plans. In 2001, the net (loss) from discontinued operations included a loss of $4.2 billion from the discontinued operations of AT&T Broadband, and income of $150 million from the discontinued operations of AT&T Wireless. In 2001, we realized a tax-free noncash 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 at the date of the split-off and AT&T's book value. In 2000, the net (loss) from discontinued operations consisted of a loss of $5.4 billion from the discontinued operations of AT&T Broadband, and income of $536 million from the discontinued operations of AT&T Wireless.
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2002 2001 2000 ------ ----- ------ (DOLLARS IN MILLIONS) Cumulative effect of accounting changes..................... $(856) $904 $ --
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, franchise costs were tested for impairment as of January 1, 2002, by comparing the fair value to the carrying value (at the market level). As a result of this test, an impairment loss (related to discontinued operations) of $0.9 billion, net of income taxes of $0.5 billion, was recorded in 2002. Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The cumulative effect of this accounting change, net of applicable income taxes, was comprised of $0.4 billion for AT&T Group (of which $0.2 billion related to discontinued operations) and $0.5 billion for LMG. The $0.4 billion recorded by AT&T Group was attributable primarily to fair value adjustments of equity derivative instruments embedded in indexed debt instruments and warrants held in public and private companies. The $0.5 billion recorded by LMG represents the impact of separately recording the embedded call option obligations associated with LMG's senior exchangeable debentures.
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2002 2001 2000 ----- ----- ----- (DOLLARS IN MILLIONS) Dividend requirements of preferred stock.................... $ -- $(652) $ -- Premium on exchange of AT&T Wireless tracking stock......... -- (80) --
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 computed 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. This beneficial feature was being accreted over the time period DoCoMo was required to hold the shares. 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, the beneficial conversion feature was fully accreted. In May 2001, AT&T completed an exchange offer of AT&T common stock for AT&T Wireless tracking stock. In 2001, this exchange resulted in a premium of $80 million, which was a reduction of net income available to common shareowners. The premium represented 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 calculated 35 based on the closing share prices of AT&T common stock and AT&T Wireless tracking stock on May 25, 2001. SEGMENT RESULTS AT&T's results are segmented according to the customers we service: AT&T Business Services and AT&T Consumer Services. The balance of AT&T's continuing operations (excluding LMG) is included in a "Corporate and Other" group. This group primarily reflects corporate staff functions and the elimination of transactions between segments. The discussion of segment results includes revenue, earnings before interest and taxes (EBIT), capital additions and total assets. EBIT is the primary measure used by AT&T's chief operating decision makers to measure AT&T's operating results and to measure segment profitability and performance. AT&T calculates EBIT as operating income plus other (expense) income, net, pretax minority interest income and pretax net (losses) earnings related to other equity investments. 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 is meaningful to investors because it provides an analysis of operating results using the same measure used by AT&T's chief operating decision makers. EBIT for AT&T was $3.9 billion, $1.5 billion and $14.0 billion for the years ended December 31, 2002, 2001 and 2000, respectively. We provide EBIT, a measure not calculated in accordance with generally accepted accounting principles (GAAP), for AT&T in order to provide investors a means to evaluate the financial results of each segment in relation to total AT&T. The table below provides a reconciliation of EBIT to operating income. Our calculations of EBIT may or may not be consistent with the calculation of this measure by other public companies. EBIT should not be viewed by investors as an alternative to a GAAP measure of performance, such as operating income. Reconciliation of EBIT to Operating Income
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2002 2001 2000 ------ ------ ------- (DOLLARS IN MILLIONS) EBIT...................................................... $3,886 $1,507 $13,973 Deduct: Other (expense) income.................................. (77) 1,327 1,190 Minority interest income................................ 114 131 41 Pretax net (losses) related to other equity investments.......................................... (512) (7,783) (51) ------ ------ ------- Operating income.......................................... $4,361 $7,832 $12,793 ====== ====== =======
Total assets for each segment generally include all assets, except intercompany receivables. Prepaid pension assets and corporate-owned or leased real estate are generally held at the corporate level, and therefore are included in the Corporate and Other group. The total assets of discontinued operations and the related (loss) as well as the 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, additions to nonconsolidated investments and additions to internal-use software. Our existing segments reflect certain managerial changes that were implemented during 2002. The changes primarily include the following: revenue previously recorded by the AT&T Business Services segment as "Internal revenue" for services provided to certain other AT&T units and then eliminated within the Corporate and Other group is now recorded as a contra-expense by AT&T Business Services; the results of certain units previously included in the Corporate and Other group were transferred to the AT&T Business Services segment; the financial impacts of SFAS No. 133 that were previously recorded in the Corporate and Other group were transferred to the appropriate segments. In addition, AT&T Consumer Services and total AT&T revenue was restated in accordance with Emerging Issues Task Force (EITF) issue 01-9, "Accounting 36 for Consideration Given by a Vendor to a Customer," which requires cash incentives given to customers previously recorded as advertising and promotion expense now to be recorded as a reduction of revenue when recognized in the income statement, unless an identifiable benefit is received in exchange. All prior periods have been restated to reflect these changes. 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. Their services include long distance, international, toll-free and local voice; data and IP services; managed services; and wholesale transport services (sales of services to service resellers). Data and IP services are broad categories of services in which data (i.e. e-mail, video or computer files) is transported from one location to another. In packet services, data is divided into efficiently sized components and transported between packet switches until it reaches its final destination, where it is reassembled. Packet services includes IP, frame relay and Asynchronous Transfer Mode or "ATM." Managed services delivers end-to-end enterprise networking solutions by managing networks, servers and applications.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) External revenue Services revenue...................................... $25,856 $26,947 $27,900 Equipment and product sales........................... 379 317 236 ------- ------- ------- Total external revenue.................................. 26,235 27,264 28,136 Internal revenue........................................ 323 441 423 ------- ------- ------- Total revenue........................................... $26,558 $27,705 $28,559 ======= ======= ======= EBIT.................................................... $ 1,638 $(2,305) $ 5,917 Capital additions....................................... 3,716 5,451 6,841
AT DECEMBER 31, ----------------- 2002 2001 ------- ------- Total assets............................................ $36,365 $40,316
REVENUE AT&T Business Services revenue decreased $1.1 billion, or 4.1%, in 2002 compared with 2001, and decreased $0.9 billion, or 3.0% in 2001 compared with 2000. The declines were primarily driven by a decline in long distance voice revenue of $1.7 billion in 2002 and $2.0 billion in 2001. Partially offsetting the decline was growth in data/IP/managed services, including equipment sales, and local voice services of $0.7 billion in 2002 and $1.3 billion in 2001. In 2003, we expect long distance voice revenue will continue to decline, reflecting continued competitive pressure as well as an accelerating shift in the retail/wholesale mix. We expect the declines in long distance voice revenue will continue to be partially offset by growth in local and data/IP/managed services. Long distance voice revenue declined approximately 12% in 2002 compared with 2001, and approximately 13% in 2001 compared with 2000, reflecting the continued impact of pricing pressures and a change in the wholesale-retail product mix. While long distance volumes grew at a low single-digit rate in 2002 and 2001, the increase was driven by growth in lower-priced wholesale volumes that was essentially offset by a decrease in higher-priced retail volumes. These factors are expected to continue to negatively impact revenue in 2003. 37 Data/IP/managed services, excluding equipment and product sales, increased approximately 5% in 2002 compared with 2001. Growth was driven by increased sales in packet services, which grew at a rate of approximately 17%, partially offset by a decline in private line services (a service in which the connection is dedicated to the customer), reflecting an industry trend of customers migrating from private line services to more cost-effective and technologically-advanced packet services. When we include equipment and product sales, data/IP/managed services increased approximately 6%. Data/IP/managed services increased approximately 13% in 2001 compared with 2000, with or without the impact of equipment sales. The growth was led by packet services, which grew at a mid-20 percent rate. Local voice services revenue grew approximately 13% in 2002 compared with 2001 and more than 20% in 2001 compared with 2000. This growth reflects our continued focus on increasing the utilization of our existing footprint. AT&T added approximately 676,000 access lines in 2002. Access lines at the end of 2002 and 2001 were approximately 3.6 million and 2.9 million, respectively. AT&T Business Services internal revenue decreased $0.1 billion in 2002 compared with 2001 and was relatively flat in 2001 compared with 2000. The impact of internal revenue is included in the revenue by product discussions, above. The decrease in internal revenue in 2002 compared with 2001 was primarily due to the split-off of AT&T Wireless on July 9, 2001, as these sales are now reported as external revenue, partially offset by an increase in sales to AT&T Broadband. Sales to AT&T Broadband were recorded as internal revenue through the November 18, 2002, date of disposition. Subsequent to November 18, 2002, sales to AT&T Broadband, now Comcast, are recorded as external revenue. EBIT In 2002, EBIT increased $3.9 billion, or 171.1%, compared with 2001. The improvement was primarily due to a decrease in pretax net losses related to equity investments of $3.5 billion for Concert and $2.6 billion for AT&T Canada driven primarily by impairment charges and equity losses recorded in 2001, as well as $0.4 billion in lower restructuring charges recorded in 2002. This improvement was partially offset by a decrease in the long distance voice business resulting primarily from the impact of pricing pressures, a $1.0 billion impairment charge recorded in 2002 for AT&T Latin America, and a gain of approximately $0.5 billion recorded on the sale of our stake in Japan Telecom in 2001. In 2001, EBIT decreased $8.2 billion, or 138.9%, compared with 2000. The decline was primarily due to higher losses of $3.5 billion related to Concert and $3.0 billion related to AT&T Canada, primarily due to impairment charges recorded in 2001. Also reflected in the decline was the impact of long distance voice pricing pressure, as well as a shift from higher-margin long distance services to lower-margin growth services. OTHER ITEMS Capital additions decreased $1.7 billion in 2002 compared with 2001 and $1.4 billion in 2001 compared with 2000 as we continue to maintain a disciplined focus on capital spending. Although these declines reflect significantly lower capital expenditures for network assets that support all services provided by AT&T, we continue to focus the majority of our capital spending on our data, IP and local voice products. Total assets decreased $4.0 billion, or 9.8%, at December 31, 2002, compared with December 31, 2001. The decrease reflects lower receivables primarily driven by the settlement of receivables from Concert in connection with the Concert unwind, improved cash collections and lower revenue. The decrease also reflects the write-off of the assets associated with the impairment of AT&T Latin America. 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. 38
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) Revenue................................................. $11,527 $14,843 $18,643 EBIT.................................................... 2,647 4,875 6,893 Capital additions....................................... 127 140 148
AT DECEMBER 31, ----------------- 2002 2001 ------- ------- Total assets............................................ $ 1,674 $ 2,141
REVENUE AT&T Consumer Services revenue declined $3.3 billion, or 22.3%, in 2002 compared with 2001, and $3.8 billion, or 20.4%, in 2001 compared with 2000. The decline in both periods was primarily due to long distance revenue, which fell $3.6 billion in both 2002 and 2001. These declines were largely driven by traditional long distance voice services, such as domestic and international dial services (long distance calls where the number "1" is dialed before the call), and domestic calling card services. The traditional long distance voice services revenue was negatively impacted by substitution and the impact of ongoing competition, which has led to a loss of market share. In addition, the continued migration of customers to optional calling plans and lower-priced products, such as prepaid cards, has also negatively impacted revenue. The revenue decline for 2001 also reflects a $0.5 billion impact due to the elimination of per-line charges in July 2000. Partially offsetting these declines was growth of $0.2 billion in both 2002 and 2001 related to local services. Calling volumes declined at a low-teen percentage rate in 2002, and a low double-digit percentage rate in 2001 as a result of competition and wireless and Internet substitution, partially offset by an increase in prepaid card usage. In 2002, approximately 5% of AT&T Consumer Services total revenue and more than 50% of prepaid card revenue was related to a contract with Wal-Mart, Inc. If this contract is not renewed at the next renewal date, January 31, 2004 (subject to early termination if certain events occur), AT&T Consumer Services revenue would be adversely affected if we are unsuccessful in selling the cards through a different channel. We expect product substitution, competition (including the continued entry of the Regional Bell Operating Companies (RBOCs) 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 2003. EBIT EBIT declined $2.2 billion, or 45.7%, in 2002 compared with 2001 and declined $2.0 billion, or 29.3%, in 2001 compared with 2000. The declines in both periods were primarily due to the revenue declines in the long distance business. Also impacting the EBIT decline in 2002 was an asset impairment charge of $0.2 billion recorded in 2002 related to the Digital Subscriber Line (DSL) assets that will no longer be utilized by AT&T as a result of the agreement with Covad Communications to offer DSL services over their network. EBIT margin declined to 23.0% in 2002 from 32.8% in 2001 and 37.0% in 2000. The declining EBIT margins primarily reflect the impact of customers who substitute long distance calling with wireless and Internet service and remain AT&T Consumer Services customers as well as customers who migrate to optional calling plans and lower-priced products. These customers generate less revenue, while their billing, customer care and fixed costs remain. The 2002 margin was also negatively impacted by the DSL asset impairment charge. The 2001 margin decline was also impacted by a slight increase in marketing spending targeted at high-value customers, partially offset by the receipt of $0.2 billion in 2001 from the settlement of disputes relating to obligations resulting from the sale of AT&T Universal Card Services to Citigroup in 1998. OTHER ITEMS In 2002, capital additions decreased $13 million, or 9.2%, compared with 2001. In 2001, capital additions decreased $8 million, or 5.2%, compared with 2000. 39 Total assets declined $0.5 billion to $1.7 billion at December 31, 2002, compared with $2.1 billion at December 31, 2001. This decline was primarily due to lower accounts receivable, reflecting lower revenue and slightly improved cash collections. CORPORATE AND OTHER This group primarily reflects the results of corporate staff functions and the elimination of transactions between segments.
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 2000 ----- ------- ------ (DOLLARS IN MILLIONS) Revenue.................................................... $(258) $ (351) $ (352) EBIT....................................................... (399) (1,063) 1,163 Capital additions.......................................... 63 150 1,594
AT DECEMBER 31, ----------------- 2002 2001 ------- ------- Total assets............................................. $17,233 $19,872
REVENUE In 2002, Corporate and Other revenue was negative $258 million, compared with negative $351 million in 2001. The year-over-year change was primarily due to lower internal revenue with AT&T Wireless due to its split-off on July 9, 2001, partially offset by an increase in internal revenue with AT&T Broadband. In 2003, as a result of the AT&T Broadband spin-off, the elimination of internal revenue residing in Corporate and Other will decline significantly. Revenue for Corporate and Other was essentially flat in 2001 compared with 2000, as lower internal revenue from AT&T Wireless due to its split-off in 2001 was offset by increased sales from AT&T Business Services to AT&T Broadband. EBIT In 2002, EBIT improved $0.7 billion to a deficit of $0.4 billion. The improvement was largely due to lower investment impairment charges of approximately $1.4 billion, primarily related to our investments in Net2Phone and Time Warner Telecom in 2001. Also contributing to the EBIT improvement was lower business restructuring charges as well as lower transaction costs associated with AT&T's restructuring announced in October of 2000, totaling $0.6 billion. These EBIT improvements were partially offset by lower net gains of $0.7 billion driven by a $0.5 billion tax-free gain recorded in 2001 associated with the disposal of a portion of AT&T's retained interest in AT&T Wireless. Also offsetting the EBIT improvements were a lower pension credit (income) of $0.3 billion primarily driven by a lower long-term expected rate of return and the effects of lower actual plan assets, a $0.2 billion impairment charge recorded in 2002 of certain leases of aircraft which are accounted for as leveraged leases, and a $0.2 billion variance due to mark-to-market adjustments on derivative instruments. EBIT declined $2.2 billion to a deficit of $1.1 billion in 2001 compared with 2000. The decline was largely due to $1.5 billion of greater investment impairment charges in 2001, primarily for Net2Phone and Time Warner Telecom. Also contributing to the decline were higher restructuring and other charges and higher transaction costs associated with AT&T's restructuring announced in October 2000, totaling $0.4 billion; and a lower pension credit (income) and higher postretirement expense of $0.3 billion. These declines were partially offset by the $0.5 billion gain associated with the disposal of a portion of AT&T's retained interest in AT&T Wireless. 40 OTHER ITEMS Capital additions decreased $87 million in 2002 primarily due to a decline in the purchase of investments. Capital additions decreased $1.4 billion in 2001 primarily as a result of our investment in Net2Phone in 2000. Total assets decreased $2.6 billion, to $17.2 billion in 2002. The decrease was primarily driven by a lower cash balance at December 31, 2002, and a decrease in investments primarily due to mark-to-market adjustments, partially offset by derivative-related activity. FINANCIAL CONDITION
AT DECEMBER 31, ---------------------- 2002 2001 --------- ---------- (DOLLARS IN MILLIONS) Total assets................................................ $55,272 $165,481 Total liabilities........................................... 42,960 105,778 Total shareowners' equity................................... 12,312 51,680
Total assets decreased $110.2 billion, or 66.6%, to $55.3 billion at December 31, 2002, compared with December 31, 2001. The November 18, 2002, spin-off of AT&T Broadband accounted for $103.2 billion of the decrease. The decrease also reflects lower receivables of $3.1 billion primarily driven by improved cash collections, the settlement of receivables from Concert in connection with the Concert unwind, and lower revenue. In addition, assets decreased as a result of a $2.7 billion reduction in cash and the write-off of $1.1 billion of assets associated with the impairment of our interest in AT&T Latin America. Total liabilities decreased $62.8 billion, or 59.4%, to $43.0 billion at December 31, 2002, from $105.8 billion at December 31, 2001. The November 18, 2002, spin-off of AT&T Broadband contributed $48.9 billion to the decrease. Also contributing to the decrease in liabilities was $11.6 billion in lower debt reflecting the pay-down of short-term debt and AT&T Broadband's assumption of $3.5 billion of AT&T long-term debt in connection with its spin-off. In addition, total liabilities decreased as a result of the settlement of AT&T's obligation to purchase the publicly owned shares of AT&T Canada and due to the impairment of our interest in AT&T Latin America. Minority interest of discontinued operations decreased $3.3 billion at December 31, 2002, compared with December 31, 2001. The decrease was a result of the exchange or redemption of all TCI Pacific preferred shares for AT&T common stock and the November 18, 2002, spin-off of AT&T Broadband. Quarterly income preferred securities of discontinued operations decreased $4.7 billion at December 31, 2002, compared with December 31, 2001, as these securities were converted into Comcast class A common stock in conjunction with the spin-off of AT&T Broadband. Total shareowners' equity decreased $39.4 billion, or 76.2%, to $12.3 billion at December 31, 2002, from $51.7 billion at December 31, 2001. This decrease was primarily due to a decline of $26.6 billion in additional paid-in capital principally due to a $31.0 billion reduction resulting from the spin-off of AT&T Broadband (including compensation expense triggered by the spin-off), partially offset by an increase of $2.5 billion from the June 2002 common stock offering and $2.1 billion from the exchange or redemption of all TCI Pacific preferred shares for AT&T common shares. Retained earnings decreased $13.1 billion at December 31, 2002, compared with December 31, 2001, primarily due to the net (loss) from discontinued operations partially offset by a $1.3 billion gain on the spin-off of AT&T Broadband. During 2002, when AT&T declared its quarterly dividends to the AT&T Common Stock Group shareowners, the Company was in an accumulated deficit position. As a result, the Company reduced additional paid-in capital by $0.6 billion, the entire amount of the dividends declared. 41 LIQUIDITY
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) CASH FLOWS: Provided by operating activities of continuing operations............................................ $10,483 $10,005 $10,641 (Used in) investing activities of continuing operations............................................ (1,429) (4,295) (32,678) (Used in) provided by financing activities of continuing operations............................................ (6,041) (2,778) 23,745 (Used in) provided by discontinued operations........... (5,679) 7,683 (2,746) ------- ------- ------- Net (decrease) increase in cash and cash equivalents.... $(2,666) $10,615 $(1,038) ======= ======= =======
Net cash provided by operating activities of AT&T's continuing operations of $10.5 billion for the year ended December 31, 2002, was generated primarily by $11.4 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 reflecting cash collections and lower revenue. Partially offsetting these sources of cash were a net change in other operating assets and liabilities of $1.4 billion due to lower tax liabilities as well as lower payroll and benefit-related liabilities. Net cash provided by operating activities of continuing operations of $10.0 billion for the year ended December 31, 2001, primarily included $11.8 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 $0.9 billion due to lower revenue and strong cash collections in December 2001. Partially offsetting the cash provided were net changes in other operating assets and liabilities of $2.1 billion due to tax payments, and a decrease in accounts payable of $0.5 billion. Net cash provided by operating activities of continuing operations of $10.6 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 $13.8 billion, partially offset by an increase in accounts receivable of $2.4 billion due to an increase in the receivables from Concert and slow customer collections at AT&T Business Services, a decrease in accounts payable of $0.6 billion and a net change in other assets and liabilities of $0.1 billion. AT&T's investing activities resulted in a net use of cash of $1.4 billion in 2002, compared with $4.3 billion in 2001 and $32.7 billion in 2000. During 2002, AT&T spent $3.9 billion on capital expenditures, paid $3.4 billion to settle the AT&T Canada obligation and received a $5.8 billion cash distribution from AT&T Broadband in conjunction with its spin-off. In 2001, AT&T spent $5.8 billion on capital expenditures, and received approximately $1.6 billion from the sales of investments. During 2000, AT&T used approximately $23.7 billion for acquisitions of businesses, primarily MediaOne Group, Inc., and spent $7.0 billion on capital expenditures. During 2002, net cash used in financing activities was $6.0 billion, compared with net cash used in financing activities of $2.8 billion in 2001, and net cash provided by financing activities of $23.7 billion in 2000. During 2002, AT&T made net payments of $8.2 billion to reduce debt, paid dividends of $0.6 billion, and received $2.7 billion from the issuance of AT&T common stock, primarily due to the sale of 46 million shares in the second quarter. The proceeds from this stock sale, along with funds from other short-term sources, were used to satisfy AT&T's obligation to the AT&T Canada shareholders (see investing activities above). During 2001, AT&T made net debt payments of $6.5 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 in 2001 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 $17.0 billion. These sources of cash were partially offset by the payment of $3.0 billion in dividends. 42 WORKING CAPITAL AND OTHER SOURCES OF LIQUIDITY At December 31, 2002, our working capital ratio (current assets divided by current liabilities) was 1.32, reflecting the cash balance on hand as a result of cash received in conjunction with the spin-off of AT&T Broadband. During the second and third quarters of 2002, AT&T renewed both its AT&T Business Services and AT&T Consumer Services customer accounts receivable securitization facilities. Together, the programs provide up to $2.0 billion of available financing, limited by the eligible receivables balance, which varies from month to month. Proceeds from the securitization are recorded as a borrowing and included in short-term debt. At December 31, 2002, approximately $0.2 billion was outstanding. The terms of these facilities have been extended to June (AT&T Business Services) and July (AT&T Consumer Services) of 2003. At December 31, 2002, we had a $3.0 billion 364-day credit facility available to us that was entered into on October 9, 2002. The credit facility contains a financial covenant that requires AT&T to meet a net debt-to-EBITDA ratio (as defined in the credit agreement) not exceeding 2.25 to 1.00 for four consecutive quarters ending on the last day of each fiscal quarter. It also contains a covenant that requires AT&T to maintain $1.27 billion in unencumbered cash, cash equivalents and marketable securities. At December 31, 2002, we were in compliance with these covenants. AT&T reduced its debt in 2002 as a result of the spin-off of AT&T Broadband on November 18, 2002. The third party debt of TCI and MediaOne Group, Inc. of $15.0 billion was included in the net assets spun-off with AT&T Broadband. This debt was included in the liabilities of discontinued operations at December 31, 2001. At the time of spin-off, AT&T and AT&T Broadband settled approximately $9.4 billion of intercompany debt and transaction-related costs. AT&T received a $5.8 billion cash distribution from AT&T Broadband, which is reflected in the cash balance at December 31, 2002. The remainder of the intercompany debt and transaction-related costs was settled via a debt exchange. In the AT&T Broadband debt exchange, $3.5 billion of outstanding AT&T notes were exchanged for notes that, upon completion of the spin-off of AT&T Broadband, became notes of AT&T Broadband and are unconditionally guaranteed by Comcast and certain of its subsidiaries. In addition, AT&T completed another exchange in which $4.6 billion of outstanding AT&T notes were exchanged for new AT&T notes that remain solely obligations of AT&T and, upon completion of the spin-off of AT&T Broadband, have revised terms, including revised maturity dates and/or interest rates. We anticipate funding our operations in 2003 primarily with cash and cash equivalents on hand as well as cash from operations. 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. However, we believe our access to the capital markets is adequate to provide the flexibility in funding our operations that we desire. Sources of liquidity include the commercial paper market, a $2.4 billion universal shelf registration, the securitization program and the credit facility. However, we cannot provide any assurances that all of these sources of funding will be available at the time they are needed or in the amounts required. CREDIT RATINGS AND RELATED DEBT IMPLICATIONS During 2002, AT&T's long-term debt ratings were lowered by Moody's and Fitch. None of AT&T's ratings are currently under review or on Credit Watch for further downgrade. As of December 31, 2002, our credit ratings were as follows:
SHORT-TERM LONG-TERM CREDIT RATING AGENCY RATING RATING OUTLOOK - -------------------- ---------- ---------- -------- Standard & Poor's................................... A-2 BBB+ Stable* Moody's............................................. P-2 Baa2 Negative Fitch Ratings....................................... F-2 BBB+ Stable*
- --------------- * Subsequent to December 31, 2002, the Outlook was changed to "Negative." 43 Our access to the capital markets as well as the cost of our borrowings is affected by our debt ratings. In 2002, as a result of the Moody's downgrade, the interest rate on $10.0 billion of notes sold in November 2001, increased by 50 basis points effective with interest payment periods that began after November 15, 2002, for the majority of the notes. The additional interest expense in 2002 was approximately $8 million and is estimated to be an additional $50 million in 2003. Additional debt rating downgrades could require AT&T to pay higher rates on certain existing debt, prepay certain operating leases and post cash collateral for certain interest-rate and equity swaps if we are in a net payable position. If our ratings were downgraded below investment grade by Standard & Poor's or Moody's, there are provisions in our securitization programs, which could require the outstanding balances to be paid by the collection of the receivables. We do not believe downgrades below investment grade are likely to occur. The holders of certain private debt with an outstanding balance of $0.9 billion at December 31, 2002, have an annual put right to cause AT&T to repay the debt upon payment of an exercise fee. In exchange for the debt holders agreeing not to exercise their put right, AT&T posted a cash-collateralized letter of credit in 2002 totaling $0.4 billion and expiring March 2005. The annual put right for 2003 expired on February 13, 2003, without exercise by the debt holders. The holders could accelerate repayment of the debt based on certain events such as the occurrence of unfavorable local law or regulation changes in its country of operation. If AT&T's debt ratings are further downgraded, AT&T's access to the capital market may be restricted and/or such replacement financing may be more costly or have additional covenants than we had in connection with our debt at December 31, 2002. In addition, the market environment for financing in general, and within the telecommunications sector in particular, has been adversely affected by economic conditions and bankruptcies of other telecommunication providers. If the financial markets become more cautious regarding the industry/ratings category we operate in, our ability to obtain financing would be further reduced. This could negatively impact our ability to pursue acquisitions, make capital expenditures to expand our network or to pay dividends. CASH REQUIREMENTS Our cash needs for 2003 will be primarily related to capital expenditures, repayment of debt and payment of dividends. We expect our capital expenditures for 2003 to be approximately $3.3 billion to $3.5 billion. On January 31, 2003, we completed the repurchase, with cash, of $3.7 billion of notes with interest rates of 6.375% and 6.5% and maturities of 2004 and 2013. These notes were classified as long-term debt at December 31, 2002. In addition, in connection with the early retirement in February 2003, of exchangeable notes that are indexed to AT&T Wireless stock, we made cash payments of $152 million to the debt holders, funded in part by $72 million of proceeds from the sale of our remaining AT&T Wireless shares. AT&T is not required to make cash contributions to its principle pension plans in 2003. However, based on the final valuation of private equities and real estate for 2002, cash contributions could be required in 2004. CONTRACTUAL CASH OBLIGATIONS The following summarizes AT&T's contractual cash obligations and commercial commitments at December 31, 2002, and the effect such obligations are expected to have on liquidity and cash flow in future periods. 44
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(1),(2)..................... $19,988 $5,470 $2,368 $4,201 $7,949 Capital lease obligations............... 101 4 17 7 73 Operating leases(3)..................... 2,124 480 729 455 460 Unconditional purchase obligations(4),(5),(6),(7)............ 674 268 291 115 -- ------- ------ ------ ------ ------ Total Contractual Cash Obligations...... $22,887 $6,222 $3,405 $4,778 $8,482 ======= ====== ====== ====== ======
- --------------- (1) We had long-term debt that was indexed to securities (monetized debt). The total balance of monetized debt of $519 million at December 31, 2002, had scheduled maturity dates of 2005 and 2006. However, in February 2003, we redeemed those notes with a combination of shares and cash of $152 million. The portion of debt that was settled in shares is excluded from the above table and the cash payments were included in "Less than 1 Year" in the above table. (2) We had long-term debt, with original maturity dates of 2004 and 2013, with a carrying value of $3.7 billion at December 31, 2002. This debt was settled in the first quarter of 2003 and included in "Less than 1 Year" in the above table. In connection with the settlement of this debt, we paid premiums of $124 million, which are excluded from the above table. (3) Under certain real estate operating leases, we could be required to make payments to the lessors of up to $447 million at the end of the lease term (lease terms range from 2004 through 2007). The actual amount paid, if any, would be reduced by amounts received by the lessor upon remarketing of the property. These amounts are excluded from the above table due to the uncertainty of the dollar amounts to be paid, if any, as well as the timing of such amounts. (4) AT&T Consumer Services has unconditional purchase obligations with multiple vendors to purchase a broad range of products and services, including the outsourcing of billing and customer care services, and the purchase of certain promotional items. Such obligations extend through 2005. (5) AT&T has contractual obligations to utilize network facilities from local exchange carriers with terms greater than one year. Since the contracts have no minimum volume requirements, and are based on an interrelationship of volumes and discounted rates, we assessed our minimum commitment based on penalties to exit the contracts, assuming we exited the contracts on December 31, 2002. At December 31, 2002, the penalties AT&T would have incurred to exit all of these contracts would have been $2.1 billion. These amounts are excluded from the above table due to the uncertainty of the dollar amounts to be paid, if any, as well as the timing of such amounts. (6) AT&T has contractual obligations under two contracts that extend through 2006 for services that include computer application design, development, maintenance and testing as well as the operation of data centers that host many of the computer applications operated throughout AT&T. Payments under these contracts are based in part on the volume and type of services we require. Since AT&T can terminate either or both of these contracts for convenience at any time by paying a fee, we assessed our minimum commitment based on the termination for convenience fees, which decline each year during the term of the contracts. If we elect to exit both of these contracts, the maximum termination fees we would be obligated to pay in the year of termination would be approximately $359 million in 2003, $308 million in 2004, $239 million in 2005, or $164 million in 2006. These termination fees are excluded from the above table due to the uncertainty of the dollar amounts to be paid, if any, as well as the timing of such amounts. (7) AT&T has contractual obligations that extend through 2009 for services that include payroll and related human resource services. Payments under these contracts are based on level of service required and fluctuates based on volume. Since there is no minimum service requirement and we can exit the contract at any time by paying a termination fee, we assessed our minimum commitment based on these 45 termination fees, assuming we terminated the contracts on December 31 of each year. Such termination fees would be approximately $50 million in 2003, $44 million in 2004, $38 million in 2005, $23 million in 2006, $11 million in 2007 or $3 million in 2008. These amounts are excluded from the above table due to the uncertainty of the dollar amounts to be paid, if any, as well as the timing of such amounts. From time to time, we guarantee the debt of our subsidiaries, and, in connection with the separation of certain subsidiaries, these guarantees remained and we issued guarantees for certain debt and other obligations. These guarantees relate to our former subsidiaries AT&T Capital Corp., NCR, AT&T Wireless and AT&T Broadband. We currently hold no collateral for such guarantees, and have not recorded corresponding obligations. We have been provided with cross-guarantees or indemnifications by third parties for certain of these guarantees. In the event that the financial condition of the parties to the various agreements deteriorates to the point at which they declare bankruptcy, other third parties to the agreements could look to us for payment.
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 of debt(1).................... $ 506 $ -- $ -- $ -- $506 Guarantees of other obligations(2),(3)... 4,968 180 4,646 142 -- ------ ---- ------ ---- ---- Total.................................... $5,474 $180 $4,646 $142 $506 ====== ==== ====== ==== ====
- --------------- (1) Prior to the spin-off of AT&T Broadband, we had guaranteed certain debt of AT&T Broadband, which we continue to provide. Under the terms of the merger agreement between AT&T Broadband and Comcast, if Comcast does not call the debt in 2003, they must provide us with a letter of credit in the amount of $500 million. In addition, Comcast has provided us with an indemnification for this debt. (2) Prior to the spin-off of AT&T Broadband, we had guaranteed various obligations of AT&T Broadband, including operating leases for real estate, surety bonds, and equity hedges, which we continue to provide. Comcast has provided indemnifications for the full amount of these guarantees. (3) AT&T provides a guarantee of an obligation that AT&T Wireless has to DoCoMo. In connection with an investment DoCoMo made in AT&T Wireless, AT&T and AT&T Wireless agreed that under certain circumstances, including that AT&T Wireless fails to meet specific technological milestones by June 30, 2004 (revised to December 31, 2004, pursuant to an amended agreement between AT&T Wireless and DoCoMo), DoCoMo would have the right to require AT&T Wireless to repurchase its AT&T Wireless common stock for $9.8 billion plus interest. In the event AT&T Wireless is unable to satisfy its entire obligation, AT&T is secondarily liable for up to $3.65 billion, plus interest. 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 had 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. At December 31, 2002, our foreign currency market exposures were principally Euros, Japanese yen, and Swiss francs. The fair value of foreign exchange contracts is subject to the changes in foreign currency exchange rates. For the purpose of assessing specific risks, we use a sensitivity analysis to determine the effects that market 46 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% adverse change in the value of foreign currencies, assuming no change in interest rates. For foreign exchange contracts outstanding at December 31, 2002 and 2001, assuming a hypothetical 10% appreciation of the U.S. dollar against foreign currencies from the prevailing foreign currency exchange rates, the fair value of the foreign exchange contracts would have decreased $66 million and $492 million, respectively. The decrease in the change from 200l was primarily due to a $5.3 billion decline in the notional amount of contracts outstanding. This decline was largely due to debt under the Euro Commercial Paper Program paid down in 2002, and the satisfaction of the obligation to purchase the outstanding shares of AT&T Canada in 2002. 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. We have also entered into combined interest rate foreign currency contracts to hedge foreign-currency-denominated debt. At December 31, 2002 and 2001, assuming a hypothetical 10% appreciation in the U.S. dollar against foreign currencies from the prevailing foreign currency exchange rates, the fair value of the combined interest rate foreign currency contracts would have decreased $0.5 billion and $0.4 billion, respectively. 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 foreign-currency-denominated debt. 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 perform a sensitivity analysis on our interest rate swaps 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, 2002 and 2001, assuming a hypothetical 10% decrease in interest rates, the fair value of interest rate swaps would have decreased by $1 million and $2 million, respectively. We believe the decrease in fair value would be largely offset by an increase in the fair value of the underlying hedged debt. As discussed above, we have also entered into combined interest rate foreign currency contracts to hedge foreign-currency-denominated debt. Assuming a hypothetical 10% increase in interest rates, the fair value of the contracts would have decreased by $3 million at December 31, 2002, and by a negligible amount at December 31, 2001. 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. Assuming a 10% downward shift in interest rates at December 31, 2002 and 2001, the fair value of unhedged debt would have increased by $0.7 billion and $1.0 billion, respectively. At December 31, 2002, we had certain notes, with embedded derivatives, which were indexed to the market price of equity securities we owned. Changes in the market prices of these securities resulted in changes in the fair value of the derivatives. Assuming a hypothetical 10% increase in the market price of these equity securities, the fair value of the collars would have decreased by $46 million and $112 million at December 31, 2002 and 2001, respectively. Because these collars hedged the underlying equity securities monetized, we believed that the decrease in the fair value of the collars would have been largely offset by increases 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 various equity awards of previously affiliated companies. Assuming a hypothetical 10% decrease in equity prices of these companies, the fair value of the equity hedges (net liability) would have increased by $9 million at December 31, 2002, and by a negligible amount at December 31, 2001. Because these contracts are entered 47 into for hedging purposes, we believe that the increase in fair value would be largely offset by decreases in the underlying liabilities. In order to determine the changes in fair value of our various financial instruments, including options, equity collars and other equity awards, 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. NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard requires that obligations that are legally enforceable and unavoidable, and are 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. The offset to the initial asset retirement obligation is an increase in the carrying amount of the related long-lived asset. Over time, this liability is accreted to its future value, and the asset 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 was adopted on January 1, 2003. AT&T currently includes, in its group depreciation rates, an amount related to the retirement costs for certain assets. However, such amounts are not legally enforceable or unavoidable; therefore, AT&T will be required to reverse the amount accrued in accumulated depreciation. As of January 1, 2003, AT&T will report approximately $40 million as the cumulative effect of a change in accounting principles related to the adoption of SFAS No. 143. The impact of no longer including the cost of removal in the group depreciation rates for these assets, coupled with the cumulative effect impact on accumulated depreciation, will result in a decrease to depreciation expense in 2003. However, the costs incurred to remove these assets will be reflected as a cost in the period incurred as "Costs of services and products." On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." This statement addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities. This statement includes the restructuring activities that are currently accounted for pursuant to the guidance set forth in EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," costs related to terminating a contract that is not a capital lease and one-time benefit arrangements received by employees who are involuntarily terminated -nullifying the guidance under EITF 94-3. Under SFAS No. 146, the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred rather than at the date the company committed to the exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002, with earlier application encouraged. Previously issued financial statements will not be restated. The provisions of EITF 94-3 shall continue to apply for exit plans initiated prior to the adoption of SFAS No. 146. Accordingly, the initial adoption of SFAS No. 146 will not have an effect on AT&T's results of operations, financial position or cash flows. Liabilities associated with future exit and disposal activities will not be recognized until actually incurred. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123." This standard provides alternate methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation and requires more prominent disclosure about the method used. This statement is effective for fiscal years ending after December 15, 2002. For AT&T, this means it is effective for December 31, 2002. 48 Currently AT&T applies the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and we do not expense our stock options. However, as previously announced, AT&T will begin expensing all stock options issued after January 1, 2003, and will continue to apply the disclosure-only provisions to stock options issued prior to January 1, 2003. This method of transition is in compliance with the provisions of SFAS No. 148. The adoption of the disclosure provisions of SFAS No. 148 will not have an impact on AT&T's results of operations, financial position or cash flows; however, the expensing of the stock options issued after January 1, 2003, will have a negative impact on our results of operations. (See note 2 to the Consolidated Financial Statements for the required disclosure under this standard.) In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that an entity issuing a guarantee (including those embedded in a purchase or sales agreement) must recognize, at the inception of the guarantee, a liability equal to the fair value of the guarantee. The recording of this liability is not dependent on the probability that the payments will be required. The offset to the liability will depend on the circumstances under which the guarantee was issued, but could include: cash/accounts receivable if it is a standalone transaction, net proceed in a sales transaction, or expense if no compensation is received. FIN 45 also requires detailed information about each guarantee or group of guarantees even if the likelihood of making a payment is remote. The disclosure requirements of this interpretation are effective for financial statements of periods ending after December 15, 2002, which makes them effective for AT&T for December 31, 2002 (see note 9 to the Consolidated Financial Statements for the disclosures required under this interpretation). The recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. FIN 45 could have an impact on the future results of AT&T depending on guarantees issued; however, at this time we do not believe that the adoption of this statement will have a material impact on our results of operation, financial position or cash flows. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities -- an Interpretation of Accounting Research Bulletin (ARB) No. 51." FIN 46 requires the primary beneficiary to consolidate a variable interest entity (VIE) if it has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both. FIN 46 applies immediately to VIEs created after January 31, 2003, and to VIEs in which the entity obtains an interest after that date. For VIEs acquired before February 1, 2003, the effective date for AT&T is July 1, 2003. AT&T is currently in the process of determining the impact of this statement on its results of operations, financial position and cash flows. The disclosures relating to our present involvement with possible VIEs and our maximum exposure to losses are included in note 18 to the Consolidated Financial Statements. In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue Arrangements with Multiple Deliverables," related to the timing of revenue recognition for arrangements in which goods or services or both are delivered separately in a bundled sales arrangement. The EITF requires that when the deliverables included in this type of arrangement meet certain criteria they should be accounted for separately as separate units of accounting. This may result in a difference in the timing of revenue recognition but will not result in a change in the total amount of revenue recognized in a bundled sales arrangement. The allocation of revenue to the separate deliverables is based on the relative fair value of each item. If the fair value is not available for the delivered items then the residual method must be used. This method requires that the amount allocated to the undelivered items in the arrangement is their full fair value. This would result in the discount, if any, being allocated to the delivered items. This consensus is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003, which, for AT&T, is July 1, 2003. AT&T is currently evaluating the impact of this consensus on its results of operations, financial position and cash flows. In January 2003, the EITF reached a consensus on EITF 02-18, "Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition." This consensus states that if an additional investment, in whole or in part, represents the funding of prior losses, the investor should recognize previously suspended losses. This determination would be based on various factors including whether the investment results in an increased ownership percentage, the fair value of the consideration received is equivalent to the consideration paid and whether the investment is acquired from a third party or 49 directly from an investee. If any of these provisions are met, the additional investment would generally not be considered as funding prior losses. When appropriate to recognize prior losses, the amount recognized would be limited to the amount of the additional investment determined to represent the funding of prior losses. The consensus will be effective for additional investments made after February 5, 2003. SUBSEQUENT EVENTS In January 2003, AT&T early retired $3.7 billion of long-term notes. In February 2003, AT&T redeemed exchangeable notes that were indexed to AT&T Wireless common stock and subsequently sold its remaining AT&T Wireless holdings. For further information on these items, see the contractual cash obligations table in the liquidity discussion. 50 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. 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. David W. Dorman Thomas W. Horton Chairman of the Board, Senior Executive Vice President, Chief Executive Officer Chief Financial Officer
51 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 operations, 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 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 for the year ended December 31, 2000 of Liberty Media Group, an equity method investee, which was acquired by AT&T on March 9, 1999. AT&T's financial statements include equity method earnings of $1,488 million for the year ended December 31, 2000. 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, for the year ended December 31, 2000, 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. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. PRICEWATERHOUSECOOPERS LLP New York, New York January 23, 2003, except for Note 20, as to which the date is February 28, 2003 52 INDEPENDENT AUDITORS' REPORT The Board of Directors AT&T Corp.: We have audited the combined statements of operations and comprehensive earnings, attributed net assets, and cash flows of Liberty Media Group for the year ended December 31, 2000. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the results of the operations and cash flows of Liberty Media Group for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Denver, Colorado February 26, 2001 53 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------- 2002 2001 2000 -------- ------- ------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenue..................................................... $ 37,827 $42,197 $46,850 Operating Expenses Access and other connection................................. 10,790 12,085 13,139 Costs of services and products (excluding depreciation of $3,391, $2,954 and $3,119 included below)................. 8,363 8,621 8,235 Selling, general and administrative......................... 7,988 8,064 7,387 Depreciation and amortization............................... 4,888 4,559 4,538 Net restructuring and other charges......................... 1,437 1,036 758 -------- ------- ------- Total operating expenses.................................... 33,466 34,365 34,057 -------- ------- ------- Operating income............................................ 4,361 7,832 12,793 Other (expense) income, net................................. (77) 1,327 1,190 Interest (expense).......................................... (1,448) (1,493) (1,503) -------- ------- ------- Income from continuing operations before income taxes, minority interest income, and net (losses) earnings related to equity investments............................. 2,836 7,666 12,480 (Provision) for income taxes................................ (1,587) (2,890) (4,487) Minority interest income.................................... 114 131 41 Equity (losses) earnings from Liberty Media Group........... -- (2,711) 1,488 Net (losses) earnings related to other equity investments... (400) (4,836) 10 -------- ------- ------- Income (loss) from continuing operations.................... 963 (2,640) 9,532 Net (loss) from discontinued operations (net of income tax benefits of $6,014, $3,715, and $1,364)................... (14,513) (4,052) (4,863) Gain on disposition of discontinued operations (net of income tax benefit of $61 in 2002)........................ 1,324 13,503 -- -------- ------- ------- (Loss) income before cumulative effect of accounting changes................................................... (12,226) 6,811 4,669 Cumulative effect of accounting changes (net of income taxes of $530 and $(578))....................................... (856) 904 -- -------- ------- ------- Net (loss) income........................................... (13,082) 7,715 4,669 Dividend requirements of preferred stock.................... -- (652) -- Premium on exchange of AT&T Wireless tracking stock......... -- (80) -- -------- ------- ------- (Loss) income attributable to common shareowners............ $(13,082) $ 6,983 $ 4,669 ======== ======= ======= AT&T Common Stock Group -- per basic share: Earnings (loss) from continuing operations.................. $ 1.29 $ (0.91) $ 11.54 (Loss) from discontinued operations......................... (19.44) (5.60) (7.09) Gain on disposition of discontinued operations.............. 1.77 18.53 -- Cumulative effect of accounting changes..................... (1.15) 0.49 -- -------- ------- ------- AT&T Common Stock Group (loss) earnings..................... $ (17.53) $ 12.51 $ 4.45 ======== ======= ======= AT&T Common Stock Group -- per diluted share: Earnings (loss) from continuing operations.................. $ 1.26 $ (0.91) $ 11.01 (Loss) from discontinued operations......................... (18.95) (5.60) (6.76) Gain on disposition of discontinued operations.............. 1.73 18.53 -- Cumulative effect of accounting changes..................... (1.12) 0.49 -- -------- ------- ------- AT&T Common Stock Group (loss) earnings..................... $ (17.08) $ 12.51 $ 4.25 ======== ======= ======= AT&T Wireless Group -- per basic and diluted share: Earnings.................................................... $ -- $ 0.08 $ 0.21 Liberty Media Group -- per basic and diluted share: (Loss) earnings -- before cumulative effect of accounting changes................................................... $ -- $ (1.05) $ 0.58 Cumulative effect of accounting changes..................... -- 0.21 -- -------- ------- ------- Liberty Media Group (loss) earnings......................... $ -- $ (0.84) $ 0.58 ======== ======= =======
The notes are an integral part of the consolidated financial statements. 54 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, --------------------- 2002 2001 --------- --------- (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents................................... $ 8,014 $ 10,680 Accounts receivable, less allowances of $669 and $754....... 5,286 7,153 Other receivables........................................... 173 1,431 Deferred income taxes....................................... 910 1,192 Other current assets........................................ 1,520 622 Current assets of discontinued operations................... -- 1,649 -------- -------- TOTAL CURRENT ASSETS........................................ 15,903 22,727 Property, plant and equipment, net.......................... 25,604 26,803 Goodwill, net of accumulated amortization in 2001 of $564... 4,626 5,314 Other purchased intangible assets, net of accumulated amortization of $244 and $190............................. 556 661 Prepaid pension costs....................................... 3,596 3,329 Other assets................................................ 4,987 5,144 Non-current assets of discontinued operations............... -- 101,503 -------- -------- TOTAL ASSETS................................................ $ 55,272 $165,481 ======== ======== LIABILITIES Accounts payable............................................ $ 3,819 $ 4,156 Payroll and benefit-related liabilities..................... 1,519 1,606 Debt maturing within one year............................... 3,762 10,134 Other current liabilities................................... 2,924 3,929 Current liabilities of discontinued operations.............. -- 5,801 -------- -------- TOTAL CURRENT LIABILITIES................................... 12,024 25,626 Long-term debt.............................................. 18,812 24,025 Long-term benefit-related liabilities....................... 4,001 3,459 Deferred income taxes....................................... 4,739 2,438 Other long-term liabilities and deferred credits............ 3,384 7,159 Non-current liabilities of discontinued operations.......... -- 43,071 -------- -------- TOTAL LIABILITIES........................................... 42,960 105,778 Minority Interest of Discontinued Operations................ -- 3,303 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T of Discontinued Operations........ -- 4,720 SHAREOWNERS' EQUITY AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 783,037,580 shares (net of 171,801,716 treasury shares) at December 31, 2002 and 708,481,149 shares (net of 170,349,286 treasury shares) at December 31, 2001......................................... 783 708 Additional paid-in capital.................................. 28,163 54,798 Accumulated deficit......................................... (16,566) (3,484) Accumulated other comprehensive loss........................ (68) (342) -------- -------- TOTAL SHAREOWNERS' EQUITY................................... 12,312 51,680 -------- -------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $ 55,272 $165,481 ======== ========
The notes are an integral part of the consolidated financial statements. 55 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) AT&T Common Stock Balance at beginning of year.............................. $ 708 $ 752 $ 639 Shares issued (acquired), net: Under employee plans.................................... 6 3 1 For acquisitions........................................ -- 9 121 Settlement of put option................................ -- 31 -- For exchange of AT&T Wireless tracking stock............ -- (74) -- For funding AT&T Canada obligation...................... 46 -- -- Redemption of TCI Pacific preferred stock............... 10 -- -- Other................................................... 13 (13) (9) -------- -------- -------- Balance at end of year...................................... 783 708 752 -------- -------- -------- AT&T Wireless Group Common Stock Balance at beginning of year.............................. -- 362 -- Shares issued: For stock offering...................................... -- -- 360 Under employee plans.................................... -- 2 2 For exchange of AT&T Wireless tracking stock............ -- 438 -- Conversion of preferred stock........................... -- 406 -- AT&T Wireless Group split-off............................... -- (1,208) -- -------- -------- -------- Balance at end of 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 Other................................................... -- 14 (12) Liberty Media Group split-off............................. -- (2,378) -- -------- -------- -------- Balance at end of year...................................... -- -- 2,364 -------- -------- -------- Liberty Media Group Class B Common Stock Balance at beginning of year.............................. -- 206 217 Shares issued (acquired), net............................. -- 6 (11) Liberty Media Group split-off............................. -- (212) -- Other..................................................... -- -- -- -------- -------- -------- Balance at end of year...................................... -- -- 206 -------- -------- -------- Additional Paid-In Capital Balance at beginning of year.............................. 54,798 93,504 62,083 Shares issued (acquired), net: Under employee plans.................................... 328 291 100 For acquisitions........................................ -- 862 23,583 Settlement of put option................................ -- 3,361 -- For funding AT&T Canada obligation...................... 2,485 -- -- Redemption of TCI Pacific preferred stock............... 2,087 -- -- Other*.................................................. 31 (1,054) (2,804) Proceeds in excess of par value from issuance of AT&T Wireless common stock................................... -- -- 9,915 Gain on issuance of common stock by affiliates............ -- 20 530 Conversion of preferred stock............................. -- 9,631 -- AT&T Wireless Group split-off............................. -- (20,955) -- Liberty Media Group split-off............................. -- (30,768) -- (continued on next page)
56 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) AT&T Broadband spin-off................................... (31,032) -- -- Exchange of AT&T Wireless tracking stock.................. -- (284) -- Beneficial conversion value of preferred stock............ -- 295 -- Dividends declared -- AT&T Common Stock Group............. (569) (265) -- Other..................................................... 35 160 97 -------- -------- -------- Balance at end of year...................................... 28,163 54,798 93,504 -------- -------- -------- Guaranteed ESOP Obligation Balance at beginning of year.............................. -- -- (17) Amortization.............................................. -- -- 17 -------- -------- -------- Balance at end of year...................................... -- -- -- -------- -------- -------- (Accumulated Deficit)/Retained Earnings Balance at beginning of year.............................. (3,484) 7,408 6,712 Net (loss) income......................................... (13,082) 7,715 4,669 Dividends declared -- AT&T Common Stock Group............. -- (275) (2,485) 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) AT&T Wireless Group split-off............................. -- (17,593) -- -------- -------- -------- Balance at end of year...................................... (16,566) (3,484) 7,408 -------- -------- -------- Accumulated Other Comprehensive (Loss) Balance at beginning of year.............................. (342) (1,398) 6,979 Other comprehensive income (loss)......................... 266 1,742 (8,377) AT&T Wireless Group split-off............................. -- 72 -- Liberty Media Group split-off............................. -- (758) -- AT&T Broadband spin-off................................... 8 -- -- -------- -------- -------- Balance at end of year...................................... (68) (342) (1,398) -------- -------- -------- Total Shareowners' Equity................................... $ 12,312 $ 51,680 $103,198 ======== ======== ======== Summary of Total Comprehensive (Loss) Income: (Loss) income before cumulative effect of accounting changes................................................. (12,226) 6,811 4,669 Cumulative effect of accounting changes................... (856) 904 -- Net (loss) income......................................... (13,082) 7,715 4,669 Other comprehensive income (loss)[net of income taxes of $(169), $(1,119), and $5,348]........................... 266 1,742 (8,377) -------- -------- -------- Comprehensive (Loss) Income................................. $(12,816) $ 9,457 $ (3,708) ======== ======== ========
- --------------- 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. 57 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- (DOLLARS IN MILLIONS) OPERATING ACTIVITIES Net (loss) income........................................... $(13,082) $ 7,715 $ 4,669 Deduct: Loss from discontinued operations......................... (14,513) (4,052) (4,863) Gain on disposition of discontinued operations............ 1,324 13,503 -- Cumulative effect of accounting changes -- net of income taxes................................................... (856) 904 -- -------- -------- -------- Income (loss) from continuing operations.................... 963 (2,640) 9,532 Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities of continuing operations: Net gains on sales of businesses and investments.......... (30) (1,231) (734) Cost investment impairment charges........................ 146 531 7 Net restructuring and other charges....................... 1,418 973 577 Depreciation and amortization............................. 4,888 4,559 4,538 Provision for uncollectible receivables................... 1,058 884 925 Deferred income taxes..................................... 2,631 (1,338) 1,005 Net revaluation of certain financial instruments.......... 8 (150) -- Minority interest income.................................. (114) (131) (41) Equity losses (earnings) from Liberty Media Group......... -- 2,711 (1,488) Net losses related to other equity investments............ 512 7,783 51 Decrease (increase) in receivables........................ 707 888 (2,382) Decrease in accounts payable.............................. (175) (508) (585) Net change in other operating assets and liabilities...... (1,400) (2,126) (148) Other adjustments, net.................................... (129) (200) (616) -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS................................................ 10,483 10,005 10,641 -------- -------- -------- INVESTING ACTIVITIES Capital expenditures and other additions.................... (3,878) (5,767) (7,025) Proceeds from sale or disposal of property, plant and equipment................................................. 468 73 555 Increase in other receivables............................... -- -- (981) Investment distributions and sales.......................... 10 1,585 414 Investment contributions and purchases...................... (2) (101) (1,787) Net dispositions (acquisitions) of businesses, net of cash disposed/acquired......................................... (18) 15 (23,742) Decrease in AT&T Canada obligation.......................... (3,449) -- -- Proceeds from AT&T Broadband................................ 5,849 -- -- Increase in restricted cash................................. (442) -- -- Other investing activities, net............................. 33 (100) (112) -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS................................................ (1,429) (4,295) (32,678) -------- -------- -------- FINANCING ACTIVITIES Proceeds from long-term debt issuances, net of issuance costs..................................................... 79 11,392 739 Retirement of long-term debt................................ (1,091) (725) (688) (Decrease) increase in short-term borrowings, net........... (7,157) (17,168) 16,973 Repayment of borrowings from AT&T Wireless.................. -- (5,803) -- Issuance of convertible preferred securities and warrants... -- 9,811 -- Issuance of AT&T common shares.............................. 2,684 224 99 Issuance of AT&T Wireless Group common shares............... -- 54 10,314 Net issuance (acquisition) of treasury shares............... -- 24 (581) Dividends paid on common stock.............................. (555) (549) (3,047) Other financing activities, net............................. (1) (38) (64) -------- -------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS..................................... (6,041) (2,778) 23,745 -------- -------- -------- Net cash (used in) provided by discontinued operations...... (5,679) 7,683 (2,746) Net (decrease) increase in cash and cash equivalents........ (2,666) 10,615 (1,038) Cash and cash equivalents at beginning of year.............. 10,680 65 1,103 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 8,014 $ 10,680 $ 65 ======== ======== ========
The notes are an integral part of the consolidated financial statements. 58 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. AT&T RESTRUCTURING AND DISCONTINUED OPERATIONS In connection with the restructuring of AT&T Corp. (AT&T or the "Company") announced on October 25, 2000, AT&T Broadband, AT&T Wireless, and Liberty Media Group have all been separated from AT&T. AT&T Broadband, which was spun-off from AT&T on November 18, 2002, was accounted for as a discontinued operation pursuant to Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In accordance with SFAS No. 144, prior period financial statements have been restated to reflect AT&T Broadband as a discontinued operation in all periods. AT&T Wireless, which was split-off from AT&T on July 9, 2001, was accounted for as a discontinued operation pursuant to Accounting Principles Board (APB) Opinion No. 30, "Reporting Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Since AT&T Wireless was separated in 2001, it was reflected as a discontinued operation in the prior year's financial statements. As discontinued operations, the revenue, costs and expenses and cash flows of AT&T Broadband and AT&T Wireless have been excluded from the respective captions in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows, and have been reported through their respective dates of separation as "Net (loss) from discontinued operations" and as "Net cash (used in) provided by discontinued operations." In addition, the assets and liabilities of AT&T Broadband have been excluded from the respective captions in the Consolidated Balance Sheet at December 31, 2001, and have been reported as "Current assets of discontinued operations," "Non-current assets of discontinued operations," "Current liabilities of discontinued operations," "Non-current liabilities of discontinued operations," "Minority Interest of Discontinued Operations" and "Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T of Discontinued Operations." AT&T BROADBAND On November 18, 2002, AT&T spun-off AT&T Broadband, which was comprised primarily of the AT&T Broadband segment, to AT&T shareowners. Simultaneously, AT&T Broadband combined with Comcast Corporation (Comcast) to form new Comcast. The combination was accomplished through a distribution of stock to AT&T shareowners, who received 0.3235 (1.6175 adjusted for the 1-for-5 reverse stock split) of a share of Comcast Class A common stock for each share of AT&T they owned at market close on November 15, 2002, the record date. 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. Approximately 1.2 billion Comcast shares were issued to AT&T shareowners at a value of approximately $31.1 billion, based on the Comcast stock price on November 18, 2002. AT&T shareowners received a 56% economic stake and a 66% voting interest in new Comcast. In connection with the non-pro rata spin-off of AT&T Broadband, AT&T wrote up the net assets of AT&T Broadband to fair value. This resulted in a noncash gain of $1.3 billion, which represented the difference between the fair value of the AT&T Broadband business at the date of the spin-off and AT&T's book value in AT&T Broadband, net of certain charges triggered by the spin-off and their related income tax effect. These charges included compensation expense due to the accelerated vesting of stock options as well as the enhancement of certain incentive plans. The gain was recorded as a "Gain on disposition of discontinued operations." Revenue for AT&T's Broadband business (which included At Home Corporation, or "Excite@Home" through September 2001) was $8.9 billion, $10.1 billion and $8.4 billion for 2002, 2001 and 2000, respectively. Net (loss) from discontinued operations before income taxes was $(20.5) billion, $(8.1) billion, and $(7.1) billion for 2002, 2001, and 2000, respectively for the AT&T Broadband business. The loss for 2002 59 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) included pretax impairment charges of $16.5 billion ($11.8 billion after taxes) relating to goodwill and franchise costs which was recorded in the second quarter of 2002. Interest expense of $359 million, $333 million and $463 million was allocated to discontinued operations in 2002, 2001 and 2000, respectively, based on the balance of intercompany debt between AT&T Broadband and AT&T. At the time of the spin-off of AT&T Broadband, this intercompany debt was settled via a $5.8 billion cash distribution from AT&T Broadband and the exchange of $3.5 billion of AT&T notes for notes of AT&T Broadband which are unconditionally guaranteed by Comcast and certain of its subsidiaries (see note 8). At December 31, 2001, current assets of $1.6 billion, non-current assets of $101.5 billion (including net goodwill of $19.4 billion), current liabilities of $5.8 billion, non-current liabilities of $43.1 billion, minority interest of $3.3 billion, and company-obligated convertible quarterly income preferred securities of $4.7 billion were attributable to the discontinued operations of the AT&T Broadband business. Current assets were primarily comprised of accounts receivable and investments, while non-current assets were primarily comprised of goodwill, franchise costs and investments. Current liabilities were primarily comprised of short-term debt, accounts payable and payroll and benefit-related liabilities, while non-current liabilities were primarily comprised of long-term debt and deferred income taxes. The noncash impacts of the spin-off of AT&T Broadband include a reduction to assets of approximately $84.3 billion, a reduction to liabilities of approximately $48.8 billion, the reduction of minority interest of $1.2 billion, the reduction of company-obligated convertible quarterly income preferred securities of subsidiary trust of $4.7 billion, and a reduction to shareowners' equity of approximately $29.6 billion, including the $1.3 billion noncash gain on spin-off. AT&T WIRELESS 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 was used for acquisitions, network expansion, capital expenditures and general corporate purposes. AT&T utilized the remaining net proceeds of $3.3 billion for general corporate purposes. 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 (5.88 shares adjusted for the 1-for-5 reverse stock split) 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 (74.4 million shares adjusted for the 1-for-5 reverse stock split) 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 million premium as a reduction to net income available to common shareowners. The premium represented 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 shares (1.609 shares adjusted for the 1-for-5 reverse stock split) of AT&T Wireless for each AT&T share outstanding. AT&T common shareowners received whole shares of AT&T Wireless common stock 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 60 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exception of cash received for fractional shares. For accounting purposes, the deemed effective split-off date was June 30, 2001. The impact of operating results from the July 1, 2001 through July 9, 2001, were deemed immaterial to our consolidated results. The split-off of AT&T Wireless resulted in a tax-free noncash 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 2001 as a "Gain on disposition of discontinued operations." At the time of split-off, AT&T retained approximately $3.0 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 was exchangeable into AT&T Wireless shares (or their cash equivalent) at maturity (see notes 7 and 8). Revenue for AT&T Wireless was $6.6 billion for 2001 and $10.4 billion for 2000. Income from discontinued operations before income taxes for AT&T Wireless was $308 million for 2001 and $844 million for 2000. Interest expense of $153 million and $330 million was allocated to AT&T Wireless discontinued operations in 2001 and 2000, respectively, based on the debt of AT&T that was attributable to AT&T Wireless. The noncash impacts of the split-off of AT&T Wireless reflect the split-off of approximately $39.7 billion of net assets which included a $13.5 billion noncash gain. LUCENT TECHNOLOGIES INC. Net (loss) from discontinued operations for 2002 reflects an estimated loss on a litigation settlement associated with the business of Lucent Technologies Inc. (Lucent), which was spun-off from AT&T in 1996. Sparks, et al. v. AT&T and Lucent Technologies Inc. et al., was a class action lawsuit filed in 1996 in Illinois state court. The complaint sought damages on behalf of present and former customers based on a claim that the AT&T Consumer Products business (which became part of Lucent in 1996) and Lucent had defrauded and misled customers who leased telephones, resulting in payments in excess of the cost to purchase the telephones. AT&T and Lucent have denied any wrongdoing, but settled this matter to avoid the uncertainty and expense of protracted litigation. On August 9, 2002, a settlement proposal was submitted to and accepted by the court. In accordance with the separation and distribution agreement between AT&T and Lucent, AT&T's estimated proportionate share of the settlement and legal costs totaled $45 million pretax ($33 million after-tax), reflecting a fourth quarter adjustment to the initial estimate. Depending upon the number of claims submitted and accepted, the actual cost of the settlement to AT&T may be less than stated amounts, but it is not possible to estimate the amount at this time. While similar consumer class actions are pending in various state courts, the Illinois state court has held that the class it certified covers claims in the other state court class actions. SUMMARY Following is a summary of net (loss) from discontinued operations, net of income taxes:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 ---------- --------- --------- (DOLLARS IN MILLIONS) AT&T Broadband, net of income tax benefits of $6,002, $3,873, and $1,671................................... $(14,480) $(4,202) $(5,399) AT&T Wireless, net of income taxes of $(158), and $(307)............................................... -- 150 536 Lucent Technologies Inc., net of income tax benefit of $12.................................................. (33) -- -- -------- ------- ------- Net (loss) from discontinued operations, net of income taxes................................................ $(14,513) $(4,052) $(4,863) ======== ======= =======
61 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LIBERTY MEDIA CORPORATION As a result of our merger with Tele-Communications, Inc. (TCI) in 1999, 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. 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. The operating results of LMG through July 31, 2001, the deemed effective split-off date for accounting purposes, were reflected as "Equity (losses) earnings from Liberty Media Group." The impact of the operating results from August 1 through August 10, 2001, was deemed immaterial to our consolidated results. At the time of disposition, AT&T did not exit the line of business that Liberty Media Group operated in; therefore, at the time of its separation, Liberty Media Group was not accounted for as a discontinued operation. Upon split-off, AT&T paid LMG $803 million pursuant to a tax-sharing agreement related to TCI net operating losses generated prior to AT&T's merger with TCI. In addition, in 2002, AT&T received approximately $114 million 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, 2001, this receivable was included in "Accounts receivable." Summarized results of operations for LMG were as follows:
FOR THE FOR THE SEVEN MONTHS ENDED YEAR ENDED JULY 31, 2001 DECEMBER 31, 2000 ------------------ ----------------- (DOLLARS IN MILLIONS) Revenue............................................ $ 1,190 $1,526 Operating (loss) income............................ (426) 436 (Loss) income from continuing operations before cumulative effect of accounting change........... (2,711) 1,488 Cumulative effect of accounting change............. 545 -- Net (loss) income.................................. (2,166) 1,488
2. 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 loss" within shareowners' equity. Gains and losses from foreign currency transactions are included in results of operations. 62 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. REVENUE RECOGNITION We recognize long distance, local voice and data services revenue based upon minutes of traffic processed or contracted fee schedules. In addition, we record an estimated revenue reduction for adjustments to customer accounts. This estimate is based on a detailed analysis that compares accounts receivable aging at different points in time to determine the appropriate level of adjustments. 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 as incurred. Advertising and promotional expenses were $814 million, $874 million and $801 million in 2002, 2001 and 2000, respectively. INCOME TAXES The provision for income taxes is based on reported income before income taxes. Deferred income taxes are provided for the effect of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. Deferred tax assets and liabilities are measured using currently enacted tax laws and the effects of any changes in income tax laws are included in the provision for income taxes in the period of enactment. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that the asset will not be realized. In assessing the likelihood of realization, we consider estimates of future taxable income, the character of income needed to realize future benefits and all available evidence. Investment tax credits are amortized 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. 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 63 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) asset group has an average life. A 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 difference between the proceeds, if any, and the cost of the asset is charged or credited 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 (expense) income, net." Property, plant and equipment is reviewed for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the total of the expected future undiscounted cash flows is less than the carrying value of the asset, a loss is recognized for the difference between the fair value and the carrying value of the asset. We use accelerated depreciation methods 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. 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 capitalized costs are included in property, plant and equipment and are amortized over a useful life not to exceed five years. GOODWILL AND OTHER INTANGIBLE ASSETS 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. Beginning January 1, 2002, in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and indefinite-lived intangible assets are no longer amortized, but instead are tested for impairment at least annually (see note 3). Intangible assets that have finite useful lives are amortized over their useful lives, which range from five to 20 years. 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. Certain derivatives, at inception, are designated as hedges and evaluated for effectiveness at least quarterly throughout the hedge period. These derivatives are designated as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or (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). All other derivatives are not formally designated for accounting purposes (undesignated). These derivatives, except for warrants, although undesignated for accounting purposes, are entered into to hedge economic risks. 64 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We record changes in the fair value of fair-value hedges, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), in "Other (expense) income, net." We record changes in the fair value of cash-flow hedges, along with the recognized asset or liability, in "Other comprehensive income (loss)," 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 (expense) income, net," along with the change in fair value of the underlying 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 the derivative 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. 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, the derivative is adjusted for changes in fair value through "Other (expense) income, net." For fair value hedges, the underlying asset or liability will no longer be adjusted for changes in fair value and any asset or liability recorded in connection with a firm commitment will be removed from the balance sheet and recorded in current period earnings. For cash flow hedges, gains and losses that were accumulated in "Other comprehensive income (loss)" as a component of shareowners' equity in connection with a forecasted transaction, will be recognized immediately in "Other (expense) income, net." STOCK-BASED COMPENSATION As of December 31, 2002, AT&T had a Long-Term Incentive Program and an Employee Stock Purchase Plan, which are described more fully in note 12. 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, stock appreciation rights (SARs), and certain occasions when we have modified the terms of the stock option vesting schedule in conjunction with the 2001 split-off of AT&T Wireless and the 2002 spin-off of AT&T Broadband. 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 65 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:
AT&T COMMON STOCK AT&T WIRELESS GROUP GROUP -------------------------- ------------- FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 2001 2000 - -------------------------------- -------- ------ ------ ----- ----- (DOLLARS IN MILLIONS) Net (loss) income......................... $(13,082) $9,114 $3,105 $ 35 $ 76 Add: Stock-based employee compensation included in reported net (loss) income, net of tax.............................. 43 75 (156) -- -- Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax...................... (345) (692) (324) (17) (25) -------- ------ ------ ----- ----- Pro forma net (loss) income............... $(13,384) $8,497 $2,625 $ 18 $ 51 ======== ====== ====== ===== ===== Basic (loss) earnings per share........... $ (17.53) $12.51 $ 4.45 $0.08 $0.21 Proforma basic (loss) earnings per share................................... $ (17.93) $11.66 $ 3.77 $0.04 $0.14 Diluted (loss) earnings per share......... $ (17.08) $12.51 $ 4.25 $0.08 $0.21 Proforma diluted (loss) earnings per share................................... $ (17.47) $11.66 $ 3.60 $0.04 $0.14
The stock-based employee compensation (expense) income, net of tax, for AT&T Common Stock Group included in income (loss) from continuing operations was $(55) million, $(71) million and $(7) million in 2002, 2001 and 2000, respectively, and included in discontinued operations was $12 million, $(4) million and $163 million in 2002, 2001 and 2000, respectively. The amounts attributed to discontinued operations included income (expense), net of tax, of $51 million, $(2) million and $166 million in 2002, 2001 and 2000, respectively, related to grants of SARs of affiliated companies held by certain employees subsequent to the TCI merger and prior to the AT&T Broadband spin-off. In addition, we entered into an equity hedge in 1999 to offset potential future compensation costs associated with these SARS. (Expense), net of tax, related to this hedge was $(56) million, $(10) million, and $(200) million in 2002, 2001, and 2000, respectively. Total stock-based employee compensation (expense), net of tax, determined under the fair value based method for all awards related to continuing operations was $(288) million, $(562) million, and $(315) million for 2002, 2001 and 2000, respectively, and related to discontinued operations was $(57) million $(147) million and $(34) million for 2002, 2001 and 2000, respectively. Pro forma earnings (loss) for AT&T Common Stock Group from continuing operations was $730 million, $(1,152) million and $7,736 million for 2002, 2001 and 2000, respectively, and from discontinued operations was $(14,582) million, $(4,213) million and $(5,111) million for 2002, 2001 and 2000, respectively. Pro forma earnings (loss) for AT&T Common Stock Group per basic share from continuing operations was $0.98, $(1.58) and $11.10 for 2002, 2001 and 2000, respectively, and from discontinued operations was $(19.53), $(5.78) and $(7.33) for 2002, 2001 and 2000, respectively. Pro forma earnings (loss) for AT&T Common Stock Group per diluted share from continuing operations was $0.96, $(1.58) and $10.59 for 2002, 2001 and 2000, respectively, and from discontinued operations was $(19.04), $(5.78) and $(6.99) for 2002, 2001 and 2000, respectively. The pro forma effect on net loss from discontinued operations for AT&T Common Stock Group for 2002 includes expense of $28 million due to the accelerated vesting of AT&T stock options held by AT&T Broadband employees at the date of spin-off. The pro forma effect on net loss from discontinued operations for 66 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AT&T Common Stock Group for 2001 includes expense of $10 million due to the conversion of AT&T common stock options in connection with the split-off of AT&T Wireless, and also includes expense of $12 million due to the accelerated vesting of AT&T Wireless stock options held by AT&T employees at the date of the split-off. The pro forma effect on net loss from continuing operations available to common shareowners for 2001 includes expense of $40 million due to the conversion of AT&T common stock options in connection with the split-off of AT&T Wireless, and also includes expense of $163 million due to the accelerated vesting of AT&T Wireless stock options held by AT&T employees at the date of split-off. 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. CONCENTRATIONS As of December 31, 2002, other than the guarantee issued in connection with the split-off of AT&T Wireless (see note 9), we do not have any significant concentration of business transacted with a particular customer, supplier, lender or former affiliate that could, if suddenly adversely impacted, severely impact our operations. We also do not have a concentration of available sources of labor, services or other rights that could, if suddenly eliminated, severely impact our operations. We invest our cash with many high-quality credit institutions. RECLASSIFICATIONS AND RESTATEMENTS We reclassified and restated certain amounts for previous years to conform to the 2002 presentation. 3. IMPACTS OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" Effective January 1, 2002, AT&T adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Upon adoption, goodwill was tested for impairment by comparing the fair value of our reporting units to their carrying values. As of January 1, 2002, the fair value of the reporting units' goodwill exceeded their carrying value, and therefore no impairment loss was recognized. Franchise costs were tested for impairment as of January 1, 2002, by comparing the fair value to the carrying value (at the market level). An impairment loss of $856 million, net of taxes of $530 million, was recorded relating to the discontinued operation of AT&T Broadband in the first quarter of 2002. At December 31, 2002, this amount is included in the "Cumulative effect of accounting changes" in the Consolidated Statements of Operations. 67 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The table below presents the impact of SFAS No. 142 on net (loss) income and (loss) earnings per share, had the standard been in effect on January 1, 2000:
AT&T LIBERTY AT&T COMMON STOCK GROUP WIRELESS GROUP MEDIA GROUP --------------------------- --------------- ---------------- FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 2001 2000 2001 2000 - -------------------------------- -------- ------- ------ ------ ------ ------- ------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net (loss) income: Reported income (loss) from continuing operations............................. $ 963 $ 71 $8,044 $ -- $ -- $(2,711) $1,488 Dividend requirements of preferred stock.................................. -- (652) -- -- -- -- -- Premium on exchange of AT&T Wireless tracking stock......................... -- (80) -- -- -- -- -- Reported income (loss) from continuing operations available to common shareowners............................ 963 (661) 8,044 -- -- (2,711) 1,488 Add back amortization, net of tax: Goodwill............................... -- 175 149 -- -- 350 568 Equity method excess basis............. -- 37 37 -- -- 346 654 Franchise costs........................ -- -- -- -- -- 4 8 Adjusted income (loss) from continuing operations available to common shareowners............................ 963 (449) 8,230 -- -- (2,011) 2,718 Reported (loss) income from discontinued operations............................. (14,513) (4,087) (4,939) 35 76 -- -- Add back discontinued operations amortization, net of tax............... -- 1,588 1,705 36 27 -- -- Gain on disposition of discontinued operations............................. 1,324 13,503 -- -- -- -- -- Cumulative effect of accounting changes................................ (856) 359 -- -- -- 545 -- Adjusted net (loss) income available to common shareowners..................... $(13,082) $10,914 $4,996 $ 71 $ 103 $(1,466) $2,718 Basic (loss) earnings per share: Reported basic earnings (loss) per share from continuing operations............. $ 1.29 $ (0.91) $11.54 $ -- $ -- $ (1.05) $ 0.58 Add back amortization, net of tax: Goodwill............................... -- 0.24 0.21 -- -- 0.14 0.22 Equity method excess basis............. -- 0.05 0.05 -- -- 0.13 0.25 Franchise costs........................ -- -- -- -- -- -- 0.01 Adjusted basic earnings (loss) per share from continuing operations............. 1.29 (0.62) 11.80 -- -- (0.78) 1.06 Reported (loss) earnings from discontinued operations................ (19.44) (5.60) (7.09) 0.08 0.21 -- -- Add back discontinued operations amortization, net of tax............... -- 2.18 2.45 0.08 0.08 -- -- Gain on disposition of discontinued operations............................. 1.77 18.53 -- -- -- -- -- Cumulative effect of accounting changes................................ (1.15) 0.49 -- -- -- 0.21 -- Adjusted basic (loss) earnings per share.................................. $ (17.53) $ 14.98 $ 7.16 $0.16 $0.29 $ (0.57) $ 1.06 Diluted (loss) earnings per share: Reported diluted earnings (loss) per share from continuing operations....... $ 1.26 $ (0.91) $11.01 $ -- $ -- $ (1.05) $ 0.58
68 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T LIBERTY AT&T COMMON STOCK GROUP WIRELESS GROUP MEDIA GROUP --------------------------- --------------- ---------------- FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 2001 2000 2001 2000 - -------------------------------- -------- ------- ------ ------ ------ ------- ------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Add back amortization, net of tax: Goodwill............................... -- 0.24 0.20 -- -- 0.14 0.22 Equity method excess basis............. -- 0.05 0.05 -- -- 0.13 0.25 Franchise costs........................ -- -- -- -- -- -- 0.01 Adjusted diluted earnings (loss) per share from continuing operations....... 1.26 (0.62) 11.26 -- -- (0.78) 1.06 Reported (loss) earnings from discontinued operations................ (18.95) (5.60) (6.76) 0.08 0.21 -- -- Add back discontinued operations amortization, net of tax............... -- 2.18 2.34 0.08 0.08 -- -- Gain on disposition of discontinued operations............................. 1.73 18.53 -- -- -- -- -- Cumulative effect of accounting changes................................ (1.12) 0.49 -- -- -- 0.21 -- Adjusted diluted (loss) earnings per share.................................. $ (17.08) $ 14.98 $ 6.84 $0.16 $0.29 $ (0.57) $ 1.06
EMERGING ISSUES TASK FORCE (EITF) ISSUE 01-9, "ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER" During 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer," that cash incentives given to customers should be characterized as a reduction of revenue when recognized in the income statement, unless an identifiable benefit is received in exchange. Prior to this consensus, cash incentives to acquire customers were recorded as advertising and promotion expense within selling, general and administrative expenses. These cash incentives are now recorded as a reduction of revenue and prior periods have been reclassified to conform to this presentation. The amounts reclassified as a reduction of revenue for the years ended December 31, 2001 and 2000, were $236 million and $250 million, respectively. Net income was not affected by this reclassification. SFAS NO. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" On January 1, 2002, AT&T adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all long-lived assets, including discontinued operations, and consequently amends APB Opinion No. 30. The initial adoption had no impact on AT&T's results of operations, financial position or cash flows. ADOPTION OF SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" 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, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." 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 $1,482 million ($904 million after-tax); $581 million ($359 million after-tax) was attributable to AT&T Group (other than LMG), and $901 million ($545 million after-tax) was attributable to LMG. AT&T Group's cumulative-effect increase to net income of $359 million was comprised of $130 million related to continuing operations primarily attributable to warrants held in both public and private companies, 69 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and $229 million related to discontinued operations primarily attributable to embedded and non-embedded net purchase options related to indexed debt instruments. Upon adoption, AT&T Group, as permitted by SFAS No. 133, reclassified certain securities from "available-for-sale" to "trading." This reclassification resulted in the recognition, in earnings, of losses previously recorded within "Accumulated other comprehensive loss." A portion of the loss ($1.6 billion pretax; $1.0 billion after-tax) was recorded as part of the cumulative effect of adoption. This loss completely offset a gain 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 after-tax) recorded in "Net (loss) from discontinued operations," in the Consolidated Statements of Operations. LMG's cumulative-effect increase to income of $545 million was primarily attributable to separately recording the embedded call option obligations associated with LMG's senior exchangeable debentures. Also included in the cumulative-effect was $87 million previously included in "Accumulated other comprehensive loss" primarily related to changes in the fair value of LMG's warrants and options to purchase certain available-for-sale securities. 4. SUPPLEMENTARY FINANCIAL INFORMATION SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2002 2001 2000 ----- ------ ------ (DOLLARS IN MILLIONS) INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Research and development expenses........................... $ 254 $ 274 $ 313 ===== ====== ====== OTHER (EXPENSE) INCOME, NET Aircraft leveraged-lease write-downs........................ $(244) $ -- $ -- Cost investment impairment charges.......................... (146) (531) (7) Net revaluation of certain financial instruments............ (8) 150 -- Investment-related income................................... 116 285 435 Settlements associated with businesses disposed of.......... 107 154 -- Net gains on sales of businesses and investments............ 30 1,231 734 Miscellaneous, net.......................................... 68 38 28 ----- ------ ------ Total other (expense) income, net........................... $ (77) $1,327 $1,190 ===== ====== ======
70 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31, --------------------- 2002 2001 --------- --------- (DOLLARS IN MILLIONS) PROPERTY, PLANT AND EQUIPMENT Communications, network and other equipment................. $48,169 $47,552 Buildings and improvements.................................. 8,129 7,969 Land and improvements....................................... 327 370 ------- ------- Total property, plant and equipment......................... 56,625 55,891 Accumulated depreciation.................................... 31,021 29,088 ------- ------- Property, plant and equipment, net.......................... $25,604 $26,803 ======= =======
AT&T AT&T BUSINESS CONSUMER SERVICES SERVICES TOTAL -------- -------- ------ (DOLLARS IN MILLIONS) GOODWILL Balance at December 31, 2001............................. $5,244 $70 $5,314 Write-off of goodwill of AT&T Latin America.............. (777) -- (777) Translation adjustment................................... 91 -- 91 Other.................................................... (2) -- (2) ------ --- ------ Balance at December 31, 2002............................. $4,556 $70 $4,626 ====== === ======
GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION NET -------- ------------ ---- (DOLLARS IN MILLIONS) INTANGIBLE ASSETS Amortizable purchased intangible assets at December 31, 2002: Customer lists and relationships....................... $557 $132 $425 Other.................................................. 243 112 131 ---- ---- ---- Total intangible assets.................................. $800 $244 $556 ==== ==== ====
The amortization expense associated with purchased intangible assets for the year ended December 31, 2002, was approximately $83 million. Amortization expense for purchased intangible assets is estimated to be approximately $65 million for the year ending December 31, 2003, $50 million for the year ending December 31, 2004, and $45 million for each of the years ending December 31, 2005, 2006, and 2007. LEVERAGED LEASES We lease to third parties 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 71 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) investment in leveraged leases is primarily included in "Other assets." Following is a summary of our investment in leveraged leases:
AT DECEMBER 31, ---------------- 2002 2001 ------ ------- (DOLLARS IN MILLIONS) Rental receivables (net of nonrecourse debt*)............... $ 476 $ 635 Estimated unguaranteed residual values...................... 483 720 Unearned income............................................. (211) (297) Allowance for credit losses................................. (23) (28) ----- ------ Investment in leverage leases (included in "Other assets").................................................. 725 1,030 Deferred taxes.............................................. 932 1,063 ----- ------ Net investment.............................................. $(207) $ (33) ===== ======
- --------------- * The rental receivables are net of nonrecourse debt of $1.4 billion and $2.0 billion at December 31, 2002 and 2001, respectively. SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 2000 ----- ------ ------- (DOLLARS IN MILLIONS) OTHER COMPREHENSIVE INCOME (LOSS) Net foreign currency translation adjustment [net of taxes of $(82), $160 and $181](1).............................. $ 132 $ (250) $ (309) Net revaluation of certain financial instruments: Unrealized (losses) gains [net of taxes of $340, $(343) and $4,686](2)........................................ (550) 475 (7,317) Recognition of previously unrealized losses (gains) on available-for-sale securities [net of taxes of $(539), $(950) and $480](3)................................... 869 1,535 (750) Net minimum pension liability adjustment (net of taxes of $112, $14 and $1)........................................ (185) (18) (1) ----- ------ ------- Total other comprehensive income (loss).................... $ 266 $1,742 $(8,377) ===== ====== =======
- --------------- (1) Includes LMG's foreign currency translation adjustments, net of taxes of $149 in 2001 through July 31, 2001, and $202 in 2000. (2) Includes LMG's unrealized gains (losses) on available-for-sale securities, net of taxes of $(1,286) in 2001 through July 31, 2001, and $6,117 in 2000. (3) See below for a summary of the "Recognition of previously unrealized losses (gains) on available-for-sale securities" and the Statement of Operations line items impacted. 72 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 STATEMENT OF OPERATIONS LINE ITEMS IMPACTED
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 2002 2001 2000 ------------------ ------------------ ------------------- PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX ------ --------- ------ --------- ------- --------- (DOLLARS IN MILLIONS) AT&T GROUP: Other (expense) income, net: Other-than-temporary investment impairments........................... $ 148 $ 91 $ 475 $ 293 $ -- $ -- Other derivative activity................ 28 17 -- -- -- -- Sales of various securities.............. -- -- (238) (147) (433) (267) Income from discontinued operations: Other-than-temporary investment impairments........................... 1,232 761 510 315 290 179 Reclassification of securities to "trading" in conjunction with the adoption of SFAS No. 133*............. -- -- 1,154 713 -- -- Sales of various securities.............. -- -- 555 343 (43) (27) LIBERTY MEDIA GROUP: Earnings (losses) from Liberty Media Group: Sales of various securities.............. -- -- 173 105 (1,044) (635) Cumulative effect of accounting change*............................... -- -- (144) (87) -- -- ------ ---- ------ ------ ------- ----- Total recognition of previously unrealized losses (gains) on available-for-sale securities............................... $1,408 $869 $2,485 $1,535 $(1,230) $(750) ====== ==== ====== ====== ======= =====
- --------------- * See note 3 for detailed discussion. SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 2000 ------ ------ ------ (DOLLARS IN MILLIONS) Interest payments, net of capitalized interest of $61, $121 and $143................................................. $1,532 $1,537 $1,420 Income tax (receipts) payments............................. (814) 1,441 3,379
5. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE During 2001 and 2000, in addition to AT&T Common Stock, the AT&T Wireless Group and Liberty Media Group tracking stocks were outstanding. The tracking stocks represented an interest in the economic performance of the net assets of each of the respective groups. The earnings attributable to AT&T Wireless Group and Liberty Media Group were excluded from the earnings attributable to the AT&T Common stock group. On July 9 and August 10, 2001, AT&T Wireless and Liberty Media Group, respectively, were separated from AT&T and the tracking stocks were redeemed (see note 1). 73 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income (loss) attributable to the different classes of AT&T common stock is as follows:
AT&T COMMON STOCK AT&T WIRELESS LIBERTY MEDIA GROUP GROUP GROUP ---------------------------- ------------------- ------------------------ FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------- 2002 2001 2000 2002 2001 2000 2002 2001 2000 -------- ------- ------- ----- ---- ---- ----- ------- ------ (DOLLARS IN MILLIONS) Income (loss) from continuing operations before cumulative effect of accounting change................. $ 963 $ 71 $ 8,044 $ -- $-- $-- $ -- $(2,711) $1,488 Dividend requirements of preferred stock................................ -- (652) -- -- -- -- -- -- -- Premium on exchange of AT&T Wireless tracking stock....................... -- (80) -- -- -- -- -- -- -- -------- ------- ------- ----- --- --- ----- ------- ------ Income (loss) from continuing operations attributable to common shareowners.......................... 963 (661) 8,044 -- -- -- -- (2,711) 1,488 (Loss) income from discontinued operations........................... (14,513) (4,087) (4,939) -- 35 76 -- -- -- Gain on disposition of discontinued operations........................... 1,324 13,503 -- -- -- -- -- -- -- Cumulative effect of accounting changes.............................. (856) 359 -- -- -- -- -- 545 -- -------- ------- ------- ----- --- --- ----- ------- ------ Net (loss) income attributable to common shareowners................. $(13,082) $ 9,114 $ 3,105 $ -- $35 $76 $ -- $(2,166) $1,488 ======== ======= ======= ===== === === ===== ======= ======
AT&T COMMON STOCK GROUP On November 18, 2002, a 1-for-5 reverse stock split of AT&T common stock as approved by shareowners on July 10, 2002, was effected. Shares (except shares authorized) and per share amounts were restated to reflect the stock split on a retroactive basis. Basic earnings per common share (EPS) is computed by dividing income attributable to common shareowners by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution (considering the combined income and share impact) that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The potential issuance of common stock is assumed to occur at the beginning of the year, and the incremental shares are included using the treasury stock method, which assumes the proceeds (after-tax) from exercise are used by the Company to purchase common stock at the average market price during the period. The incremental shares (difference between the shares assumed to be issued and the shares assumed to be purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. 74 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the share components for AT&T Common Stock Group basic to diluted EPS calculations is as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002(1) 2001(1),(2) 2000(1) -------- ------------ -------- (SHARES IN MILLIONS) Weighted-average common shares.......................... 746 729 697 Effect of dilutive securities: Stock options......................................... 1 -- 4 Preferred stock of subsidiary......................... 3 -- 8 Convertible quarterly income preferred securities..... 16 -- 14 Excite@Home Put Options............................... -- -- 8 --- --- --- Weighted-average common shares and potential common shares................................................ 766 729 731 === === ===
- --------------- (1) For 2002, 2001 and 2000, no adjustments were made to income for the computation of diluted EPS. (2) As AT&T reported a loss from its continuing operations for 2001, the effects of including incremental shares are antidilutive; therefore, both basic and diluted EPS reflect the same calculation. Preferred Stock of Subsidiary Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T was required to redeem the outstanding TCI Pacific Communications, Inc. Class A Senior Cumulative Exchangeable Preferred Stock (TCI Pacific preferred stock) for AT&T common stock. All outstanding shares of TCI Pacific preferred stock were either exchanged or redeemed for AT&T common stock during 2001 and 2002 (see note 10). At December 31, 2001, the carrying value of TCI Pacific preferred stock was included in "Minority Interest of Discontinued Operations." Dividends were included in "Net (loss) from discontinued operations" for 2002, 2001 and 2000. Convertible Quarterly Income Preferred Securities (Quarterly Preferred Securities) On June 16, 1999, AT&T Finance Trust I, 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 Corporation. Such securities were convertible into AT&T common stock. However, in connection with the AT&T Broadband spin-off (see note 1), Comcast assumed the quarterly preferred securities and Microsoft agreed to convert these preferred securities into shares of Comcast common stock. At December 31, 2001, these securities were included in "Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T of Discontinued Operations." Dividends were included in "Net (loss) from discontinued operations" for 2002, 2001 and 2000. AT&T WIRELESS GROUP 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. 75 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LIBERTY MEDIA GROUP 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, and 2,572 million in 2000. 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. 6. NET RESTRUCTURING AND OTHER CHARGES In 2002, net restructuring and other charges were $1,437 million which included a $1,029 million charge for the impairment of the net assets of our consolidated subsidiary, AT&T Latin America. In December 2002, the AT&T Board of Directors approved a plan for AT&T to sell its approximate 95% voting stake in AT&T Latin America in its current condition. On December 31, 2002, we signed a non-binding term sheet for the sale of our shares within one year for a nominal amount. As a result of this plan, we classified AT&T Latin America as an asset held for sale at fair market value, in accordance with SFAS No. 144. Consequently, there are approximately $160 million of assets (principally cash and accounts receivable) included in Other Current Assets and approximately $160 million of liabilities (principally secured short-term debt) included in Other Current Liabilities. The $1,029 million charge to write the assets and liabilities down to their fair values was reported within our AT&T Business Services segment. Also included in net restructuring and other charges was a $204 million impairment charge related to certain Digital Subscriber Line (DSL) assets (including internal-use software, licenses, and property, plant & equipment) that will not be utilized by AT&T as result of changes to our "DSL build" strategy. Instead of building DSL capabilities in all geographic areas initially targeted, we have signed an agreement with Covad Communications to offer DSL services over their network. As a result, the assets in these areas were impaired. This charge was reported within our AT&T Consumer Services segment. In 2002, AT&T recorded net business restructuring charges of $204 million. These activities consisted of new exit plans totaling $377 million and reversals of $173 million. The new plans primarily consisted of $334 million for employee separation costs ($28 million of which was recorded as a pension liability associated with management employees to be separated in 2002 which will be funded from the pension trust) and $39 million of facility closing reserves. Slightly more than 4,800 employees will be separated in conjunction with these exit plans, approximately one-half of which are management employees and one-half are non-management employees. The majority of these employee separations will be involuntary. Approximately 14% of the employees affected by these exit plans had left their positions by December 31, 2002, and we expect those remaining to leave their positions by the end of 2003. The $173 million reversal primarily consisted of $124 million of employee separation costs (approximately $48 million of which was reversed from the pension liability) and $26 million related to prior plan facility closings that were deemed to be no longer necessary. The reversals were primarily due to management's determination that the restructuring plan established in the fourth quarter of 2001 for certain areas of AT&T Business Services, including network services, needed to be modified given current industry conditions, as well as the redeployment of certain employees to different functions within the Company. 76 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table displays the activity and balances of the restructuring reserve account:
TYPE OF COST -------------------------------------- EMPLOYEE FACILITY SEPARATIONS CLOSINGS OTHER TOTAL ----------- -------- ----- ----- (DOLLARS IN MILLIONS) BALANCE AT JANUARY 1, 2000........................ $ 150 $239 $ 21 $ 410 Additions....................................... 442 2 62 506 Deductions...................................... (350) (67) (47) (464) ----- ---- ---- ----- BALANCE AT DECEMBER 31, 2000...................... 242 174 36 452 Additions....................................... 474 166 12 652 Deductions...................................... (230) (36) (29) (295) ----- ---- ---- ----- BALANCE AT DECEMBER 31, 2001...................... 486 304 19 809 Additions....................................... 306 78 -- 384 Deductions...................................... (413) (99) (16) (528) ----- ---- ---- ----- BALANCE AT DECEMBER 31, 2002...................... $ 379 $283 $ 3 $ 665 ===== ==== ==== =====
In addition to the new exit plans recorded during 2002, total additions for 2002 in the table above also includes $39 million facility closing reserves recorded by Concert in 2001 and transferred to AT&T during 2002 as part of the unwind of that joint venture. Deductions reflect cash payments of $366 million, $249 million and $410 million for 2000, 2001, and 2002, respectively. These payments included cash termination benefits of $254 million, $202 million, and $328 million, for 2000, 2001 and 2002, respectively, which were primarily funded through cash from operations. In 2000, 2001 and 2002, reserves of $98 million, $13 million and $9 million, respectively, were transferred out of the restructuring liability to long-term liability accounts as a result of exiting managers deferring severance payments, primarily related to executives. Also included in 2001 and 2002 deductions are reversals of prior business restructuring reserves of $33 million and $109 million, respectively. The business restructuring plans of 2000 and 2001 were substantially complete as of December 31, 2001 and 2002, respectively. During 2001, net restructuring and other charges were $1,036 million which were primarily comprised of $862 million for employee separations, of which $388 million related to benefits to be paid from pension assets as well as pension and postretirement curtailment losses, and $166 million for facility closings. These charges were slightly offset by the reversal of $33 million related to business restructuring plans announced in the fourth quarter 1999 and the first quarter 2000 (of which $15 million related to employee separations and $18 million related to contract terminations). The charge covered separation costs for approximately 10,000 employees, approximately one-half of whom were management employees and one-half were non-management employees. More than 9,000 employee separations related to involuntary terminations and the remaining 1,000 were voluntary. During 2000, we recorded $758 million of net restructuring and other charges which included $586 million for employee separations, of which $144 million primarily related to pension and postretirement curtailment losses, $91 million related to the government-mandated disposition of AT&T Communications (U.K.) Ltd., which would have competed directly with Concert and $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. The charge covered separation costs for approximately 6,100 employees, approximately one-half of whom were management employees and one-half were non-management employees. Approximately 5,500 of the 77 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) employee separations were related to involuntary terminations and approximately 600 related to voluntary terminations. 7. INVESTMENTS EQUITY METHOD INVESTMENTS We have investments in various companies and partnerships that are accounted for under the equity method of accounting and included within "Other assets." Under the equity method, investments are stated at initial cost, and are adjusted for subsequent contributions and our share of earnings, losses and distributions as well as declines in value that are "other than temporary." At December 31, 2002 and 2001, we had equity investments of $135 million and $313 million, respectively. Distributions from equity investments totaled $5 million, $25 million, and $13 million for the years ended December 31, 2002, 2001 and 2000, respectively. Summarized combined financial information for investments accounted for under the equity method that were significant to AT&T's financial results in 2001 is as follows:
OTHER EQUITY CONCERT(1) AT&T CANADA INVESTMENTS(2) ---------------- ------------------------- ---------------- FOR THE YEARS ENDED DECEMBER 31, 2001 2000 2002 2001 2000 2001 2000 - -------------------------------- ------- ------ ------- ------ ------ ------ ------- (DOLLARS IN MILLIONS) Revenue........................ $ 6,189 $7,748 $ 947 $1,000 $1,001 $3,813 $11,751 Operating (loss) income........ (3,574) 329 (853) (226) (225) 86 542 (Loss) income from continuing operations before extraordinary items & cumulative effect of accounting changes........... (3,609) 103 (1,247) (521) (351) (18) 307 Net (loss) income.............. $(3,609) $ 103 $(2,220) $ (518) $ (351) $ (20) $ 260
AT DECEMBER 31, 2001 2002 2001 2001 - --------------- ------- ------- ------ ------ (DOLLARS IN MILLIONS) Current assets................ $ 3,744 $ 386 $ 391 $ 171 Non-current assets............ 1,758 496 2,577 645 Current liabilities........... 4,296 3,152 256 179 Non-current liabilities....... 76 41 2,963 589 Redeemable preferred stock.... -- -- -- 7 Minority interest............. -- -- -- --
- --------------- (1) The Concert joint venture was unwound in April 2002; therefore, financial information for 2002 is not applicable. (2) AT&T did not have any individually significant equity investments in 2002 and on a combined basis such investments were not significant to AT&T's 2002 financial results. Concert On April 1, 2002, Concert, our 50% owned joint venture with British Telecommunications plc (BT), was officially unwound and the venture's assets and customer accounts were distributed back to the parent companies, as agreed to in 2001. Under the partnership termination agreement, each of the partners generally reclaimed the customer contracts and assets that were initially contributed to the joint venture, including international transport facilities and gateway assets. In addition, AT&T assumed certain other assets that BT originally contributed to the joint venture. 78 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 2001, 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 impairment charge ($2.9 billion pretax) included in "Net (losses) related to other equity investments." The charge related to the difference between the fair market value of the net assets AT&T was to receive in the transaction and the carrying value of AT&T's investment in Concert. Certain items reserved for in 2001 were favorably settled resulting in a $60 million after-tax reversal in 2002, recorded within "Net (losses) earnings related to other equity investments." AT&T Canada At December 31, 2002, AT&T had an approximate 31% ownership interest in AT&T Canada. Pursuant to a 1999 merger agreement, AT&T had a commitment to purchase, or arrange for another entity to purchase, the publicly owned shares of AT&T Canada for the Back-end Price, which was the greater of the contractual floor price or the fair market value. The floor price accreted 4% each quarter, commencing on June 30, 2000. In 2002 and 2001, AT&T recorded charges reflecting the estimated loss on this commitment. The charges represented the difference between the underlying value of the publicly owned AT&T Canada shares and the price AT&T had committed to pay for them, including the 4% accretion of the floor price. After-tax charges of $0.3 billion ($0.5 billion pretax) and $1.8 billion ($3.0 billion pretax) were recorded within "Net (losses) related to other equity investments" for 2002 and 2001, respectively. At December 31, 2001, this liability of $3.0 billion was included in "Other long-term liabilities and deferred credits." During 2002, AT&T arranged for third parties (Tricap Investment Corporation and CIBC Capital Partners) to purchase the remaining 69% equity in AT&T Canada. As part of this agreement, AT&T agreed to fund the purchase price on behalf of the third parties. Tricap and CIBC Partners made a nominal payment to AT&T upon completion of the transaction. Although AT&T held an approximate 31% ownership interest in AT&T Canada throughout 2002, it did not record equity earnings or losses since its investment balance was written down to zero largely through losses generated by AT&T Canada. Subsequent to December 31, 2002, AT&T entered into an agreement to dispose of its stake in AT&T Canada. In February 2003, pursuant to that agreement, AT&T disposed of substantially all of its AT&T Canada shares. Impairments -- Equity Investments Declines in value of equity method investments judged to be other-than-temporary are recorded in "Net (losses) related to other equity investments." In 2002 and 2001, we recorded impairment charges on equity method investments of $0.3 billion after-tax ($0.5 billion pretax), and $4.3 billion after-tax ($7.0 billion pretax), respectively. The 2002 charges primarily related to AT&T Canada and the 2001 charges primarily related to AT&T Canada and Concert, as discussed above. In addition, in 2001, we recorded an impairment charge on our investment in Net2Phone, Inc. (Net2Phone) of $0.7 billion after-tax ($1.1 billion pretax). This charge resulted from the deterioration of market valuations of Internet-related companies. In October 2001, AT&T contributed its investment in Net2Phone to NTOP Holdings, LLC (NTOP), and received ownership in NTOP. At December 31, 2001 AT&T retained an approximate 10% interest in NTOP, which was accounted for as a cost method investment. It was subsequently sold in December 2002. COST METHOD INVESTMENTS At December 31, 2002 and 2001, we had cost method investments included in "Other assets" of $0.6 billion and $1.6 billion, respectively. Under the cost method, earnings are recognized only 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. The Company's cost 79 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) investments are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded as a separate component of "Other comprehensive income (loss)" in shareowners' equity. At December 31, 2002 and 2001, approximately $0.5 billion and $1.3 billion, respectively, of these investments were indexed to certain long-term debt instruments (see note 8). Impairments -- Cost Investments Declines in value of available-for-sale securities, judged to be other-than-temporary, are recorded in "Other (expense) income, net." During 2002 and 2001, we believed that certain investments would not recover our cost basis in the foreseeable future given the significant decline in stock prices, the length of time these investments had been below market, and industry specific issues. Accordingly, we believed the declines in value were other-than-temporary and, as a result, recorded investment impairment charges on such securities of $0.1 billion after-tax ($0.1 billion pretax) and $0.3 billion after-tax ($0.5 billion pretax) for 2002 and 2001, respectively, consisting primarily of charges related to Time Warner Telecom in both years. In addition, during 2002, we recorded a pretax impairment charge of $0.6 billion related to our holdings in AT&T Wireless, which is monetized by debt indexed to the value of the AT&T Wireless shares (see note 8). The debt contains an embedded derivative that is designated as a cash flow hedge. At the time we recognized the other-than-temporary decline in the value of AT&T Wireless as an expense, as permitted by SFAS No. 133, we also recognized, in earnings, the previously unrecognized gain on the embedded derivative of $0.6 billion pretax, resulting in no net income impact. AT&T Wireless Group On July 9, 2001, AT&T completed the split-off of AT&T Wireless (see note 1). At that time, AT&T retained an approximate 7.3% interest in AT&T Wireless common stock. In 2001, we recorded a $0.5 billion tax-free gain associated with the disposal of a portion of this ownership interest in a debt-for-equity exchange in "Other (expense) income, net." In February 2003, AT&T redeemed exchangeable notes that were indexed to AT&T Wireless common stock. The notes were settled with 78.6 million AT&T Wireless shares (see note 8). Subsequently, AT&T sold its remaining AT&T Wireless shares (approximately 12.2 million shares) for $72 million in cash, resulting in a gain of $22 million. Japan Telecom Co. Ltd On April 27, 2001, AT&T completed the sale of its 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 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, net" and a pretax gain of approximately $0.5 billion recorded in "Net (loss) from discontinued operations." 80 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. DEBT OBLIGATIONS
DEBT MATURING WITHIN ONE YEAR AT DECEMBER 31, ---------------------- 2002 2001 --------- ---------- (DOLLARS IN MILLIONS) Commercial paper............................................ $1,091 $ 5,087 Short-term notes............................................ 1,086 3,970 Currently maturing long-term debt........................... 1,581 955 Other....................................................... 4 122 ------ ------- Total debt maturing within one year......................... $3,762 $10,134 ====== ======= Weighted-average interest rate of short-term debt........... 3.7% 5.0%
SECURITIZATIONS During 2002, AT&T renewed both its AT&T Business Services and AT&T Consumer Services customer accounts receivable securitization facilities, the terms of which have been extended to June (AT&T Business Services) and July (AT&T Consumer Services) of 2003. Together, the 2002 programs provide up to $2.0 billion of available financing, limited by monthly eligible receivable balances, which vary from month to month. At December 31, 2002, the available financing was collateralized by $4.6 billion of accounts receivable. Approximately $0.2 billion and $2.3 billion was outstanding at December 31, 2002 and 2001, respectively, and was included in "Short-term notes" in the table above. Under the program, accounts receivable are sold on a discounted, revolving basis, to special-purpose, wholly-owned and fully consolidated subsidiaries of AT&T, which assign interests in such receivables to unrelated third-party financing entities. CREDIT FACILITY At December 31, 2002, we had a $3.0 billion 364-day credit facility available to us that was entered into on October 9, 2002. The credit facility contains a financial covenant that requires AT&T to meet a net debt-to-EBITDA ratio (as defined in the credit agreement) not exceeding 2.25 to 1.00 for four consecutive quarters ending on the last day of each fiscal quarter. It also contains a covenant that requires AT&T to maintain $1.27 billion in unencumbered cash, cash equivalents and marketable securities. At December 31, 2002, we were in compliance with these covenants. 81 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT DEBENTURES AND NOTES AT DECEMBER 31, - ----------------------------------- --------------------- INTEREST RATES(2) MATURITIES 2002(1) 2001(1) - ----------------- ----------- ------- ------- (DOLLARS IN MILLIONS) 4.59% - 6.00% 2004 - 2009 $ 1,455 $ 6,760 6.06% - 6.50% 2004 - 2029 6,678 4,960 6.75% - 7.50% 2004 - 2006 2,449 4,459 7.75% - 8.85% 2003 - 2031 6,796 5,328 9.90% - 19.95%(3) 2004 - 2004 13 21 Variable rate 2003 - 2054 3,012 3,440 ------- ------- Total debentures and notes.............................................. 20,403 24,968 Other................................................................... 105 162 Unamortized discount, net............................................... (115) (150) ------- ------- Total long-term debt.................................................... 20,393 24,980 Less: Currently maturing long-term debt................................. 1,581 955 ------- ------- Net long-term debt...................................................... $18,812 $24,025 ======= =======
- --------------- (1) Debt amounts are included within the range of interest rates that are applied at each respective balance sheet date. See below for discussion on interest rate changes that occurred during 2002. (2) 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 9). (3) Interest rates greater than 10% are related to $8 million in bank loans held by AT&T Latin America in 2001. In 2002, AT&T Latin America is classified as an "asset held for sale," and accordingly its associated liabilities, including debt, was recorded at fair value and included in "Other current liabilities" at December 31, 2002 (see note 6). The following table shows maturities at December 31, 2002, of the $20,393 million in total long-term obligations:
2003 2004 2005 2006 2007 LATER YEARS - ------ ------ ------ ------ ---- ----------- (DOLLARS IN MILLIONS) $1,581 $2,437 $1,185 $4,328 $296 $10,566
In connection with the spin-off of AT&T Broadband, AT&T completed two debt exchanges. In the AT&T Broadband debt exchange, $3.5 billion of outstanding AT&T notes (with interest rates ranging from 6.0% to 8.63%) were exchanged for notes that, upon completion of the spin-off of AT&T Broadband, became notes of AT&T Broadband and are unconditionally guaranteed by Comcast and certain of its subsidiaries. Also, $4.6 billion of outstanding long-term AT&T notes (with fixed interest rates ranging from 5.63% to 8.0%, and maturities of 2004, 2025 and 2029) were exchanged for new AT&T notes (with fixed interest rates ranging from 6.38% to 8.6%, and maturities of 2004, 2013 and 2025) that upon completion of the spin-off of AT&T Broadband, have revised terms, including revised maturity dates and/or interest rates. As a result of a long-term debt rating downgrade by Moody's, the interest rate on approximately $10.0 billion of notes (with interest rates ranging from 6.0% to 8.0%) sold in November 2001, increased by 50 basis points effective with interest payment periods that begin after November 15, 2002, for the majority of the notes. 82 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The holders of certain private debt with an outstanding balance of $0.9 billion at December 31, 2002, have an annual put right to cause AT&T to repay the debt upon payment of an exercise fee. In exchange for the debt holders agreeing to not exercise their put right for 2002, AT&T posted a cash-collateralized letter of credit in 2002, totaling $0.4 billion, and expiring in March, 2005. The $0.4 billion is considered restricted cash and is included in "Other assets" at December 31, 2002. The annual put right in 2003 expired on February 13, 2003, without exercise by the debt holders. The debt holders could accelerate repayment of the debt based on certain events such as the occurrence of unfavorable local law or regulation changes in its country of operation. On January 31, 2003, AT&T completed the early retirement of approximately $1,152 million and $2,590 million long-term notes, with interest rates of 6.375% and 6.50%, due in March 2004 and March 2013, respectively. The notes were repurchased with cash and resulted in a loss of $178 million recorded in "Other (expense) income, net" in the first quarter of 2003. EXCHANGEABLE NOTES During 2001, we issued long-term debt (exchangeable notes) that was indexed to AT&T Wireless common stock and, at AT&T's option, was mandatorily redeemable with a number of shares of AT&T Wireless common stock that was equal to the underlying shares multiplied by an exchange ratio, or its cash equivalent. The notes were accounted for as indexed debt instruments because the carrying value of the debt was dependent upon the fair market value of the underlying securities. In addition, the notes contained embedded derivatives that required separate accounting. The economic characteristics of the embedded derivatives (i.e. equity-like features) were not clearly and closely related to those of the host instruments (a debt security). As a result, the embedded derivatives were separated from the host debt instrument for valuation purposes and were carried at fair value within the host debt instrument. The embedded derivatives for these exchangeable notes were designated as cash flow hedges. The options hedged the market risk of a decline in value of AT&T Wireless securities. The market risk of a decline in these securities, below the respective put prices, had been eliminated. In addition, any market gains we may have earned had been limited to the call prices. These designated options were carried at fair value with changes in fair value recorded, net of income taxes, within "Accumulated other comprehensive loss" as a component of shareowners' equity. There was no ineffectiveness recognized on the cash flow hedges. The shares of AT&T Wireless common stock were accounted for as "available-for-sale" securities under SFAS No. 115 with changes in the carrying value of the underlying securities that are not "other-than-temporary" being recorded as unrealized gains or losses, net of income taxes, within "Other comprehensive income (loss)" as a component of shareowners' equity. See note 7 for a discussion of impairments recorded in 2002. Following is a summary of the exchangeable notes outstanding at December 31, 2002:
PUT PRICE CALL PRICE CARRYING MATURITIES FACE VALUE INTEREST RATE PER SHARE PER SHARE VALUE - ---------- ---------- ------------- --------- ---------- -------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) Indexed to 45.8 million shares of AT&T Wireless common stock: 2005... $220 LIBOR + 0.4% $14.41 $18.87 $87 2006... 220 LIBOR + 0.4% 14.41 19.31 87 2006... 220 LIBOR + 0.4% 14.41 19.74 87 Indexed to 45 million shares of AT&T Wireless common stock: 2006 $204 LIBOR + 0.4% $13.57 $19.03 $85 2006 201 LIBOR + 0.4% 13.37 19.27 86 2006 204 LIBOR + 0.4% 13.57 19.90 87
83 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In February 2003, AT&T redeemed these exchangeable notes that had a carrying value of $652 million at the time of settlement. The notes were settled with 78.6 million shares of AT&T Wireless common stock and $152 million in cash. The settlement resulted in a pretax gain of approximately $176 million. The 12.2 million remaining AT&T Wireless shares were subsequently sold (see note 7). 9. 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 and certain obligations of former affiliates, interest rate swap agreements, foreign currency exchange contracts, option contracts, equity contracts and warrants. Collateral is generally not required for these types of instruments. However, as the requirements for collateral are generally dependent upon debt ratings and market conditions, AT&T may be required to post collateral for interest rate and equity swaps, as well as letters of credit in the future. By their nature, all such instruments involve risk, including the credit risk of nonperformance by counter-parties, and our maximum potential loss may exceed the amount recognized in our balance sheet. However, at December 31, 2002 and 2001, in management's opinion, there was no significant risk of loss in the event of nonperformance of the counter-parties to these financial instruments. We control our exposure to credit risk through credit approvals, credit limits and monitoring procedures. Other than the guarantee issued in connection with the split-off of AT&T Wireless, we do not have any significant exposure to any individual customer or counter-party, 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, 2002 and 2001, were $923 million and $408 million, respectively. The letters of credit in effect at December 31, 2002, were collateralized by restricted cash of $496 million, of which $442 million was recorded in "Other assets" and $54 million was recorded in "Other current assets." The fair values of the letters of credit, based on the fees paid to obtain the obligations, were immaterial at December 31, 2002 and 2001. GUARANTEES From time to time, we guarantee the debt of our subsidiaries, and, in connection with the separation of certain subsidiaries, we issued guarantees for certain debt and other obligations of our former subsidiaries AT&T Capital Corp., NCR, AT&T Wireless and AT&T Broadband. We also issue indemnifications as part of our software license agreements. Total notional amounts of guaranteed debt at December 31, 2002 and 2001, were $506 million and $59 million, respectively. Prior to the spin-off of AT&T Broadband, we had guaranteed certain debt of AT&T Broadband that matures in 2038. Such guarantee remained outstanding after the spin-off of AT&T Broadband and at December 31, 2002 totaled $500 million. Comcast has provided us with an indemnification for this debt and, under the terms of the merger agreement between AT&T Broadband and Comcast, if Comcast does not call the debt in 2003 they must provide us with a letter of credit in the amount of $500 million. The remaining guarantees for debt have expiration dates ranging from 2003 to 2020. Should the financial condition of debtors, including AT&T Broadband and Comcast, deteriorate to the point at which they are unable to meet their obligations, third party creditors could look to us for payment. We currently hold no collateral for these 84 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) guarantees, and have not recorded corresponding obligations. At December 31, 2002 and 2001, there were no quoted market prices for similar agreements. AT&T provides a guarantee of an obligation that AT&T Wireless has to NTT DoCoMo (DoCoMo). The amounts of the guarantee at December 31, 2002 and 2001, were $4.1 billion and $3.9 billion, respectively. On January 21, 2001, DoCoMo invested approximately $9.8 billion for shares of AT&T preferred stock that were converted into AT&T Wireless common stock in connection with the split-off of AT&T Wireless. Of the initial investment, AT&T retained approximately $3.6 billion, with the remainder of the proceeds allocated to AT&T Wireless. In connection with that investment, AT&T and AT&T Wireless agreed that, under certain circumstances, including if AT&T Wireless fails to meet specific technological milestones by June 30, 2004, DoCoMo would have the right to require AT&T Wireless to repurchase its AT&T Wireless common stock for $9.8 billion, plus interest. In the event AT&T Wireless is unable to satisfy the entire obligation, AT&T is secondarily liable for up to $3.65 billion, plus accrued interest. On December 26, 2002, AT&T Wireless and DoCoMo entered into an amendment to the original agreement which, among other things, extended the deadline for compliance with the technological milestones to December 31, 2004. We currently hold no collateral for this guarantee, and have not recorded a corresponding obligation. At December 31, 2002 and 2001, there were no quoted market prices for similar agreements. The total notional amount of other guaranteed obligations at December 31, 2002, was $458 million. Prior to the spin-off of AT&T Broadband, we had guaranteed various obligations of AT&T Broadband. In connection with the spin-off of AT&T Broadband, we continue to provide guarantees of these obligations, including operating leases for real estate, surety bonds, and equity hedges. These guarantees have expiration dates ranging from 2003 through 2007. Comcast has provided indemnifications for these guarantees of $458 million at December 31, 2002. Should the financial condition of AT&T Broadband and Comcast deteriorate to the point at which they are unable to meet their obligations, third party creditors could look to us for payment. We currently hold no collateral for these guarantees, and have not recorded corresponding obligations. At December 31, 2002, there were no quoted market prices for similar agreements. The total notional amounts of software license indemnifications with a stated maximum liability, at December 31, 2002 and 2001, were approximately $50 million and $30 million, respectively. In addition, in a few instances, our liability is limited by the value of the licensing fees received or is not limited at all. Amounts related to these indemnifications cannot be estimated. The indemnifications generally have terms that coincide with the software license which may be until terminated by the licensee. Under the terms of these agreements, we indemnify licensees against damages, expenses and losses arising from third party claims and proceedings against trademark, copyright and/or patent infringement. We currently hold no collateral for these guarantees and have not recorded corresponding obligations. At December 31, 2002, there were no quoted market prices for similar agreements. INTEREST RATE SWAP AGREEMENTS We enter into interest rate swaps 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 the exchange of fixed-rate for floating-rate payments without the exchange of the underlying principal amount. Floating-rate payments are tied to the LIBOR. We also designated certain interest-rate swaps as cash flow hedges under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 85 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table indicates the types of swaps in use at December 31, 2002 and 2001, the respective notional amounts and their weighted-average interest rates. Average floating rates are those in effect at the reporting date, and may change significantly over the lives of the contracts:
AT DECEMBER 31, --------------- 2002 2001 ------ ------ (DOLLARS IN MILLIONS) Floating-rate to fixed-rate swaps -- notional amount........ $ 190 $ 218 Weighted-average receive rate............................. 1.81% 2.08% Weighted-average pay rate................................. 7.30% 7.31%
In addition, we have combined interest rate, foreign currency swap agreements for foreign-currency-denominated debt, which hedge our risk to both interest rate and currency movements. At December 31, 2002 and 2001, the notional amounts related to these contracts was $3.8 billion, of which $3.1 billion was associated with our Euro bond offering in 2001. The table below summarizes the fair and carrying values of the agreements. These swaps are valued using current market quotes, which were obtained from dealers.
2002 2001 ----------------- ----------------- FAIR/CARRYING FAIR/CARRYING VALUE VALUE ----------------- ----------------- ASSET LIABILITY ASSET LIABILITY ----- --------- ----- --------- (DOLLARS IN MILLIONS) Interest rate swap agreements........................ $ -- $23 $ -- $18 Combined interest rate foreign currency swap agreements......................................... 660 -- 18 26
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. At December 31, 2002, our foreign exchange contracts consisted principally of Euros, Japanese yen, and Swiss francs. At December 31, 2001, our foreign exchange contracts consisted principally of Canadian dollars (which related to our obligation to purchase the remaining shares of AT&T Canada), Euros, Japanese yen, Swiss francs, and Brazilian reais. In addition, we are subject to foreign exchange risk related to other foreign-currency-denominated transactions. The notional amounts under contract at December 31, 2002 and 2001, were $742 million and $6.4 billion, respectively. The decrease from 200l was primarily due to approximately $5.3 billion in 2001 of foreign exchange contracts relating to a Euro Commercial Paper Program and our obligation to purchase the outstanding AT&T Canada shares we did not own. A significant portion of our debt under the Euro Commercial Paper Program was paid down in 2002, and our obligation to purchase the outstanding shares of AT&T Canada was satisfied in 2002. The following table summarizes the fair and carrying values of the foreign exchange contracts at December 31, 2002 and 2001. These foreign exchange contracts are valued using current market quotes which were obtained from independent sources.
2002 2001 ----------------- ----------------- FAIR/CARRYING FAIR/CARRYING VALUE VALUE ----------------- ----------------- ASSET LIABILITY ASSET LIABILITY ----- --------- ----- --------- (DOLLARS IN MILLIONS) Foreign exchange contracts............................ $41 $2 $72 $299
86 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EQUITY OPTION AND EQUITY SWAP CONTRACTS We enter into equity option and equity swap contracts, which are undesignated, to manage our exposure to changes in equity prices associated with various equity awards of previously affiliated companies (see note 12). The notional amounts outstanding on these contracts at December 31, 2002 and 2001, were $112 million and $19 million, respectively. The following table summarizes the carrying and fair values of these instruments at December 31, 2002 and 2001. Fair values are based on market quotes.
2002 2001 ----------------- ----------------- CARRYING/FAIR CARRYING/FAIR VALUE VALUE ----------------- ----------------- ASSET LIABILITY ASSET LIABILITY ----- --------- ----- --------- (DOLLARS IN MILLIONS) Equity hedges......................................... $ -- $25 $ -- $15
WARRANTS We may obtain warrants to purchase equity securities in 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 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, as determined by using the Black-Scholes model, was $2 million and $24 million at December 31, 2002 and 2001, respectively. DEBT SECURITIES The carrying value of debt with an original maturity of less than one year approximates market value. The table below summarizes the carrying and fair values of long-term debt (including currently maturing long-term debt), excluding capital leases, at December 31, 2002 and 2001. The fair values of long-term debt were obtained based on quotes or rates available to us for debt with similar terms and maturities.
2002 2001 --------------------------- --------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ---------- -------------- ---------- (DOLLARS IN MILLIONS) Long-term debt, excluding capital leases............................. $20,292 $21,030 $24,820 $24,704
DERIVATIVE IMPACTS The following table summarizes the activity in "Accumulated other comprehensive loss" in Shareowners' equity related to derivatives designated as cash flow hedges during the periods January 1, 2001 (date of the company's adoption of SFAS No. 133) through December 31, 2002. Unrealized amounts recorded within 87 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) "Accumulated other comprehensive loss" prior to adoption of SFAS No. 133 were recognized in earnings in conjunction with the adoption of SFAS No. 133 ($1.6 billion pretax; $1.0 billion after-tax), (see note 3).
PRETAX AFTER-TAX -------- ---------- (DOLLARS IN MILLIONS) Balance at January 1, 2001.................................. $ -- $ -- Unrealized gains (losses)................................... (480) (296) Realized (gains) losses reclassified into earnings.......... 85 52 ------- ------ Balance at December 31, 2001................................ $ (395) $ (244) Unrealized gains (losses)................................... 1,747 1,078 Realized (gains) losses reclassified into earnings.......... (1,259) (777) Net amounts spun-off with AT&T Broadband.................... 317 196 ------- ------ Balance at December 31, 2002................................ $ 410 $ 253 ======= ======
Included within the balance at December 31, 2002, were unrealized gains of $131 million pretax ($81 million after-tax) on embedded derivatives related to exchangeable notes that were indexed to AT&T Wireless common stock, which were settled in February 2003. The remaining balance of unrealized gains at December 31, 2002, was largely offset within "Accumulated other comprehensive loss" by unrealized losses on the underlying debt. Based upon the expiration or maturity dates of these remaining derivatives designated as cash flow hedges, we do not expect additional amounts to be transferred into earnings within the next year. 10. EQUITY TRANSACTIONS Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T was required to redeem the outstanding TCI Pacific Communications, Inc. Class A Senior Cumulative Exchangeable Preferred Stock for AT&T common stock. Each share of TCI Pacific preferred stock was exchangeable at the option of the holder for 8.365 shares (1.673 adjusted for the 1-for-5 reverse stock split) of AT&T common stock. All outstanding shares (approximately 6.2 million) of TCI Pacific preferred stock with a carrying value of $2.1 billion at December 31, 2001 (included in Minority Interest of Discontinued Operations in the Consolidated Balance Sheet), were either exchanged or redeemed for approximately 51.8 million shares (10.4 million shares adjusted for the 1-for-5 reverse stock split) of AT&T common stock. No gain or loss was recorded on the exchange/redemption of the TCI Pacific preferred stock. During 2002, AT&T issued 14.7 million shares (2.9 million shares adjusted for the 1-for-5 reverse stock split) of AT&T common stock to certain current and former senior managers in settlement of their deferred compensation accounts. Pursuant to AT&T's deferred compensation plan, senior managers may defer short- and long-term incentive compensation awards. The issuance of these shares resulted in an increase to total shareowners' equity of $196 million. In June 2002, AT&T completed a public equity offering of 230 million shares (46 million shares adjusted for the 1-for-5 reverse stock split) of AT&T common stock for net proceeds of $2.5 billion. AT&T utilized the proceeds from the offering to satisfy a portion of its obligation to AT&T Canada common shareholders (see note 7). On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for 812,512 shares of a new class of AT&T preferred stock with a par value of $1 per share. On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group, these preferred shares were converted into AT&T Wireless common stock. During 2001, we recorded dividend requirements on this preferred stock of $652 million. The preferred stock dividend represented interest in connection with the DoCoMo preferred stock as well as accretion of the beneficial conversion feature associated with this preferred stock. The beneficial conversion feature was 88 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recorded upon the issuance of the preferred stock and represented the excess of the fair value of the preferred shares issued over the proceeds received. 11. 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. The following table shows the components of the net periodic benefit (credit) costs for continuing operations included in our Consolidated Statements of Operations:
PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------- ------------------------ FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 2002 2001 2000 - -------------------------------- ------- ------- ------- ------ ------ ------ (DOLLARS IN MILLIONS) Service cost -- benefits earned during the period............................ $ 209 $ 226 $ 239 $ 23 $ 26 $ 34 Interest cost on benefit obligations.... 1,002 938 983 365 344 351 Amortization of unrecognized prior service cost.......................... 152 172 174 12 4 4 Credit for expected return on plan assets................................ (1,526) (1,647) (1,812) (187) (201) (230) Amortization of transition asset........ (34) (89) (156) -- -- -- Amortization of (gains) losses.......... (22) (182) (332) 5 -- (16) Charges for special termination (credits) benefits*................... (19) 188 -- -- 28 16 Net curtailment losses (gains)*......... -- 113 121 -- 59 (14) Net settlement losses*.................. 6 4 8 -- -- -- ------- ------- ------- ----- ----- ----- Net periodic benefit (credit) cost...... $ (232) $ (277) $ (775) $ 218 $ 260 $ 145 ======= ======= ======= ===== ===== =====
- --------------- * Primarily included in "Net restructuring and other charges" in the Consolidated Statements of Operations. In connection with our restructuring plan announced in the fourth quarter of 2001, we recorded a $188 million charge related to management employee separation benefits expected to be funded by assets of the AT&T Management Pension Plan as well as a $28 million charge related to expanded eligibility for postretirement benefits for certain employees expected to exit under the plan. We also recorded pension and postretirement benefit curtailment charges of $172 million. 89 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:
POSTRETIREMENT PENSION BENEFITS BENEFITS ----------------- ----------------- FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2002 2001 - -------------------------------- ------- ------- ------- ------- (DOLLARS IN MILLIONS) CHANGE IN BENEFIT OBLIGATIONS: Benefit obligation, beginning of year.......... $13,878 $12,898 $ 5,277 $ 4,851 Service cost................................... 209 226 23 26 Interest cost.................................. 1,002 938 365 344 Plan amendments................................ 34 62 14 -- Actuarial losses............................... 1,134 655 640 373 Benefit payments............................... (1,221) (1,072) (480) (406) Special termination (credits) benefits......... (19) 188 -- 28 Settlements.................................... (32) (17) -- -- Curtailment losses............................. -- -- -- 61 ------- ------- ------- ------- Benefit obligation, end of year................ $14,985 $13,878 $ 5,839 $ 5,277 ======= ======= ======= ======= Change in fair value of plan assets: Fair value of plan assets, beginning of year... $18,449 $21,055 $ 2,156 $ 2,521 Actual return on plan assets................... (1,663) (1,576) (255) (214) Employer contributions......................... 70 59 324 255 Benefit payments............................... (1,221) (1,072) (480) (406) Settlements.................................... (32) (17) -- -- ------- ------- ------- ------- Fair value of plan assets, end of year......... $15,603 $18,449 $ 1,745 $ 2,156 ======= ======= ======= ======= At December 31, Funded (unfunded) benefit obligation........... $ 618 $ 4,571 $(4,094) $(3,121) Unrecognized net loss (gain)................... 1,715 (2,624) 1,684 606 Unrecognized transition asset.................. -- (34) -- -- Unrecognized prior service cost (credits)...... 769 887 (10) (12) ------- ------- ------- ------- Net amount recorded............................ $ 3,102 $ 2,800 $(2,420) $(2,527) ======= ======= ======= =======
The AT&T Management Pension Plan had an unfunded accumulated benefit obligation of $1.1 billion as of December 31, 2002. The accumulated benefit obligation of $9.4 billion at December 31, 2002, was in excess of the fair value of the plan assets of $8.3 billion. Our nonqualified pension plans had an unfunded accumulated benefit obligation of $98 million and $113 million at December 31, 2002 and 2001, respectively. The unfunded accumulated benefit obligation for the AT&T Management Pension Plan is attributed primarily to the loss in value of the plan assets and the impact of the decline in the discount rate used to value the pension benefit obligations. As a result, due to the under-funded status of these plans, in 2002, the Company recorded an additional minimum pension liability of $699 million. The offset to this liability was an intangible asset of $410 million and a charge to "Other comprehensive income (loss)" of $289 million ($179 million, net of tax). Our postretirement welfare benefit plans and telephone concession benefit plans had accumulated postretirement benefit obligations of $5.9 billion at December 31, 2002, which was in excess of plan assets of 90 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $1.7 billion. Our postretirement welfare benefit plans and telephone concession benefit plans had accumulated postretirement benefit obligations of $5.3 billion at December 31, 2001, which was in excess of plan assets of $2.2 billion. At December 31, 2002 and 2001, our pension plan assets included $13 million and $31 million of AT&T common stock, respectively. The following table provides the amounts recorded in our Consolidated Balance Sheets:
POSTRETIREMENT PENSION BENEFITS BENEFITS ---------------- ----------------- AT DECEMBER 31, 2002 2001 2002 2001 - --------------- ------- ------ ------- ------- (DOLLARS IN MILLIONS) Prepaid pension cost............................ $ 3,596 $3,329 $ -- $ -- Benefit related liabilities..................... (1,255) (591) (2,420) (2,527) Intangible asset (in "Other assets")............ 456 46 -- -- Accumulated other comprehensive income.......... 305 16 -- -- ------- ------ ------- ------- Net amount recorded............................. $ 3,102 $2,800 $(2,420) $(2,527) ======= ====== ======= =======
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. These assumptions were reassessed as of December 31, 2002. The discount rate was reduced to 6.5% based on current yields on high quality corporate fixed-income investments with maturities corresponding to the expected duration of the benefit obligations. The expected long-term rate of return on plan assets was adjusted downward to 8.5% effective January 1, 2003, primarily in consideration of the current and projected investment portfolio mix and estimated long-term investment returns for each asset class. Additionally, the rate of projected compensation increases was reduced to 4.25% reflecting expected inflation levels, our actual recent experience and future outlook. Our previous years' disclosed compensation rates have been restated to include the component of the assumed compensation rate increase attributable to employee promotion.
WEIGHTED-AVERAGE ASSUMPTIONS ------------------ AT DECEMBER 31, 2002 2001 2000 - --------------- ---- ---- ---- Discount rate............................................... 6.50% 7.25% 7.50% Expected return on plan assets.............................. 9.0% 9.5% 9.5% Rate of compensation increase............................... 4.25% 5.9% 5.9%
We assumed a rate of increase in the per capita cost of covered health-care benefits (the health-care cost trend rate) of 10.9%. This rate was assumed to gradually decline after 2002 to 5.0% by 2010 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 million and $10 million, respectively, and would increase or decrease the health-care component of the accumulated postretirement benefit obligation by $175 million and $152 million, 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. Contributions relating to continuing operations amounted to $135 million in 2002, $131 million in 2001, and $206 million in 2000. 91 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. 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, and also granted 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 30 million shares of AT&T common stock available for grant with a maximum of 4.5 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 7.5 million shares may be used for awards other than stock options. In 2001, as a result of the AT&T Wireless split-off, the number of shares available for grant increased by 3.5 million which includes 0.6 million for awards other than stock options. In 2002, AT&T restructured stock options and other stock-based awards in conjunction with the AT&T Broadband spin-off. The number of shares available for grant increased by 44.5 million which includes 0.8 million for awards other than stock options. 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. (All above share amounts have been adjusted for the 1-for-5 reverse stock split.) 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, AT&T issued AT&T Wireless Group stock options to employees. 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, and were exercisable up to 10 years from the date of grant. On April 27, 2000, substantially all employees were granted AT&T Wireless Group tracking stock options. In connection with the July 9, 2001 split-off of AT&T Wireless Group, all outstanding AT&T Wireless Group tracking stock options and all AT&T common stock options granted prior to January 1, 2001, were converted in the same manner as common shares (see note 1). 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 million of compensation expense related to these modifications. In connection with the spin-off of AT&T Broadband, all outstanding AT&T stock options held by active AT&T employees were restructured into an adjusted number of AT&T options. All outstanding AT&T stock options held by active AT&T Broadband employees were restructured into an adjusted number of AT&T Broadband options and subsequently replaced with new Comcast stock options, and all AT&T stock options held by inactive employees at the time of the spin-off were converted into adjusted AT&T stock options and new Comcast stock options. In January 2002, AT&T modified the terms and conditions of outstanding AT&T stock options and other equity awards granted under plans other than the Program and held by AT&T Broadband employees. This modification provided that upon the change in control of AT&T Broadband, their stock options and other equity awards granted prior to December 19, 2001, would be immediately vested and exercisable through their remaining contractual term. In 2002, $48 million (pretax) of compensation expense related to this modification was recognized by AT&T Broadband and is included within "Gain on disposition of discontinued operations." 92 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 21 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 1.3 million, 1.2 million and 1.1 million shares to employees in 2002, 2001 and 2000, respectively. (All above share amounts have been adjusted for the 1-for-5 reverse stock split.) A summary of the AT&T common stock option transactions is shown below. (All share and per share amounts have been restated to reflect the 1-for-5 reverse stock split.)
WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE 2002 PRICE* 2001 PRICE* 2000 PRICE* ------- --------- ------ --------- ------ --------- (SHARES IN THOUSANDS) Outstanding at January 1,........... 63,509 $122.90 49,805 $179.10 33,753 $187.10 Options assumed in mergers.......... 5,923 123.55 Options granted..................... 15,183 68.84 13,680 110.85 14,914 180.60 AT&T Wireless split-off adjustments....................... 4,330 AT&T Broadband spin-off adjustments....................... 37,049 Options and SARs exercised.......... (436) 32.28 (1,044) 58.15 (2,290) 110.35 Options canceled or forfeited....... (17,048) 125.72 (3,262) 155.35 (2,495) 228.05 At December 31: Options outstanding................. 98,257 40.64 63,509 122.90 49,805 179.10 Options exercisable................. 46,770 49.88 34,289 130.25 26,290 152.20 Shares available for grant.......... 27,751 6,944 6,841
- --------------- * The weighted-average exercise prices for the period prior to the AT&T Wireless split-off in 2001, and for the year ended December 31, 2000, have not been adjusted to reflect the impact of the split-off. The weighted-average exercise prices for the period prior to the AT&T Broadband spin-off in 2002, and for the years ended December 31, 2001 and 2000, have not been adjusted to reflect the impact of the spin-off. 93 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, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ------------------------------- WEIGHTED- NUMBER AVERAGE NUMBER OUTSTANDING AT REMAINING WEIGHTED- EXERCISABLE AT WEIGHTED- DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE RANGE OF EXERCISE PRICES 2002 LIFE EXERCISE PRICE 2002 EXERCISE PRICE - ------------------------ -------------- ----------- -------------- -------------- -------------- (IN THOUSANDS) (IN THOUSANDS) $ 3.93 - $23.70.............. 3,368 5.6 $16.76 2,316 $14.57 $23.88....................... 10,417 9.7 $23.88 8 $23.88 $23.94 - $28.00.............. 1,166 8.5 $25.75 406 $25.59 $28.03....................... 21,465 9.1 $28.03 422 $28.03 $28.23 - $33.66.............. 9,148 8.2 $32.15 3,716 $32.04 $33.68....................... 8,341 8.2 $33.68 2,823 $33.68 $33.77 - $38.27.............. 8,206 4.6 $35.68 7,172 $35.68 $38.31....................... 3,657 4.1 $38.31 3,657 $38.31 $38.48 - $46.73.............. 4,050 4.6 $44.35 3,459 $44.21 $46.91....................... 5,553 7.6 $46.91 3,113 $46.91 $47.04 - $61.54.............. 8,609 5.5 $59.06 8,506 $59.15 $61.66 - $87.01.............. 9,136 6.9 $71.10 7,146 $71.71 $87.51 - $90.80.............. 5,141 6.1 $87.52 4,026 $87.52 ------ ------ 98,257 7.4 $40.64 46,770 $49.88 ====== ======
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
In 2002, AT&T offered employees the option to cancel certain outstanding stock option grants and replace them with restricted stock units. Approximately 15 million stock options were canceled as a result of this offer, and 2.5 million restricted stock units were granted which vest over a three-year period. The 2.5 million restricted stock units were restructured into 6.5 million units as a result of the spin-off of AT&T Broadband. Those options that were eligible for cancelation but retained by the employee became variable awards and will be marked to market until the options are exercised, forfeited, or expired unexercised. The cancelation of stock options had an immaterial impact on 2002 results of operations. 94 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted-average fair values at date of grant for AT&T common stock options granted during 2002, 2001 and 2000 were $24.49, $39.50 and $60.50, respectively, and were estimated using the Black-Scholes option-pricing model. The weighted-average risk-free interest rates applied for 2002, 2001 and 2000 were 3.73%, 4.61% and 6.29%, respectively. The following assumptions were applied for 2002, 2001 and 2000, respectively: (i) expected dividend yields of 1.17%, 0.85% and 1.6%, (ii) expected volatility rates of 40.0%, 36.9% and 33.5% and (iii) expected lives of 4.7 years in 2002, 2001 and 2000. 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, 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. Effective January 1, 2003, AT&T will begin recording compensation expense pursuant to SFAS No. 123, "Accounting for Stock Based Compensation," for AT&T common stock options issued subsequent to January 1, 2003. The fair value of these stock options will be measured on the grant date and recognized in the income statement over the vesting period. (For additional information, see note 2.) 13. INCOME TAXES The following table shows the principal reasons for the difference between the effective income tax rate and the U.S. federal statutory income tax rate:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) U.S. federal statutory income tax rate.................. 35% 35% 35% Federal income tax (provision) at statutory rate........ $ (993) $(2,683) $(4,368) Amortization of investment tax credits.................. 16 18 23 State and local income tax (provision), net of federal income tax effect..................................... (222) (209) (292) AT&T Latin America charge............................... (360) -- -- Foreign operations, net of tax credits.................. (140) (107) (20) Investment dispositions, acquisitions and legal entity restructurings........................................ 93 91 70 Research and other credits.............................. 51 42 36 Other differences, net.................................. (32) (42) 64 ------- ------- ------- (Provision) for income taxes............................ $(1,587) $(2,890) $(4,487) ======= ======= ======= Effective income tax rate............................... 56.0% 37.7% 35.9%
95 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The U.S. and foreign components of income from continuing operations before income taxes and the (provision) for income taxes are presented in the following table:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (DOLLARS IN MILLIONS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES United States........................................... $ 2,924 $ 7,671 $12,727 Foreign................................................. (88) (5) (247) ------- ------- ------- Total................................................... $ 2,836 $ 7,666 $12,480 ======= ======= ======= (PROVISION) FOR INCOME TAXES Current: Federal............................................... $ 1,041 $(1,554) (3,126) State and local....................................... 19 (192) (416) Foreign............................................... (95) (98) (87) ------- ------- ------- 965 (1,844) (3,629) ------- ------- ------- Deferred: Federal............................................... (2,201) (936) (851) State and local....................................... (360) (129) (34) Foreign............................................... (7) 1 4 ------- ------- ------- (2,568) (1,064) (881) Deferred investment tax credits......................... 16 18 23 ------- ------- ------- (Provision) for income taxes............................ $(1,587) $(2,890) $(4,487) ======= ======= =======
We also recorded current and deferred income tax benefits that resulted from net losses (earnings) related to other equity investments in the amounts of $112 million in 2002, $2.9 billion in 2001, and $59 million in 2000. 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. 96 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, --------------- 2002 2001 ------ ------ (DOLLARS IN MILLIONS) DEFERRED INCOME TAX ASSETS Reserves and allowances................................... $ 845 $2,237 Employee pensions and other benefits...................... 604 843 Business restructuring.................................... 297 359 Investments............................................... 281 423 Net operating loss, capital loss and credit carryforwards.......................................... 252 70 Advance payments.......................................... 174 30 Other deferred tax assets................................. 162 419 Valuation allowance....................................... (689) (34) ------ ------ Total deferred income tax assets............................ 1,926 4,347 ------ ------ DEFERRED INCOME TAX LIABILITIES Property, plant and equipment............................. 3,135 3,230 Leveraged and capital leases.............................. 1,059 1,078 Capitalized software and intangible assets................ 743 575 Other..................................................... 818 710 ------ ------ Total deferred income tax liabilities....................... 5,755 5,593 ------ ------ Net deferred income tax liability........................... $3,829 $1,246 ====== ======
The net increase in the valuation allowance in 2002 of $655 million was primarily attributable to the book and tax basis difference relating to our investment in AT&T Latin America. At December 31, 2002, the tax effect of net operating and capital loss carryforwards for federal and state income tax purposes were $10 million and $130 million, respectively, which expire through 2021. In addition, at December 31, 2002, federal tax credit carryforwards were $1 million, with no expiration date, and state tax credit carry-forwards were $111 million expiring through 2016. 14. 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. In connection with the separation of its former subsidiaries, AT&T has entered into a number of separation and distribution agreements that provide, among other things, for the allocation and/or sharing of certain costs associated with potential litigation liabilities. For example, pursuant to these agreements, AT&T shares in the cost of certain litigation (relating to matters while affiliated with AT&T) if the settlement exceeds certain thresholds. With the exception of the Sparks matter (see note 1), as of December 31, 2002, we have assessed that none of the litigation liabilities allocated to former subsidiaries were probable of incurring costs in excess of the threshold above which we would be required to share in the costs. However, in the event these former subsidiaries were unable to meet their obligations with respect to these liabilities due to financial difficulties, AT&T could be held responsible for all or a portion of the costs, irrespective of the sharing agreements. 97 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 2002. 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. LEASES AND OTHER COMMITMENTS From time to time, AT&T provides guarantees of debt or other obligations relating to former subsidiaries. (Guarantees are occasionally provided for subsidiaries when owned by AT&T or in connection with its separation from AT&T. See note 9 for a detailed discussion of these guarantees.) We lease land, buildings and equipment through contracts that expire in various years through 2040. Our rental expense under operating leases was $529 million in 2002, $552 million in 2001 and $583 million in 2000. The total of minimum rentals to be received in the future under non-cancelable operating subleases as of December 31, 2002, was $250 million. The following table shows our future minimum commitments due under non-cancelable operating and capital leases at December 31, 2002:
OPERATING CAPITAL LEASES LEASES ---------- -------- (DOLLARS IN MILLIONS) 2003........................................................ $ 480 $ 10 2004........................................................ 409 19 2005........................................................ 320 8 2006........................................................ 252 8 2007........................................................ 203 8 Later years................................................. 460 100 ------ ---- Total minimum lease payments................................ $2,124 153 ====== Less: Amount representing interest.......................... 52 ---- Present value of net minimum lease payments................. $101 ====
In addition, under certain real estate operating leases, we could be required to make payments to the lessor of up to $447 million at the end of the lease term (ending in years 2004 through 2007). The actual amount paid, if any, would be reduced by amounts received by the lessor upon remarketing of the property. (See note 18 for a discussion of the possible consolidation of certain of entities that we lease facilities from.) AT&T has contractual obligations to utilize network facilities from local exchange carriers with terms greater than one year. Since the contracts have no minimum volume requirement and are based on an interrelationship of volumes and discounted rates, we assessed our minimum exposure based on penalties to exit the contracts on December 31 of each year. At December 31, 2002, the penalties AT&T would incur if we exited all of these contracts would be $2.1 billion. 15. SEGMENT REPORTING AT&T's results are segmented according to the customers we service: AT&T Business Services and AT&T Consumer Services. AT&T Business Services provides a variety of services to various sized businesses and government agencies including long distance, international, toll-free and local voice, data and Internet protocol (IP) services; managed services; and wholesale transport services. 98 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The balance of AT&T's continuing operations (excluding LMG) is included in a "Corporate and Other" group. This group primarily reflects corporate staff functions and the elimination of transactions between segments. 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 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. In addition, as the assets of discontinued operations are not considered to be a part of AT&T's ongoing operations, they are included in a category separate from reportable segments and the Corporate and Other group for reporting purposes. Capital additions for each segment include capital expenditures for property, plant and equipment, additions to nonconsolidated investments, and additions to internal-use software (which are included in "Other assets"). The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see note 2). 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 inter-segment transactions at market prices. AT&T Business Services sells services to AT&T Consumer Services at cost-based prices, which approximate market prices. Generally AT&T Business Services accounts for these sales as contra-expense. REVENUE
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2002 2001 2000 ------- ------- ------- (DOLLARS IN MILLIONS) AT&T Business Services external revenue................. $26,235 $27,264 $28,136 AT&T Business Services internal revenue................. 323 441 423 ------- ------- ------- Total AT&T Business Services revenue.................... 26,558 27,705 28,559 AT&T Consumer Services external revenue................. 11,527 14,843 18,643 ------- ------- ------- Total reportable segments............................... 38,085 42,548 47,202 Corporate and Other..................................... (258) (351) (352) ------- ------- ------- Total revenue........................................... $37,827 $42,197 $46,850 ======= ======= =======
99 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DEPRECIATION AND AMORTIZATION
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 2000 ------ ------ ------ (DOLLARS IN MILLIONS) AT&T Business Services..................................... $4,546 $4,234 $4,255 AT&T Consumer Services..................................... 230 200 167 ------ ------ ------ Total reportable segments.................................. 4,776 4,434 4,422 Corporate and Other........................................ 112 125 116 ------ ------ ------ Total depreciation and amortization........................ $4,888 $4,559 $4,538 ====== ====== ======
NET (LOSSES) EARNINGS RELATED TO OTHER EQUITY INVESTMENTS
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 2002 2001 2000 ----- ------- ---- (DOLLARS IN MILLIONS) AT&T Business Services pretax net (losses).................. $(454) $(6,482) $ (8) Corporate and Other pretax net (losses)..................... (58) (1,301) (43) ----- ------- ---- Total pretax (losses)....................................... (512) (7,783) (51) Total tax benefit........................................... 112 2,947 61 ----- ------- ---- Total net (losses) earnings related to other equity investments............................................... $(400) $(4,836) $ 10 ===== ======= ====
RECONCILIATION OF EBIT TO INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST INCOME AND LOSSES RELATED TO OTHER EQUITY INVESTMENTS
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 2002 2001 2000 ------- ------- ------- (DOLLARS IN MILLIONS) AT&T Business Services EBIT............................. $ 1,638 $(2,305) $ 5,917 AT&T Consumer Services EBIT............................. 2,647 4,875 6,893 ------- ------- ------- Total reportable segments EBIT.......................... 4,285 2,570 12,810 Corporate and Other EBIT................................ (399) (1,063) 1,163 ------- ------- ------- Total EBIT.............................................. 3,886 1,507 13,973 Deduct: Minority interest income.............................. 114 131 41 Pretax net (losses) related to other equity investments........................................ (512) (7,783) (51) Add: Interest (expense)................................. (1,448) (1,493) (1,503) ------- ------- ------- Income from continuing operations before income taxes, minority interest income and losses related to other equity investments.................................... $ 2,836 $ 7,666 $12,480 ======= ======= =======
100 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ASSETS
AT DECEMBER 31, ---------------------- 2002 2001 --------- ---------- (DOLLARS IN MILLIONS) AT&T Business Services...................................... $36,365 $ 40,316 AT&T Consumer Services...................................... 1,674 2,141 ------- -------- Total reportable segments................................... 38,039 42,457 Corporate and Other assets(1)............................... 17,233 19,872 Total assets from discontinued operations................... -- 103,152 ------- -------- Total Assets................................................ $55,272 $165,481 ======= ========
- --------------- (1) Includes cash of $7.8 billion for 2002 and $10.4 billion for 2001 CAPITAL ADDITIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 2000 ------ ------ ------ (DOLLARS IN MILLIONS) AT&T Business Services..................................... $3,716 $5,451 $6,841 AT&T Consumer Services..................................... 127 140 148 ------ ------ ------ Total reportable segments.................................. 3,843 5,591 6,989 Corporate and Other........................................ 63 150 1,594 ------ ------ ------ Total capital additions.................................... $3,906 $5,741 $8,583 ====== ====== ======
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. 16. RELATED PARTY TRANSACTIONS AT&T had various related party transactions with Concert until the joint venture was officially unwound on April 1, 2002. Included in "Revenue" was $268 million, $1.1 billion and $1.1 billion for services provided to Concert for the years ended December 31, 2002, 2001 and 2000, respectively. Included in "Access and other connection" 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 $491 million, $2.1 billion and $2.4 billion for the years ended December 31, 2002, 2001 and 2000, respectively. The Consolidated Balance Sheet at December 31, 2001, included a loan of $1.0 billion to Concert, which was included within "Other assets." Interest income of $67 million was recognized for the year ended December 31, 2000. In the third quarter of 2001, this loan together with the associated accrued interest was written off in connection with the decision to unwind Concert (see note 7). 101 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 2001, AT&T had a floating-rate loan payable to Concert in the amount of $80 million. The loan was included in "Debt maturing within one year" at December 31, 2001. This loan was paid off in conjunction with the unwind of Concert. Interest expense was $5 million and $6 million for the years ended December 31, 2001 and 2000, respectively. Included in "Accounts receivable" at December 31, 2001, was $438 million related to telecommunications transactions with Concert. Included in "Accounts payable" at December 31, 2001, was $201 million related to transactions with Concert. Included in "Other receivables" at December 31, 2001, was $781 million related to administrative transactions performed on behalf of Concert. Included in "Other current liabilities" at December 31, 2001, was $935 million related to administrative transactions performed by Concert on behalf of AT&T. 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 million for the seven months ended July 31, 2001, the effective split-off date of LMG for accounting purposes, and $239 million for the year ended December 31, 2000. 17. QUARTERLY INFORMATION (UNAUDITED) 2002
FIRST SECOND(1) THIRD FOURTH(2) --------- ----------- --------- ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenue...................................... $ 9,548 $ 9,580 $ 9,409 $ 9,290 Operating income (loss)...................... 1,634 1,592 1,415 (280) Income (loss) from continuing operations..... 446 603 525 (611) Net (loss) from discontinued operations (net of income taxes)........................... (565) (13,433) (318) (197) Gain on disposition of discontinued operations (net of income taxes)........... -- -- -- 1,324 (Loss) income before cumulative effect of accounting change.......................... (119) (12,830) 207 516 Cumulative effect of accounting change (net of income taxes)........................... (856) -- -- -- Net (loss) income............................ (975) (12,830) 207 516
102 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND(1) THIRD FOURTH(2) --------- ----------- --------- ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) AT&T Common Stock Group:(3) Earnings (loss) per share -- basic: Earnings (loss) from continuing operations... $ 0.63 $ 0.83 $ 0.68 $ (0.79) (Loss) from discontinued operations.......... (0.80) (18.41) (0.41) (0.26) Gain on disposition of discontinued operations................................. -- -- -- 1.71 Cumulative effect of accounting change....... (1.21) -- -- -- AT&T Common Stock Group (loss) earnings...... $ (1.38) $ (17.58) $ 0.27 $ 0.66 Earnings (loss) per share -- diluted: Earnings (loss) from continuing operations... $ 0.60 $ 0.80 $ 0.67 $ (0.79) (Loss) from discontinued operations.......... (0.76) (17.91) (0.41) (0.26) Gain on disposition of discontinued operations................................. -- -- -- 1.71 Cumulative effect of accounting change....... (1.16) -- -- -- AT&T Common Stock Group (loss) earnings...... $ (1.32) $ (17.11) $ 0.26 $ 0.66 Dividends declared........................... 0.1875 0.1875 0.1875 0.1875 AT&T common stock High....................................... $ 39.47 $ 32.50 $ 26.35 $ 29.42 Low........................................ 27.62 18.64 16.81 21.43 Quarter-end close.......................... 32.19 21.94 24.62 26.11
2001
FIRST SECOND THIRD(4) FOURTH ---------- ---------- ----------- ---------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenue........................................ $10,890 $10,602 $10,537 $10,168 Operating income............................... 2,451 2,265 2,313 803 Income (loss) from continuing operations....... 556 (1,433) (1,547) (216) Net (loss) from discontinued operations (net of income taxes)................................ (1,804) (525) (548) (1,175) Gain on disposition of discontinued operations (net of income taxes)........................ -- -- 13,503 -- Net (loss) income before cumulative effect of accounting change............................ (1,248) (1,958) 11,408 (1,391) Cumulative effect of accounting change (net of income taxes)................................ 904 -- -- -- Net (loss) income(5)........................... (344) (1,958) 11,408 (1,391) AT&T Common Stock Group:(3) Earnings (loss) per share -- basic: Earnings (loss) from continuing operations..... $ 1.41 $ 0.51 $ (2.68) $ (0.31) (Loss) from discontinued operations............ (2.36) (0.77) (0.77) (1.66) Gain on disposition of discontinued operations................................... -- -- 19.10 -- Cumulative effect of accounting change......... 0.47 -- -- -- AT&T Common Stock Group (loss) earnings........ $ (0.48) $ (0.26) $ 15.65 $ (1.97)
103 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD(4) FOURTH ---------- ---------- ----------- ---------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Earnings (loss) per share -- diluted: Earnings (loss) from continuing operations..... $ 1.32 $ 0.48 $ (2.68) $ (0.31) (Loss) from discontinued operations............ (2.21) (0.72) (0.77) (1.66) Gain on disposition of discontinued operations................................... -- -- 19.10 -- Cumulative effect of accounting change......... 0.44 -- -- -- AT&T Common Stock Group (loss) earnings........ $ (0.45) $ (0.24) $ 15.65 $ (1.97) Dividends declared............................. 0.1875 0.1875 0.1875 0.1875 AT&T Wireless Group (loss) earnings from discontinued operations per basic and diluted share(3),(6)................................. $ (0.02) $ 0.08 -- -- Liberty Media Group (loss) earnings per basic and diluted share(7)......................... $ (0.06) $ (0.82) $ 0.04 -- Stock price(8) AT&T common stock High......................................... $ 40.00 $ 37.05 $ 44.00 $ 41.01 Low.......................................... 27.67 31.56 33.85 30.24 Quarter-end close............................ 33.92 35.03 39.57 37.19 AT&T Wireless Group common stock(6) 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(7) 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(7) High......................................... $ 18.69 $ 18.75 $ 18.35 -- Low.......................................... 14.20 12.50 12.00 -- Quarter-end close............................ 15.00 18.15 -- --
- --------------- (1) The loss from discontinued operations in the second quarter of 2002 included impairment charges of $16.5 billion ($11.8 billion after-tax) of goodwill and franchise costs. (2) Fourth quarter 2002 net income included $1,463 of net restructuring and other charges. (3) Earnings per share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during the quarter while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters' EPS does not always equal the full-year EPS. (4) Third quarter 2001 net income included a gain on disposition of discontinued operations of $13,503, or $19.10 per share. (5) First quarter 2001 net income included cumulative effect of accounting change of $359 and $545, or $0.44 per diluted share and $0.21 per share, for AT&T Common Stock Group and LMG, respectively, due to the adoption of SFAS No. 133. 104 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) 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. (7) No dividend had been declared on LMG common stock. LMG was split-off from AT&T on August 10, 2001. (8) Stock prices obtained from the New York Stock Exchange Composite Tape. AT&T Common Stock prices have been restated to reflect the spin-off of AT&T Broadband and for the 1-for-5 reverse stock split. 18. VARIABLE INTEREST ENTITIES As stated in note 19, AT&T is currently assessing the potential impacts of FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." As part of that assessment, we have determined that one entity, from which we currently lease two buildings, may be determined to be a Variable Interest Entity and subject to consolidation. We have no ownership interest in this entity and our transactions with it have met the requirements to be classified as operating leases, with AT&T being the lessee. At the end of their respective lease terms (including any extensions), AT&T has the option to: renew the lease for a new term, purchase the property at the unamortized loan funding amount, or exercise the remarketing option. Under the remarketing option, AT&T could be held liable for a loss in value relative to the properties. At December 31, 2002, our maximum exposure was $99 million. This entity has approximately $105 million of total assets, (principally the leased properties) and $110 million of liabilities (principally long term debt secured by the properties). In addition, we have six leases with another entity, having characteristics similar to those described above. It is possible that this entity may be deemed to be a VIE. We may, therefore, have variable interests in specified assets of this entity and be subject to "silo" consolidation of the specific assets and related liabilities. At December 31, 2002, our maximum total exposure related to this entity was $328 million. The estimated building value is approximately $362 million and the outstanding long-term debt is approximately $386 million. 19. NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard requires that obligations that are legally enforceable and unavoidable, and are 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. The offset to the initial asset retirement obligation is an increase in the carrying amount of the related long-lived asset. Over time, this liability is accreted to its future value, and the asset 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 was adopted on January 1, 2003. AT&T currently includes in its group depreciation rates an amount related to the cost of removal for certain assets. However, such amounts are not legally enforceable or unavoidable; therefore, AT&T will be required to reverse the amount accrued in accumulated depreciation. As of January 1, 2003, AT&T will report approximately $40 million as the cumulative effect of a change in accounting principles related to this reversal. The impact of no longer including the cost of removal in the group depreciation rates, coupled with the cumulative effect impact on accumulated depreciation, will result in a decrease to depreciation expense in 2003. However, the costs incurred to remove these assets will be reflected as a cost in the period incurred as "Costs of services and products." On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." This statement addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities. This statement includes the restructuring activities that are currently accounted for 105 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) pursuant to the guidance set forth in EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," costs related to terminating a contract that is not a capital lease and one-time benefit arrangements received by employees who are involuntarily terminated -nullifying the guidance under EITF 94-3. Under SFAS No. 146 the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred rather than at the date the company committed to the exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002, with earlier application encouraged. Previously issued financial statements will not be restated. The provisions of EITF 94-3 shall continue to apply for exit plans initiated prior to the adoption of SFAS No. 146. Accordingly, the initial adoption of SFAS No. 146 will not have an effect on AT&T's results of operations, financial position or cash flows. Liabilities associated with future exit and disposal activities will not be recognized until actually incurred. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123." This standard provides alternate methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation and requires more prominent disclosure about the method used. This statement is effective for fiscal years ending after December 15, 2002. For AT&T, this means it is effective for December 31, 2002. Currently AT&T applies the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and we do not expense our stock options. However, as previously announced, AT&T will begin expensing all stock options issued after January 1, 2003, and will continue to apply the disclosure-only provisions to stock options issued prior to January 1, 2003. This method of transition is in compliance with the provisions of SFAS No. 148. The adoption of the disclosure provisions of SFAS No. 148 will not have an impact on AT&T's results of operations, financial position or cash flows; however, the expensing of the stock options issued after January 1, 2003, will have a negative impact on our results of operations. In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that an entity issuing a guarantee (including those embedded in a purchase or sales agreement) must recognize, at the inception of the guarantee, a liability equal to the fair value of the guarantee. FIN 45 also requires detailed information about each guarantee or group of guarantees even if the likelihood of making a payment is remote. The disclosure requirements of this interpretation are effective for financial statements of periods ending after December 15, 2002, which makes them effective for AT&T for December 31, 2002 (see note 9 for the disclosures required under this interpretation). The recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. FIN 45 could have an impact on the future results of AT&T depending on guarantees issued; however, at this time we do not believe that the adoption of this statement will have a material impact on our results of operation, financial position or cash flows. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities -- an Interpretation of Accounting Research Bulletin (ARB) No. 51." FIN 46 requires the primary beneficiary to consolidate a variable interest entity (VIE) if it has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both. FIN 46 applies immediately to VIEs created after January 31, 2003, and to VIEs in which the entity obtains an interest after that date. For VIEs acquired before February 1, 2003, the effective date for AT&T is July 1, 2003. AT&T is currently in the process of determining the impact of this statement on its results of operations, financial position and cash flows. The disclosures relating to our present involvement with VIEs and our maximum exposure to losses are included in note 18. In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue Arrangements with Multiple Deliverables," related to the timing of revenue recognition for arrangements in which goods or services or both are delivered separately in a bundled sales arrangement. The EITF requires that when the 106 AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deliverables included in this type of arrangement meet certain criteria they should be accounted for separately as separate units of accounting. This may result in a difference in the timing of revenue recognition but will not result in a change in the total amount of revenue recognized in a bundled sales arrangement. The allocation of revenue to the separate deliverables is based on the relative fair value of each item. If the fair value is not available for the delivered items then the residual method must be used. This method requires that the amount allocated to the undelivered items in the arrangement is their full fair value. This would result in the discount, if any, being allocated to the delivered items. This consensus is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003, which, for AT&T, is July 1, 2003. AT&T is currently evaluating the impact of this consensus on its results of operations, financial position and cash flows. In January 2003, the EITF reached a consensus on EITF 02-18, "Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition." This consensus states that if the additional investment, in whole or in part, represents the funding of prior losses, the investor should recognize previously suspended losses. This determination would be based on various factors including whether the investment results in an increased ownership percentage, the fair value of the consideration received is equivalent to the consideration paid and whether the investment is acquired from a third party or directly from an investee. If any of these provisions are met, the additional investment would generally not be considered as funding prior losses. When appropriate to recognize prior losses, the amount recognized would be limited to the amount of the additional investment determined to represent the funding of prior losses. The consensus will be effective for additional investments made after February 5, 2003. 20. SUBSEQUENT EVENTS In January 2003, AT&T early retired $3.7 billion of long-term notes. In February 2003, AT&T redeemed exchangeable notes that were indexed to AT&T Wireless common stock and subsequently sold its remaining AT&T Wireless holdings. For further information on these items, see notes 7 and 8. 107 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. PART III ITEMS 10 THROUGH 13. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding executive officers of the Company is set forth below. The other information required by Item 10 is incorporated by reference to that portion of the Company's definitive proxy statement for the 2003 annual meeting of shareowners under the captions "Nominees for Election as Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance". EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 1, 2003)
BECAME AT&T EXECUTIVE NAME AGE OFFICER ON - ---- --- -------------- Betsy J. Bernard.................. 47 President 04-01 James W. Cicconi.................. 49 Executive Vice President and General 12-98 Counsel Nicholas S. Cyprus................ 49 Vice President and Controller 01-03 David W. Dorman................... 47 Chairman of the Board and Chief Executive 12-00 Officer Edward M. Dwyer................... 46 Vice President and Treasurer 01-03 Hossein Eslambolchi............... 45 President, AT&T Labs, AT&T Chief Technology 01-03 Officer and AT&T Business Chief Information Officer Robert S. Feit.................... 40 Vice President -- Law and Secretary 01-03 Mirian M. Graddick-Weir........... 47 Executive Vice President, Human Resources 03-99 Thomas W. Horton.................. 41 Senior Executive Vice President and Chief 06-02 Financial Officer Frank Ianna....................... 52 Executive Vice President, Chief Quality 03-97 Officer and President, AT&T Network Services John C. Petrillo.................. 52 Executive Vice President, Corporate 01-96 Strategy and Business Development John Polumbo...................... 51 President and Chief Executive 10-02 Officer -- AT&T Consumer Constance K. Weaver............... 50 Executive Vice President, Public Relations, 10-02 Brand & Business Marketing
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. Cicconi, Dorman, Horton, Polumbo and Ms. Bernard. 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, Chief Executive Officer 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, Hauer & 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 British Telecom, from 1999 to 2000; Chairman, President and 108 Chief Executive Officer 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 2002, Mr. Horton served in various high level management positions of AMR Corporation, the parent company of American Airlines; he was Senior Vice President and Chief Financial Officer from 2000 to 2002, Vice President-Europe Division from 1998 to 2000 and Vice President and Controller from 1993 to 1998. Prior to becoming an Executive Officer of AT&T in 2002, Mr. Polumbo served as Senior Vice President of AT&T Business Global Ventures from September 2001 and prior to joining AT&T, Mr. Polumbo served as President of the Global Services Unit of Concert, from June 1999 to September 2001 and from August 1998 to May 1999 he was President and Chief Operating Officer of Excite, Inc. and from September 1997 to August 1998 was President and Chief Executive Officer of Pacific Bell Wireless (now part of Cingular Wireless). ITEM 11. EXECUTIVE COMPENSATION There is incorporated by reference in this Item 11 that portion of the Company's definitive proxy statement for the 2003 annual meeting of shareowners under the captions "Five Year Performance Graph" and "Executive Compensation". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS There is incorporated by reference in this Item 12 that portion of the Company's definitive proxy statement for the 2003 annual meeting of shareowners under the captions "Stock Ownership of Management and Directors" and "Ownership of Voting Securities in Excess of Five of Five Percent by Beneficial Owners". Securities authorized under equity compensation plans as of December 31, 2002, were as follows: EQUITY COMPENSATION PLAN INFORMATION
(A) (B) (C) NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION PLANS OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES PLAN CATEGORY WARRANTS AND RIGHTS(2) WARRANTS AND RIGHTS(2) REFLECTED IN COLUMN (A))(2) - ------------- ----------------------- ---------------------- --------------------------- (SHARES IN THOUSANDS) Equity compensation plans approved by shareholders.......... 89,756 $40.93 27,751 Equity compensation plans not approved by shareholders(1)....... 0 $ 0 0 ------ ------ ------ Total.............. 89,756 $40.93 27,751 ====== ====== ======
- --------------- (1) With respect to equity compensation plans that AT&T has assumed in connection with mergers, acquisitions or consolidations, the aggregate number of shares of AT&T common stock to be issued upon exercise of outstanding options, warrants and rights outstanding under such plans on December 31, 2002 was 8,500,266 shares and the weighted average exercise price of such outstanding options, warrants and rights was $37.5914, as adjusted for the November 18, 2002 spin-off of AT&T Broadband and AT&T one-for-five reverse stock split. These shares were granted under plans administered by the companies acquired by AT&T and upon acquisition no longer provided shares for future grants. (2) AT&T's 1997 Long Term Incentive Program (as amended, the "1997 LTIP") originally provided for the issuance of 150 million shares of AT&T common stock. In 1999 the Plan was amended to provide for an annual increase in the number of shares available for awards under the 1997 LTIP equal to 1.75% of the number of shares of AT&T common stock outstanding on the first day of each year commencing 109 January 1, 2000. Pursuant to this provision, an additional 61,992,101 shares of AT&T common stock became available for awards on January 1, 2002. The 1997 LTIP limits the number of shares which may be used for awards other than stock options or stock appreciation rights. As of December 31, 2002, 2.8 million shares remained available, as adjusted for the November 18, 2002 spin-off of AT&T Broadband and AT&T one-for-five reverse stock split. The 1997 LTIP is currently the only equity compensation plan under which AT&T grants awards relating to its equity securities. Effective with the November 18, 2002, spin-off of AT&T Broadband, any grants held under these plans by an active AT&T Broadband employee were cancelled effective with the spin-off. Any grants held under these plans by an active AT&T employee were adjusted in accordance with footnote 6 as described in the Summary Compensation Table. All other grants held under these plans that were outstanding on November 18, 2002 were adjusted into stock options exercisable for AT&T common shares and Comcast common shares effective with the November 18, 2002 spin-off of AT&T Broadband and AT&T one-for-five reverse stock split, whereby the aggregate fair market value of the original award immediately prior to the spin-off of AT&T Broadband was maintained. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is incorporated by reference in this Item 13 that portion of the Company's definitive proxy statement for the 2003 annual meeting of shareowners under the captions "Certain Relationships and Related Transactions". PART IV ITEM 14. CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, we completed an evaluation, under the supervision and with the participation of our management including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in alerting them timely to material information required to be included in our Exchange Act filings. There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. ITEM 15. 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.............................. 51 Report of Independent Accountants................. 52 Statements: Consolidated Statement of Operations.............. 54 Consolidated Balance Sheets....................... 55 Consolidated Statements of Changes in Shareowners' Equity............................................ 56 Consolidated Statements of Cash Flows............. 58 Notes to Consolidated Financial Statements........ 59 (2) Financial Statement Schedule: Report of Independent Accountants................. 118 Schedule: II -- Valuation and Qualifying Accounts........... 119
110 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 as 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, Certificate of Amendment of the registrant filed on June 20, 2001 and Certificate of Amendment of the registrant filed on November 18, 2002. (3)b By-Laws of the registrant, as amended March 20, 2003. (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), except for the instruments referred to in 4(i)(1) and 4(i)(2) below. Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument not filed herewith to the SEC upon request. (4)(i)(1) Indenture between American Telephone and Telegraph Company and The Bank of New York, as trustee, dated as of September 7, 1990 (incorporated by reference to Exhibit 4A to Form SE filed September 10, 1990, file no. 33-36756), as supplemented by First Supplemental Indenture dated October 30, 1992 (incorporated by reference to Exhibit 4.AA to Current Report on Form 8-K filed December 1, 1992) and by Second Supplemental Indenture dated November 14, 2002 (incorporated by reference to Exhibit 4.10 to Amendment No. 1 to Form S-4 filed September 26, 2002, file no. 333-97953). (4)(i)(2) Indenture between AT&T Corp. and The Bank of New York, as trustee, dated as of November 1, 2001 (incorporated by reference to Exhibit 4 to Form S-4 filed May 12, 2002, file no. 333-87960). (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).
111 (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). (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).
112 (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). (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).
113 (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). (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 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)36 Employee Benefits Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp. (incorporated by reference to Exhibit (10)(i)37 to Form 10-K for 2001, File No. 1-1105).
114 (10)(i)37 Amended and Restated 364-Day Revolving Credit Facility Agreement, dated as of October 9, 2002, among AT&T Corp., the Lenders party hereto, JPMORGAN CHASE BANK, CITIBANK, N.A., CREDIT SUISSE FIRST BOSTON, CAYMAN ISLANDS BRANCH and GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative Agents, and CITIBANK, N.A., as Paying Agent (incorporated by reference to Form 8-K filed October 10, 2002, File No. 1-1105). (10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to Exhibit (3)b to Form 10-K for 2000, File No. 1-1105).
115 (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 (incorporated by reference to 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 (incorporated by reference to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105), and as amended, restated and renamed AT&T Senior Officer Separation Plan as of January 1, 2003. (10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna dated October 30, 1997 (incorporated by reference to 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 (incorporated by reference to 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 as amended on October 1, 2002 including original agreement dated April 9, 2001 (incorporated by reference to Exhibit (10)(iii)(A)21 to Form 10-K for 2001, File No. 1-1105). (10)(iii)(A)22 Form of Employment Agreement between AT&T Corp. and C. Michael Armstrong dated October 17, 1997 (incorporated by reference to Exhibit (10)(iii)(A)23 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)23 Form of Agreement between AT&T Corp. and C. Michael Armstrong dated November 18, 2002. (10)(iii)(A)24 Liberty Media 401(K) Savings Plan (incorporated 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 (incorporated by reference to 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 (incorporated by reference to Exhibit (10)(iii)(A)26 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)27 Form of Special Deferral Agreement between AT&T Corp. and C. Michael Armstrong dated November 5, 2002. (10)(iii)(A)28 Form of Agreement between AT&T Corp. and Hossein Eslambolchi dated January 4, 2001 including amendment dated March 9, 2001. (10)(iii)(A)29 Form of Special Deferral Agreement between AT&T Corp. and Frank Ianna dated January 16, 2001 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to Exhibit (10)(iii)(A)31 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)32 AT&T Corp. board resolutions adopting change in control provision to various plans effective October 23, 2000 (incorporated by reference to 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 (incorporated by reference to Exhibit (10)(iii)(A)33 to Form 10-K for 2001, File No. 1-1105). (10)(iii)(A)34 Form of Employment Agreement between AT&T Corp. and David Dorman dated May 18, 2001 (incorporated by reference to Exhibit (10)(iii)(A)35 to Form 10-K for 2001, File No. 1-1105) including amendment dated December 31, 2002.
116 (10)(iii)(A)35 Form of Special Equity Agreement between AT&T Corp. and Hossein Eslambolchi dated January 31, 2001. (10)(iii)(A)36 Form of Employment Agreement between AT&T Corp. and Hossein Eslambolchi dated December 28, 1999 including amendment dated January 6, 2000. (10)(iii)(A)37 Form of Agreement between AT&T Corp. and James W. Cicconi dated July 29, 1998. (10)(iii)(A)38 Form of Special Deferral Agreement between AT&T Corp. and James W. Cicconi dated April 2, 2001. (10)(iii)(A)39 AT&T Corp. board resolution approving special payment to Betsy J. Bernard effective on April 1, 2002. (10)(iii)(A)40 Form of Retention Agreement between AT&T Corp. and Frank Ianna effective December 1, 2000. (12) Computation of Ratio of Earnings to Fixed Charges. (21) List of subsidiaries of AT&T. (23a) Consent of PricewaterhouseCoopers LLP. (23b) Consent of KPMG LLP. (23c) Consent of KPMG LLP. (23d) Consent of KPMG LLP. (23e) Consent of PricewaterhouseCoopers LLP. (24) Powers of Attorney executed by officers and directors who signed this report. (99.1) CEO Certification of Periodic Financial Reports (99.2) CFO Certification of Periodic Financial Reports (99.3) AT&T Canada Inc. Financial Statements. (99.4) Liberty Media Corporation Financial Statements. (99.5) Concert B.V. Financial Statements.
Shareowners may access and download without charge on AT&T's wedsite at att.com/ir copies of the proxy statement, portions of which are incorporated herein by reference, and certain Exhibits that have been filed electronically with the Securities and Exchange Commission. AT&T will furnish a copy of any other exhibit at cost. (b) Reports on Form 8-K: During the fourth quarter 2002, Form 8-K dated October 9, 2002 was filed pursuant to Item 5 (Other Events) on October 10, 2002, Form 8-K dated October 22, 2002 was filed pursuant to Item 5 (Other Events) on October 22, 2002, Form 8-K dated October 30, 2002 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on October 30, 2002, Form 8-K dated November 4, 2002 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on November 4, 2002, Form 8-K dated November 6, 2002 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on November 7, 2002, Form 8-K dated November 11, 2002 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on November 12, 2002, Form 8-K dated November 14, 2002 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on November 19, 2002, Form 8-K dated November 18, 2002 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on November 19, 2002, Form 8-K dated November 18, 2002 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on November 19, 2002 and Form 8-K dated November 18, 2002 was filed pursuant to Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements and Exhibits) on December 3, 2002. 117 REPORT OF INDEPENDENT ACCOUNTANTS ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE To the Board of Directors of AT&T Corp.: Our audits of the consolidated financial statements referred to in our report dated January 23, 2003, except for Note 20, as to which the date is February 28, 2003, appearing in the 2002 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 consolidated financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this consolidated 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 January 23, 2003 118 SCHEDULE II -- SHEET 1 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D BALANCE AT CHARGED TO COLUMN E BEGINNING COSTS AND BALANCE AT DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(A) END OF PERIOD - ----------- ---------- ---------- ------------- ------------- (DOLLARS IN MILLIONS) Year 2002 Allowances for doubtful accounts(b).............. $ 809 $1,058 $1,147 $ 720 Deferred tax asset valuation allowance(c)........ $ 34 $ 655 $ -- $ 689 Year 2001 Allowances for doubtful accounts(b).............. $1,164 $ 884 $1,239 $ 809 Deferred tax asset valuation allowance........... $ 18 $ 16 $ -- $ 34 Year 2000 Allowances for doubtful accounts(b).............. $1,179 $ 925 $ 940 $1,164 Deferred tax asset valuation allowance........... $ 99 $ 3 $ 84 $ 18
- --------------- (a) For allowances for doubtful accounts, this column includes amounts written off as uncollectible, net of recoveries. (b) Includes allowances for doubtful accounts on long-term receivables of $51 million, $55 million, and $53 million at December 31, 2002, 2001, and 2000, respectively (included in Other assets in the Consolidated Balance Sheets). (c) The increase in the deferred tax asset valuation allowance in 2002 was primarily due to the asset impairment charge recorded for AT&T's investment in AT&T Latin America. 119 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/ R. S. FEIT ------------------------------------ R. S. FEIT Vice President -- Law and Secretary By: /s/ T. W. HORTON ------------------------------------ T. W. Horton Senior Executive Vice President and Chief Financial Officer By: /s/ N. S. CYPRUS ------------------------------------ N. S. Cyprus Vice President and Controller March 28, 2003 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. PRINCIPAL EXECUTIVE OFFICERS: David W. Dorman* Chairman of the Board and Chief Executive Officer PRINCIPAL FINANCIAL OFFICER: Thomas W. Horton Senior Executive Vice President and Chief Financial Officer PRINCIPAL ACCOUNTING OFFICER: Nicholas S. Cyprus Vice President and Controller DIRECTORS: Kenneth T. Derr* David W. Dorman* M. Kathryn Eickhoff* Frank C. Herringer* Amos B. Hostetter, Jr.* Shirley A. Jackson* Jon C. Madonna* Donald F. McHenry* Tony L. White* March 28, 2003 By: /s/ R. S. FEIT ---------------------------- R. S. Feit (attorney-in-fact)* 120 CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER CERTIFICATIONS AT&T CORP. CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION I, David W. Dorman, certify that: 1. I have reviewed this annual report on Form 10-K of AT&T; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ DAVID W. DORMAN -------------------------------------- Chief Executive Officer Date: March 28, 2002 121 CERTIFICATION I, Thomas W. Horton, certify that: 1. I have reviewed this annual report on Form 10-K of AT&T; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ THOMAS W. HORTON -------------------------------------- Chief Financial Officer Date: March 28, 2002 122 EXHIBIT INDEX (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, Certificate of Amendment of the registrant filed on June 20, 2001 and Certificate of Amendment of the registrant filed on November 18, 2002. (3)b By-Laws of the registrant, as amended March 20, 2003. (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), except for the instruments referred to in 4(i)(1) and 4(i)(2) below. Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument not filed herewith to the SEC upon request. (4)(i)(1) Indenture between American Telephone and Telegraph Company and The Bank of New York, as trustee, dated as of September 7, 1990 (incorporated by reference to Exhibit 4A to Form SE filed September 10, 1990, file no. 33-36756), as supplemented by First Supplemental Indenture dated October 30, 1992 (incorporated by reference to Exhibit 4.AA to Current Report on Form 8-K filed December 1, 1992) and by Second Supplemental Indenture dated November 14, 2002 (incorporated by reference to Exhibit 4.10 to Amendment No. 1 to Form S-4 filed September 26, 2002, file no. 333-97953). (4)(i)(2) Indenture between AT&T Corp. and The Bank of New York, as trustee, dated as of November 1, 2001 (incorporated by reference to Exhibit 4 to Form S-4 filed May 12, 2002, file no. 333-87960). (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). (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). (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). (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 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)36 Employee Benefits Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp. (incorporated by reference to Exhibit (10)(i)37 to Form 10-K for 2001, File No. 1-1105). (10)(i)37 Amended and Restated 364-Day Revolving Credit Facility Agreement, dated as of October 9, 2002, among AT&T Corp., the Lenders party hereto, JPMORGAN CHASE BANK, CITIBANK, N.A., CREDIT SUISSE FIRST BOSTON, CAYMAN ISLANDS BRANCH and GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative Agents, and CITIBANK, N.A., as Paying Agent (incorporated by reference to Form 8-K filed October 10, 2002, File No. 1-1105). (10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105), and as amended, restated and renamed AT&T Senior Officer Separation Plan as of January 1, 2003.
(10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna dated October 30, 1997 (incorporated by reference to 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 (incorporated by reference to 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 as amended on October 1, 2002 including original agreement dated April 9, 2001 (incorporated by reference to Exhibit (10)(iii)(A)21 to Form 10-K for 2001, File No. 1-1105). (10)(iii)(A)22 Form of Employment Agreement between AT&T Corp. and C. Michael Armstrong dated October 17, 1997 (incorporated by reference to Exhibit (10)(iii)(A)23 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)23 Form of Agreement between AT&T Corp. and C. Michael Armstrong dated November 18, 2002. (10)(iii)(A)24 Liberty Media 401(K) Savings Plan (incorporated 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 (incorporated by reference to 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 (incorporated by reference to Exhibit (10)(iii)(A)26 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)27 Form of Special Deferral Agreement between AT&T Corp. and C. Michael Armstrong dated November 5, 2002. (10)(iii)(A)28 Form of Agreement between AT&T Corp. and Hossein Eslambolchi dated January 4, 2001 including amendment dated March 9, 2001. (10)(iii)(A)29 Form of Special Deferral Agreement between AT&T Corp. and Frank Ianna dated January 16, 2001 (incorporated by reference to 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 (incorporated by reference to 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 (incorporated by reference to Exhibit (10)(iii)(A)31 to Form 10-K for 2000, File No. 1-1105). (10)(iii)(A)32 AT&T Corp. board resolutions adopting change in control provision to various plans effective October 23, 2000 (incorporated by reference to 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 (incorporated by reference to Exhibit (10)(iii)(A)33 to Form 10-K for 2001, File No. 1-1105). (10)(iii)(A)34 Form of Employment Agreement between AT&T Corp. and David Dorman dated May 18, 2001 (incorporated by reference to Exhibit (10)(iii)(A)35 to Form 10-K for 2001, File No. 1-1105) including amendment dated December 31, 2002. (10)(iii)(A)35 Form of Special Equity Agreement between AT&T Corp. and Hossein Eslambolchi dated January 31, 2001. (10)(iii)(A)36 Form of Employment Agreement between AT&T Corp. and Hossein Eslambolchi dated December 28, 1999 including amendment dated January 6, 2000. (10)(iii)(A)37 Form of Agreement between AT&T Corp. and James W. Cicconi dated July 29, 1998. (10)(iii)(A)38 Form of Special Deferral Agreement between AT&T Corp. and James W. Cicconi dated April 2, 2001.
(10)(iii)(A)39 AT&T Corp. board resolution approving special payment to Betsy J. Bernard effective on April 1, 2002. (10)(iii)(A)40 Form of Retention Agreement between AT&T Corp. and Frank Ianna effective December 1, 2000. (12) Computation of Ratio of Earnings to Fixed Charges. (21) List of subsidiaries of AT&T. (23a) Consent of PricewaterhouseCoopers LLP. (23b) Consent of KPMG LLP. (23c) Consent of KPMG LLP. (23d) Consent of KPMG LLP. (23e) Consent of PricewaterhouseCoopers LLP. (24) Powers of Attorney executed by officers and directors who signed this report. (99.1) CEO Certification of Periodic Financial Reports. (99.2) CFO Certification of Periodic Financial Reports. (99.3) AT&T Canada Inc. Financial Statements. (99.4) Liberty Media Corporation Financial Statements. (99.5) Concert B.V. Financial Statements.
EX-3.A 3 e84804exv3wa.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 NOVEMBER 18, 2002 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 per 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. 1. Voting Rights. (a) 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. (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 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: (i) 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); (ii) 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 (iii) 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. (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 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. 2. 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. 3. Dividends. (a) 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"). (b) 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. (c) 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. 4. 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. (a) 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): (i) 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; (ii) 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; (iii) 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. 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). (b) 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)). 5. Redemption and Other Provisions Relating to the Liberty Media Group Common Stock. (a) 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. (b) 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: (i) 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 (ii) 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: (A) 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 (B) 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. (c) 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. (d) GENERAL. (i) 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. (ii) 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. (iii) 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. (iv) 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. (v) 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. (vi) 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. (vii) 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. (viii) 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. (ix) 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. (x) 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. (xi) 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. 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) 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. 7. 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. 8. Relationship Between the Liberty Media Group and the Common Stock Group. (a) 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. (b) 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. (c) 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. (d) 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. 9. 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: (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 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; (e) 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; (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 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 66 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: _________________________________ 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%
B91B 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 B92B 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. B93B "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. B94B (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 B95B 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 B96B 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) B97B 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 B98B 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' B99B 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. B100B (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 B101B 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 B102B 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. B103B 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. B104B 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. (A) 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"). (B) Dividends and Distributions. (1) (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. (2) 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. (3) 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. (C) Voting Rights. The holders of shares of Subsidiary Preferred Stock shall have the following voting rights: (1) 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. (2) 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. (3) 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. (D) Certain Restrictions. (1) 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: First: 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; Second: 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; Third: 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 Fourth: 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. (2) 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. (E) 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. (F) 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. (G) Redemption. (1) 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. (2) 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. (3) Any redemption pursuant to this Section 7 shall be pursuant to notice and other procedures as determined by the Board of Directors. (H) 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. (I) 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] CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF AT&T CORP. 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: (1) effect a reverse stock split, pursuant to which every five shares of AT&T Common Stock, par value $1.00 per share, outstanding immediately prior to the reverse stock split will represent one share of AT&T Common Stock, par value $1.00 per share, after the reverse stock split, subject to the payment of cash in lieu of fractional shares. As of the most recent practicable date, November 15, 2002, there was a total of 3,853,170,534.5142 issued shares of AT&T Common Stock, par value $1.00 per share. Giving effect to the reverse stock split and including fractional shares for which shareholders will instead receive cash in lieu thereof, there will be 770,634,106.9028 issued shares of AT&T Common Stock, par value $1.00 per share. (2) reduce the number of authorized common shares of the corporation from 16,400,000,000 to 2,500,000,000, and delete references to the following authorized but unissued classes of common shares of the corporation, which as a result of this change will no longer be authorized classes of common shares of the corporation: 4,000,000,000 shares of Class A Liberty Media Group Common Stock, par value $1.00 per share, 400,000,000 shares of Class B Liberty Media Group Common Stock, par value $1.00 per share and 6,000,000,000 shares of Wireless Group Common Stock, par value $1.00 per share. (b) To effect the foregoing, and certain related technical changes, Article THIRD of the Certificate of Incorporation of the corporation is hereby amended as set forth below: PART A IS HEREBY AMENDED AND RESTATED IN ITS ENTIRETY AS FOLLOWS: "The aggregate number of shares which the corporation is authorized to issue is two billion six hundred million (2,600,000,000) shares, consisting of one hundred million (100,000,000) preferred shares having a par value of $1.00 per share ("Preferred Stock") and two billion five hundred million (2,500,000,000) common shares, of which two billion five hundred million (2,500,000,000) common shares shall be Common Stock having a par value of $1.00 per share ("Common Stock"). Without regard to any other provision of Certificate of Incorporation of the corporation, as the same may be amended from time to time (this "Certificate"), every five shares of Common Stock, either issued and outstanding or held by the Corporation as treasury stock, in each case at the close of trading on November 18, 2002, shall be automatically reclassified as and changed (without any further act) into one fully-paid and nonassessable share of Common Stock, subject to the payment of cash in lieu of fractional shares." PARTS B AND C OF ARTICLE THIRD ARE HEREBY DELETED IN THEIR ENTIRETY, AND PART D OF ARTICLE THIRD IS HEREBY REDESIGNATED AS PART B OF ARTICLE THIRD AND SHALL OTHERWISE REMAIN UNCHANGED. 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 our board of directors. IN WITNESS WHEREOF, we have subscribed this document on November 18, 2002 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/ Robert S. Feit -------------------------- Name: Robert S. Feit Title: Vice President -- Law and Secretary By: /s/ David J. Pester --------------------------- Name: David J. Pester Title: Assistant Secretary EX-3.B 4 e84804exv3wb.txt BY-LAWS EXHIBIT 3(b) BY-LAWS - AT&T CORP. AS AMENDED BY THE BOARD OF DIRECTORS ON DECEMBER 6, 2000, JANUARY 25, 2001, NOVEMBER 14, 2002 AND MARCH 20, 2003 ARTICLE I. MEETING OF SHAREHOLDERS Section 1. The annual meeting of the shareholders of the company shall be held on such date, at such time and at such place as may be fixed by resolution of the Board of Directors. A notice of the annual meeting as approved by the Board of Directors shall be mailed not less than ten nor more than sixty days before the meeting, directed to each shareholder entitled to vote at said meeting at his address as it appears on the record of shareholders unless he shall have filed with the Secretary a written request that notices intended for him be mailed to some other address, in which case it shall be directed to him at such other address. Section 2. The Board of Directors may fix, in advance, a date not more than sixty nor less than ten days before the date of any meeting of the shareholders as the record date for determination of shareholders entitled to notice of or to vote at such meeting, and only shareholders of record on such date shall be entitled to notice of or to vote at such meeting. Section 3. Subject to the rights of the holders of any series of stock having a preference over the common stock and except as may otherwise be required by law, special meetings of the shareholders may be called at any time only by the Chairman of the Board or the Board of Directors. The meeting shall be held at such place within or without the State of New York as may be designated in the notice of the meeting. A notice of not less than ten nor more than sixty days shall be given by mail for each special meeting, in the manner provided for notice of the annual meeting. Such notice shall state the purpose or purposes for which the meeting is called and the time when and the place where it is to be held and shall indicate that the notice is being issued by or at the direction of the person or persons calling the meeting. Section 4. Failure to receive notice of any meeting shall not invalidate the meeting. Section 5. (A) Nominations of persons for election to the Board of Directors of the company and notice of shareholders business at meetings of shareholders shall be governed by the provisions of this By-Law. (1) Nominations of persons for election to the Board of Directors of the company, and the proposal of business to be considered by the shareholders, may be made at an annual meeting of shareholders only (a) pursuant to the company's notice of meeting pursuant to Article I of these By-Laws, (b) by or at the direction of the Board of Directors or (c) by any shareholder of the company who was a shareholder of record at the time of giving notice provided for in this By-Law, -more- -2- who is entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (c) of paragraph (A)(1) of this By-Law, the shareholder must have given timely notice thereof in writing to the Secretary of the company and such other business must otherwise be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the company not later than the close of business on the 90th calendar day nor earlier than the close of business on the 120th calendar day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 calendar days before or more than 60 calendar days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th calendar day prior to such annual meeting but not later than the close of business on the later of the 90th calendar day prior to such annual meeting or the 10th calendar day following the calendar day on which public announcement of the date of such meeting is first made by the company. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any description of any other business desired to be brought before the meeting, the reasons for conducting such other business at the meeting and any material interest in such other business of such shareholder and beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the company's books, and of such beneficial owner and (ii) the class and number of shares of the company which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the company is increased and there is no public announcement by the company naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the company not later than -3- the close of business on the 10th day following the day on which such public announcement is first made by the company. (B) Special Meetings of Stockholders. Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected pursuant to the company's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any shareholder of the company who is a shareholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the company calls a special meeting of shareholders for the purpose of electing one or more directors to the Board of Directors, any such shareholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the company's notice of meeting, if the shareholder's notice required by paragraph (A)(2) of this By-Law shall be delivered to the Secretary at the principal executive offices of the company not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a shareholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this By-Law shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights (i) of shareholders to request inclusion of proposals in the company's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. Section 6. The Chairman of the Board of Directors may postpone or adjourn any meeting of the shareholders from time to time, whether or not a quorum is present. The chair of the meet- -4- ing shall determine all matters relating to the efficient conduct of the meeting, including but not limited to the maintenance of order and decorum. ARTICLE II. THE CONDUCT OF SHAREHOLDERS' MEETINGS At all meetings of the shareholders, the holders of forty per centum of the shares entitled to vote thereat shall constitute a quorum, except as otherwise required by law; but the shareholders present may adjourn the meeting to another time or place despite the absence of a quorum. Every shareholder entitled to vote shall be entitled to one vote for each share standing in his name on the record of shareholders; and every shareholder entitled to vote may vote in person or by proxy. At all meetings of shareholders, a shareholder, or such person's duly authorized attorney in fact, may vote by proxy, executed in writing or granted or authorized in such other manner as is prescribed by the Business Corporation Law of the State of New York. Except as otherwise required by law or as specified in the company's certificate of incorporation, every shareholder entitled to vote shall be entitled to one vote for each share standing in his name on the record of shareholders; and every shareholder entitled to vote may vote in person or by proxy. ARTICLE III. INSPECTORS The Board of Directors, in advance of any shareholders' meeting, shall appoint one inspector to act at the meeting or any adjournment thereof. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the person presiding thereat. ARTICLE IV. THE BOARD OF DIRECTORS Section 1. The business of the company shall be managed under the direction of its Board of Directors, who shall be elected by the shareholders at the annual meeting. Section 2. The number of Directors shall be not less than nine nor more than twenty-five, the exact number of Directors within such minimum and maximum limits to be fixed and determined by the vote of a majority of the entire Board. -5- ARTICLE V. MEETINGS OF DIRECTORS Section 1. Regular meetings shall be held at such times and places as the Board may determine. Section 2. Special meetings of the Directors may be called at any time by the Chairman of the Board, or by two members of the Executive Committee, and shall be called by the Chairman of the Board, or by the Secretary, forthwith upon request in writing signed by two Directors and specifying the object of the meeting. At least three days' notice of a special meeting shall be given in the manner provided for herein. Section 3. Any notice of a meeting of Directors required to be given may be given to each Director by mail or telegraph, addressed to him at his residence or usual place of business, or in person or by telephone, stating the time and place of the proposed meeting. Section 4. One-third of the entire Board shall constitute a quorum. Section 5. Meetings of the Directors may be held within or without the State of New York. Section 6. Any one or more members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board shall be filed with the minutes of the proceedings of the Board. ARTICLE VI. EXECUTIVE COMMITTEE AND OTHER COMMITTEES The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from their number an Executive Committee and other committees, and may determine the quorum thereof. Any such committee shall consist of three or more members and shall serve at the pleasure of the Board. The Chairman of the Board, one or more Vice Chairmen of the Board and the President, if any, shall be members of the Executive Committee. The Executive Committee shall, except as otherwise provided by law or by resolution of the Board, have all the authority of the Board of Directors during the intervals between the meetings of the Board. The Executive Committee shall keep a record of its proceedings, which shall from time to time be reported to the Board of Directors. The Chairman of the Board shall preside at the meetings of the Executive Committee. -6- Committees other than the Executive Committee shall, except as otherwise provided by law, have such authority as shall be provided by resolution of the Board. The Board may designate from time to time one or more Directors as alternate members of the Executive Committee or of any other committee, who may replace any absent member or members at any meeting of the committee. Any one or more members of the Executive Committee or any other committee established by the Board pursuant to this Article VI may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. Any action required or permitted to be taken by the Executive Committee or any other committee established by the Board pursuant to this Article VI may be taken without a meeting if all members of the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and written consents thereto shall be filed with the minutes of the proceedings of the committee. The Board of Directors shall form a Capital Stock Committee, which committee shall consist of one director elected pursuant to Section 7.15 of the Agreement and Plan of Restructuring and Merger, dated June 23, 1998, among the Corporation, Italy Merger Corp. and Tele-Communications, Inc. and three directors who are not current or former officers, directors or employees of the Corporation or any of its affiliates, or otherwise affiliated with the Corporation (other than as members of the Board of Directors or any committee thereof). The Liberty Media Group Capital Stock Committee shall have the authority of the Board of Directors to (i) interpret, make determinations under, and oversee the implementation of the policies set forth in the policy statement regarding Liberty Media Group tracking stock matters adopted by resolution of a majority of the entire Board, and (ii) to the extent permitted by law, to take all actions required to be taken by the Board of Directors of the company in connection with authorization of the issuance of shares of Liberty Media Group tracking stock. The Board of Directors may form an AT&T Wireless Group Capital Stock Committee, the members of which shall be selected by the board of directors. The Board may delegate to the AT&T Wireless Group Capital Stock Committee the authority to, and the AT&T Wireless Group Capital Stock Committee will thereby have the authority to, (i) interpret, make determinations under, and oversee the implementation of the policies set forth in the Policy Statement Regarding AT&T Wireless Group Tracking Stock Matters; (ii) review the policies, programs and practices of the company relating to (a) the business and financial relationships between the company or any of its units (other than the Liberty Media Group) and the AT&T Wireless Group, (b) dividends in respect of, disclosures to shareholders and the public concerning, and transactions by the company or any of its subsidiaries (other than subsidiaries included in the Liberty Media Group) in, shares of AT&T Wireless Group Tracking Stock, and (c) any matters arising in connection therewith, all to the extent the AT&T Wireless Group Capital Stock Committee may deem appropriate; and (iii) recommend such changes in such policies, programs and practices as the AT&T Wireless Group Capital Stock Committee may deem appropriate. In performing this function, the AT&T Wireless Group Capital Stock Committee's role shall not be to make deci- -7- sions concerning matters referred to its attention, but, rather, to oversee the process by which decisions concerning such matters are made. The AT&T Wireless Group Capital Stock Committee shall have and may exercise such other powers, authority and responsibilities as may be determined from time to time by the Board of Directors. ARTICLE VII. OFFICERS OF THE COMPANY Section 1. The officers of the company shall be elected by the Board of Directors, and may consist of a Chairman of the Board, one or more Vice Chairmen of the Board, a President, such number of Executive Vice Presidents and Senior Vice Presidents as the Board of Directors shall from time to time determine, a Secretary, a Treasurer and a Controller. The officers shall hold office until their successors have been elected. Section 2. The Board of Directors may appoint one or more Assistant Secretaries, one or more Assistant Treasurers, one or more Assistant Controllers, and such other officers and agents as the Board may consider necessary. ARTICLE VIII. DUTIES OF THE CHAIRMAN OF THE BOARD, PRESIDENT, VICE CHAIRMEN OF THE BOARD, EXECUTIVE VICE PRESIDENTS AND SENIOR VICE PRESIDENTS Section 1. The Chairman of the Board shall be the chief executive officer of the company and shall have such authority and perform such duties as usually appertain to the chief executive office in business corporations. He shall preside at the meetings of the Board of Directors and he, or such officer as he may designate from time to time, shall preside at meetings of the shareholders. Section 2. The President, Vice Chairmen of the Board, Executive Vice Presidents and Senior Vice Presidents shall perform such duties as the Board of Directors or Chairman of the Board may from time to time determine. Section 3. In case of absence or inability of the Chairman of the Board, the President shall possess all the authority of the Chairman of the Board. ARTICLE IX. DUTIES OF THE TREASURER AND ASSISTANT TREASURERS Section 1. The Treasurer shall receive all the funds of the company, and shall disburse them under the direction of the Board of Directors. All disbursement instruments shall be signed by such person or persons and in such manner as the Board may from time to time provide. Section 2. The Treasurer shall keep full and regular books, showing all his receipts and disbursements, which books shall be open at all times to the inspection of the Chairman of the -8- Board or of any member of the Board of Directors; and he shall make such reports and perform such other duties as the Chairman of the Board or Board of Directors may require. Section 3. The Treasurer shall deposit all moneys received by him, in the corporate name of the company, with such depositories as shall be approved from time to time by the Board of Directors or by the Chairman of the Board, the President, a Vice Chairman of the Board or the Treasurer. Section 4. Assistant Treasurers shall have such of the authority and perform such of the duties of the Treasurer as may be provided in these By-Laws or assigned to them by the Board of Directors or the Chairman of the Board or by the Treasurer upon the approval of the Chairman of the Board, the President or a Vice Chairman of the Board. During the Treasurer's absence or inability, his authority and duties shall be possessed by such Assistant Treasurer or Assistant Treasurers as the Board of Directors, the Chairman of the Board, the President or a Vice Chairman of the Board may designate. Section 5. The Board of Directors may require the Treasurer and Assistant Treasurers to give such security for the faithful performance of their duties as the Board shall from time to time determine. ARTICLE X. DUTIES OF THE SECRETARY AND ASSISTANT SECRETARIES Section 1. The Secretary shall send notice to the shareholders of all annual and special meetings, and to the Directors of meetings of the Board where notice is required to be given; and he shall perform such other duties as may be required of him by the Chairman of the Board or Board of Directors, and such as usually appertain to the office of Secretary. Section 2. The Secretary or in his absence an Assistant Secretary shall keep an accurate record of the proceedings of the Board of Directors and of the Executive Committee, and of all meetings of shareholders, and shall have the custody of the seal of the company and affix it to all instruments requiring the seal. Section 3. Assistant Secretaries shall have such of the authority and perform such of the duties of the Secretary as may be provided in these By-Laws or assigned to them by the Board of Directors or the Chairman of the Board or by the Secretary upon the approval of the Chairman of the Board, the President or a Vice Chairman of the Board. During the Secretary's absence or inability, his authority and duties shall be possessed by such Assistant Secretary or Assistant Secretaries as the Board of Directors, the Chairman of the Board, the President or a Vice Chairman of the Board may designate. ARTICLE XI. DUTIES OF THE CONTROLLER The Controller shall be the principal accounting officer of the company and shall perform such duties as may be required of him by the Chairman of the Board or Board of Directors. -9- ARTICLE XII. TRANSFER OF SHARES Section 1. Shares shall be issued by the Treasurer in uncertificated form pursuant to the customary arrangements for issuing shares in such form. Shares shall be transferable only on the record of shareholders of the company by the holder thereof in person or by attorney, upon compliance with the customary procedures for transferring shares in uncertificated form or upon surrender of the outstanding certificate therefore. Section 2. In case of the loss of a certificate, a new certificate may be issued upon such terms as the Board of Directors may prescribe. ARTICLE XIII. INDEMNIFICATION OF DIRECTORS AND OFFICERS The company is authorized, by (i) a resolution of shareholders, (ii) a resolution of Directors, or (iii) an agreement providing for such indemnification, to the fullest extent permitted by applicable law, to provide indemnification and to advance expenses to its Directors and officers in respect of claims, actions, suits or proceedings based upon, arising from, relating to or by reason of the fact that any such Director or officer serves or served in such capacity with the company or at the request of the company in any capacity with any other enterprise. ARTICLE XIV. SEAL The common seal of the company shall be in the following form. ARTICLE XV. AMENDMENTS These By-Laws may be amended by the shareholders at any meeting; or by the Board of Directors at any meeting by a majority vote of the full Board, or at two successive meetings of the Board by a majority vote of a quorum present, provided that the third paragraph of Article II shall not be rescinded, amended or waived except at a shareholders meeting in accordance with applicable state law. The notice of a special meeting of the Board at which such action is to be taken shall set forth the substance of the proposed amendment. EX-10.III.A.18 5 e84804exv10wiiiwaw18.txt SENIOR OFFICER SEVERANCE PLAN EXHIBIT 10(iii)(a)18 AT&T SENIOR OFFICER SEPARATION PLAN PLAN DOCUMENT AND SUMMARY PLAN DESCRIPTION (AMENDED AND RESTATED AS OF JANUARY 1, 2003) THIS DOCUMENT, LIKE ALL COMPANY PLANS, PERSONNEL POLICIES OR PRACTICES, IS NOT A CONTRACT OF EMPLOYMENT. IT IS NOT INTENDED TO CREATE, AND IT SHOULD NOT BE CONSTRUED TO CREATE, ANY CONTRACTUAL RIGHTS TO CONTINUED EMPLOYMENT, EITHER EXPRESS OR IMPLIED, BETWEEN THE COMPANY AND ITS EMPLOYEES. AT AT&T CORP., THE EMPLOYMENT RELATIONSHIP WITH EMPLOYEES COVERED BY THIS PLAN IS "AT-WILL." THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO QUIT THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON, AND THE COMPANY RESERVES THE RIGHT TO TERMINATE ANY EMPLOYEE'S EMPLOYMENT, WITH OR WITHOUT CAUSE, AT ANY TIME FOR ANY REASON, SUBJECT TO THE RIGHTS OF ELIGIBLE SENIOR OFFICERS TO BENEFITS PROVIDED BY THIS PLAN. IN THE EVENT THERE IS A CONFLICT BETWEEN STATEMENTS IN THIS PLAN AND THE TERMS OF ANY OTHER BENEFIT PLAN, POLICY, OR PRACTICE, THE APPLICABLE BENEFIT PLAN, POLICY OR PRACTICE PROVIDING THE BENEFITS IN QUESTION WILL CONTROL. AT&T CORP. RESERVES THE RIGHT, AT ANY TIME, TO MODIFY, SUSPEND, CHANGE, OR TERMINATE ITS EMPLOYEE BENEFIT PLANS OR EXECUTIVE LEVEL INCENTIVE, BENEFIT AND/OR PERQUISITE PLANS, PROGRAMS, POLICIES OR PRACTICES. AT&T Senior Officer Separation Plan 1 Proprietary (Restricted) AT&T SENIOR OFFICER SEPARATION PLAN PLAN DOCUMENT AND SUMMARY PLAN DESCRIPTION A. OVERVIEW The AT&T Senior Officer Separation Plan, which includes the attached Appendix A, Appendix B and Appendix C, and Schedule 1 (collectively, the "Plan"), which was originally adopted as of October 9, 1997 and periodically amended, is now amended and restated, effective January 1, 2003 ("Effective Date"). The Plan is designed to provide certain supplemental payments and benefit enhancements to eligible senior management employees of AT&T Corp. ("AT&T") and its Affiliates (as defined below) who are designated by the Board of Directors of AT&T Corp. (the "Board") as eligible to participate in this Plan ("Senior Officers"), and whose employment is terminated under circumstances set forth in this Plan. In this Plan, AT&T, and, in the event of a "Change in Control" of AT&T Corp., as that term is defined in the AT&T 1997 Long Term Incentive Program in effect as of October 23, 2000 ("CIC"), the successor to AT&T, and its subsidiaries and affiliates, are referred to collectively as the "Company". A Senior Officer will become eligible for benefits under this Plan only if the conditions for eligibility, as set forth in Section E of this Plan, are met. Appendix A to this Plan contains certain specific provisions for the operation of the Plan following a CIC which become operative as a result of the CIC, including provisions regarding eligibility to receive benefits. This Plan supersedes all prior versions of the AT&T Senior Officer Separation Plan (previously named the AT&T Senior Officer Severance Plan). Except as otherwise expressly provided pursuant to this Plan, this Plan shall be construed and administered in a manner which avoids duplication of compensation and benefits which may be provided under any other plan, program, policy, or other arrangement. In the event a Participant is covered by an individual arrangement in effect as of his or her Final Payroll Date that may duplicate the Severance Payment provided for in Section F.1, or certain of the post-termination benefits provided for in Sections F.2 - F.11, or the Severance Payment or benefits provided by Appendix A, the Executive Vice President - Human Resources is specifically empowered to reduce or eliminate the duplicative benefits provided for under the Plan. In taking such action, the Executive Vice President - Human Resources will be guided by the principles that (1) such a Participant will be AT&T Senior Officer Separation Plan 2 Proprietary (Restricted) treated, for the purpose of the Sections specified above, no more or no less favorably than are other Participants who are not covered by such individual arrangements and (2) individual arrangement provisions (e.g., individual pension/deferral accounts) which are not duplicative of the Severance Payment provided for in Section F.1, or the post-termination benefits specified in Sections F.2 - F.11, or the Severance Payment or benefits provided by Appendix A, will not be considered in determining elimination and/or reductions in Plan benefits. B. DEFINITIONS For purposes of this Plan: "Affiliate" means any entity that is within AT&T's controlled group of corporations within the meaning of Section 1563 of the Internal Revenue Code of 1986, as amended (the "Code"). "Cause" means: (i) commission of a crime, or conviction of a crime, including by a plea of guilty or nolo contendere, involving theft, fraud, dishonesty or moral turpitude; (ii) intentional or grossly negligent disclosure of confidential or trade secret information of the Company to anyone not entitled to such information; (iii) omission or dereliction of any statutory or common law duty of loyalty to the Company; (iv) violation of the Company's Code of Conduct or any other written Company policy; or (v) repeated failure to carry out the Senior Officer's duties despite specific instruction to do so. "Eligible for Retirement-Related Benefits" means that a Participant, or a CIC Eligible Senior Officer, has satisfied the minimum age and service requirements for the benefits provided under the terms of the AT&T Corp. Post Retirement Welfare Benefits Plan, or the successor to such plan, as amended from time to time, as of his or her Final Payroll Date. "Final Payroll Date" means the date the Participant or the CIC Eligible Senior Officer actually terminates employment with the Company in accordance with the terms and conditions of this Plan, including Appendix A, if applicable. AT&T Senior Officer Separation Plan 3 Proprietary (Restricted) "Good Reason" shall mean the occurrence of either of the following events without the Senior Officer's express written consent: (i) the material reduction of the Senior Officer's authority or responsibility; or (ii) a Reduction in Compensation (as defined below). Whether a reduction in a Senior Officer's authority or responsibility is material shall be determined in accordance with the criteria established by AT&T's Executive Vice President - Human Resources and set forth in Schedule 1 to this Plan; provided, however, that (1) the Company's decision not to continue an Operations Group (or similar governance body); or (2) changes in reporting relationships; or (3) a reduction in the Participant's business unit's budget or a reduction in the Participant's business unit's head count, by themselves, do not constitute Good Reason. "Participant" means a senior management employee who has been designated by the Board (or the successor to the Board) as an individual who is eligible to participate in this Plan. "Participant Notification Form" means the form indicating that a Senior Officer has been designated as an individual whose employment is being terminated pursuant to the terms of this Plan, or who has elected to terminate employment for Good Reason. "Reduction in Compensation" shall mean a reduction in the Participant's "Total Annual Compensation" (defined as the sum of the Participant's Annual Base Salary Rate, Target Annual Incentive and "Target Annual Long Term Incentive Grants" (or their equivalent within the context of a successor employer's compensation plans and programs)) for any calendar or fiscal year, as applicable, to an amount that is less than the Senior Officer's Total Annual Compensation that existed immediately prior to such reduction. For purposes of this definition, the dollar value of the "Target Annual Long Term Incentive Grants" shall mean, in general, compensatory equity-based incentive compensation, however, it could also include cash long term incentives, but 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, Restricted 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"), or other such management committee or committee of the Board Of Directors or duly authorized officer of the successor to AT&T Corp., when authorizing such grants, and assuming 100% performance achievement if such grants include performance criteria. For the purposes of this definition, Stock Options and Stock Appreciation Rights will AT&T Senior Officer Separation Plan 4 Proprietary (Restricted) be valued by the Black-Scholes methodology (and related share price) as utilized in the materials presented to the Committee, or other such management committee or committee of the Board Of Directors or duly authorized officer of the successor to AT&T Corp., when authorizing such grants. "Termination Year" means the calendar year during which the Participant's or CIC Eligible Senior Officer's Final Payroll Date occurs. C. TYPE OF PLAN This Plan is intended to be, and shall be interpreted as an unfunded employee welfare benefit plan under Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Section 2520.104-24 of the Department of Labor Regulations, maintained primarily for the purpose of providing employee welfare benefits, to the extent that it provides welfare benefits and, under Sections 201, 301 and 401 of ERISA, as a plan that is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, to the extent that it provides other benefits. D. PLAN PARTICIPATION An individual shall participate in this Plan if he or she is designated by the Board (or the successor to Board) as being eligible to participate in the Plan. The Board, or its delegate, shall have complete discretionary authority to remove an individual from participation and eligibility for benefits under the Plan. For a period of two years following a CIC, an individual cannot be removed from Participation. The Board, or its delegate, shall have complete discretionary authority to determine if and when, and to what organizations, positions and groups of senior management employees, this Plan is to be applied. E. ELIGIBILITY TO RECEIVE BENEFITS 1. BASIC ELIGIBILITY REQUIREMENTS A Participant or CIC Eligible Senior Officer will receive the payments and benefits described in this Plan, including any benefits that may be provided pursuant to the terms of Appendix A hereto, only if the conditions listed in clause (i) or (ii) and the condition listed in clause (iii) below are satisfied: AT&T Senior Officer Separation Plan 5 Proprietary (Restricted) (i) The Senior Officer terminates his or her employment with the Company at the initiation of the Company, in accordance with the terms and conditions of this Plan, other than (a) with eligibility for benefits under any AT&T long term disability plan, or (b) for Cause. A Senior Officer, other than a CIC Eligible Senior Officer, shall receive a Participant Notification Form that shall indicate his or her termination pursuant to the terms of this Plan. The Participant Notification Form shall include the Participant's Final Payroll Date; or (ii) The Senior Officer elects to terminate his or her employment with the Company for Good Reason, having satisfied the Notification provisions set forth below and having obtained the Company's agreement that the Senior Officer has Good Reason to terminate employment, or, in the absence of such agreement, having successfully arbitrated his or her claim that Good Reason occurred, pursuant to the provisions of Section M. In such event, the Senior Officer shall receive a Participant Notification Form which shall include the Participant's Final Payroll Date; and (iii) The Senior Officer executes a Waiver and Release ("Release") (a copy of which is attached as Appendix B), and the time during which the Senior Officer may revoke the Release has expired without revocation. Notwithstanding the foregoing, the Senior Officer shall remain subject to the forfeiture and repayment provisions set forth in Section J of this Plan. 2. NOTIFICATION REQUIREMENTS FOR TERMINATION FOR GOOD REASON In the event a Senior Officer determines that Good Reason exists to elect to terminate his or her employment with the Company, the Senior Officer must notify the Executive Vice President - Human Resources in writing of the specific event which the Senior Officer believes constitutes Good Reason within thirty (30) days of the occurrence of such event. Within ten (10) business days of the Company's receipt of such written notice, the Company shall notify the Senior Officer that it agrees or disagrees with the Senior Officer's determination that the event specified in the Senior Officer's notice constitutes Good Reason. The Company shall have thirty (30) days from its receipt of the Senior Officer's written notice in which to remedy any event specified in such notice as constituting Good Reason. The Company's notification that it agrees with the Senior Officer's determination shall state whether or not it will take action to remedy the event constituting Good Reason. In the event the Company notifies the Senior Officer that it agrees with the Senior Officer's determination that the event specified in the Senior Officer's notice constitutes Good Reason, but will not take action to remedy the event, the AT&T Senior Officer Separation Plan 6 Proprietary (Restricted) Senior Officer shall receive a Participant Notification Form within five business days thereafter, which shall include the Participant's Final Payroll Date, which date shall be two weeks from the date of delivery of the Participant Notification Form, or such earlier or later date as the Company and the Senior Officer shall mutually agree. In the event the Company notifies the Senior Officer that it disagrees with the Senior Officer's determination that the event specified in the Senior Officer's notice constitutes Good Reason, or in the event the Senior Officer believes that the corrective actions taken by the Company fail to adequately address the event claimed to constitute Good Reason specified in the Senior Officer's notice, the procedures set forth in Sections L and M of this Plan shall apply. If the Senior Officer's claim or arbitration is ultimately concluded in the Senior Officer's favor, the Senior Officer shall receive a Participant Notification Form, which shall include the Participant's Final Payroll Date. F. PLAN PAYMENTS AND BENEFITS A Participant who satisfies the conditions for receipt of benefits or payments under Section E shall be entitled to the following: 1. SEVERANCE PAYMENT A Participant shall receive a severance payment under this Section F.1 that will equal two hundred percent (200%) of the sum of (i) the Participant's annual base salary rate, plus (ii) the Participant's target annual incentive, (such sum to be referred to as the "Severance Payment"), in each case, determined as of the Participant's Final Payroll Date, as indicated on the Participant Notification Form; provided, however, that if a Participant's termination for Good Reason results from a Reduction in Compensation, a Participant's base salary and target annual incentive shall be determined as of the date immediately prior to such Reduction in Compensation. The Severance Payment will be paid in a single lump sum as soon as administratively feasible after expiration of the revocation period indicated in the Participant's Release without revocation, unless deferral of such Severance Payment is elected in accordance with Section F.2 below. 2. DEFERRAL OPTION The Participant may elect to defer receipt of the Severance Payment. The Participant's written election must be submitted to the AT&T Executive Benefits Organization not later than the day prior to the date on which the Release is executed. A copy of the election form to be completed is attached as Appendix C. Deferral may be for a period of up to five (5) years following the Participant's Final Payroll Date, in whole year increments. Payout of the deferred Severance Payment may be in the form of a lump sum, or up to a maximum of five (5) approximately equal annual installments, as indicated on the election form. AT&T Senior Officer Separation Plan 7 Proprietary (Restricted) The first installment from the deferred account (or the single payment, if the Participant so elected), including interest thereon, will be paid by the end of the calendar quarter which immediately follows the calendar quarter in which the first, second, third, fourth or fifth anniversary (as so elected by the Participant) of the Participant's Final Payroll Date occurs. All unpaid deferred amounts will continue to accrue interest at the rate of return set forth below. In the event of a Participant's death prior to the payment of all deferred amounts, the unpaid balance shall be paid to his or her named beneficiary (or to his or her estate, if no beneficiary has been named) in a lump sum not later than the end of the calendar quarter immediately following the calendar quarter in which the AT&T Executive Benefits Organization receives written notice of such death. For individuals designated as Senior Officers as of January 1, 2003, deferred amounts will be credited quarterly with interest equal to one-quarter (1/4) of the average rate applicable to actively traded 10-year US Treasury Notes for the prior calendar quarter, plus 1.25 percent. For an individual who is designated as a Senior Officer after January 1, 2003, the interest rate credited on their deferred amounts will be as determined by the Board. The crediting of interest on deferred amounts, commencing with the Participant's Final Payroll Date, shall be calculated in accordance with rules and procedures determined by the Company in its sole and absolute discretion. Participants who elect to defer amounts under this arrangement shall be unsecured general creditors of the Company. The Company shall establish for each such Participant, an unfunded bookkeeping account to which deferred amounts (and interest) will be credited, but the Company shall have no obligation to fund or set aside assets for the payment of any deferred amounts under this arrangement. 3. ANNUAL BONUS A Participant who has performed at least eighty eight (88) consecutive days of service to the Company during his or her Termination Year, will be eligible to receive a prorated portion of the annual incentive applicable to the Termination Year based on the Participant's time on the active payroll during the Termination Year, in an amount equal to the product of the actual achievement level for the Participant's annual incentive for such year, as determined by the Company in its sole discretion, multiplied by a fraction, the numerator of which is the number of completed months of the Participant's employment during the Termination Year (including the last month of employment if the Participant's Final Payroll Date is on or after the 15th of the month) and the denominator of which is 12. Such amount shall be payable during the first quarter of the following year, in accordance with existing practices and terms of the AT&T Short Term Incentive Plan. AT&T Senior Officer Separation Plan 8 Proprietary (Restricted) If a Participant's Final Payroll Date occurs prior to the payment of his or her annual incentive with respect to the year preceding his or her Termination Year, such Participant will be eligible to receive such annual incentive, which shall be paid at the same time as such annual incentive is paid to other actively employed senior management employees. 4. OUTSTANDING LONG TERM INCENTIVES a) GENERAL - Subject to the provisions of paragraphs (b), (c), (d), (e), (f), (g), (h) and (i) of this Section F.4, following a Participant's Final Payroll Date, the Participant shall retain any performance shares, stock units, unexercised options to purchase AT&T common stock, restricted stock and restricted stock units payable or redeemable in shares of AT&T common stock, cash equivalent awards, and any other awards granted as part of a standard annual grant, as a special recognition or retention grant, or in connection with AT&T's offer of employment to such Participant, under any AT&T long term incentive program (other than the AT&T Wireless Adjustment Plan, the terms of which shall govern any grants under such plan), including any plan previously maintained by McCaw, LIN, TCG, TCI or MediaOne ("Long Term Incentives"), and which remain outstanding as of such Participant's Final Payroll Date. Except as otherwise specified in paragraphs (b), (c), (d), (e), (f), (g), (h) and (i) of this Section F.4, all grants under any AT&T long term incentive program, or the successor to such program, shall remain subject to the same terms and conditions of the original grant agreements, including any modifications or amendments to such grant agreements which become effective on or prior to such Participant's Final Payroll Date. b) PERFORMANCE SHARES (i) Performance shares granted on or after January 1, 2002 shall be prorated based on the number of full months of employment in the performance period (including the last month if the Participant's Final Payroll Date is on or after the 15th of the month) and distributed to the Participant as soon as practicable following the Participant's Termination Year, in accordance with the terms and conditions of the performance share award agreement. The payout level, if any, for the award will be determined by the level of performance criteria met from the beginning of the applicable performance period through the end of Participant's Termination Year. AT&T Senior Officer Separation Plan 9 Proprietary (Restricted) (ii) Performance shares granted prior to January 1, 2002 shall be retained and shall be paid, if any payment is due, as and when they would otherwise have been paid pursuant to the terms of such grant agreements. Retained performance shares shall remain subject to achievement of the performance criteria established as part of the original grant. c) STOCK OPTIONS - A Participant shall become immediately vested, as of his or her Final Payroll Date and upon expiration of the revocation period indicated in the Release without revocation, in all outstanding options to purchase AT&T common stock. All retained stock options shall remain exercisable for the remainder of the original term of the grant. d) RESTRICTED STOCK AWARDS - A Participant shall become vested, as of his or her Final Payroll Date, and upon expiration of the revocation period indicated in the Release without revocation, in each award of restricted stock. Shares related to the vested restricted stock awards under this Section F.4(d) will be distributed to a Participant as soon as administratively feasible after they become vested. e) RESTRICTED STOCK UNITS - Restricted stock units granted on or after January 1, 2003 that contain terms requiring the proration of such restricted stock units upon termination of employment from the Company under a force management plan or program, shall be prorated according to the terms of such grant. Such resulting restricted stock units that will be retained, and other outstanding restricted stock units not subject to proration, shall become vested, as of Participant's Final Payroll Date and upon expiration of the revocation period indicated in the Release without revocation. Shares related to the vested restricted stock units under this Section F.4(e) will be distributed to the Participant as soon as administratively feasible after they become vested. The balance of the prorated restricted stock units that will not be retained and will not be vested under this Section F.4(e) shall be canceled. f) CASH AWARDS/PAYMENTS - Cash awards/payments, including cash retention, unpaid signing bonuses and any other cash payments or awards which have not yet been paid, will vest as of the Participant's Final Payroll Date and upon expiration of the revocation period indicated in the Release without revocation, and will be paid as soon as administratively feasible following such revocation period. AT&T Senior Officer Separation Plan 10 Proprietary (Restricted) g) OTHER PERFORMANCE-DEPENDENT AWARDS - The unvested portion of any other special, performance-dependent equity and/or cash award(s) granted to a Participant shall become vested, as of his or her Final Payroll Date, and upon expiration of the revocation period indicated in the Release without revocation. The vested portion of any other such award will be administered in accordance with the terms of the grant. h) AT&T WIRELESS EQUITY - Options to purchase shares of common stock of AT&T Wireless Services, Inc. shall be governed by the terms of the AT&T Wireless Services Adjustment Plan. i) STOCK UNITS - Stock units created as the result of any corporate transaction, restructuring or reorganization shall follow, and remain subject to, the terms of the original equity award with respect to which such stock units were granted (i.e. performance shares, restricted stock or restricted stock units). Distribution of such stock units will be in cash and will be made according to the terms created pursuant to such original grants. 5. SENIOR MANAGER UNIVERSAL LIFE INSURANCE PROGRAM Each Participant who is participating in the AT&T Corp. Senior Management Universal Life Insurance Program on his or her Final Payroll Date, shall continue such participation in accordance with the terms and conditions of that Program as if he or she were Eligible for Retirement-Related Benefits. 6. PENSION DEATH BENEFIT The death benefit provided with respect to pensioners under the AT&TMPP (equal to one times base salary in effect on December 31, 1997) and the death benefit provided under the AT&T Non-Qualified Pension Plan (AT&TNQPP) (equal to the greater of the annual incentive paid to the Participant in 1997 with respect to 1996, or the annual incentive paid to the Participant in 1998 with respect to 1997), will be paid to the qualified survivor, if any, of a Participant who was an AT&T management employee on January 1, 1998, and whose Final Payroll Date occurs not later than December 31, 2007. If such a Participant is not Eligible for Retirement-Related Benefits as of his or her Final Payroll Date, the death benefits that would otherwise have been payable from the AT&T MPP and AT&TNQPP will be paid from the operating income of the Company. A Participant's qualified survivor will be determined under the terms of the AT&T MPP. Any Death Benefit paid under the AT&T Senior Management Long Term Disability and Survivor Protection Plan ("SMLTD&SPP") will be reduced by the amount of any Death Benefit payable under this Section F.6. AT&T Senior Officer Separation Plan 11 Proprietary (Restricted) 7. FINANCIAL COUNSELING A Participant who is participating in the AT&T Senior Management Financial Counseling Program as of his or her Final Payroll Date shall continue such participation for a period of two years following such Participant's Final Payroll Date in accordance with the terms and conditions of that program, including the preparation of personal income tax returns with respect to calendar years through and including the second anniversary of such Participant's Termination Year. 8. TRANSITION COUNSELING A Participant will be entitled to receive the services of a Company-paid and Company-approved outplacement or career transition consultant in accordance with AT&T's current practices for Senior Officers in effect as of the Participant's Final Payroll Date; provided, however, that commencement of such transition counseling services, if desired, must begin within one year of the Participant's Final Payroll Date. 9. AT&T TOLL DISCOUNT A Participant will be eligible for toll reimbursement through the AT&T Toll Discount Program under the terms and conditions that apply to management employees Eligible for Retirement-Related Benefits, as those terms and conditions may be amended from time to time. 10. VACATION A Participant should make every reasonable effort, consistent with the needs of the business and AT&T's policies and procedures, to use all vacation, personal days, and floating holidays to which he or she is eligible before his or her Final Payroll Date. If the Participant is unable to do so, he or she will be paid for any unused (earned and unearned) vacation days for the calendar year in which his or her Final Payroll Date occurs and any approved and un-expired carry-over days (not to exceed the number of carry-over days as approved by the Company) from the prior year. The Participant will not receive pay in lieu of floating holidays and management personal days if these days are not taken prior to his or her Final Payroll Date, except for those Participants in the states of California, Illinois or Ohio, who will receive such payments as may be mandated by state law. AT&T Senior Officer Separation Plan 12 Proprietary (Restricted) 11. MEDICAL/DENTAL COVERAGE The extension and cost of medical and dental coverage for a Participant who is Eligible for Retirement-Related Benefits will be in accordance with the terms of the AT&T Corp. Post-Retirement Welfare Benefits Plan, or the successor to such plan, as amended from time to time. If, on the Participant's Final Payroll Date, the Participant is not Eligible for Retirement-Related Benefits, the Company will continue to provide coverage under the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, or the successors to such plans, on the same basis as for active employees, to such Participant and his or her eligible dependents, (provided that such eligible dependents were covered by the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, or the successors to such plans, immediately prior to the Participant's termination of employment), for up to eighteen (18) months after the month in which the Participant's Final Payroll Date occurs, subject to the terms and conditions of those plans, as amended from time to time. Such a Participant who is enrolled in a medical and/or dental plan option as an active employee under the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, or the successors to such plans, that requires employee contributions, must continue to pay those contributions during the period of time that the Company provides the Participant with continued coverage. To the extent that the continuation of Company-provided coverage results in taxable imputed income to the Participant in excess of the taxable income incurred as an active employee, the Company will provide a tax allowance, calculated in accordance with the Company's then current practice for Senior Officers, estimated to cover the Federal income and FICA (Medicare portion) taxes to be incurred by the Participant by reason of such imputed income and the additional payment provided for in this sentence. Company-provided continuation of coverage under the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, or the successors to such plans, shall run concurrently with any rights to continuation of coverage the Participant and/or his or her eligible dependents may otherwise have under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). The Participant should immediately notify the COBRA administrator if he or she becomes covered under another group health plan, at which time the Participant's COBRA coverage and the Company's provision of medical and/or dental coverage for the Participant and his or her eligible dependents will cease. AT&T Senior Officer Separation Plan 13 Proprietary (Restricted) If, at the end of the 18 month COBRA period, the Participant is not covered under another group health plan, the Company will make medical coverage (not dental coverage) available for the Participant and his or her eligible dependents under the AT&T Separation Medical Plan, or the successor to such plan, on the same basis as for certain former senior managers. Should the Participant elect to take this coverage, the Participant will be responsible for the same portion of the annual premium for this medical coverage as is applicable to similarly situated former senior managers covered under the AT&T Separation Medical Plan. Continuation of coverage under the AT&T Separation Medical Plan after the Participant's death is available to the Participant's spouse, if the spouse pays 100% of the annual premium for coverage. There will be no continuing dental coverage for the Senior Officer or his or her eligible dependents after the end of eighteen (18) months following the month in which occurs the Senior Officer's Final Payroll Date, except as may otherwise be required by law. G. RELEASE The Release must be signed and returned to the AT&T Executive Benefits Organization c/o Aon Consulting, Inc. of NJ, Room 7C19, 270 Davidson Avenue, Somerset, NJ 08873, on or after the Participant's or the CIC Eligible Senior Officer's Final Payroll Date. H. WITHHOLDINGS Any taxable payment or benefit paid pursuant to this Plan is subject to applicable withholding of Federal, state and local income taxes, FICA (Social Security and Medicare taxes), and FUTA (unemployment taxes) and will be reported on IRS form W-2. AT&T Senior Officer Separation Plan 14 Proprietary (Restricted) I. PAYMENT UPON DEATH, DISABILITY OR LEAVE OF ABSENCE 1. DEATH If a Participant should die on or before his or her Final Payroll Date, no payments will be made or benefits provided under this Plan. The Participant will be treated as if he or she had died as an active Senior Officer and his or her estate or beneficiaries will be entitled to the applicable benefits payable upon the death of an active Senior Officer. If a Participant should die after his or her Final Payroll Date, without having executed a valid Release, or having revoked a previously executed Release, no payments will be made or benefits provided under this Plan. The Participant will be treated as if he or she had died as a terminated Senior Officer and his or her estate or beneficiaries will be entitled to the applicable benefits payable upon the death of a terminated Senior Officer. If a Participant should die after his or her Final Payroll Date, and the Participant has executed a valid Release which has not been revoked, benefits will be provided (a) according to the valid beneficiary designations on file with the Company for such benefits, (b) to the mandatory beneficiary pursuant to the terms of the applicable plan, or (c) to the Participant's estate, as applicable, as soon as administratively feasible after the AT&T Executive Benefits Organization receives written notification of the Participant's death. With respect to the period following a Participant's death, no additional payments for toll reimbursement, transition counseling, financial counseling and group health continuation coverage will be made under this Plan. Long term incentive awards will continue to be subject to the terms and conditions of the applicable AT&T long term incentive plan and the award agreements under which they were granted as applicable upon the death of a Senior Officer. 2. DISABILITY AND LEAVES OF ABSENCE If, on a Participant's Final Payroll Date, the Participant is receiving short term disability benefits under any AT&T short term disability plan, or the Participant is on a leave of absence with a guaranteed right to reinstatement, any benefits to the Participant under this Plan shall be computed and paid as follows: a) SENIOR OFFICER RECEIVING DISABILITY BENEFITS - Except as provided in the final sentence of this paragraph, no benefit under this Plan will be provided until the Participant's employment is formally terminated at the time his or her short-term disability benefits under any AT&T short term disability plan cease, which shall be his or her Final Payroll Date. Any Severance Payments due under Section F.1 of this Plan shall be reduced (but not below zero) in accordance with procedures established by the Executive Vice President - Human Resources, by the full amount of any disability benefits paid under any AT&T short term disability plan for the period after the date established by the Participant Notification AT&T Senior Officer Separation Plan 15 Proprietary (Restricted) Form as the Participant's Final Payroll Date. A Senior Officer who terminates employment at the end of a period of short term disability benefits and immediately thereafter commences long term disability benefits (under the Company's long term disability program) shall not be eligible to receive any payments or benefits under this Plan. b) SENIOR OFFICER ON A LEAVE OF ABSENCE WITH GUARANTEED RIGHT OF REINSTATEMENT - Benefits under this Plan will not be payable until a Participant's employment is formally terminated at the conclusion of the Participant's leave of absence. J. FORFEITURE Participants shall repay and forfeit the payments and/or benefits provided under this Plan, in the following circumstances. 1. VIOLATION OF AT&T CODE OF CONDUCT OR AT&T NON-COMPETITION GUIDELINE Notwithstanding any other provision of this Plan, if it is determined by the Executive Vice President - Human Resources of AT&T, in consultation with AT&T's General Counsel, that a Senior Officer has violated AT&T's Code of Conduct, and/or violated the AT&T Non-Competition Guideline, (the "Guideline") (copies of which will be provided to the Senior Officer prior to his or her Final Payroll Date, if requested by the Senior Officer), the Senior Officer will be required to repay to the Company an amount equal to the economic value of all benefits already provided to the Senior Officer under this Plan and shall forfeit all unpaid benefits under this Plan. Severance that the Participant has elected to defer under Section F.2 of this Plan shall be repaid, to the extent that payments have been made to Participant from the deferred account established for the Participant's Severance Payment. The amount, if any, not paid from the deferred account to the Participant as of the breach of the Guideline shall be forfeited. Additional forfeiture provisions may apply under other AT&T compensation, incentive, benefit and perquisite plans, programs and arrangements. 2. FUTURE SERVICES If the Senior Officer provides services within the two-year period (104 weeks) following the Senior Officer's Final Payroll Date (as an employee, independent contractor, consultant or otherwise (other than as a witness in any proceeding in which the Company is a party)) to the Company or any joint venture in which the Company (directly or indirectly) owns any equity interest, then upon commencement of any such services, the Senior Officer will be required to repay AT&T Senior Officer Separation Plan 16 Proprietary (Restricted) (or forfeit) a portion of the Severance Payment, or the amounts credited to the Senior Officer's deferred account under Section F.2 of the Plan, provided to the Senior Officer under the Plan prior to such commencement of services. Such portion of the Severance Payment, or the amounts credited to the Senior Officer's deferred account, shall be determined by multiplying the Severance Payment, or the amounts credited to the Senior Officer's deferred account, respectively, by a fraction, the numerator of which is the number of whole weeks remaining in the two-year period (up to 104 weeks) following the Senior Officer's Final Payroll Date (determined as of the effective date of his or her commencement of such services), and the denominator of which is 104. Except to the extent provided in the remaining sentences of this Section J.2, benefits that would otherwise be provided to the Senior Officer under the Plan, on and after such commencement of services, shall be forfeited. Notwithstanding the foregoing, the Company shall make an additional payment ("Additional Payment") to the Senior Officer who commences such services (or may reduce the amount required to be repaid or forfeited by the Senior Officer under the first and second sentence of this paragraph), to the extent necessary, such that the total value of Plan benefits retained by the Senior Officer, when added to the Additional Payment, will total twenty-five thousand dollars ($25,000.00). This sum of twenty-five thousand dollars ($25,000.00), which the Senior Officer shall retain and/or continue to defer, shall be treated as consideration for the Senior Officer's completion and non-revocation of the Release. Any deferred amounts remaining after the repayment (or forfeiture) required by this Section J.2 will continue to accrue interest and will be payable as provided under the applicable election to defer. K. TERMS AND CONDITIONS OF EXISTING PLANS AND PROGRAMS Except as otherwise specifically provided for in this Plan, a Senior Officer's rights and benefits under any of the Company's other employee and Senior Officer level compensation, incentive, benefit and/or perquisite plans and programs, including annual and long term incentive plans, continue to be subject to the terms of those plans and programs as they may be modified or amended from time to time or terminated in accordance with the Company's reservation of rights to so modify, amend or terminate. In the event there is a conflict between the content in this Plan and the terms of the respective compensation, incentive, benefit and/or perquisite plan documents, the compensation, incentive, benefit and perquisite plan or program documents will control and govern the operation of the plans. The Executive Vice President - Human Resources of AT&T (or any successor to that officer's responsibilities), with the concurrence of AT&T's General Counsel, shall be authorized, in addition to any other authority previously granted, to make minor or administrative amendments to the Plan, as well as amendments required by applicable federal or state law (or authorized or made desirable by AT&T Senior Officer Separation Plan 17 Proprietary (Restricted) such statutes). Subject to Section I.2 (pertaining to short term disability payments), no payment or benefit pursuant to this Plan will be reduced for contributions to or benefits under, or be recognized under, any other AT&T employee or Senior Officer level benefit plan, program or arrangement. L. PLAN ADMINISTRATION AT&T is the Plan Administrator and a named fiduciary of the Plan. AT&T has delegated sole authority and responsibility to administer this Plan to AT&T's Executive Vice President - Human Resources, or his or her delegate, and he or she shall make all determinations regarding the interpretation and administration of this Plan. The Executive Vice President - Human Resources, or his or her delegate, shall have sole and complete discretionary authority to determine such matters. The Executive Vice President - Human Resources is also a named fiduciary who shall serve as the final review authority under this Plan, and shall have sole and complete discretionary authority to determine conclusively for all parties and in accordance with the terms of the documents or instruments governing the Plan, any and all questions arising from the administration of this Plan and interpretation of all Plan provisions, determination of all questions relating to participation of eligible Senior Officers and eligibility for benefits, determination of all relevant facts, the amount and type of benefits payable to any Senior Officer, beneficiary or estate, and the construction of all terms of this Plan. All determinations and decisions of the named fiduciary are conclusive and binding on all parties and not subject to further review. The Executive Vice President - Human Resources has delegated to the AT&T Executive Benefits Organization the authority to review all initial claims for payments and benefits under the terms of this Plan. The Executive Vice President - Human Resources shall afford a full and fair review of any denial of a claim by the AT&T Executive Benefits Organization for payments under the terms of this Plan. If there is a situation that requires an administrator who is also a Participant or a CIC Eligible Senior Officer to make judgment(s) about himself/herself, such administrator will automatically be recused and replaced by another administrator named by the Executive Vice President - Human Resources. 1. CLAIM PROCEDURE Any Senior Officer, or his or her estate or beneficiary (a "Claimant"), who either qualifies or believes the Senior Officer qualifies as a Participant or a CIC Eligible Senior Officer, may file a claim in writing for benefits under this Plan, if the Claimant believes that the Claimant has not received benefits to which the Claimant is entitled under this Plan. Such claim may only relate to a matter under this Plan and not to any matter under the Guidelines or any other AT&T policy, practice or guidelines. AT&T Senior Officer Separation Plan 18 Proprietary (Restricted) The written claim should be sent to the AT&T Executive Benefits Organization, Room 4A146, One AT&T Way, Room 5A106, Bedminster, New Jersey 07921, or to an alternative address identified and communicated to the Claimant. The written claim should be sent within sixty (60) days of the date of the occurrence of facts giving rise to the claim. If the claim is denied, in whole or in part, the Claimant will receive written notice from the AT&T Executive Benefits Organization (or the successor of such organization's responsibilities). This information will be provided within ninety (90) days of the date the claim was received. This written notice will include: - the specific reason or reasons for the denial; - specific reference to pertinent Plan provisions on which the denial was based; - a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary; and - appropriate information as to the steps to be taken if the Claimant desires to submit the claim for arbitration. In some cases, more than ninety (90) days may be needed to make a decision. In such cases, the Claimant will be notified in writing, within the initial ninety (90)-day period, of the reason more time is needed. An additional ninety (90) days may be taken to make the decision if the Claimant is sent such a notice. The extension notice will show the date by which the decision will be sent. If no response is received within the ninety (90)-day period, the claim is considered denied. The procedure for appealing a denied claim is set forth below in Section M, Arbitration. PLEASE NOTE THAT THE PLAN REQUIRES THAT A CLAIMANT PURSUE THE CLAIM RIGHTS DESCRIBED ABOVE BEFORE SEEKING ARBITRATION UNDER SECTION M. Official Plan Name: AT&T Senior Officer Separation Plan AT&T Senior Officer Separation Plan 19 Proprietary (Restricted) Plan Sponsor and Administrator: AT&T Corp. Room 4A146 One AT&T Way Bedminster, New Jersey 07921 Employer Identification Number: 13-4924710 Type of Plan: Welfare benefit plan; deferred compensation plan. Type of Administration and Funding: The Plan is unfunded. Agent for Legal Process: Once all claim procedures detailed herein have been exhausted, if a Claimant wants to begin arbitration, service of legal process may be made upon the plan administrator to the attention of the AT&T Executive Vice President - Human Resources (or the successor of such officer's responsibilities). Plan Document: This document serves as the plan document for the AT&T Senior Officer Separation Plan. Effective Date: The Effective Date of this amended and restated Plan shall be January 1, 2003. RIGHTS UNDER ERISA. The Plan is an employee welfare benefit plan and a deferred compensation plan governed by ERISA. Senior Officers are entitled to certain rights and protections under ERISA. In addition to creating rights for Participants, ERISA imposes duties upon the people who are responsible for the operation of the Plan. The people who operate and interpret the Plan, called "fiduciaries" of the Plan, have a duty to do so prudently, in the interest of all Participants and beneficiaries. No one, including the Company, may terminate a Senior Officer's employment for the purpose of preventing the Senior Officer from receiving the benefits to which he or she is entitled, and no one, including the Company or any other person, may discriminate against a Senior Officer in any other way for that AT&T Senior Officer Separation Plan 20 Proprietary (Restricted) purpose or in order to keep him or her from exercising his or her rights under ERISA. If the Senior Officer's benefit request is denied in whole or in part, such Senior Officer has the right to have the Plan Administrator review and reconsider the benefit request. Under ERISA, there are steps a Senior Officer can take to enforce the above rights. For instance, if a Senior Officer requests materials from the Plan and does not receive them within thirty (30) days, he or she may file suit in federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay the Senior Officer up to one hundred ten dollars ($110.00) a day until the materials are produced unless they were not sent or received because of reasons beyond the control of the Administrator. If a Senior Officer's benefit request is denied or ignored, in whole or in part, the Senior Officer may file suit in a state or federal court. If a Senior Officer alleges discrimination for asserting his or her rights, the Senior Officer may seek assistance from the US Department of Labor, or the Senior Officer may file suit in a federal court. The court will decide who should pay court costs and legal fees. If the Senior Officer is successful, the court may order the person sued to pay these costs and fees. If the Senior Officer loses, the court may order the claimant to pay these costs and fees, for example, if it finds the claim is frivolous. If a Senior Officer has any questions, he or she should contact AT&T's Executive Benefits Organization, Room 4A146, One AT&T Way, Bedminster, New Jersey 07921 (or any successor office). If a Senior Officer has any questions about this statement or about their rights under ERISA, he or she should contact the nearest Area Office of the Pension and Welfare Benefits Administration, US Department of Labor. M. ARBITRATION Any dispute, controversy, or question arising under, out of, or relating to this Plan remaining after a Claimant has filed a claim with the AT&T Executive Benefits Organization, in accordance with the procedures set forth in or adopted pursuant to the provisions of Section L hereof, and been denied, shall be, at the Claimant's election, referred for arbitration in the State of New Jersey to a neutral arbitrator jointly selected by the Claimant and AT&T. The proceeding shall be governed by the Commercial Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence) and the decision of the arbitrator shall be governed by the rule of law, and in particular ERISA and its related rules and regulations and relevant case law. If the parties are unable to agree upon a neutral arbitrator within thirty (30) AT&T Senior Officer Separation Plan 21 Proprietary (Restricted) days after the Claimant has given AT&T written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for the appointment of a neutral arbitrator, or, if such Association is not then in existence or does not desire to act in the matter, either party may apply to the Presiding Judge of the Superior Court of any county in New Jersey for the appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question. Such right to submit a dispute arising hereunder to arbitration and the decision of the neutral arbitrator shall be final, conclusive and binding on all interested persons and no action at law or in equity shall be instituted, or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. The Claimant and AT&T shall each bear their own costs and attorneys' fees, except that AT&T shall pay the costs of any arbitrator appointed hereunder as well as the costs of any copy of any official transcript of the proceeding. N. PLAN DOCUMENTS This document shall serve as both the Summary Plan Description and the official Plan document that regulates the operation of this Plan. O. ASSIGNMENT OR ALIENATION Subject to applicable federal income tax laws, no payments or benefits under this Plan or any right or interest in such payments or benefits shall be assignable or subject in any manner to anticipation, alienation, sale, transfer, assignment, claims of creditors, garnishment, pledge, execution, attachment or encumbrance of any kind, including, but not limited to, pursuant to any domestic relations order (within the meaning of Section 206(d)(3) of ERISA and Internal Revenue Code Section 414(p)(1)(B)), and any such attempted disposition shall be null and void. P. OFFICERS OR DEPARTMENTS Throughout this Plan, there are references to specific AT&T officers and/or offices. Such references are intended to include the appropriate officer and/or office. Any addresses contained herein shall be amended automatically to the appropriate address whenever necessary to reflect changes in office location or corporate reorganization. AT&T Senior Officer Separation Plan 22 Proprietary (Restricted) Q. SEVERABILITY If any provision of this Plan or the application thereof to any Senior Officer's circumstance is held invalid or unenforceable, the remainder of this Plan, and the application of such provision to other Participants or circumstances, shall not be affected thereby, and to such end, the provisions of this Plan are to be severable. R. AMENDMENT AND TERMINATION The Company reserves the right to amend, modify, suspend or terminate this Plan and any policies, procedures or guidelines for workforce reductions which may be maintained by the Company, for any reason whatsoever, subject to the provisions of Section 18 of Appendix A to this Plan. AT&T Senior Officer Separation Plan 23 Proprietary (Restricted) APPENDIX A AT&T SENIOR OFFICER SEPARATION PLAN CHANGE IN CONTROL PROVISIONS (TO BE PROVIDED) AT&T Senior Officer Separation Plan 24 Proprietary (Restricted) APPENDIX B WAIVER AND RELEASE I am terminating my employment with AT&T Corp., or one of its subsidiaries or affiliates ("the Company"). In consideration for the receipt of benefits under Section F of the AT&T Senior Officer Separation Plan ("Plan"), or under Appendix A of the Plan, if applicable, I acknowledge and agree to the following: 1. I HAVE BEEN TOLD BY THE COMPANY AND I UNDERSTAND THAT ALL BENEFITS SET FORTH IN SECTION F OF THE PLAN, OR UNDER APPENDIX A OF THE PLAN, IF APPLICABLE, FROM THE COMPANY ARE CONDITIONED UPON MY SIGNING AND NOT REVOKING THIS WAIVER AND RELEASE ("THIS RELEASE" OR "THE RELEASE") ON MY FINAL PAYROLL DATE (AS THAT TERM IS DEFINED IN THE PLAN), AND RETURNING IT TO THE AT&T EXECUTIVE BENEFITS ORGANIZATION, C/O AON CONSULTING, INC. OF NJ, ROOM 7C19, 270 DAVIDSON AVENUE, SOMERSET, NJ 08873 ON MY FINAL PAYROLL DATE. I UNDERSTAND THAT PURSUANT TO THE TERMS OF THE PLAN, I MUST REPAY AND/OR FORFEIT A PORTION OF SUCH BENEFITS, IF WITHIN THE TWO-YEAR PERIOD FOLLOWING MY FINAL PAYROLL DATE, I PROVIDE SERVICES (AS AN EMPLOYEE, INDEPENDENT CONTRACTOR, CONSULTANT OR OTHERWISE (OTHER THAN AS A WITNESS IN ANY PROCEEDING IN WHICH THE COMPANY IS A PARTY)) TO THE COMPANY OR ANY JOINT VENTURE IN WHICH THE COMPANY (DIRECTLY OR INDIRECTLY) OWNS ANY EQUITY INTEREST. 2. I realize that there are various state, local and federal laws that prohibit, among other things, employment discrimination on the basis of age, sex, race, color, gender, creed, religion, sexual preference/orientation, marital status, national origin, mental or physical disability, veteran status, and that these laws are enforced through the Equal Employment Opportunity Commission ("EEOC"), Department of Labor ("DOL") and State or Local Human Rights agencies. Such laws include, without limitation, Title VII of the Civil Rights Act of 1964; the Family and Medical Leave Act of 1993 ("FMLA"); the Age Discrimination in Employment Act of 1964 ("ADEA"); the Americans with Disabilities Act of 1990 ("ADA"); the Employee Retirement Income Security Act of 1974 ("ERISA"); 42 U.S.C. Section 1981; the Equal Pay Act; the New Jersey Conscientious Employee Protection Act; the New Jersey Law Against Discrimination, etc., as each may have been amended; and other state and local human or civil rights laws as well as other statutes which regulate employment; and the common law of contracts and torts. I hereby waive and release any right I may have under these or any other laws with respect to my employment and termination of employment at the Company and acknowledge that the Company has not (a) discriminated against me, (b) breached any contract with me, (c) committed any civil wrong (tort) against me, or (d) otherwise acted unlawfully toward me. I also hereby waive any right to become, and promise not to consent to become, a member of any class in a case in which claims are asserted against any Releasee (as defined in Paragraph 3 hereof) that are related in any way to my employment or the termination of my employment with the Company, and that involve events which AT&T Senior Officer Separation Plan 25 Proprietary (Restricted) have occurred as of the date of this Release (defined to mean the date on which Employee signs this Release). If, without my prior knowledge and consent, I am made a member of a class in any proceeding, I shall opt out of the class at the first opportunity afforded to me after learning of my inclusion. In this regard, I agree that I will execute, without objection or delay, an "opt-out" form presented to me either by the court in which such proceeding is pending or by counsel for any Releasee who is made a defendant in any such proceeding. 3. On behalf of myself, my heirs, executors, administrators, successors and assigns, I hereby unconditionally release and discharge the Company, the various AT&T Benefit Committees, plans, trusts and trustees, and their successors, assigns, affiliates, shareholders, directors, officers, representatives, agents and employees (collectively "Releasees" and individually "Releasee") from any and all claims, (including claims for attorneys' fees and costs), charges, actions and causes of action, demands, damages, and liabilities of any kind or character, in law or equity, suspected or unsuspected, past or present, that I ever had, may now have, or may later assert against any Releasee, arising out of or related to my employment or termination of employment with the Company. To the fullest extent permitted by law, this Release includes, but is not limited to: (a) claims arising under ADEA, Title VII, the ADA, the Equal Pay Act, the Older Workers Benefit Protection Act, the Worker Adjustment and Retraining Notification Act, ERISA, the FMLA, the ADA, 42 U.S.C. Section 1981, the New Jersey Conscientious Employee Protection Act, and any other federal, state, or local law prohibiting age, sex, race, color, gender, creed, religion, sexual preference/orientation, marital status, national origin, mental or physical disability, veteran status, or any other form of unlawful discrimination or claim with respect to or arising out of my employment with or termination from the Company; (b) claims (whether based on common law or otherwise) arising out of or related to any contract or employment agreement (whether express or implied); (c) claims under any federal, state or local constitutions, statutes, rules or regulations; (d) claims (whether based on common law or otherwise) arising out of any kind of tortious conduct (whether intentional or otherwise) including, but not limited to, wrongful termination, defamation, violation of public policy; and (e) claims included in, related to, or which could have been included in any presently pending federal, state or local lawsuit filed by me or on my behalf against any Releasee, which I agree to immediately dismiss with prejudice. (For employees working in California) Section 1542 of the Civil Code of the State of California states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge of all Releasees, I expressly acknowledge that this Release is intended to include not only claims that are known, anticipated or disclosed, but also claims that are unknown, unanticipated and undisclosed. 4. I covenant and agree not to bring any action, suit or administrative proceeding contesting the validity of this Release or attempting to negate, modify or reform it, AT&T Senior Officer Separation Plan 26 Proprietary (Restricted) nor to sue any Releasee for any reason arising out of my employment or termination thereof, other than a claim contesting the validity of this Release under applicable provisions of ADEA. If I breach either Paragraph 3 or 4 hereof, I shall: (i) to the extent not prohibited by law, promptly return to the Company all consideration received hereunder, except twenty-five thousand dollars ($25,000.00), and (ii) pay any Releasee all of their actual attorneys' fees and costs incurred in each such action, suit or other proceeding, including any and all appeals or petitions therefrom, regardless of the outcome. I agree to pay such expenses within thirty (30) days of written demand. This Paragraph 4 is not intended to limit me from instituting legal action according to the terms of the Plan for the sole purpose of a claim for benefits to which I am entitled under the Plan. I understand that this Waiver and Release has neither the purpose nor intent of interfering with my protected right to file a charge with or participate in an investigation or proceeding pursuant to the statutes administered and enforced by the EEOC, specifically: the ADEA, the Equal Pay Act, Title VII of the Civil Rights Act of 1964 and the ADA. I understand that I will not breach this Waiver and Release if I file a charge with or participate in an investigation or proceeding pursuant to the statutes administered and enforced by the EEOC. However, by signing this Waiver and Release, I understand that I waive any right I may have to recover money or other relief in any lawsuit or proceeding brought by me or by an agency or third party, including the EEOC, on my behalf. EXCEPTION: Nothing in this Waiver and Release limits my right to participate and recover damages or other relief in a case known as "Engers, et al. v. AT&T and AT&T Management Pension Plan," Civil Action No. 98-CV-3660 (NHP), which alleges ADEA and ERISA violations in AT&T's cash balance pension program for management employees and is currently pending before the United States District Court for the District of New Jersey. 5. I understand that this in no way affects any benefits to which I would be entitled in the absence of the Plan under any AT&T benefit plan in which I participated during my employment, such as the AT&T Pension Plan for Management Employees but specifically excluding any other Company plan providing for severance or other termination-related benefits. 6. I have no knowledge of any wrongdoing involving improper or false claims against a federal or state governmental agency, other than as I have disclosed to the AT&T Law Division. 7. I agree to return to the Company, on or before my Final Payroll Date, all Company property including, but not limited to, files, records, computer access codes, computer programs, keys, card key passes, instruction manuals, documents, business plans and any copies thereof and other property or materials which I received or prepared or helped to prepare in connection with my employment with the Company, and to assign to the Company all right, title and interest in such property, and any other inventions, discoveries or works of authorship created by me during the course of my employment. AT&T Senior Officer Separation Plan 27 Proprietary (Restricted) 8. I agree that I will submit all vouchers for reasonable business expenses prior to my Final Payroll Date or as soon thereafter as is practicable. I understand and agree that after my Final Payroll Date I will no longer be authorized to incur any expenses, obligations or liabilities on behalf of the Company. 9. I affirm my obligation to keep all proprietary Company information confidential and not to disclose it to any third party in the future. As used in this Release, the term "Proprietary Company Information" includes, but is not necessarily limited to, technical, marketing, business, financial or other information which constitutes trade secret information or information not available to competitors of the Company, the use or disclosure of which might reasonably be construed to be contrary to the interests of the Company. 10. The construction, interpretation and performance of this Release shall be governed by the laws of the state of my work location on my Final Payroll Date without regard to that state's conflict of laws rules and principles. 11. In the event that any one or more of the provisions contained in the Release shall for any reason be held to be unenforceable in any respect under the law of any state or of the United States of America, such unenforceability shall not affect any other provisions of this Release, but, with respect only to that jurisdiction holding the provision to be unenforceable, this Release shall then be construed as if such unenforceable provision or provisions had never been contained herein. 12. I understand that I have the right to consult with an attorney before signing the Release and that the Company has advised me to do so. I have 45 days to consider the Release before signing it, and I may revoke the Release within seven (7) calendar days (15 days in Minnesota) after signing it. Revocation must be made by delivery of written notice of revocation to AT&T's Executive Benefits Organization, c/o Aon Consulting, Inc. of NJ, Room 7C19, 270 Davidson Avenue, Somerset, NJ 08873. 13. This contains the entire agreement between the Company and me and fully supersedes any and all prior agreements or understandings pertaining to the subject matter hereof (including any employment agreements, severance or separation agreements, arrangements, and offer letters) and all such prior agreements are null and void in their entirety and of no force and effect. I represent and acknowledge that in executing this Release, I have not relied upon any representation or statement not set forth herein made by any of the Releasees or by any of the Releasees' agents, representatives or attorneys with regard to the subject matter of this Release. BY SIGNING THIS WAIVER AND RELEASE, I STATE THAT: I HAVE READ IT; I UNDERSTAND IT AND KNOW THAT I AM GIVING UP IMPORTANT RIGHTS; I AGREE WITH EVERYTHING IN IT; THE COMPANY HAS ADVISED ME TO CONSULT AT&T Senior Officer Separation Plan 28 Proprietary (Restricted) AN ATTORNEY BEFORE SIGNING IT; AND I HAVE SIGNED IT KNOWINGLY AND VOLUNTARILY. __________________________________ _________________________________ Date Employee Signature ________________________________ Employee Name Printed ________________________________ Employee Social Security Number AT&T Senior Officer Separation Plan 29 Proprietary (Restricted) ADDENDUM TO WAIVER AND RELEASE IMPORTANT NOTICE REGARDING RIGHTS YOU ARE WAIVING BY SIGNING THE FOREGOING RELEASE NOTICE: IF YOU WORKED FOR A BELL SYSTEM COMPANY AND TOOK A PREGNANCY-RELATED LEAVE OF ABSENCE AT ANY TIME PRIOR TO APRIL 29, 1979, YOU MAY BE GIVING UP LEGAL RIGHTS TO POSSIBLE ADDITIONAL NET CREDITED SERVICE ("NCS") CURRENTLY AT ISSUE IN A PENDING CLASS ACTION LAWSUIT. Currently, the lawsuit of Hulteen, et al. v. AT&T Corp, AT&T Management Pension Plan, AT&T Pension Plan, and AT&T Employees' Benefit Committee, Civil Action No. C01 1122 MJJ, is pending before the United States District Court for the Northern District of California. The plaintiffs in the lawsuit allege on behalf of themselves and all other similarly affected female employees that, because prior to April 29, 1979, while working at a Bell System Company, they did not receive Net Credited Service ("NCS") for the entire time they were disabled due to pregnancy, while employees disabled for any other reason than pregnancy did receive full NCS, they were discriminated against based on gender in violation of Title VII. The plaintiffs also claim that these events violate ERISA. The plaintiffs also seek NCS for any time that they and all other similarly affected female employees were forced to be on leave when they were willing and able to work. Through the lawsuit, the plaintiffs seek to have their NCS dates and those of similarly situated women adjusted and to recover pension benefits and any other benefits denied to them due to insufficient NCS, including but not limited to the benefits from any early retirement opportunity for which they did not have enough NCS to qualify. The Court has ordered that this notice be provided to employees who are considering whether or not to sign this release so that they know that they are giving up important legal rights. The amount of NCS Plaintiffs believe you may be entitled to recover if they are successful in this lawsuit could depend on your individual situation. Plaintiffs believe this time you might be entitled to should include: - The time you were DISABLED by pregnancy: For normal pregnancies, a woman is usually considered disabled for 6 to 8 weeks after the date of birth, but for pregnancies with any complications, a woman is usually considered disabled for as long as she is unable to perform one or more of her regular job duties. It does not include time you were out of work for childcare or bonding. - The NCS you lost when you were out of work for a non-pregnancy disability which occurred while you were on leave for a pregnancy-related disability. - The NCS you lost because your Bell System employer required you to begin your pregnancy-related leave earlier than you wanted to leave work. - The NCS you lost because your Bell System employer refused to reinstate you as soon as you wanted and were able to return to work. Plaintiffs also believe that the amount of NCS you would be entitled to if they are successful in this lawsuit would include increased pension benefits. The amount of benefits to which you might be entitled could be affected by any early retirement opportunities or other promotional opportunities or benefits you lost due to insufficient NCS. AT&T Senior Officer Separation Plan 30 Proprietary (Restricted) AT&T contends that its pregnancy leave policies and practices have been lawful at all times before and after the enactment of Title VII and ERISA, and denies that it violated either of these statutes. AT&T is currently defending the lawsuit and intends to continue doing so. Thus, AT&T contends that plaintiffs and any future class members are not entitled to any additional NCS based on this lawsuit. If you choose to sign the attached release: - You will receive all applicable benefits under the AT&T Senior Officer Separation Plan. - You will not be able to have your NCS adjusted and you will not recover any additional pension or other benefits due to you as a result of this lawsuit. - You will give up your right to participate in the Hulteen lawsuit as a named plaintiff or a class member, and your right, if any, to recover if the plaintiffs and plaintiff class prevail in the lawsuit. If you choose not to sign the attached release: - You will give up all applicable benefits under the AT&T Senior Officer Separation Plan that AT&T is offering you. - You may retire and receive your accrued vested pension benefits. - You may participate as a named plaintiff or class member in the Hulteen lawsuit. If you are part of the class in the lawsuit and plaintiffs prevail, you could receive an NCS adjustment and possible additional pension benefits and other benefits associated with an increase in NCS. PLEASE NOTE: The value of the applicable benefits under the AT&T Senior Officer Separation Plan that you are being offered to sign this release may be greater than the value of any recovery you could receive should the class be certified and should plaintiffs prevail in the Hulteen lawsuit. Also, because the court in Hulteen has not yet determined the scope of the class and has not yet decided on the merits of the lawsuit, there is no guarantee that you will be entitled to any recovery. Therefore, it is in your best interest to consult with an attorney about your decision of whether or not to sign the foregoing release. Attorneys specializing in ERISA matters or Title VII discrimination may best be able to assist you in evaluating your alternatives. AT&T Senior Officer Separation Plan 31 Proprietary (Restricted) APPENDIX C AT&T SENIOR OFFICER SEPARATION PLAN ELECTION TO DEFER (For named Participants as of 1/1/03) Pursuant to (a) Section F.1 of the AT&T Senior Officer Separation Plan ("the Plan"), or (b) Section 5 of Appendix A of the Plan, if applicable, I will become entitled to a Severance Payment only if I sign a Waiver and Release (as referenced in Section G of the Plan) on or after my Final Payroll Date and do not revoke such Waiver and Release during the revocation period. The Severance Payment has been determined to be $______. If I become entitled to such amount, I hereby elect, as indicated on LINE 1 below, that in lieu of the payment of such amount to me in a lump sum following my Final Payroll Date, AT&T ("the Company") shall credit such amount to a separate deferred account established in my name on the books of the Company. Such deferred account also shall be credited with interest, compounded as of the end of each calendar quarter, at a rate equal to one-quarter (1/4) of the average rate applicable to actively traded 10 year U.S. Treasury Notes in effect for the prior calendar quarter plus 1.25%. I further elect that amounts credited to my deferred account shall be paid to me in the same number of approximately equal annual installments indicated on LINE 2 below. The first installment from the deferred account (or the single payment, if I have so elected) shall be paid by the end of the calendar quarter which immediately follows the calendar quarter in which the anniversary of my Final Payroll Date occurs, as indicated on LINE 3 below, and subsequent installments shall be paid in the same calendar quarter in succeeding calendar years. Undistributed amounts in my deferred account shall continue to be credited with interest, as described above.
- -------------------------------------------------------------------------------- LINE SEVERANCE PAYMENT ELECTION - -------------------------------------------------------------------------------- 1. Defer - (Check "Yes" box if you elect to defer and complete Lines 2 and 3 below) Yes [ ] No [ ] - -------------------------------------------------------------------------------- 2. Number of installment payments to self (indicate from 1 - 5 only if you checked _____installments "Yes" box on Line 1.) - -------------------------------------------------------------------------------- 3. First installment (or single payment) to be paid by the end of the calendar quarter immediately following the _____anniversary calendar quarter in which the (1st, 2nd, 3rd, 4th, or 5th) anniversary of my Final Payroll Date occurs. (Enter number only if you checked "Yes" box on Line 1.) - --------------------------------------------------------------------------------
If I should die prior to the distribution of all amounts credited to my deferred account, the unpaid balance shall be paid to my beneficiary (or to my estate if no beneficiary is named) in a lump sum by the end of the calendar quarter immediately following the calendar quarter in which the Company receives notification of my death. All amounts credited to my deferred account shall be unsecured general obligations of the Company, and amounts credited to my deferred account shall not be subject to assignment or alienation. AT&T Senior Officer Separation Plan 32 Proprietary (Restricted) The elections contained in this document must be submitted to Noreen Fitzgerald, AT&T Executive Benefits, c/o Aon Consulting, Inc. of NJ, Room 7C13, 270 Davidson Avenue, Somerset, NJ, 08873, no later than the day before the date I execute the Waiver and Release, and once submitted, shall be irrevocable. ________________________________ _________________________________ Print Name Social Security Number ________________________________ _________________________________ Signature Date AT&T Senior Officer Separation Plan 33 Proprietary (Restricted) EX-10.III.A.21 6 e84804exv10wiiiwaw21.txt FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10(iii)(a)21 EXECUTION COPY EMPLOYMENT AGREEMENT This Agreement, dated as of October 1, 2002, by and between Betsy J. Bernard (the "Executive") and AT&T Corp., a New York corporation (the "Company"). WITNESSETH THAT WHEREAS, the Company has offered the Executive, and the Executive has accepted, employment on the terms and conditions set forth in this Agreement; and WHEREAS, the Company and the Executive wish to set forth such terms and conditions in a binding written agreement. NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement, it is hereby agreed as follows: 1. Term of Employment. The term of the Executive's employment under this Agreement (the "Term") shall begin on October 1, 2002 (the "Effective Date") and end on September 30, 2005; provided, that the Term shall be extended by successive periods of one (1) year, effective as of each Renewal Date (as defined in the next sentence), unless, before any Renewal Date, the Company shall have notified the Executive or the Executive shall have notified the Company that no such extension shall take place, in each case at least ninety (90) days prior to the expiration of the then-current Term (a "Notice of Nonrenewal"); and provided, further, that the Term shall in any event end upon a Termination, as set forth in Section 5 below. "Renewal Date" means each October 1 following a September 30 that occurs during the Term, beginning with October 1, 2005. 2. Position, Duties and Location. (a) Position. Beginning on the Effective Date, the Executive shall serve as the Chief Executive Officer of AT&T Business Services, with the duties and responsibilities customarily assigned to that position and such other duties and responsibilities as the Board of Directors of the Company (the "Board") shall from time to time reasonably assign to the Executive consistent with Executive's position. Beginning on the Distribution Date, as the term is defined in the Employee Benefits Agreement, dated December 19, 2001, by and between AT&T Corp. and AT&T Broadband Corp., but in no event later than December 31, 2002 and continuing through the remainder of the Term, the Executive shall serve as President of AT&T Corp. and the Chief Executive Officer of AT&T Business Services, with the duties and responsibilities customarily assigned to that position and such other duties and responsibilities as the Board shall from time to time reasonably assign to the Executive consistent with Executive's position. The Executive shall at all times report directly to the Chairman and Chief Executive Officer of AT&T Corp. (b) Duties. During the Term, the Executive shall devote Executive's full business attention and time to the business and affairs of the Company and shall use Executive's reasonable best efforts to carry out such responsibilities faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to serve on corporate, civic or charitable boards or committees, and manage personal investments, so long as such activities do not materially interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement or otherwise violate the Executive's obligations hereunder. The Executive hereby acknowledges that Executive has received a copy of the Non-Competition Guideline (such Guideline and any successor policy thereto, the "Non-Competition Guideline"), and that Executive understands that compensation and benefits otherwise payable to Executive under this Agreement are subject to the terms of Section 8(c) hereof and to the terms of the Non-Competition Guideline. Notwithstanding the second sentence of this Section 2(b), the Executive shall not serve on any corporate, civic or charitable boards or committees without first disclosing such proposed service to the Corporate Secretary of Company (the "Corporate Secretary") and obtaining the consent of the Corporate Secretary to such service, and in any event Executive shall not serve on any board or committee of an entity that is a competitor of the Company within the meaning of the Non-Competition Guideline. The Executive hereby represents to the Company that Executive has previously informed the Corporate Secretary of the boards and committees on which Executive presently serves, and has obtained the Corporate Secretary's consent to Executive remaining a member of such boards and committees. (c) The Executive's services shall be performed primarily at the Company's current offices in Bedminster, N.J. or such other location within 35 miles thereof as the Company may hereafter determine. 3. Compensation. (a) Base Salary. During the Term, the Executive shall receive a base salary (the "Base Salary") at an annual rate of not less than eight hundred fifty thousand dollars ($850,000), payable at such times and intervals as the Company customarily pays the base salaries of other members of the Company's Operations Group or any comparable successor group of senior executives (hereinafter, the "Other Senior Executives"). The Base Salary shall be reviewed in March 2003 and annually thereafter during the Term for possible increase in accordance with the Company's normal practices for the Other Senior Executives. The Base Salary shall not be reduced, including, after any such increase, and the term "Base Salary" shall thereafter refer to the Base Salary as so increased. (b) Annual Bonus. The Executive shall be eligible to earn an annual bonus (the "Annual Bonus") based on individual and Company performance, under the terms and conditions applicable to the Other Senior Executives. For 2002, the Executive's target Annual Bonus shall be a composite of one hundred twenty-five percent (125%) of the Base Salary earned by the Executive from October 1 through December 31, 2002 and one hundred percent (100%) of the Base Salary earned by the Executive from January 1 through September 30, 2002. For each subsequent year, the Executive's target Annual Bonus shall be one hundred twenty-five (125%) of the Executive's Base Salary earned during the fiscal year in question, subject to review by the Board for possible increase. Performance criteria with respect to the Annual Bonus will be established by the Board and communicated to the Executive in the same manner and at the same times as such criteria are communicated to other senior executives of the Company. - 2 - (c) Long Term Incentive Compensation. (i) During the Term, the Executive shall be eligible to receive awards under the Company's 1997 Long Term Incentive Program or any successor thereto (collectively, the "LTIP") in amounts and under the terms and conditions no less favorable than those applicable to the Other Senior Executives. Executive's award shall be issued at the same time, valued in the same manner (but not necessarily based on the same salary multiple) and contain the same components in the same ratio as the awards made to other members of the Company's Operations Group. (d) Special Tax Payment. Within seven days of the execution of this Agreement, the Company shall make a cash payment to the Executive of two hundred seventy nine thousand five hundred eighty two dollars and fifteen cents ($279,582.15) to mitigate certain tax consequences to the Executive in connection with Executive's relocation to New Jersey. (e) Special Individual Pension. The Company shall provide the Executive a Special Individual Pension. This Special Individual Pension is designed to provide Executive with a nonqualified pension payable from Company operating assets equal to the sum of the benefits that she would have received under the AT&T Management Pension Plan ("AT&T MPP"), the AT&T Non-Qualified Pension ("AT&T NQPP") and the AT&T Excess Compensation and Benefits Plan ("AT&T ECBPP") (collectively "the AT&T Pension Plans) if she had no break in service from January 5, 1977 until her Termination Date under this Agreement. Therefore, this Section shall assign as Executive's pensionable compensation certain amounts as the Executive's "Assumed Salary" and "Assumed Short Term Awards" for the period February 14, 1995 through April 8, 2001 in which Executive was not a Company employee. For this purpose Assumed Salary shall be one hundred thirty three thousand eight hundred dollars ($133,800) as of February 14, 1995, with an annual increase of sixty-six thousand six hundred dollars ($66,600) each March 1, beginning March 1, 1995 through March 1, 2001. Assumed Short Term Award for 1994 shall be $73,300. The Assumed Short Term Award for 1995 shall be forty-three percent (43%) of the applicable combination of the Executive's actual salary and Assumed Salary for 1995. The Assumed Short Term Award for each of the years 1996-1999 shall be fifty-five percent (55%) of the Assumed Salary for each such calendar year and the Assumed Short Term Award for 2000 shall be sixty (60%) of the Assumed Salary for the calendar year 2000. The Special Individual Pension shall apply the formulas as in effect from time to time under the AT&T Pension Plans to both the eligible compensation (as defined by the applicable AT&T Pension Plans) earned by the Executive during the years that Executive was a Company employee, and the Assumed Salary and Assumed Short Term Awards for the period Executive was not a Company employee, to determine what the Executive's pension payments would be under the AT&T Pension Plans if Executive had worked continuously for the Company from January 5, 1977 through Executive's Termination Date under this Agreement. This amount shall be Executive's Special Individual Pension. Upon the Executive's eligibility to receive benefits under the AT&T Pension Plans, the Company shall make payments to Executive under this Special Individual Pension, but the amount that would otherwise be owed to Executive under the Special Individual Pension shall be offset and reduced on an actuarially equivalent basis by the amount that Executive is eligible to receive at that time or subsequent thereto from the AT&T Pension Plans and both qualified and non-qualified payments from any pension plan(s) arising from Executive's employment with Qwest Communications International Inc. (including the entity formerly known as USWest). The form and duration of the payments of the Special Individual Pension will be in the same - 3 - form and duration as payments made under the terms of the AT&T NQPP in effect at the time that the Executive commences Special Individual Pension benefits under this Section 3(e). The Company shall have the right to request confirmation from the Executive of the amounts that Executive is receiving from both qualified and non-qualified Qwest Communications International Inc. (including US West) pension plans. The Special Individual Pension paid under this Section 3(e) shall vest on April 1, 2006 and is contingent upon continued employment through such date; provided, however, that the Special Individual Pension shall vest immediately if the Executive's employment terminates due to death, Disability or for Good Reason, the Company terminates the Executive without Cause, or the Company is subject to a Change in Control, as each such term is defined in Section 5 of this Agreement. (f) Special Individual Deferral. The Company shall credit three million two hundred thousand dollars ($3,200,000) to a deferral account on October 1, 2003 ("Special Individual Deferral") in the Executive's name. The Special Individual Deferral shall vest on October 1, 2003 and from its establishment 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 one-half of one percent (.5%). The establishment of the Special Individual Deferral shall be contingent upon Executive's employment with the Company on October 1, 2003, and if Executive is not employed with the Company on October 1, 2003, regardless of the reason, then Executive shall not receive this Special Individual Deferral. Notwithstanding anything in this Agreement to the contrary, the terms of the Special Individual Deferral are set forth in Attachment A to this Agreement and shall govern the deferral, payment and vesting of the Special Individual Deferral. (g) April 2001 Individual Deferral. The Special Deferral Account (the "April 2001 Deferral") set forth in Section 5(c) of the Executive's April 9, 2001 Agreement ("Initial Employment Agreement") shall continue according to the terms and conditions under which it was established in the Initial Employment Agreement, except that the reference to vesting and payout in the event of a Special Voluntary Termination, as the Initial Employment Agreement defines that term, shall be eliminated. (h) Lake Tahoe home. When the Executive sells Executive's Lake Tahoe home, the Company shall provide Executive a payment equal to the amount that the Company would have paid for real estate commissions, closing costs and shipment of household goods to New Jersey had the Executive been entitled to relocation benefits on the vacation home pursuant to the AT&T Relocation Plan B. (i) To the extent that 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 the Medicare portion of the 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 allowance to offset the federal and state income and the Medicare portion of the FICA tax impact of the tax allowance itself. (j) Certain Long Term Incentive Compensation from the Initial Employment Agreement. 2001 AT&T Performance Shares, 2001 AT&T Stock Options, - 4 - Restricted Stock Units, Seasoned Performance Shares, and the Special Grant of AT&T Restricted Stock awarded to the Executive under Sections 4(a), 4(b), 4(c), 4(d), 4(e), and 4(f) of the Executive's Initial Employment Agreement shall continue under their original terms, including, without limitation, the terms of Section 7 of the Initial Agreement. (k) Certain Payments Not Benefit-Bearing. The following amounts will not be counted for purposes of benefit accrual under any employee benefit plans and perquisite programs made available by the Company to its management and senior management employees (the "Employee Benefit Plans"): (i) the Special Tax Payment; (ii) payments under Special Individual Pension; (iii) Special Individual Deferral; (iv) April 2001 Individual Deferral; and (v) tax payments associated with the sale of the Lake Tahoe home. Notwithstanding the foregoing, in the event of a conflict between this Agreement and a particular plan, program or agreement regarding the inclusion or exclusion of payments under this Section, such plan and not this Agreement shall control. 4. Benefits. (a) Expenses. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses that Executive incurs during the Term in carrying out Executive's duties under this Agreement, provided that Executive complies with the policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses as in effect from time to time. (b) Benefits Generally. During the Term, the Executive shall be entitled to participate in the Employee Benefit Plans, on the same terms and conditions as apply to the Other Senior Executives, as the same may be in effect from time to time. Without limiting the generality of the foregoing, Executive shall continue to be entitled to the benefits provided for under Sections 6 and 26 of the Initial Employment Agreement, except for Sections 6(c), (e) and (g) thereof and except that Executive's vacation entitlement shall be subject to the policies of the Company regarding carryover. (c) Perquisites. The Company shall provide Executive with the perquisites of employment as are commonly provided to other member of the Operations Group. 5. Payments to Executive at Termination. (a) Consequences of Termination. If the Executive's employment with the Company is terminated for any reason other than Voluntary Resignation (as defined in Section 5(g) below) or Cause before the end of the Term of this Agreement, including without limitation as a result at the end of the Term pursuant to the Executive's or the Company's Notice of Nonrenewal, by action of the Company or the Executive or by reason of the Executive's death or Disability (as defined in Section 5(d) below) (a "Termination"), the Term shall end on the date of the Termination, and the Company and the Executive shall have no further obligations under this Agreement, except as provided in this Section 5. The Executive (or, in the case of Executive's death, the Executive's estate and/or beneficiaries) shall be entitled to the following upon a Termination: (i) to receive the Base Salary through the date of the Termination; (ii) payment of any Annual Bonus earned with respect to a completed fiscal year of the Company that is unpaid as of the date of Termination; (iii) payment of the Annual Bonus in the target amount for the year in which the termination occurs, prorated to reflect length of service during that year; (iv) payment of the April 2001 - 5 - Deferral, and after September 30, 2003, the Special Individual Deferral and (v) all other compensation and benefits that may be provided under the terms and conditions of the Employee Benefit Plans. (b) Severance. Without limiting the generality of the foregoing, upon a Termination of the Executive's employment by the Company without Cause or by the Executive for Good Reason (provided that a termination upon the Company's Notice of Nonrenewal shall also be considered without Cause) or by the Executive for Good Reason, the Executive shall be entitled to such benefits, if any, upon such Termination as may be provided for in, and subject to the terms and conditions (including the execution of any required release or other documentation or agreement) of, the AT&T Senior Officer Severance Plan (the "Severance Plan"), as in effect at the time of the Termination (including, if applicable, any change of control severance pay or benefits); provided, that such pay shall not duplicate any pay or benefits provided for under Section 5(a) above. The Executive shall also be entitled to the following, if the Severance Plan either does not provide the following or provides the following at a level less advantageous to the Executive, provided that the benefits received under this Section 5(b) may not duplicate benefits receive under the Severance Plan; provided, further, that the benefits received under this Section 5(b) are subject to Executive's execution of a release as required by the Non-Competition Guideline: (i) a lump sum severance payment equal to 200% of the sum of Executive's Base Salary and target Annual Bonus as in effect at the time of termination; provided that if Executive's termination is for Good Reason due to a reduction in any such amount, the amount use in calculating the severance payment shall be that in effect prior to the event giving rise to Good Reason; (ii) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable in accordance with the terms of the grants governing Company initiated terminations; (iii) continued vesting of outstanding 2001 Performance Shares and pay out in accordance with the terms thereof and pro rated vesting based on the date of Executive's termination for any Performance Shares awarded after 2001 with payment, if any, to be based on Company performance from the beginning of the applicable performance period through the end of the calendar year of Termination and payable as soon as practicable in the calendar year immediately following the calendar year in which the date of Termination occurs; (iv) lapse of restrictions on Restricted Stock and Restricted Stock Units; (v) payout at target for each Performance Share Cycle in which the Executive was participating at the time of Executive's Termination, prorated for the amount of time on the payroll in the applicable three (3) year cycle; (vi) vesting and payout of the April 2001 Individual Deferral established in the Initial Employment Agreement; (vii) coverage for the Executive and Executive's eligible dependents under the Senior Management Separation Medical Plan; (viii) continuation of the Senior Management Universal Life Insurance; and (ix) financial counseling consistent with the type financial counseling provided to Executive under Section 6 of the Initial Employment Agreement, including income tax return preparation and a federal tax allowance to the Executive for the cost of the financial counseling, for the length of time specified in Section 6 of the Initial Employment Agreement or for the length of time specified under the Severance Plan with respect to financial counseling, whichever is greater (the "Financial Counseling Benefit"). For purposes of this Agreement, "Good Reason" shall mean the occurrence without Executive's express written consent of any of the following events: - 6 - (i) Executive's demotion to a position which is not of a rank and responsibility comparable to the positions set forth in Section 2(a) of this Agreement; provided, however, 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 Executive's business unit's budget or a reduction in Executive's business unit's head count, by themselves, do not constitute Good Reason; (ii) A reduction in Executive's Annual Base Salary Rate, Target Annual Incentive and/or "Target Annual Long Term Incentive Grants" for any calendar or fiscal year, as applicable, to an amount that is less than the Executive's Annual Base Salary Rate, Target Annual Incentive and/or Target Annual Long Term Incentive Grants (as applicable) that existed in the prior calendar or fiscal year, as applicable. For purposes of this Section 5(b), the dollar value of the "Target Annual Long Term Incentive Grants" shall exclude the value of any special one-time or non-ordinary course periodic long-term incentive grants, and shall be determined by valuing Performance Shares, Stock Units, Restricted Stock and Restricted 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; (iii) the failure of the Company to appoint Executive as President of AT&T Corp. by the earlier of (A) the date that is 30 days after the appointment of David Dorman as Chief Executive Officer of the Company, or (B) September 30, 2003; or (iv) the Company's breach of any material term of this Agreement; provided that the Executive shall give written notice to the Company of Executive's termination of employment for Good Reason, 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 termination for Good Reason is based and (B) to be given within six (6) months of the Executive's learning of such act or acts or failure or failures to act. The Company shall have ten (10) calendar days after the date that such written notice has been given by the Executive in which to cure such conduct, to the extent such cure is possible. (c) Termination Due to Death. In the event of a Termination as a result of the Executive's death during the Term, Executive's estate or Executive's beneficiaries, as the case may be, shall be entitled to the following benefits in addition to, but not duplicative of, those provided for in Section 5(a) above: (i) a cash payment equal to the amount of the Executive's target Annual Bonus for the year of the Termination, pro-rated to reflect the portion of the performance year that occurs before the Termination payable in a single installment as soon as practicable following the Termination; (ii) the Financial Counseling Benefit; (iii) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable in accordance with the terms of the grants governing Death; (iv) lapse of restrictions on Restricted Stock and Restricted Stock Units; (v) payout at target for each Performance Share Cycle in which the Executive was participating at the time of Executive's Death, prorated for the - 7 - amount of time on the payroll in the applicable three (3) year cycle; provided, however, for Seasoned Performance Shares in the Executive's Initial Employment Agreement, the period of time in each performance cycle prior to the Effective Date of the Initial Employment Agreement shall be counted in determining the prorated amount; and (vi) vesting and payout of the April 2001 Individual Deferral established in the Initial Employment Agreement. (d) Termination Due to Disability. The Company shall have the right to terminate Executive's employment as a result of Executive's inability to perform Executive's duties under this Agreement by reason of any physical or mental impairment, which inability is expected to continue for more than twelve (12) months ("Disability"). In the event that Executive's employment is terminated during the Term due to Executive's Disability, Executive shall be entitled to the following benefits in addition to, but not duplicative of, those provided for in Section 5(a) above: (i) disability benefits in accordance with the disability program then in effect for Other Senior Executives (and the terms of such disability program shall govern exclusively the Executive's rights to benefits thereunder); (ii) the Financial Counseling Benefit; (iii) all outstanding options, whether or not then exercisable, shall become exercisable and shall remain exercisable in accordance with the terms of the grants governing Disability; (iv) lapse of restrictions on Restricted Stock and Restricted Stock Units; (v) payout at target for each Performance Share Cycle in which the Executive was participating at the time of Executive's Disability, prorated for the amount of time on the payroll in the applicable three (3) year; provided, however, for Seasoned Performance Shares in the Executive's Initial Employment Agreement, the period of time in each performance cycle prior to the Effective Date of the Initial Employment Agreement shall be counted in determining the prorated amount; and (vi) payout of the April 2001 Individual Deferral established in the Initial Employment Agreement. (e) Rights upon a Change in Control. Upon the occurrence of a Change in Control, (i) all rights and benefits of Executive that were subject to vesting immediately prior to the Change in Control under any employee benefit plan of the Company, other than qualified defined benefit pension plans, shall become fully vested (and, to the extent applicable, shall also become exercisable and/or unrestricted), including, without limitation, stock option, Performance Shares, Restricted Stock and Restricted Stock Units awards, special deferral arrangements (including, without limitation, the April 2001 Deferral, but excluding the Special Individual Deferral if not already vested at such time), non-qualified pension plans and qualified savings plans; and (ii) Executive shall be entitled to a pro rata payment of her Annual Bonus. (f) Severance in Connection with a Change in Control. In the event of a termination Executive's employment by the Company without Cause or by the Executive for Good Reason within two years following a Change in Control, Executive shall be entitled to all the payments and benefits provided for in Sections 5(a) and 5(b) hereof, provided, however, that the severance payment in clause (i) of Section 5(b) shall be equal to the following: three (3) times the sum of (i) Executive's Base Salary for the year in which the termination occurs; (ii) Executive's target Annual Bonus for the year in which the termination occurs; and (iii) Executive's target Performance Shares Value for the year in which the termination occurs. In addition, Executive shall be entitled to (i) a lump sum cash payment in an amount sufficient to provide fully paid death benefits in the same amount as provided to Executive under the Company's Senior Management Life Universal Insurance Program; (ii) full vesting of benefits - 8 - under the Company's qualified defined benefit plans and a lump sum payment option with respect thereto; and (iii) the Gross Up Payment (as defined below). For purposes of this Agreement, "Change in Control" shall have the meaning set forth in the AT&T 1997 Long Term Incentive Plan as in effect on the date hereof. (g) Termination by Voluntary Resignation or for Cause. In the event that the Executive resigns without Good Reason, which shall include a Notice of Non-Renewal by Executive (a "Voluntary Resignation"), Executive shall receive nothing further under this Agreement except for (i) Base Salary earned but unpaid as of the effective date of a Voluntary Resignation; (ii) any Annual Bonus earned with respect to a completed fiscal year of the Company that is unpaid as of the effective date of a Voluntary Resignation, provided that Executive is on the Company's payroll on the payment date; (iii) any benefits due to Executive under any employee benefit plans of the Company and any payments due to the Executive under any Company policy, program, arrangement or agreement (including, without limitation reimbursement for previously incurred expenses) that are not by their terms subject to forfeiture in the event of a Voluntary Resignation; and (iv) stock options, Performance Shares, Restricted Stock, Restricted Stock Units and any other equity-based awards that are vested as of the effective date of a Voluntary Resignation shall continue according to the terms of the award applicable to a Voluntary Resignation. In the event that the Company terminate the Executive's employment for Cause, then the Executive shall be entitled to nothing further under this Agreement except as required by applicable law and all Long Term Incentive Compensation previously promised or awarded (whether vested or not) shall be cancelled as of the termination date. For purposes of this Agreement "Cause" 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 (iv) repeated failure to carry out the duties of Executive's position despite specific instruction to do so. Notwithstanding anything in this Agreement or in the Severance Plan to the contrary, "Cause" shall not exist unless the provisions of this Section 8(f) are complied with. The Executive shall be given written notice by the Company of the intention to terminate Executive 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 - 9 - notice has been given to the Executive in which to cure such conduct, to the extent such cure is possible. If Executive fails to cure such conduct, the Executive shall then be entitled to a hearing before a meeting of the Board of Directors. Such hearing shall be held within fifteen (15) calendar days of such notice to the Executive, provided Executive requests such hearing within ten (10) calendar days of the written notice from the Company of the intention to terminate Executive 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, Executive shall thereupon be terminated for Cause. Any purported termination for Cause that fails to comply with the foregoing requirements shall be conclusively deemed to be a termination by the Company without Cause. Company may suspend Executive during the pendency of the foregoing process; provided that Executive shall continue to receive all compensation and benefits during such suspension; provided, further that such suspension may not be effected if it prevents or hinders Executive's ability to cure Executive's conduct. 6. Confidentiality of Trade Secrets and Business Information. The Executive agrees that Executive will not, at any time during Executive's employment with the Company or thereafter, disclose or use any trade secret, proprietary or confidential information of the Company or any subsidiary or affiliate of the Company (collectively, "Confidential Information"), obtained during the course of such employment, except for disclosures and uses 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 the Executive receives notice that any party will seek to compel him by process of law to disclose any Confidential Information, Executive shall promptly notify the Company and cooperate with the Company in seeking a protective order against such disclosure. 7. Return of Information. The Executive agrees that at the time of any termination of Executive's employment with the Company, whether at the instance of the Executive or the Company, and regardless of the reasons therefore, Executive 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 Confidential Information and other information relating to the business of the Company or any subsidiary or affiliate of the Company which are in Executive's possession, except as otherwise consented in writing by the Company at the time of such termination. The foregoing shall not prevent the Executive from retain copies of personal contact information to the extent such copies do not contain any Confidential Information. 8. Covenants of the Executive. (a) Noncompetition. In consideration for the compensation payable to the Executive under this Agreement, including compensation under the Initial Employment Agreement specifically incorporated into the Agreement under Sections 4(g), 4(h) and 4(i), the Executive agrees that Executive will not, during Executive's employment with the Company and for a period of one (1) year after any Termination, render services to a competitor, regardless of the nature thereof, 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"). The Executive recognizes that this obligation includes, and is not limited to, an agreement that Executive shall not work for a competitor of AT&T Corp. as an the Executive, consultant, independent - 10 - contractor or in any other capacity for a period of one (1) year following any Termination, regardless of whether the Termination is at the instance of the Company or the Executive, and regardless of whether the Executive is entitled to severance pay as a result thereof. The foregoing shall not prohibit the Executive from being a passive owner of not more than one percent (1%) of the outstanding common stock, capital stock and/or equity of any publicly traded entity so long as the Executive has no active participation in the management of business of such firm, corporation or enterprise. (a) Noninterference. During the Executive's employment with the Company and for a period of one (1) year following any Termination, the 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 the Executive's employment with the Company and for a period of one (1) year following any Termination, the 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. (b) Forfeiture. Notwithstanding any other provision of this Agreement or of any Employee Benefit Plan or other plan, policy, arrangement or agreement, the Company may, subject to the provisions of applicable law and in accordance with the terms of the Non-Competition Guideline, in its discretion, determine to cause the Executive to forfeit any and all payments and benefits from the Company and its affiliates (except those made from Company-sponsored tax-qualified pension or welfare plans) to which Executive may otherwise be entitled, whether under this Agreement or otherwise, if Executive violates any of Executive's obligations under the Non-Competition Guideline; provided, that before imposing such forfeiture, the Company shall first given the Executive written notice of the violation and its intent to cause such forfeiture, and an opportunity to cure such violation; and provided, further, that no such notice shall be required if either (i) the Company had previously notified the Executive that the conduct or proposed conduct in question violated or would violate Executive's obligations under the Non-Competition Guideline, or (ii) such conduct is not capable of being cured. 9. Enforcement. The Executive acknowledges and agrees that: (i) the purpose of the covenants set forth in Sections 6 through 8 above is to protect the goodwill, trade secrets and other confidential information of the Company; (ii) because of the nature of the business in which the Company and the Affiliated Companies are engaged and because of the nature of the Confidential Information to which the Executive has access, it would be impractical and excessively difficult to determine the actual damages of the Company and the Affiliated Companies in the event the Executive breached any such covenants; (iii) remedies at law (such as monetary damages) for any breach of the Executive's obligations under Sections 6 through 8 would be inadequate; and (iv) even the threat of any misuse of the Confidential Information of the Company would be irreparably harmful because of the importance of that Confidential Information. The Executive therefore agrees and consents that if Executive commits any breach of a covenant under Sections 6 through 8 or threatens to commit any such breach, the Company shall have the right (in addition to, and not in lieu of, any other right or remedy that may be available to it) to temporary and permanent injunctive relief from a court of competent - 11 - jurisdiction, without posting any bond or other security and without the necessity of proof of actual damage. If any portion of Sections 6 through 8 is hereafter determined to be invalid or unenforceable in any respect, such determination shall not affect the remainder thereof, which shall be given the maximum effect possible and shall be fully enforced, without regard to the invalid portions. In particular, without limiting the generality of the foregoing, if the covenants set forth in Section 8 are found by a court or an arbitrator to be unreasonable, the Executive and the Company agree that the maximum period, scope or geographical area that is found to be reasonable 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. If any of the covenants of Sections 6 through 8 are determined to be wholly or partially unenforceable in any jurisdiction, such determination shall not be a bar to or in any way diminish the Company's right to enforce any such covenant in any other jurisdiction. 10. Cooperation After Termination of Employment. Following the termination of Executive's employment for any reason and for a period of six years thereafter, the Executive shall reasonably cooperate with the Company with respect to the prosecution or defense by the Company of any legal proceedings in which the Executive is or could be a witness. The Executive's obligation to cooperate pursuant to this Section 10 shall continue until such legal proceedings are concluded or Executive's services as a witness or consultant are no longer required. The Company shall reimburse the Executive for Executive's time (at an hourly rate based on Executive's last Base Salary), plus all travel and other out-of-pocket expenses required by Executive's obligations under this Section 10. 11. Resolution of Disputes. Any disputes arising under or in connection with this Agreement, other than Sections 6 through 8 above, shall first be addressed by third-party mediation and, if such mediation fails to resolve such dispute within sixty days, by binding arbitration, to be held in New Jersey. 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 the Executive; provided, however, that the Company shall reimburse the Executive for attorneys' fees if the Executive prevails in such arbitration on any material issue. 12. Certain Additional Payments. (a) If any element of compensation or benefit provided to the Executive under the terms of this Agreement, or under any other Company plan, program, policy or other arrangement ("Benefit"), either alone or in combination with other elements of compensation and benefits paid or provided to the Executive, constitutes an "excess parachute payment", as that term is defined in Section 280G of the Internal Revenue Code and the regulations thereunder, and subjects the Executive to the excise tax pursuant to Section 4999 of the Internal Revenue Code, and any interest and penalties thereon (collectively, the "Excise Tax"), then the Executive shall be entitled to an additional lump-sum cash payment from the Company (the "Gross Up Payment"), subject to mandatory withholding, in an amount equal to the Excise Taxes (including the Excise Tax attributable to the Gross Up Payment related to the Benefit), plus any income and FICA taxes, and any interest and penalties thereon attributable to the Gross Up Payment. For purposes of calculating an Gross Up Payment to the Executive in any year, it shall be assumed (i) that the inclusion of the Gross Up Payment in the Executive's Federal adjusted gross income shall result in the maximum disallowance of itemized - 12 - deductions related to such inclusion, and (ii) that Executive is subject to Federal and applicable state and local income taxes at the highest marginal Federal and applicable state and local income tax rates, respectively, for the year in which the Gross Up Payment is made. Also, the Gross Up Payment to the Executive shall reflect the Federal tax benefits attributable to the deduction of applicable state and local income taxes. (b) Subject to the provisions of paragraph (c) below, all determinations required to be made under this section, including whether and when an Gross Up Payment is required and the amount of such Gross Up Payment and the assumptions utilized in arriving at such determinations, shall be made by the Company's independent accounting firm responsible for auditing the Company's financial statements for the annual period in which the determinations are made. The Accounting Firm shall provide detailed supporting calculations to the Company and to the Executive within thirty (30) business days of the receipt of notice from the Company or the Executive that there has been a Benefit provided to which this section applies (or such earlier time as requested by the Company). Any Gross Up Payment, as determined pursuant to this paragraph (b), shall be paid by the Company to the Executive within fifteen (15) business days of the receipt of the Accounting Firm's determination. (c) (i) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding, or in the opinion of independent counsel whose opinion is agreed upon by the Company and the Executive, that the Excise Tax payable by the Executive on the Benefit is less than the amount initially taken into account under paragraph (a) for purposes of calculating the Gross Up Payment related to such Benefit, the Accounting Firm shall recalculate the Gross Up Payment, based on the results of the judicial determination or Internal Revenue Service proceeding to reflect the actual Excise Tax related to such Benefit. Within thirty (30) business days following the later of (i) the Executive's receipt of notice of the results of such recalculation from the Accounting Firm and/or the Company, or (ii) the Executive's receipt of a refund from the Internal Revenue Service, related to the Excise Tax on such Benefit, the Executive shall repay to the Company the excess of the initial Gross Up Payment over the recalculated Gross Up Payment. (ii) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding, or in the opinion of an independent counsel agreed upon by the Company and the Executive, that the Excise Tax payable by the Executive on the Benefit is more than the amount initially taken into account under paragraph (a) for purposes of calculating the Gross Up Payment, the Accounting Firm shall recalculate the Gross Up Payment to reflect the actual Excise Tax. Within fifteen (15) business days following the Company's receipt of notice of the results of such recalculation from the Accounting Firm, the Company shall pay to the Executive the excess of the recalculated Gross Up Payment over the initial Gross Up Payment. (d) All fees and expenses of the Accounting Firm shall be borne solely by the Company. (e) The Executive shall notify the Company in writing of any written claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross Up Payment or the recalculation of a Gross Up Payment. The notification - 13 - shall apprise the Company of the nature of such claim, including (1) a copy of the written claim from the Internal Revenue Service, (2) the identification of the element of compensation and/or benefit that is the subject of such Internal Revenue Service claim, and (3) the date on which such claim is requested to be paid. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive receives notice in writing of such claim. Within ten (10) business days following receipt of the notification of the Internal Revenue Service written claim from the Executive, the Company shall pay to the Executive an Gross Up Payment, or the excess of a recalculated Gross Up Payment over the initial Gross Up Payment, as applicable, related to the element of compensation and/or benefit which is the subject of the Internal Revenue Service claim. Within ten (10) business days following such payment to the Executive, the Executive shall provide to the Company written evidence that she had paid the claim to the Internal Revenue Service (the United States Treasury). The failure of the Executive to properly notify the Company of the Internal Revenue Service claim (or to provide any required information with respect thereto) shall not affect any rights granted to the Executive under this section, except to the extent that the Company is materially prejudiced in the challenge to such claim as a direct result of such failure. If the Company notifies the Executive in writing, within sixty (60) business days following receipt from the Executive of notification of the Internal Revenue Service claim, that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time including, without limitation accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim if the Company elects not to assume and control the defense of such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax, income tax and FICA tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this section, the Company shall have the right, at its sole option, to assume the control of all proceedings in connection with such contest, in which case it may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim, and may direct the Executive to sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, that any extension of the - 14 - statute of limitations relating to payment of tax for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's rights to assume the control of the contest shall be limited to issues with respect to which an Gross Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. To the extent that the contest to the Internal Revenue Service claim is successful, the Gross Up Payment related to the element of compensation and/or benefit that was the subject of the claim shall be recalculated in accordance with the provisions of paragraph (c)(ii). 13. Indemnification. 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 Executive 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 York, 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 Executive has ceased to 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 Executive 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 Executive is not entitled to be indemnified against such costs and expense. 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 Executive 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. 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. In addition to, and not in limitation of the foregoing, the terms of the letter agreement dated December 17, 2001 between C. Michael Armstrong and the Executive shall remain in full force and effect during the Term. 14. The Executive's Representations. The Executive hereby represents and warrants that the Executive has the right to enter into this Agreement with the Company and to - 15 - grant the rights contained in this Agreement, and 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. The 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 and attorney and with representatives of the Company. The Executive further acknowledges that the Company has not provided the Executive with any legal advice regarding this Agreement. 15. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed given when delivered (a) personally, (b) by facsimile with evidence of completed transmission, 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. 900 Route 202/206N Post Office Box 752 Bedminster, N.J. 07921 Attention: Executive Vice President, Human Resources If to the Executive: Betsy Bernard 900 Route 202/206N Bedminster, N.J. 07921 16. Assignment and Successors. (a) The Executive. This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) The Company. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. 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. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor to which this Agreement is assigned or that assumes this Agreement by operation of law or otherwise. The provisions of this Section 14(b) are not intended to, and in no way shall, limit Executive's rights and entitlement under Sections 5(b) and 5(e) of this Agreement. 17. Governing Law; Amendment. This Agreement shall be governed by, and construed in accordance with, the laws of New Jersey, without reference to principles of conflict of laws. This Agreement may not be amended or modified except by a written agreement - 16 - executed by the Executive and the Company or their respective successors and legal representatives. 18. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. 19. Tax Withholding. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. 20. Costs Associated with Agreement. The Company shall reimburse the Executive for the costs incurred by The Executive for financial counseling and attorneys' fees associated with negotiation and preparation of this Agreement. To the extent the Company's reimbursement under this Section 18 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 allowance to offset the federal and state income and Medicare portion of FICA tax impact of the tax allowance itself. 21. No Waiver. The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. 22. No Mitigation/Offset. The Executive shall not be obligated to mitigate the amount of any payments due under this Agreement and, except as specifically provided in Section 8(c) hereof, no payments or benefits under this Agreement shall be subject to reduction, offset or forfeiture for any reason. 23. Headings. The Section headings contained in this Agreement are for convenience only and in no manner shall be construed as part of this Agreement. 24. Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and shall supersede all prior agreements, whether written or oral, with respect thereto, including without limitation any term sheet and the Initial Employment Agreement (including but not limited to the Special Voluntary Termination), except where the Initial Employment Agreement or any other document is specifically incorporated into this Agreement. 25. Duration of Terms. The respective rights and obligations of the parties hereunder shall survive any termination of Executive' employment, the Term or this Agreement to the extent necessary to give effect to such rights and obligations. - 17 - 26. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. - 18 - IN WITNESS WHEREOF, the Executive has hereunto set Executive's hand and, pursuant to the authorization of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. /s/ Betsy Bernard ------------------------- Betsy Bernard AT&T Corp. By: /s/ Mirian M. Graddick-Weir -------------------------------- Mirian M. Graddick-Weir Executive Vice-President Human Resources B. Bernard Special Individual Deferral Attachment A This Arrangement will detail and document the terms of a Special Individual Deferral (the SID) which will be provided to you as part of employment agreement with AT&T Corp. (the "Company"), dated as of October 1, 2002 (the "Employment Agreement"). Under this Arrangement, the SID will be established in your name. The maintenance, vesting, forfeiture and distribution of the SID shall be in accordance with the following terms and conditions. As of October 1, 2003 (hereinafter the "Effective Date"), and contingent upon your continued employment with the Company through the Effective Date, the Company shall credit the SID with an initial balance of three million two hundred thousand dollars ($3,200,000). The SID will be fully vested and non-forfeitable on the Effective Date and you will be responsible for applicable FICA and Medicare taxes on the amount vested on such date. The Company shall credit interest to the SID, compounded as of the end of each calendar quarter following the Effective Date, at a rate equal to the sum of one-quarter (1/4) of the average rate applicable to the 10 year Treasury Note for the prior calendar quarter, plus .5%. The SID 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 SID, nor in any assets of the Company with respect thereto. You shall not have any right to receive any payment with respect to the SID, except as expressly provided below. The SID 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 SID, will not be recognized. This Arrangement 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. The applicable SID balance shall be paid to you in a single lump sum payment as soon as administratively feasible following the earliest to occur of: (i) your written election to receive such payment, subject to a 10% reduction in your SID balance, notwithstanding the full vesting and non-forfeitability of your SID on the Effective Date; (ii) December 31, 2004 (unless deferred pursuant to clause (iii)); (iii) a Deferral Date (as defined below) or (iv) your termination from the Company for any reason following the Effective Date. For purpose of determining the SID balance, interest shall be credited through the end of the calendar quarter in which the applicable payment date occurs. Notwithstanding any provision herein to the contrary, in the event a change in applicable law or regulation is reasonably likely to result in the recognition of income by you for income tax purposes following the Effective Date in respect of the SID, the SID balance shall be paid to you as soon as practicable following the earliest date that such law or regulation would be reasonably likely to cause you to recognize income in respect of the SID. "Deferral Date" means a date, elected by you in writing no later than one calendar year prior to the date certain on which the SID balance would otherwise be paid, until which such - 2 - payment will be deferred; provided that such date shall be at least five calendar years after the date on which the payment was originally due. By way of example, if you wish to defer payment beyond December 31, 2004, you must elect to do so no later than December 31, 2003, and you may not elect a Deferral Date prior to December 31, 2009. In the event of Change in Control (as defined in the Employment Agreement), the Company shall deposit the entire amount of your SID balance into an account for your benefit under a "rabbi" trust established by the Company upon the Change in Control. Any interest earned on your SID balance following a Change in Control will also be deposited into the rabbi trust account when earned. In the event of your termination for any reason prior to the Effective Date, the SID will not be established for you. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Arrangement or any fact concerning its execution or implementation unless required by law or to enforce the terms of this Arrangement. You may, however, discuss its contents with your legal and/or financial counselor, provided that you advise them of your obligations of confidentiality and that any disclosures made by any of them may be treated by the Company as disclosures made by you for purposes of this provision. THIS ARRANGEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON. Payments from the SID are in addition to and not in lieu (nor will it or anything in this agreement postpone, reduce or negate impact) of qualified or non-qualified pension, savings, or other retirement plan, program or arrangement covering you. The SID payments provided under this Arrangement are subject to payroll tax withholding and reporting, and amounts credited to the SID are not included in the base for calculating benefits (nor shall such amounts offset any benefits) under any employee or Senior Management benefit plan, program or practice. The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of New York, without regard to its conflict of laws rule. - 3 - B. Bernard Special Individual Deferral Attachment X This Arrangement will detail and document the terms of a Special Individual Deferral (the SID) which will be provided to you as part of your new Employment Agreement. Under this Arrangement, the SID will be established in your name. The maintenance, vesting, forfeiture and distribution of the SID shall be in accordance with the following terms and conditions. As of October 1, 2003 (hereinafter the "Effective Date"), and contingent upon your continued employment with the Company, AT&T Corp. (hereinafter "the Company") shall credit the SID with an initial balance of three million two hundred thousand dollars ($3,200,000). The SID will vest on the Effective Date and you will be responsible for applicable FICA and Medicare taxes on the amount vested on such date. The Company shall credit interest to the SID, compounded as of the end of each calendar quarter, at a rate equal to the sum of one-quarter (1/4) of the average rate applicable to the 10 year Treasury Note for the prior calendar quarter, plus .5%. The SID 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 SID, nor in any assets of the Company with respect thereto. You shall not have any right to receive any payment with respect to the SID, except as expressly provided below. The SID 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 SID, will not be recognized. This Arrangement 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. The SID balance shall be paid to you in a single lump sum payment as soon as administratively feasible in the calendar quarter immediately following your termination from the Company. Interest shall be credited through the end of the calendar quarter in which the termination occurs. - 4 - In the event of your termination for any reason prior to the Effective Date, the SID will not be established for you. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Arrangement or any fact concerning its execution or implementation unless required by law or to enforce the terms of this Arrangement. You may, however, discuss its contents with your legal and/or financial counselor, provided that you advise them of your obligations of confidentiality and that any disclosures made by any of them may be treated by the Company as disclosures made by you for purposes of this provision. THIS ARRANGEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON. Payments from the SID are in addition to and not in lieu (nor will it or anything in this agreement postpone, reduce or negate impact) of qualified or non-qualified pension, savings, or other retirement plan, program or arrangement covering you. The SID payments provided under this Arrangement are subject to payroll tax withholding and reporting, and amounts credited to the SID are not included in the base for calculating benefits (nor shall such amounts offset any benefits) under any employee or Senior Management benefit plan, program or practice. 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. - 5 - EX-10.III.A.23 7 e84804exv10wiiiwaw23.txt FORM OF AGREEMENT EXHIBIT 10(III)(a)23 C.M. Armstrong November 18, 2002 Dear Mike, The purpose of this letter is to memorialize our ongoing obligations to each other. 1. As of the Effective Time, as defined in the Merger Agreement entered into among AT&T Corp. ("AT&T"), Comcast Corporation ("Comcast") and others, AT&T's obligations under your October 17, 1997 Employment Agreement ("Employment Agreement") with AT&T will cease except as specifically provided in this letter, and AT&T Broadband will assume the Employment Agreement as provided under the Employee Benefits Agreement by and between AT&T and AT&T Broadband Corp., dated December 19, 2001 (the "EBA"). 2. AT&T hereby agrees to pay you a pension benefit (the "SERP") in the amount of $97,228 per month, expressed as a single life annuity. Payment of the SERP will begin at the first day of the second month following the month in which your employment with Comcast, AT&T Broadband Corp. and their respective affiliates and successors terminates; provided, however, that you may elect, in lieu of a single life annuity, to receive the SERP in the form of a joint and survivor annuity, with such election and the conversion of the amount of the SERP to be made in accordance with the provisions and practices of the AT&T Management Pension Plan as in effect on the date hereof; and provided, further, that if your employment with Comcast, AT&T Broadband Corp. and their respective affiliates and successors terminates as a result of your death, your spouse will be provided a survivor benefit under the SERP, in the form of a single life annuity payable monthly. Such annuity to your spouse shall be the actuarial equivalent at the time of your death of the value, at the time of your death, of the lump sum provided by Comcast to AT&T in exchange for AT&T's agreement to provide the SERP, calculated based on a 6.5% discount rate and the mortality assumptions used to perform the actuarial valuation of AT&T's pension plans for funding purposes, as in effect as of the date hereof, and payment thereof shall begin at the first day of the second month following the month of your death. Examples of the calculation of such annuity to your spouse are attached to this letter. The SERP shall be in addition to any qualified and non-qualified pension payments to which you may be entitled under the AT&T Management Pension Plan, the AT&T Excess Compensation and Benefit Plan, and the AT&T Non-Qualified Pension Plan or any other plan sponsored by AT&T and its subsidiaries (together, the "Plans"), which payments will be determined in accordance with the Plans and will not affect the amount of the SERP benefit. 3. In addition: (a) AT&T will honor any rights and entitlements that you may have under the terms of any plan, program or arrangement sponsored by AT&T and its subsidiaries, to the extent not assumed by AT&T Broadband pursuant to the EBA; (b) Section 6 of the Employment Agreement shall continue in effect until all obligations thereunder are satisfied; (c) AT&T shall reimburse you for any expenses incurred by you on or prior to the date hereof for which you would have been entitled to reimbursement from AT&T under the first sentence of Section 11(a) of the Employment Agreement, absent this letter, to the extent that you have not received reimbursement for such expenses from Comcast, AT&T Broadband Corp. and their respective affiliates and successors after you have made commercially reasonable efforts to obtain such reimbursement. (d) The provisions of Section 16 of the Employment Agreement, including without limitation AT&T's obligation to indemnify you and provide insurance coverage, shall continue in effect with respect to Proceedings (as defined in the Employment Agreement) to which you are made a party or threatened to be made a party by reason of the fact that you were a director, officer or employee of AT&T or were serving at the request of AT&T as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is your alleged action in an official capacity while serving as a director, officer, member, employee or agent of AT&T; provided, that the coverage that AT&T is obligated to provide to you pursuant to Section 16(c) of the Employment Agreement shall be coverage to the extent AT&T provides such coverage to its other former senior executive officers; (e) Sections 15, 17 and 24 of the Employment Agreement shall apply to this letter as if incorporated herein; and (f) Sections 14(b), (c) and (f) of the Employment Agreement shall continue in effect. 4. Subject to your continued adherence to the AT&T Non-Competition Guideline (attached) for a period of two years following the Effective Time, AT&T has agreed to retain and assume certain obligations to you, as follows: (a) You and your eligible dependents will be eligible to enroll for coverage under the AT&T Separation Medical Plan offered by AT&T to certain former senior managers at any time after you have no medical coverage from Comcast, AT&T Broadband Corp. and their respective affiliates and successors (it being understood and agreed that if you do so enroll and your coverage subsequently lapses, you will not be entitled to re-enroll). You will be responsible for the same portion (currently 30%) of the annual premium for this medical coverage applicable from time to time to those individuals who are similarly situated former senior managers at the time you begin coverage. Continuation of coverage under the AT&T Separation Medical Plan after your death is available to your spouse, provided she pays 100% of the premium. (b) It is anticipated that during your employment with Comcast, Comcast will pay the annual premiums for continuation of your $4.5 million Senior Management Universal Life Insurance policy. At such time as Comcast is no longer obligated to pay such premiums, AT&T shall resume paying the premiums and shall continue to do so through the fifteenth anniversary of the date of issuance of the policy. Since the annual premiums paid by AT&T will be taxable as ordinary income, AT&T will include an additional amount (i.e., a "federal tax gross-up") to provide the benefit to you with a minimal after-tax cost to you. For purposes of this Section 4 and any obligations you may have relating to the AT&T Non-Competition Guideline, the following shall not be deemed to constitute a violation of the AT&T Non-Competition Guideline: (1) your entering into any employment or consulting agreement with Comcast or its successors and your performance of services for Comcast or its successors to the extent required under such agreement, and (2) your solicitation and employment of Maureen Radigan. This letter may be executed in counterparts, both of which shall be considered one and the same agreement, and shall become effective when each of such counterparts have been signed by each of the parties and delivered to the other party. AT&T CORP. By /s/ Mirian M. Graddick-Weir ---------------------------------- Name: Mirian M. Graddick-Weir Title: Executive Vice President - Human Resources Agreed and Accepted, C. MICHAEL ARMSTRONG /s/ C. Michael Armstrong - ------------------------------------ EX-10.III.A.27 8 e84804exv10wiiiwaw27.txt FORM OF SPECIAL DEFERRAL AGREEMENT EXHIBIT 10(iii)(a)27 November 5, 2002 Mr. C. M. Armstrong Dear Mike: In recognition of the contributions you have made to the successful spin-off of AT&T Broadband and the close of the merger with Comcast, the Board of Directors of AT&T Corp. (the "Board") has awarded you a Completion Bonus equal to two million, five hundred thousand dollars ($2,500,000). Effective on the date of the successful close of the merger (the "Effective Date"), AT&T Corp. (the "Company") will apply the Completion Bonus to establish a special individual deferred account (the "Deferred Account") for you. The maintenance, vesting, forfeiture and distribution of the Deferred Account shall be in accordance with the following terms and conditions. The Company shall credit the Deferred Account with an initial balance equal to the Completion Bonus of two million, five hundred thousand dollars. The Deferred Account will be credited with interest from the Effective Date to the end of the first calendar quarter following the Effective Date, at a rate equal to one-quarter (1/4) of the average annual rate applicable to actively traded 10 Year Treasury Notes for the prior calendar quarter plus .5%. The Deferred Account will be credited with interest as of the end of each calendar quarter thereafter, compounded quarterly, at a rate equal to one-quarter (1/4) of the average annual rate applicable to actively traded 10 Year Treasury Notes for the prior calendar quarter plus .5%. Interest credited to the Deferred Account will be calculated in accordance with procedures determined by the Company in its sole and absolute discretion. The Deferred Account, including interest, shall be paid in ten (10) approximately equal annual installments beginning in the calendar quarter immediately following your 65th birthday. 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 herein. The Deferred Account may not be assigned, pledged or otherwise alienated by you and any attempt to 2 do so, or any garnishment, execution or levy of any kind with respect to the Deferred Account, will not be recognized. 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, and the Board. The Deferred Account will be 100% vested on the Effective Date, with respect to the initial balance credited thereto, and will be 100% vest from time to time thereafter, with respect to interest credited to the Deferred Account. As of the Effective Date you will be responsible for applicable FICA and Medicare taxes on the initial amount credited to the Deferred Account. In the event of your termination of employment for Cause (as defined below) prior to the Effective Date, the Completion Bonus shall be forfeited. In the event of your termination of employment from the Company, due to Long Term Disability as defined below, or your death, prior to the Effective Date, the entire Completion Bonus will become vested and be distributed to you or your named beneficiary (or your estate if no beneficiary has been named), in a lump sum payment as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your termination of employment occurs. In the event of a Company-initiated termination for other than Cause prior to the Effective Date, the entire Completion Bonus shall become vested and be distributed to you in a lump sum payment as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your termination occurs. For purposes of this Agreement: a) "Cause" termination shall mean: (i) your conviction (including a plea of guilty or nolo contendere) of a crime involving theft, fraud, dishonesty or moral turpitude; (ii) violation by you 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 3 (iv) repeated failure to carry out the duties of your position despite specific instruction to do so. (c) "Long Term Disability" shall mean termination of your employment with the Company with eligibility to receive a disability allowance under the AT&T Long Term Disability Plan for Management Employees or a replacement plan. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its execution or implementation unless required by law or to enforce the terms of this Agreement. You may, however, discuss its contents with your spouse, legal and/or financial counselor, provided that you advise them of your obligations of confidentiality and that any disclosures made by any of them may be treated by the Company as disclosures made by you for purposes of this provision. THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON. Credits to and payments from the Deferred Account are in addition to and not in lieu (nor will they or anything in this Agreement postpone, reduce or negatively impact) any qualified or non-qualified pension, savings, or other retirement plan, program or arrangement covering you. Credits to and payments from the Deferred Account provided under this Agreement are subject to payroll tax withholding and reporting, and amounts credited to and amounts paid from the Deferred Account are not included in the base for calculating benefits (nor shall such amounts offset any benefits) under any employee or Senior Management benefit plan, program or practice. You understand that the terms of Agreement shall apply to the Company and its successors. The Company specifically reserves the right to assign the terms of this Agreement to any successor, whether the successor is the result of a sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any combination or form thereof. No sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any combination or form thereof by the Company shall be construed as a termination of your employment and will not be considered a termination for purposes of this Agreement. 4 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. In addition, all of the benefits provided under this Agreement are subject to forfeiture if you violate the AT&T Non-Competition Guideline, a copy of which has been previously provided to you. Congratulations Mike! If you agree with the terms and conditions detailed above, sign and date this Agreement in the spaces provided below and return the original executed copy to me. Sincerely, /s/ C. Michael Armstrong 11/21/02 - ------------------------------- --------------------- Acknowledged and Agreed to Date EX-10.III.A.28 9 e84804exv10wiiiwaw28.txt FORM OF AGREEMENT EXHIBIT 10(iii))(a)28 January 4, 2001 Mr. Hossein Eslambolchi Dear Hossein, In recognition of the role AT&T Corp. (the "Company") anticipates that you will play as a Senior Manager, and pursuant to the terms of the Executive Term Sheet dated January 4, 2001, the Company agrees to pay you a Special Retention Payment (Payment) equal to the sum of $3,462,603.87 ($2,000,000 net of federal income and Medicare taxes; Attachment A). This Payment completely replaces and supersedes any other arrangement for special allowance payments of the type that the Company previously paid to you. This Payment shall be subject to the terms and conditions set forth below in this letter ("Agreement"). As soon as is administratively feasible after your date of hire, (hereinafter the "Effective Date"), the Company shall make the Payment to you in the sum of $3,462,603.87. This will result in a net payment of $2,230,212.30 after the deduction of federal and state income taxes at standard withholding rates, and FICA and Medicare tax withholdings. This Payment is subject to payroll tax withholding and reporting, and is in addition to and not in lieu of any qualified or non-qualified pension, savings, or other retirement plan, program or compensation. This Payment is not included in the base for calculating benefits under the employee benefit plans, programs or practices of the Company or its affiliates. Your right to retain this payment shall be contingent upon your continued employment with the Company through the fifth anniversary of the Effective Date. If, prior to the fifth anniversary of the Effective Date, you voluntarily resign from the Company or are terminated for Cause, as defined below, you will be required to repay to the Company the entire Special Retention Payment of $3,462,603.87 within ninety (90) days of such termination of employment. Following such termination the Company shall apply the following payments related to your employment, less any amounts required to be withheld for FICA, and for federal, state, and local income taxes, to the unpaid balance: Payments of compensation, including but not limited to salary and vacation pay unpaid as of your termination of employment, Long Term and Annual Incentive Awards. AT&T Proprietary (Restricted) 1 You shall continue to be obligated to repay any unpaid balance that remains after the application of such payments. If the entire amount is not repaid within ninety days following such termination of employment, you will also be required to pay interest on the unpaid balance for any period in which there is an unpaid balance, at the Prime Rate of interest as published in the Wall Street Journal on the first business day of each month. In the event of your termination of employment for any other reason including termination with Good Reason as defined below, prior to the fifth anniversary of the Effective Date, you will have no obligation to the Company with regard to this Payment. 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 understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its execution or implementation unless required by law or to enforce the terms of this Agreement. You may, however, discuss its contents with your spouse, legal and/or financial counselor, provided that you advise them of your obligations of confidentiality and that any disclosures made by any of them may be treated by the Company as disclosures made by you for purposes of this provision. THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON. For purposes of this Agreement: "Good Reason" shall mean: (i) any diminution in position, authority, duties or responsibilities (whether or not occurring solely as a result of the Company's ceasing to be a publicly traded entity) that is not remedied by the Company within thirty (30) days after receipt of notice thereof given by you, or (ii) a reduction in your "Total Annual Compensation" (defined as the sum of your Annual Base Salary Rate, Target Annual Bonus, and Target LTIP) for any calendar or fiscal year, as applicable. AT&T Proprietary (Restricted) 2 "Cause" shall mean: (i) your conviction (including a plea of guilty or nolo contendere) of a crime involving theft, fraud, dishonesty or moral turpitude; (ii) gross omission or gross dereliction of any statutory, common law or other duty of loyalty to the Company or any of its affiliates; (iii) violation by you of the Non-Competition Guideline (attached hereto) or material violation by you of the Company's Code of Conduct; (iv) Your repeated failure to carry out your job duties despite specific instructions to do so; provided, however, that your failure to meet specific business objectives despite good faith efforts to do so shall not be considered Cause. You understand that the terms of Agreement shall apply to the Company and its successors. The Company specifically reserves the right to assign the terms of this Agreement to any successor, whether the successor is the result of a sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any combination or form thereof. No sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any combination or form thereof by the Company shall be construed as a termination of your employment and will not be considered a termination for purposes of this Agreement. 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. Hossein, I am happy to present this Agreement to you. If you agree with the terms and conditions detailed above, please sign this Agreement in the space provided below and return the executed original to me. Sincerely, /s/ Mirian Graddick-Weir ------------------------- Mirian Graddick-Weir Executive Vice President Attachment /s/ Hossein Eslambolchi 1/5/01 - ------------------------------- ---------------------------- Acknowledged and agreed to Date AT&T Proprietary (Restricted) 3 Hossein Eslambolchi AT&T Proprietary (Restricted) 4 March 9, 2001 Mr. H. Eslambolchi Dear Hossein, Per our recent discussions, the agreement dated January 4, 2001, concerning your Special Retention Payment is hereby amended as follows: 1. The Special Retention Payment shall be modified to consider California State income tax in the determination of the amount of the Special Retention Payment. Accordingly, the Special Retention Payment shall equal $3,835,473.53 ($2,000,000 net of federal and state income taxes and Medicare taxes.) All references to the Special Retention Payment (Payment) shall refer to this revised amount. An additional payment shall, therefore, be paid to you on or about April 1, 2002 in the amount of $372,869.66, representing the increase in the Special Retention Payment resulting from this amendment. This payment shall be subject to any required withholdings for federal, state and local income taxes and FICA taxes. 2. Amended Attachment A to this letter replaces Attachment A to the January 4, 2001 agreement. All other terms and conditions of the January 4, 2001 agreement shall remain unchanged and continue to apply. Hossein, if you agree with this amendment, please sign this document in the space provided below. AT&T Proprietary (Restricted) 5 Sincerely, /s/ Mirian Graddick-Weir ------------------------- Mirian Gradick-Weir Executive Vice President /s/ Hossein Eslambolchi - ------------------------------ Acknowledged and Agreed Hossein Eslambolchi AT&T Proprietary (Restricted) 6 EX-10.III.A.34 10 e84804exv10wiiiwaw34.txt FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10(iii)(a)34 December 31, 2002 David Dorman AT&T Chairman and CEO One AT&T Way Room 5A108 Bedminster, NJ 07921 Dear Dave: This letter confirms our recent discussions and agreement regarding AT&T Corp.'s ("AT&T") obligations to reimburse you for relocation. Paragraph 6(d) of your employment agreement ("Agreement") with AT&T effective December 1, 2000 provides that you shall not be reimbursed for relocation expenses incurred after December 31, 2002. However, because you have not had the opportunity to complete the relocation process, AT&T agrees to amend paragraph 6(d) of your employment agreement to extend the period while you are an active employee and permit reimbursement to you under the terms and conditions of AT&T Relocation Plan B for expenses incurred prior to December 31, 2003, with requests for reimbursement to be submitted no later than March 31, 2004. Please sign below where indicated to confirm this amendment. Very truly yours, /s/ Mirian M. Graddick-Weir ---------------------------- Mirian M. Graddick-Weir Executive Vice President Human Resources Concurred: /s/ David Dorman - ---------------------- David Dorman EX-10.III.A.35 11 e84804exv10wiiiwaw35.txt FORMOF SPECIAL EQUITY AGREEMENT EXHIBIT 10(iii)(a)35 January 31, 2001 Mr. Hossein Eslambolchi Dear Hossein, In recognition of the role AT&T Corp. (the "Company") anticipates that you will play as a Senior Manager, the Company agrees to make the equity grants and awards ("Grants") described in Attachment A of this letter. These Grants are in addition to the Special Stock Option Grant and the Special Restricted Stock Unit Grant described in the Executive Term Sheet that you signed upon your re-employment with AT&T effective January 8, 2001. The "Grants" described in Attachment A shall be subject to the terms and conditions set forth in the applicable Stock Option, Restricted Stock Unit and Performance Share Agreements and the additional terms and conditions set forth below in this letter ("Agreement"). Any payments resulting from such Grants shall be subject to applicable payroll tax withholding and reporting. Such Grants are in addition to and not in lieu of any qualified or non-qualified pension, savings, or other retirement plan, program or compensation. Neither the Grants nor any payments resulting from such Grants shall be included in the base for calculating benefits under the employee benefit plans, programs or practices of the Company or its affiliates. These Grants shall be contingent upon you signing this Agreement, Attachment A to this Agreement and the appropriate Stock Option, Restricted Stock Unit and Performance Share Agreements. This Agreement may not be amended or waived, unless the amendment or waiver is in writing, signed by you and by AT&T's Executive Vice President - Human Resources. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its execution or implementation unless required by law or to enforce the terms of this Agreement. You may, however, discuss its contents with your spouse, legal and/or financial counselor, provided that you advise them of your obligations of confidentiality and that any disclosures made by any of them may be treated by the Company as disclosures made by you for purposes of this provision. THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF AT&T Proprietary (Restricted) 1 CONTINUED EMPLOYMENT. THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON. 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. Hossein, I am happy to present this Agreement to you. If you agree with the terms and conditions detailed above, please sign both this Agreement and Attachment A and return the executed originals to me. Sincerely, /s/ Mirian Graddick-Weir ------------------------- Mirian Graddick-Weir Executive Vice President Attachment /s/ Hossein Eslambolchi 3/19/01 - ------------------------------- ---------------------------- Acknowledged and agreed to Date Hossein Eslambolchi AT&T Proprietary (Restricted) 2 Hossein Eslambolchi - Special Equity Grant Term Sheet - - AT&T Stock Option Grants - - Three AT&T grants totaling 87,200 stock options: - - 16,500 @ $29.02 - - 30,000 @ $38.27 - - 40,700 @ $50.76 - - Grant date: 1/31/01 - - Vest 25% /Yr. over 4 years - - Expire 1/31/2011 - - Wireless Stock Option Grant - - Wireless grant - - 26,400 stock options @ current market price - - Grant date: 1/31/01 - - 25% vest after 6mos., 6.25% / qtr. thereafter - - Expire 1/31/2011 - - Retention Grants - - Retention Grant based on approximately 1.33 X Base Salary; - - 17,300 AT&T stock options @ current price - Grant date: 1/31/01 - Vest in 3 years - Expire 1/31/2011 - - 14,700 AT&T Restricted Stock Units - Grant date: 1/31/01 - Vest in 3 years - - Retention Grant consisting of 75,000 Wireless stock options @ current price - Grant date: 1/31/01 - Vest 33.33%/Yr. over 3 years - - Performance Shares - - 1998 - 2000 cycle - Make special cash payment equal to performance share payment. - - 1999 - 2001 and 2000 - 2002 cycles - grant seasoned Performance Shares equal to shares that were cancelled upon 12/3/00 termination of employment. /s/ Hossein Eslambolchi ___________________ - ------------------------- Date Hossein Eslambolchi AT&T Proprietary (Restricted) 3 EX-10.III.A.36 12 e84804exv10wiiiwaw36.txt FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10(iii)(a)36 December 28, 1999 Mr. H. Eslambolchi Dear Hossein, This will confirm our conversation regarding special payments which you will receive from AT&T (the Company) in connection with your move to California. In order to mitigate the higher housing costs associated with your relocation, the Company will provide you the following: - Base Salary: Your base salary will be increased to $300,000. - Special Temporary Allowance: The Company will pay you a monthly Special Temporary Allowance (STA) of $ 10,000 per month beginning with the month you close on a home in California and continuing for a total of 36 months. The above monthly STA payments will be grossed-up for taxes, since such payments are taxable income subject to tax withholding. These STA payments are predicated upon your continued employment with the Company and will not be included in the pay base for calculating any employee or Senior Manager benefits. - Special Retention Package: The Company will provide you with a retention package with a value of $850,000, such value to be provided to you over the next three years. The terms and conditions of such retention will be detailed in subsequent communications. This special retention package is predicated upon your continued employment with the Company and will not be included in the pay base for calculating any employee or Senior Manager benefits. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its negotiation, execution or implementation. You may, however, discuss its contents with your spouse, legal and/or financial counselor, or potential mortgage lender provided that you advise them of your obligations of confidentiality and that any disclosures made by any of them may be treated by AT&T as disclosures made by you for purposes of this provision. Sincerely, /s/ Hal Burlingame ------------------- Hal Burlingame Executive Vice President - Human Resources January 6, 2000 Mr. H. Eslambolchi Dear Hossein, This letter completely replaces my letter to you dated December 28, 1999, and supersedes all other oral and written correspondence on the subject. This will confirm our conversations regarding special payments which you will receive from AT&T (the Company) in connection with your move to California. In order to mitigate the higher housing costs associated with your relocation, the Company will provide you the following: - Base Salary: Your base salary will be increased to $300,000. - Special Temporary Allowance: In order to assist you with obtaining a mortgage, currently anticipated to be $2,500,000, the Company will pay you a gross monthly Special Temporary Allowance (STA) of $ 25,000 per month, beginning with the month you close on a home in California and continuing for a total of 36 months. To the extent your mortgage is less than $2,500,000, this STA will be prorated accordingly. These STA payments are predicated upon your continued employment with the Company and will not be included in the pay base for calculating any employee or Senior Manager benefits. These STA payments may be extended after the 36 month period if mutually agreeable and if your Company employment is to continue in the California location to which you are now being assigned. - Special Lump Sum Payment: The Company will provide you with a lump sum cash payment of up to $800,000 for a down payment on your new home in California and will be in addition to the equity in your current home which you agree to use as part of the down payment. This Special Lump Sum Payment will be grossed-up for taxes, since such payment is taxable income subject to tax withholding, and will not be included in the pay base for calculating any employee or Senior Manager benefits. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its negotiation, execution or implementation. You may, however, discuss its contents with your spouse, legal and/or financial counselor, or potential mortgage lender provided that you advise them of your obligations of confidentiality and that any disclosures made by any of them may be treated by AT&T as disclosures made by you for purposes of this provision. Sincerely, /s/ Hal Burlingame ------------------- Hal Burlingame Executive Vice President - Human Resources EX-10.III.A.37 13 e84804exv10wiiiwaw37.txt FORM OF AGREEMENT EXHIBIT 10(iii)(a)37 July 29, 1998 Mr. James W. Cicconi 7019 Devereux Circle Drive Alexandria, VA 22315 Dear Jim: It gives me great pleasure to offer you a Senior Management position within AT&T Corp. (the Company). In addition to confirming my offer, this letter will detail the terms and conditions of your employment and outline the current major features of AT&T's compensation and benefit plans and practices. ASSUMPTION OF DUTIES: Effective on or about September 1, 1998, you will assume the position of Senior Vice President for Government Affairs and Federal Policy, reporting to Mike Armstrong and John Zeglis. Your work location will be Washington, DC. BASE SALARY: Your initial base salary will be $425,000 per year. Specific salary treatment will be based on your relative individual performance. The first review of your base salary level will be effective March 1999. ANNUAL BONUS: The Annual Bonus for Senior Managers currently takes the form of (1) AT&T Performance Award (APA), (2) Unit Performance Award (UPA), and (3) Merit Award (MA): (1) APA is predicated on corporate performance. (2) UPA is predicated on unit performance. (3) MA is driven by individual and team contributions. The Company cannot make any representations regarding the continuation of the APA/UPA/MA incentive format, or, the size of your APA, UPA and MA awards in any given year, if any. Notwithstanding the foregoing, your TARGET (not actual) ANNUAL BONUS for 1998 and 1999 will be 80% of your annual base salary. For AT&T Proprietary 1998, your annual target is $340,000, which will be PRORATED TO REFLECT PARTIAL SERVICE IN 1998, and will be payable in the first quarter of 1999. Assuming a September 1, 1998 start date, your prorated target bonus for 1998 will be $113,400, based on 4 months at an annual target of $340,000. You may elect to defer all or a part of this award under the Incentive Award Deferral Plan. (See "Guaranteed 1998 and 1999 Annual Bonus Amounts" below.) GUARANTEED 1998 AND 1999 ANNUAL BONUS AMOUNTS: In the event that your earned prorated 1998 Annual Bonus is less than your prorated target ($113,400 based on a September 1st start date), you will be provided a lump sum which, when combined with your actual earned Annual Bonus, will equal your prorated target. In the event that your earned prorated 1998 Annual Bonus is equal to or more than your prorated target, you would receive that higher amount and no lump sum would be payable under this Guaranteed 1998 Annual Incentive Amount provision. For the 1999 performance year, in the event that your earned 1999 Annual Bonus is less than your 1999 target Annual Bonus, you will be provided a lump sum which, when combined with your actual earned Annual Bonus, will equal your 1999 target Annual Bonus. In the event that your earned 1999 Annual Bonus is equal to or more than your target Annual Bonus, you will receive that higher amount and no lump sum would be payable under this Guaranteed 1999 Annual Incentive Amount provision. The amounts payable under this Guaranteed 1998 and 1999 Annual Bonus provision will not be included as compensation under any employee or Senior Manager benefit plan, and are NOT DEFERRABLE. It is understood that this minimum guaranteed Annual Bonus for performance years 1998 and 1999 shall not in any way be construed as a precedent for future performance years. AT&T LONG TERM INCENTIVES: Your AT&T Long Term Incentive for 1998 is composed of AT&T Stock Options and AT&T Performance Shares. AT&T PERFORMANCE SHARES: You will receive 7,300 AT&T Performance Shares covering the 1998-2000 performance period (payout in the first quarter of 2001). These Performance Shares will be awarded on your date of hire. Performance Shares are equivalent in value to AT&T common shares. Historically, such awards have been made annually. - Assuming continued Company employment, distribution of from 0% to 200% of such Performance Shares is made in the form of cash and AT&T shares at the end of the performance period based on a AT&T Proprietary J.W.Cicconi-page 3 measure of AT&T's Total Shareholder Return vs. Total Shareholder Return for a peer group of companies, (where Total Shareholder Return is defined as share price appreciation and dividends), or such other measure of financial performance as the Board may determine, during the three year performance period. Under the current terms of the plan, a minimum of 50% of the distribution must be in AT&T shares. In addition, you may elect to defer all or a part of the distribution under the terms of the Incentive Award Deferral Plan. - Dividend equivalents are paid quarterly on all undistributed Performance Shares held on AT&T dividend record dates. These dividend equivalents are also deferrable beginning in the year following the year of hire. AT&T STOCK OPTIONS: Effective on your date of hire, you will be awarded your 1998 grant of 31,000 AT&T Stock Options. The term of the stock option grant is ten years. Assuming continued Company employment, these stock options vest as follows: one-third of the options will vest on the first anniversary of the date of grant, one-third on the second anniversary, and one-third on the third anniversary of the date of grant. The option price is 100% of market price on date of grant. As with the Annual Incentive Awards, Long Term Incentives are closely linked with the Company's strategy to meet the challenges of an ever-changing marketplace. Accordingly, other than the initial grants reflected in this offer of employment, the Company cannot guarantee continuation of the Long Term Incentive Plan in its current format, nor can it guarantee annual grant levels to individual participants. STOCK OWNERSHIP GUIDELINES: AT&T Officers are expected to own common shares of AT&T with a fair market value equal to a multiple of their annual salary. YOUR TARGET IS TWO (2) TIMES YOUR SALARY. There is a five (5) year window period for achieving this ownership target, and the Chairman will annually review all Officers' progress toward their goals. Once achieved, the ownership level should be maintained throughout your tenure as an Officer. HIRING BONUS: In order to incent you to join AT&T, the Company will provide you the following: - You will receive a ONE-TIME HIRING BONUS OF $240,000, payable as $10,000 per month for 24 months, based solely on continued Company service. The first $10,000 payment will be payable at the end of AT&T Proprietary J.W.Cicconi-page 4 September 1998, a similar payment to be made at the end of each of the next 23 months, assuming continued employment. It is understood that these payments shall not in any way be construed as a precedent for future years and such payments will not be benefit bearing. - The Chairman will be asked to approve the following "Seasoned" AT&T Performance Shares under the Company's Long Term Incentive Program: - 7,300 AT&T PERFORMANCE SHARES FOR THE 1997-99 PERFORMANCE PERIOD, payable in first quarter of 2000 Assuming continued Company employment, distribution of from 0% to 200% of such Performance Shares is made in the form of cash and AT&T shares at the end of the performance period based on a measure of AT&T's Total Shareholder Return vs. Total Shareholder Return for a peer group of companies, (where Total Shareholder Return is defined as share price appreciation and dividends), or such other measure of financial performance as the Board may determine, during the three year performance period. Under the current terms of the plan, a minimum of 50% of the distribution must be in AT&T shares. In addition, you may elect to defer all or a part of the distribution under the terms of the Incentive Award Deferral Plan. Dividend equivalents are paid quarterly on all undistributed Performance Shares held on AT&T dividend record dates. These dividend equivalents are also deferrable beginning in the year following the year of hire. - 7,300 AT&T PERFORMANCE SHARES FOR THE 1996-98 PERFORMANCE PERIOD, payable in first quarter of 1999 Because of the 1996 restructuring of AT&T and the difficulty of setting long-term financial targets while the restructure was in progress, the performance criteria established for the long-term cycle 1996-1998 will not be applicable. For this performance period the criteria is deemed to have been met at the target level, i.e., 100%. The opportunity to earn a distribution above 100% was eliminated, and all other terms and conditions of the award continue to apply, including that a minimum of 50% of the distribution must be in AT&T shares. In addition, you may elect AT&T Proprietary J.W.Cicconi-page 5 to defer all or a part of the distribution under the terms of the Incentive Award Deferral Plan. Dividend equivalents are paid quarterly on all undistributed Performance Shares held on AT&T dividend record dates. These dividend equivalents are also deferrable beginning in the year following the year of hire. SEVERANCE BENEFIT: (I) In the event of any Company initiated termination, within 72 months from the effective date of your employment, other than for "Long Term Disability" (as defined below) or for "Cause" (as defined below), you will be entitled to: - A "Severance Payment" equal to the higher of (1) $850,000 or (2) 200% of your annual base salary in effect on the date of such termination. This Severance Payment will be payable in the month following the month of termination. - All AT&T Stock Options which are granted under this letter agreement (i.e., the 1998 regular grant) as well as future regular annual stock option grants will continue to vest and be exercisable as if you remained an active employee. - All AT&T Performance Shares which are granted under this letter agreement (i.e., AT&T Performance Shares for the 1996-98, 1997-99 and 1998-2000 performance cycles) as well as future regular annual performance share grants will be retained and distributed at the end of each three-year cycle. Dividend equivalents will continue to be paid until all shares are paid out. - A prorated Annual Bonus based on actual results, for the year of your termination. This amount will be payable at the time such bonuses for the performance year are generally payable, currently in the first quarter of the year following the performance year. (II) In the event of any Company initiated termination prior to the vesting of your pension benefits under the AT&T Management Pension Plan and the AT&T Non-Qualified Pension Plan and the vesting of the Company match under the AT&T Long Term Savings Plan for Management Employees, other than for "Long Term Disability" (as defined below) or for "Cause" (as defined below), you will be entitled to the following: AT&T Proprietary J.W.Cicconi-page 6 - The amount of the benefits accrued, but not vested, to the date of your termination under the above-mentioned plans will be paid from Company operating income in a lump sum, as soon as practicable after your termination. The Severance Payment and other benefits due under this Severance Benefit provision will be conditioned upon you signing (and not revoking), within 30 days of your termination, a release and agreement not to sue the Company. The form of this release and agreement will be that then in use for AT&T Senior Managers. For purposes of this employment letter: - "Cause" shall be defined as follows: (1) your conviction (including a plea of guilty or nolo contendere) of a felony or any crime of 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 the Company's Code of Conduct. - "Long Term Disability" shall mean termination of your employment with the Company with eligibility to receive a disability benefit/allowance under any long term disability plan of the Company or any affiliate of the Company. BENEFITS AND SPECIAL MID-CAREER BENEFITS: You will, of course, be eligible for the benefit programs available to all AT&T Senior Managers. In addition, under the terms of the AT&T Mid-Career Hire Program, you will be entitled to a one-time payment (grossed-up to reflect taxes) equivalent to five months' premiums on the Company Medical Expense Plan and Dental Plan. Although you will have to make your own arrangements for dental coverage during your first six months, you may immediately enroll (and pay for coverage) under the Company's Medical Expense Plan. After this initial six-month period, you would be eligible for the Company paid medical, dental and vision care coverage provided to all management employees. In addition, you will be entitled to five weeks annual vacation after six months of service. ATTACHMENT A outlines the benefits available to you under various Senior Management, mid-career and employee benefit plans, programs and practices. AT&T Proprietary J.W.Cicconi-page 7 OTHER PROVISIONS: It is agreed and understood that you will not talk about, write about or otherwise disclose the terms of existence of this employment letter or any fact concerning its negotiation or implementation. You may, however, discuss the contents of this letter with your spouse, legal and/or financial counselor. As indicated in the attached AT&T Non-Competition Guideline (Attachment B), a number of AT&T incentive arrangements and non-qualified pension and benefit plans are subject to non-competition constraints. This letter reflects the entire agreement regarding the terms and conditions of your employment. Accordingly, it supersedes and completely replaces any prior oral or written communication on this subject. This letter is not an employment contract and 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 managers have the right to terminate their employment at any time and for any reason. Likewise, the Company reserves the right to discontinue your employment with or without cause at any time and for any reason. The incentive plans as well as the employee and Senior Management benefit plans, programs and practices as briefly outlined in this letter, reflect their current provisions. Payments and benefits under these plans, programs, and practices, as well as other payments referred to in this letter, are subject to IRS rules and regulations with respect to withholding, reporting, and taxation, and will not be grossed-up unless specifically stated. The Company reserves the right to discontinue or modify any such plans, programs and practices and to assign any obligations under this agreement to a successor company. Moreover, the summaries contained herein are subject to the terms of such plans, programs and practices. For purposes of the Senior Management and employee benefit plans, the definition of compensation is as stated in the plans. Currently, pensions are based on base salary and annual incentives. Other benefits are based on either base salary or base salary plus annual incentives. All other compensation and payments reflected in this offer are not included in the calculation of any employee or Senior Management benefits (except for the AT&T Incentive Deferral Award Plan, which currently permits the deferral of Annual Incentives and Performance Shares). By acceptance of this offer, you agree that (1) no trade secret or proprietary information belonging to your previous employer will be disclosed or used by you at AT&T, and that no such information, whether in the form of documents, memoranda, software, drawings, etc., will be retained by you or AT&T Proprietary J.W.Cicconi-page 8 brought with you to AT&T, and (2) you have brought to AT&T's attention and provided it with a copy of any agreement which may impact your future employment at AT&T, including non-disclosure, non-competition, invention assignment agreements or agreements containing future work restrictions. Jim, I feel the package we have developed for you is attractive and anticipates that you will make a critical contribution to AT&T. We look forward to having you join us. If you have any questions, please don't hesitate to call me or Paula Pilewicz on (908) 221-4592. If you agree with the foregoing, and affirm that there are no agreements or other impediments that would prevent you from providing exclusive service to the Company, and in particular, that you are not subject to non-competition restrictions by your current employer, please sign this letter, in the space provided below and return the original executed copy to me postmarked no later than August 5, 1998. Sincerely, /s/ James W. Cicconi - ------------------------------- ____________ Acknowledged and Agreed to Date James W. Cicconi Attachments AT&T Proprietary J.W.Cicconi-page 9 Attachment A HEALTH: MEDICAL, DENTAL, VISION FIRST SIX MONTHS - MEDICAL COVERAGE ONLY: - Company provided medical coverage through a Point-of Service [POS] option or the Traditional Indemnity option, if a POS network is not available in your area, or through an HMO. - Premiums are deducted from your paycheck, then reimbursed with a tax gross-up. AFTER SIX MONTHS SERVICE: - Eligible to select different levels of benefit coverage under the MEDICAL and DENTAL plans through AT&T's "Flex Benefits". - Eligible for VISION care coverage. Medical coverage includes prescription drugs and mental health and chemical dependency. FLEX BENEFITS After six months service, eligible to enroll in various benefit plans: - Long Term Disability - Accidental Loss Insurance - Dependent Accidental Loss Insurance - Dependent Life Insurance - Long Term Care - Health Care Reimbursement Accounts - Child/Elder Care Reimbursement Accounts - Vacation Buy DEATH BENEFITS - Spouse benefit - Minimum 15% of Pay (salary plus annual bonus) paid annually for spouse's lifetime, unless pension plans for employee exceed such percentage - 1 x Salary Company paid Senior Management Basic Life Insurance - 1.5 x Salary employee/Company paid Split Dollar Life Insurance - Up to 5 x Salary employee paid Supplemental Variable Universal Life Insurance PENSION BENEFITS - Automatically participate in the AT&T Management Pension Plan and the AT&T Non-Qualified Pension Plan, which are cash balance arrangements. - Annual pay credits added to Cash Balance Accounts based on age and eligible pay (i.e., salary and Annual Bonus) - Vesting occurs after 5 years of Vesting Service AT&T Proprietary J.W.Cicconi-page 10 SICKNESS DISABILITY - 52 weeks at full salary LONG TERM DISABILITY - 60% of salary LTD benefit to age 65 - Company paid. - Option to elect an additional 10% through Flex program - employee paid - after six months of service SAVINGS PLAN - Eligible to enroll as soon as practicable after hire - Contributions on a pre-tax (401K) or after-tax basis up to 16% of salary - Company matches two thirds of employee's contribution up to 6% of salary after one year of service. (4% match on 6% contribution) - Wide array of investment options - Rollover provisions from previous employer's qualified savings plan STOCK PURCHASE PLAN - Allocate up to 10% of salary to purchase AT&T stock at a 15% discount through payroll deductions - Eligible after 6 months of service DEFERRAL PLAN - Option to defer Short and Long Term Incentives (i.e., Annual Bonus, Performance Shares and dividend equivalents) until retirement/ termination or a specific age 55 or older. - Elect 1-20 annual deferral payments - Current interest rate is 10 year U.S. Treasury Note plus 5% interest, which is established by the AT&T Board and subject to change from time to time. FINANCIAL COUNSELING - May participate in Financial Counseling program using one of three approved firms (Asset Management Group, Ayco and PriceWaterhouse Coopers) for personal financial planning on investments, taxes, benefits, insurances and your estate. - Preparation of personal tax returns, will and trusts included. TELEPHONE REIMBURSEMENT - 100% reimbursement for most AT&T long distance and local (where available) charges on home phone bill. VACATIONS / HOLIDAYS - 5 weeks vacation annually after six months of service - 4 Management Personal Days and 3 Floating Holidays annually, with eligibility prorated during first year based on date of hire AT&T Proprietary J.W.Cicconi-page 11 AUTOMOBILE - Company provided leased U.S. automobile, e.g., Cadillac Seville, Oldsmobile Aurora, Jeep Grand Cherokee, Lincoln Town Car, etc. - Company provides insurance and maintenance. - Employee pays for gasoline. - Employee and immediate family may drive for personal use. - Fair market value of the car is imputed annually to the Senior Manager. LEGAL SERVICES PLAN - Provides certain legal service benefits after 6 months of service - Participating attorney fees are paid in full for covered legal benefits such as sale, purchase or refinancing of principal residence (outside of the AT&T Management Relocation Plan) Terms and conditions of the Management Employee, Senior Management and Mid-Career Benefit plans, programs and practices, are subject to change by the Company. The above is only a very brief outline of such benefit plans, programs and practices. Actual entitlements will be determined by the legal documents governing these plans, programs, and practices. If there is any conflict between the information presented in this outline and such legal documents, the legal documents will govern. 7/98 AT&T Proprietary EX-10.III.A.38 14 e84804exv10wiiiwaw38.txt FORM OF SPECIAL DEFERRAL AGREEMENT EXHIBIT 10(iii)(a)38 [AT&T LOGO] April 2, 2001 James Cicconi Dear Jim: In recognition of the role AT&T Corp. (the "Company") anticipates that you will play during the AT&T restructuring, the Company will establish a special individual deferred account (hereinafter the "Deferred Account") for you. The maintenance, vesting, forfeiture and distribution of the Deferred Account shall be in accordance with the following terms and conditions. The Company shall credit the Deferred Account with an initial balance of one million dollars ($1,000,000.00) retroactive to December 1, 2000 (hereinafter the "Effective Date"). The Deferred Account will be credited with an annual rate of interest equal to the annual rate applicable to actively traded 30-Year Treasury Bonds plus 2%, compounded quarterly (one-quarter (1/4) of the average rate for the prior calendar quarter plus .5%), retroactive to the Effective Date, and on a pro-rata basis through the date that the Deferral Account remains undistributed. Interest will be calculated in accordance with procedures determined by AT&T in its sole and absolute discretion. 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, nor 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. 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. The Deferred Account will vest (including interest thereon) on December 31, 2002, contingent upon your continued Company employment to the vesting date. As of the vesting date, you will be responsible for applicable FICA and Medicare taxes on the amount vested on such date. In the event of your termination of employment for any reason on or after December 31, 2002, the entire amount then credited to the Deferred Account shall be distributed to you in a lump sum payment as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your termination occurs; provided however, that at any time on or before June 30, 2002, you may elect the entire amount credited to the Deferred Account (including interest thereon) as of the end of any calendar quarter following December 31, 2002, be distributed to you in a lump sum payment as soon as administratively feasible in the calendar quarter AT&T Proprietary (Restricted) immediately following (1) such calendar quarter or (2) the calendar quarter in which your termination of employment occurs, whichever is earlier. If, prior to December 31, 2002, you resign from the Company other than for Good Reason (as defined below), or are terminated for Cause, as defined below, the entire amount then credited to the Deferred Account shall be forfeited. In the event your termination of employment from the Company due to Long Term Disability as defined below, or your death, prior to December 31, 2002, the entire amount then credited to the Deferred Account shall become vested and be distributed to you or your named beneficiary (or to your estate if no beneficiary has been named), in a lump sum payment as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your termination of employment occurs. In the event of your resignation for Good Reason or a Company-initiated termination for other than Cause (as defined below) prior to December 31, 2002, the entire amount then credited to the Deferred Account shall become vested and be distributed to you in a lump sum payment as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your termination occurs. For purposes of this Agreement: (a) "Cause" termination shall mean: (i) your conviction (including a plea of guilty or nolo contendere) of a crime involving theft, fraud, dishonesty or moral turpitude; (ii) violation by you of the Company's Code of Conduct or Non-Competition Guideline which have previously been provided to you; (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 (iv) repeated failure to carry out the duties of your position despite specific instruction to do so. (b) "Good Reason" shall mean the occurrence without your express written consent of any of the following events: (i) Your assignment to a position other than that of General Counsel of AT&T; or of AT&T Broadband or AT&T Business, in anticipation of the spin-off of such legal entity by the Company, or (ii) Your demotion to a position which is not of a rank and responsibility comparable to members of the 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) changes in reporting relationships shall not, alone, AT&T Proprietary (Restricted) constitute Good Reason and/or (2) a reduction in your business unit's budget or a reduction your business unit's head count, by themselves, do not constitute Good Reason; or (iii) A reduction in your "Total Annual Compensation" (defined as the sum of your 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 (b)(ii) 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, Restricted 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. You must notify the Company within 60 days following knowledge of an event you believe constitutes Good Reason, or such event shall not constitute Good Reason hereunder. (c) "Long Term Disability" shall mean termination of your employment with the Company with eligibility to receive a disability allowance under the AT&T Long Term Disability Plan for Management Employees or a replacement plan. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its execution or implementation unless required by law or to enforce the terms of this Agreement. You may, however, discuss its contents with your spouse, legal and/or financial counselor, provided that you advise them of your obligations of confidentiality and that any disclosures made by any of them may be treated by the Company as disclosures made by you for purposes of this provision. THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON. Payments from the Deferred Account are in addition to and not in lieu (nor will it or anything in this Agreement postpone, reduce or negatively impact) any qualified or non-qualified pension, savings, or other retirement plan, program or arrangement covering you. The Deferred Account payments provided under this Agreement are AT&T Proprietary (Restricted) subject to payroll tax withholding and reporting, and amounts credited to the Deferred Account are not included in the base for calculating benefits (nor shall such amounts offset any benefits) under any employee or Senior Management benefit plan, program or practice. You understand that the terms of this Agreement shall apply to the Company and its successors. The Company specifically reserves the right to assign the terms of this Agreement to any successor, whether the successor is the result of a sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any combination or form thereof. No sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any combination or form thereof by the Company shall be construed as a termination of your employment and will not be considered a termination for purposes of this Agreement. 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. Jim, I am happy to present this special arrangement to you. It recognizes the extraordinary contributions that we expect you to continue to make to our business. If you agree with the terms and conditions detailed above sign and date this Agreement in the spaces provided below and return the original executed copy to me. Sincerely, /s/ James W. Cicconi 4/24/01 - ----------------------------- ---------------------- Acknowledged and Agreed to Date AT&T Proprietary (Restricted) EX-10.III.A.39 15 e84804exv10wiiiwaw39.txt BOARD RESOLUTION APPROVING SPECIAL PAYMENT EXHIBIT 10(iii)(a)39 WHEREAS AT&T entered into an employment agreement with Ms.Bernard dated April 9, 2001; and Whereas it was the intent of Ms. Bernard's employment agreement to make up for significant forfeitures that she experienced as a result of accepting employment with AT&T; and Whereas at the time she began employment negotiations with AT&T she was in the process of establishing Nevada as her primary residence after her retirement from her former employer. Whereas Nevada residency would have resulted in significant savings of state income taxes in 2001 on income from her former employer; and Whereas due to the length and complexity of the AT&T negotiations, Ms. Bernard was not able to finalize the residency change in a timely manner, resulting in her having to pay Colorado state income taxes of $434,427.06 related to income from her former employer; and Whereas, after reduction for the federal tax deduction, Ms. Bernard's net tax liability for Colorado state income taxes is $341,434.06; and Whereas, had this incremental tax liability been known at the time her employment contract was being negotiated, a make-up payment for this tax liability would have been made a component of her employment agreement; and Whereas it is desirable for the Board of Director of the Company to approve a special payment to help offset this incremental state income tax liability. NOW THEREFORE, be it: RESOLVED: that a special payment in the amount of $341,434.06 is authorized to help to offset the incremental tax liability and shall be paid as soon as practicable. EX-10.III.A.40 16 e84804exv10wiiiwaw40.txt FORM OF RETENTION AGREEMENT . . . EXHIBIT 10(iii)(a)40 [AT&T LOGO] EXECUTIVE TERM SHEET EXECUTIVE: FRANK IANNA
- -------------------------------------------------------------------------------------------------------------------- New Assignment Terms - -------------------------------------------------------------------------------------------------------------------- Effective Date December 1, 2000 - -------------------------------------------------------------------------------------------------------------------- Base Salary: $700,000 - -------------------------------------------------------------------------------------------------------------------- Annual Bonus 2001 (Target %): $700,000 (100%) - -------------------------------------------------------------------------------------------------------------------- LTIP (Target) Annual Value:-2001 $8,000,000 LTI Grant Value for 2001; 2002 LTI Grant Value will be no less than $8,000,000 - -------------------------------------------------------------------------------------------------------------------- Special Retention: Special Retention Restricted Share Grant with value of $4,200,000, granted 1/2/01, vesting on 12/31/2002, based on continued employment. Prior to 12/31/2002, vests in event of death, disability, Company initiated termination for other than Cause, or Good Reason - -------------------------------------------------------------------------------------------------------------------- Special Deferral Account 1 Initial amount of $828,000 credited on 11/1/97; interest at 30 Year Treasury Bond (established 11/1/97) Rate. Current terms provide vesting as follows: - Leaves after 6 year anniversary (11/1/2003) - Death or LTD prior to 11/1/03 - Company-initiated termination prior to 11/1/03 - His election to leave prior to 11/1/03 for "Good Reason" - Loses if leaves for any reason other than those cited above New terms: - Vests at later of signing of this term sheet or February 1, 2001 (FICA/Medicare taxes due upon vesting; calculated as 1.45% of account balance on vesting date (e.g., based on 12/31/2000 balance of $995,721.64, tax would be $14,437.96;) - Other terms and conditions with respect to termination prior to vesting continue to apply, i.e., account fully vests upon death, disability, Company-initiated termination for other than Cause, self-initiated termination for Good Reason; account balance is forfeited for other terminations prior to vesting - -------------------------------------------------------------------------------------------------------------------- Special Deferral $1,000,000 deposited in special deferral account (SDA) effective - --------------------------------------------------------------------------------------------------------------------
Rev. 03/26/03 AT&T PROPRIETARY (RESTRICTED) USE PURSUANT TO COMPANY INSTRUCTIONS Acknowledged and Agreed _______________________ ________ Frank Ianna Date [AT&T LOGO] EXECUTIVE TERM SHEET EXECUTIVE: FRANK IANNA - -------------------------------------------------------------------------------------------------------------------- Account 2 upon signing of term sheet retroactive to 1/1/2001, annual interest at 30 year T Bill plus 2%, compounded quarterly; vests 1/2 on 12/31/2001, 1/2on 12/31/2002, contingent upon continued Company employment. Vested amount payable as lump sum in calendar quarter following termination. Prior to 12/31/2002, in event of Company initiated termination for other than Cause, Good Reason termination or death or disability, SDA fully vests and is payable as lump sum in calendar quarter following termination. Executive will sign a deferral agreement detailing terms and conditions. - -------------------------------------------------------------------------------------------------------------------- Special Cash Payment One-time cash lump sum payment of $300,000 fully grossed up for taxes such that net amount is $300,000. Payable within 30 days of signing term sheet. (Gross up is calculated assuming total tax rate of 46.09%: Federal: 39.6%; Federal itemized deduction limitation adjustment: 1.19%; New Jersey tax adjusted for federal deductibility: 3.85%; Medicare:1.45%); Gross payment would be $556,483. - -------------------------------------------------------------------------------------------------------------------- - - Special Equity Grants Current terms (Chairman's award in 2000 -- - Options vest 50% on 1/31/2001 and 50% on 98,000 options and 1/31/2002 contingent upon continued Company employment; 10,700 RSUs) - RSUs vest 1/31/2003 contingent upon continued Company employment; - Options (vested and unvested) and RSUs forfeited upon termination unless termination as a result of death, disability, or Company-initiated termination for other than Cause New terms : - RSUs vest as currently provided, on 1/31/2003 contingent upon continued Company employment; - Options vest as currently provided--50% on 1/31/2001 and 50% on 1/31/2002 contingent upon continued Company employment; - Options (vested and unvested) and RSUs are subject to accelerated vesting in event of death, disability, Company initiated termination for other than Cause, or Good Reason termination. - If options are vested at termination, as described above, they are exercisable for the remainder of the term - -------------------------------------------------------------------------------------------------------------------- CRSP (Special retention equity Current terms grant in 1999-- - Options vest 1/3 on each of following dates: 1/29/2002, - --------------------------------------------------------------------------------------------------------------------
Rev. 11/2000 PAGE 2 AT&T PROPRIETARY (RESTRICTED) USE PURSUANT TO COMPANY INSTRUCTIONS Acknowledged and Agreed _______________________ _______ Frank Ianna Date [AT&T LOGO] EXECUTIVE TERM SHEET EXECUTIVE: FRANK IANNA - -------------------------------------------------------------------------------------------------------------------- 325,500 options 1/29/2003, 1/29/2004 contingent upon continued Company employment, and 65,100 RSUs) - Options (vested and unvested) forfeited if termination is prior to 65 (unless death, disability, or Committee approved retirement prior to 65); - RSUs vest at age 65; prorated for death, disability and Committee approved retirement less than age 65 New Terms: - Unvested options and RSUs vest 12/31/2002 contingent upon continued Company employment - Options exercisable for remainder of term for termination on or after 12/31/2002; - Vesting will accelerate (i.e., 100% vesting for options and RSUs) upon death, disability, Committee approved retirement prior to 65, Company-initiated termination for other than Cause, or Good Reason termination - -------------------------------------------------------------------------------------------------------------------- Other Stock Options which are Assuming retirement on or after 12/31/2002: outstanding as of 12/31/2000 - All other stock options not referenced above, which are outstanding as of 12/31/2000 (including the AWE and AWE retention grants granted in 2000), to the extent not otherwise vested by virtue of their terms and conditions, will vest upon such retirement. - At such retirement all outstanding unexercised vested options (including the AWE and AWE retention grants granted in 2000) will be exercisable for the remainder of the term. - -------------------------------------------------------------------------------------------------------------------- Restricted Stock Units Granted - RSUs vest upon retirement assuming retirement is on or after as Part of 2001 Annual Long 12/31/2002 Term Award - -------------------------------------------------------------------------------------------------------------------- Definitions "Good Reason" termination and "Cause" shall have the same meanings as in the SOSP and 11/1/97 Special Deferral Agreement. - --------------------------------------------------------------------------------------------------------------------
Rev. 11/2000 PAGE 3 AT&T PROPRIETARY (RESTRICTED) USE PURSUANT TO COMPANY INSTRUCTIONS Acknowledged and Agreed ________________________ _____ Frank Ianna Date [AT&T LOGO] EXECUTIVE TERM SHEET EXECUTIVE: FRANK IANNA * Rev. 11/2000 PAGE 4 AT&T PROPRIETARY (RESTRICTED) USE PURSUANT TO COMPANY INSTRUCTIONS Acknowledged and Agreed ________________________ ______ Frank Ianna Date EX-12 17 e84804exv12.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, 2002 2001 2000 1999 1998 ------ ------ ------- ------- ------ DOLLARS IN MILLIONS Income from continuing operations before income taxes $2,836 $7,666 $12,480 $12,545 $8,151 Add distributions of less than 50% owned affiliates 1 5 11 11 61 Add fixed charges, excluding capitalized interest 1,624 1,677 1,697 958 479 ------ ------ ------- ------- ------ Total earnings from continuing operations before income taxes and fixed charges $4,461 $9,348 $14,188 $13,514 $8,691 ====== ====== ======= ======= ====== Fixed Charges: Total interest expense 1,448 1,493 1,503 774 293 Capitalized interest 61 121 143 123 106 Interest portion of rental expense 176 184 194 184 186 ------ ------ ------- ------- ------ Total fixed charges $1,685 $1,798 $ 1,840 $ 1,081 $ 585 ====== ====== ======= ======= ====== Ratio of earnings to fixed charges 2.6 5.2 7.7 12.5 14.9
EX-21 18 e84804exv21.txt LIST OF SUBSIDIARIES Exhibit 21 - Subsidiary List List of Subsidiaries of AT&T Corp. As of 3/28/03 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 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, LLC.................Delaware 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 LLC.........................Delaware AT&T Global Network Services Group LLC...................Delaware AT&T of Puerto Rico, Inc.................................New York AT&T of the Virgin Islands, Inc..........................Delaware Teleport Communications Group Inc........................Delaware EX-23.A 19 e84804exv23wa.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, 33-34264-1, 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), Forms 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, 4 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), the McCaw Cellular Communications, Inc. 1992 Stock Option Plan for Non-Employee Directors (Registration No. 33-52119-04) 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 Corp. Employee 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 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 Non-employee Director Stock Option Plan, the Tele-Communications International, Inc., the 1996 Non-employee 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 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), Post Effective Amendment No. 1 to Form S-8 for AT&T Senior Management Incentive Award Deferral Plan and AT&T Deferred Compensation Plan for Non-Employee Directors (Registration No. 333-61676-1), Form S-8 for AT&T Senior Management Incentive Award Deferral Plan and 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 January 23, 2003, except for Note 20, as to which the date is February 28, 2003, 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, 2002. We also consent to the incorporation by reference of our report dated January 23, 2003, relating to the consolidated financial statement schedule, which appears in this Form 10-K. PRICEWATERHOUSECOOPERS LLP New York, New York March 28, 2003 2 EX-23.B 20 e84804exv23wb.txt CONSENT OF KPMG LLP EXHIBIT 23B INDEPENDENT AUDITORS' CONSENT The Board of Directors AT&T Canada Inc. We consent to the incorporation by reference in the following AT&T Corp. registration statements of our report to the board of directors dated January 31, 2003, except as to notes 1, 8 and 25, which are as of February 25, 2003, relating to the consolidated balance sheet of AT&T Canada Inc. ("the Company") as of December 31, 2001, and the related consolidated statements of operations and deficit and cash flows for the year then ended, which appears as an exhibit to the AT&T Corp. 2002 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, 33-34264-1, 33-29256 and 33-21937 AT&T Long Term Savings Plan for Management 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 Amendment No. 1) AT&T 1996 Employee Stock Purchase Plan 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 Amendment Nos. 1 to Form NCR Corporation 1989 Stock Compensation Plan S-4, (33-42150-01)) S-8 33-42150 (Post-Effective Amendment No. 2 to Form S-4, NCR Corporation 1984 Stock Compensation Plan (33-42150-02)) S-8 33-42150 (Post-Effective Amendment No. 3 to Form S-4, NCR Corporation 1976 Stock Compensation Plan (33-42150-03)) S-8 33-52119 (Post-Effective Amendment No. 1 to Form S-4, McCaw Cellular Communications, Inc. 1983 (33-52119-01)) Non-Qualified Stock Option Plan S-8 33-52119 (Post-Effective Amendment No. 2 to Form S-4, McCaw Cellular Communications, Inc. 1987 Stock (33-52119-02)) Option Plan S-8 33-52119 (Post-Effective Amendment No. 3 to Form S-4, McCaw Cellular Communications, Inc. Equity (33-52119-03)) Purchase Plan S-8 33-52119 (Post-Effective Amendment No. 4 to Form S-4, McCaw Cellular Communications, Inc. 1992 Stock (33-52119-04)) Purchase Plan for Non-Employee Directors
FORM REGISTRATION STATEMENT NO. DESCRIPTION - ---- -------------------------- ----------- S-8 33-52119 (Post-Effective Amendment No. 5 to Form S-4, McCaw Cellular Communications, Inc. Employee (33-52119-05)) Stock Purchase Plan S-8 33-45302 (Post-Effective Amendment No. 1 to Form S-4, Teradata Corporation 1987 Incentive and Other (33-45302-01)) Stock Option Plan S-8 33-63195 AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. S-8 333-49419 (Post-Effective Amendment No. 1 to Form Teleport Communications Group Inc. 1993 Stock S-4, (333-49419-01)) Option Plan S-8 333-49419 (Post-Effective Amendment No. 2 to Form Teleport Communications Group Inc. 1996 Equity S-4, (333-49419-02)) Incentive Plan S-8 333-49419 (Post-Effective Amendment No. 3 to Form ACC Corp. Employee Long Term Incentive Plan S-4, (333-49419-03)) S-8 333-49419 (Post-Effective Amendment No. 4 to Form ACC Corp. Non-Employee Directors' Stock Option S-4, (333-49419-04)) Plan S-8 333-49419 (Post-Effective Amendment No. 5 to Form ACC Corp. 1996 UK Sharesave Scheme S-4, (333-49419-05)) S-8 333-70279 (Post-Effective Amendments No. 1 to Form Tele-Communications, Inc. 1998 Incentive Plan 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 Amendment No. 2 to Form Liberty Media 401(K) Savings Plan 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-8 333-86019 (Post-Effective Amendment No. 1 to Form S-4 MediaOne Group 1999 Supplemental Stock Plan (333-86019-1)) Amended MediaOne Group 1994 Stock Plan S-8 333-86019 (Post-Effective Amendment No. 2 to Form S-4 MediaOne Group 401(K) Savings Plan (333-86019-2)) S-8 333-53134 AT&T Broadband Deferred Compensation Plan
2
FORM REGISTRATION STATEMENT NO. DESCRIPTION - ---- -------------------------- ----------- S-8 333-61676 and Post-Effective Amendment No.1 AT&T Senior Management Incentive Award Deferral (333-61676-1) Plan and AT&T Deferred Compensation Plan for Non-Employee Directors S-3 333-73120 (Amendment Nos. 1, 2 and 3) Redemption of TCI Preferred Securities S-3 333-83174 (which supercedes Form S-3 for the AT&T Universal Shelf Registration $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
Our report contains Comments by the Auditors for U.S. Readers on Canada-U.S. Reporting Differences which states that in the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in note 1 to the consolidated financial statements. Our report to the board of directors is expressed in accordance with Canadian reporting standards, which do not permit a reference to such conditions and events in the auditors' report when these are adequately disclosed in the financial statements. In addition, in the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the Company's financial statements, such as the change described in note 2(e) to the consolidated financial statements. Our report to the board of directors is expressed in accordance with Canadian reporting standards, which do not require a reference to such a change in accounting principles in the auditors' report when the change is properly accounted for and adequately disclosed in the financial statements. KPMG LLP Toronto, Canada March 26, 2003 3 EX-23.C 21 e84804exv23wc.txt CONSENT OF KPMG LLP Exhibit 23c Consent of Independent Auditors The Board of Directors AT&T Corp: We consent to the incorporation by reference in the following registration statements of AT&T Corp. of our report dated February 26, 2001, with respect to the combined statements of operations and comprehensive earnings, attributed net assets, and cash flows of Liberty Media Group for the year ended December 31, 2000, which report is included in the AT&T Corp. 2002 Annual Report on Form 10-K.
Form Registration Statement No. Description - ---- -------------------------- ----------- S-3 333-00573 Shareowner Dividend Reinvestment and Stock Purchase Plan S-8 333-47257 AT&T Long Term Savings and Security Plan S-8 33-34264, 33-34264-1, 33-29256, AT&T Long Term Savings Plan for Management Employees 33-21937 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 Amendment AT&T 1996 Employee Stock Purchase Plan 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 Amendment NCR Corporation 1989 Stock Compensation Plan No. 1 to Form S-4, (33-42150-01)) S-8 33-42150 (Post-Effective Amendment NCR Corporation 1984 Stock Option Plan No. 2 to Form S-4, (33-42150-02)) S-8 33-42150 (Post-Effective Amendment NCR Corporation 1976 Stock Option Plan No. 3 to Form S-4, (33-42150-03)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option No. 1 to Form S-4, Plan (33-52119-01)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. 1987 Stock Option Plan No. 2 to Form S-4, (33-52119-02)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. Equity Purchase Plan No. 3 to Form S-4, (33-52119-03)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. 1992 Stock Option Plan for No. 4 to Form S-4, Non-Employee Directors (33-52119-04)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. Employee Stock Purchase Plan No. 5 to Form S-4, (33-52119-05)) S-8 33-45302 (Post-Effective Amendment Teradata Corporation 1987 Incentive and Other Stock Option Plan No. 1 to 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 Amendment Teleport Communications Group Inc. 1993 Stock Option Plan No. 1 to Form S-4, (333-49419-01)) S-8 333-49419 (Post-Effective Amendment Teleport Communications Group Inc. 1996 Equity Incentive Plan No. 2 to Form S-4, (333-49419-02)) S-8 333-49419 (Post-Effective Amendment ACC Corp. Employee Long Term Incentive Plan No. 3 to Form S-4, (333-49419-03))
S-8 333-49419 (Post-Effective Amendment ACC Corp. Non-Employee Directors' Stock Option Plan No. 4 to Form S-4, (333-49419-04)) S-8 333-49419 (Post-Effective Amendment ACC Corp. 1996 UK Sharesave Scheme No. 5 to Form S-4, (333-49419-05)) S-8 333-70279 (Post-Effective Amendment Tele-Communications, Inc. 1998 Incentive Plan No. 1, (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 Non-Employee Director Stock Option Plan Tele-Communications International, Inc. 1996 Non-Employee Director Stock Option Plan Tele-Communications International, Inc. 1995 Stock Incentive Plan S-8 333-70279 (Post-Effective Amendment Liberty Media 401(K) Savings Plan No. 2, (333-70279-02)) TCI 401(K) Stock Plan S-4 333-75083 Vanguard Cellular Systems, Inc. S-4 333-86019 MediaOne Corp. S-8 333-86019 (Post-Effective MediaOne Group 1999 Supplemental Stock Plan Amendment No. 1 to Form S-4 (333-86019-1)) Amended MediaOne Group 1994 Stock Plan S-8 333-86019 (Post-Effective MediaOne Group 401(K) Savings Plan Amendment No. 2 to Form S-4 (333-86019-2)) S-8 333-53134 AT&T Broadband Deferred Compensation Plan S-8 333-61676 and Post-Effective AT&T Senior Management Incentive Award Deferral Plan Amendment No.1 to Form S-8 AT&T Deferred Compensation Plan for Non-Employee Directors (333-61676-1))
S-3 333-73120 (Amendment Nos. 1, 2 Redemption of TCI Preferred Securities and 3) 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
KPMG LLP Denver, Colorado March 26, 2003 EX-23.D 22 e84804exv23wd.txt CONSENT OF KPMG LLP Exhibit 23d Consent of Independent Auditors The Board of Directors and Stockholders Liberty Media Corporation: We consent to the incorporation by reference in the following registration statements of AT&T Corp. of our report dated March 8, 2002, with respect 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 report appears as an exhibit to the AT&T Corp. 2002 Annual Report on Form 10-K.
Form Registration Statement No. Description - ---- -------------------------- ----------- S-3 333-00573 Shareowner Dividend Reinvestment and Stock Purchase Plan S-8 333-47257 AT&T Long Term Savings and Security Plan S-8 33-34264, 33-34264-1, 33-29256, AT&T Long Term Savings Plan for Management Employees 33-21937 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 Amendment AT&T 1996 Employee Stock Purchase Plan 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 Amendment NCR Corporation 1989 Stock Compensation Plan No. 1 to Form S-4, (33-42150-01)) S-8 33-42150 (Post-Effective Amendment NCR Corporation 1984 Stock Option Plan No. 2 to Form S-4, (33-42150-02)) S-8 33-42150 (Post-Effective Amendment NCR Corporation 1976 Stock Option Plan No. 3 to Form S-4, (33-42150-03)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option No. 1 to Form S-4, Plan (33-52119-01)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. 1987 Stock Option Plan No. 2 to Form S-4, (33-52119-02)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. Equity Purchase Plan No. 3 to Form S-4, (33-52119-03)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. 1992 Stock Option Plan for No. 4 to Form S-4, Non-Employee Directors (33-52119-04)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. Employee Stock Purchase Plan No. 5 to Form S-4, (33-52119-05)) S-8 33-45302 (Post-Effective Amendment Teradata Corporation 1987 Incentive and Other Stock Option Plan No. 1 to 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 Amendment Teleport Communications Group Inc. 1993 Stock Option Plan No. 1 to Form S-4, (333-49419-01)) S-8 333-49419 (Post-Effective Amendment Teleport Communications Group Inc. 1996 Equity Incentive Plan No. 2 to Form S-4, (333-49419-02)) S-8 333-49419 (Post-Effective Amendment ACC Corp. Employee Long Term Incentive Plan No. 3 to Form S-4, (333-49419-03))
S-8 333-49419 (Post-Effective Amendment ACC Corp. Non-Employee Directors' Stock Option Plan No. 4 to Form S-4, (333-49419-04)) S-8 333-49419 (Post-Effective Amendment ACC Corp. 1996 UK Sharesave Scheme No. 5 to Form S-4, (333-49419-05)) S-8 333-70279 (Post-Effective Amendment Tele-Communications, Inc. 1998 Incentive Plan No. 1, (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 Non-Employee Director Stock Option Plan Tele-Communications International, Inc. 1996 Non-Employee Director Stock Option Plan Tele-Communications International, Inc. 1995 Stock Incentive Plan S-8 333-70279 (Post-Effective Amendment Liberty Media 401(K) Savings Plan No. 2, (333-70279-02)) TCI 401(K) Stock Plan S-4 333-75083 Vanguard Cellular Systems, Inc. S-4 333-86019 MediaOne Corp. S-8 333-86019 (Post-Effective Amendment MediaOne Group 1999 Supplemental Stock Plan No. 1 to Form S-4 (333-86019-1)) Amended MediaOne Group 1994 Stock Plan S-8 333-86019 (Post-Effective Amendment MediaOne Group 401(K) Savings Plan No. 2 to Form S-4 (333-86019-2)) S-8 333-53134 AT&T Broadband Deferred Compensation Plan S-8 333-61676 and (Post-Effective AT&T Senior Management Incentive Award Deferral Plan Amendment No.1 to Form S-8 (333-61676-1)) AT&T Deferred Compensation Plan for Non-Employee Directors
S-3 333-73120 (Amendment Nos. 1, 2 and 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 26, 2003 EX-23.E 23 e84804exv23we.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit (23)e 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, 33-34264-1, 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), Forms 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, 4 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), the McCaw Cellular Communications, Inc. 1992 Stock Option Plan for Non-Employee Directors (Registration No. 33-52119-04) 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 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 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), Post Effective Amendment No. 1 to Form S-8 for AT&T Senior Management Incentive Award Deferral Plan and AT&T Deferred Compensation Plan for Non-Employee Directors (Registration No. 333-61676-1), Form S-8 for AT&T Senior Management Incentive Award Deferral Plan and 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 May 1, 2002, relating to the consolidated financial statements of Concert B.V., and its subsidiaries, which appears in AT&T Corp.'s Annual Report on Form 10-K, for the year ended December 31, 2002. PricewaterhouseCoopers LLP McLean, Virginia March 28, 2003 EX-24 24 e84804exv24.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 a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT AND E.M. DWYER 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 24th day of March, 2003. /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 both a director and officer of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT AND E.M. DWYER 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 24th day of March, 2003. /s/ David W. Dorman --------------------------- David W. Dorman Chairman of the Board and 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 R.S. FEIT AND E.M. DWYER 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 24th day of March, 2003. /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 R.S. FEIT AND E.M. DWYER 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 24th day of March, 2003. /s/ Frank C. Herringer --------------------------- Frank C. Herringer 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 R.S. FEIT AND E.M. DWYER 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 24th day of March, 2003. /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 R.S. FEIT AND E.M. DWYER 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 24th day of March, 2003. /s/ Shirley Ann Jackson --------------------------- Shirley Ann 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 R.S. FEIT AND E.M. DWYER 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 24th day of March, 2003. /s/ Jon C. Madonna --------------------------- Jon C. Madonna 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 R.S. FEIT AND E.M. DWYER 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 24th day of March, 2003. /s/ Donald F. McHenry --------------------------- Donald F. McHenry 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 R.S. FEIT AND E.M. DWYER 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 24th day of March, 2003. /s/ Tony L. White --------------------------- Tony L. White Director EX-99.1 25 e84804exv99w1.txt CEO CERTIFICATION OF PERIODIC FINANCIAL REPORTS Exhibit 99.1 CERTIFICATION OF PERIODIC FINANCIAL REPORTS I, David W. Dorman, Chief Executive Officer of AT&T Corp., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and (2) information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of AT&T Corp. Dated: March 28, 2003 /s/ David W. Dorman ------------------------------ David W. Dorman EX-99.2 26 e84804exv99w2.txt CFO CERTIFICATION OF PERIODIC FINANCIAL REPORTS Exhibit 99.2 CERTIFICATION OF PERIODIC FINANCIAL REPORTS I, Thomas W. Horton, Chief Financial Officer of AT&T Corp., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and (2) information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of AT&T Corp. Dated: March 28, 2003 /s/ Thomas W. Horton ------------------------------ Thomas W. Horton EX-99.3 27 e84804exv99w3.txt AT&T CANADA INC. FINANCIAL STATEMENTS Exhibit 99.3 Consolidated Financial Statements (Expressed in Canadian dollars) AT&T CANADA INC. Years ended December 31, 2002, 2001 and 2000 TO THE BOARD OF DIRECTORS AT&T CANADA INC. We have audited the consolidated balance sheets of AT&T Canada Inc. as at December 31, 2002 and 2001 and the consolidated statements of operations and deficit and cash flows for each of the years in the three-year period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. With respect to the consolidated financial statements for the years ended December 31, 2002 and 2000, we conducted our audits in accordance with Canadian generally accepted auditing standards. With respect to the consolidated financial statements for the year ended December 31, 2001, we conducted our audit in accordance with Canadian generally accepted auditing standards and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2002 in accordance with Canadian generally accepted accounting principles. KPMG LLP Chartered Accountants Toronto, Canada January 31, 2003, except as to notes 1, 8 and 25, which are as of February 25, 2003 COMMENTS BY THE AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in note 1 to the consolidated financial statements. Our report to the board of directors, dated January 31, 2003, except as to notes 1, 8 and 25, which are as of February 25, 2003, is expressed in accordance with Canadian reporting standards, which do not permit a reference to such conditions and events in the auditors' report when these are adequately disclosed in the financial statements. In addition, in the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the Company's financial statements, such as the change described in note 2(e) to the consolidated financial statements. Our report to the board of directors dated January 31, 2003, except as to notes 1, 8 and 25, which are as of February 25, 2003, is expressed in accordance with Canadian reporting standards, which do not require a reference to such a change in accounting principles in the auditors' report when the change is properly accounted for and adequately disclosed in the financial statements. KPMG LLP Chartered Accountants Toronto, Canada January 31, 2003, except as to notes 1, 8 and 25, which are as of February 25, 2003 AT&T CANADA INC. Consolidated Balance Sheets (In thousands of Canadian dollars) December 31, 2002 and 2001 - --------------------------------------------------------------------------------
2002 2001 ---- ---- (Restated - note 2(g)) ASSETS Current assets: Cash and cash equivalents (note 4) $ 420,542 $ 537,294 Accounts receivable (note 7(b)) 166,434 70,640 Other current assets 23,045 14,154 ----------- ----------- 610,021 622,088 Property, plant and equipment (note 5) 952,699 2,180,773 Goodwill (note 6) -- 1,639,065 Other intangible assets (note 6) 7,565 14,531 Deferred pension asset (note 16) 60,430 45,174 Deferred foreign exchange -- 144,287 Other assets, net (note 7) 56,985 117,707 ----------- ----------- $ 1,687,700 $ 4,763,625 =========== =========== LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities: Liabilities not subject to compromise: Accounts payable $ 45,802 $ 63,291 Accrued liabilities 234,549 267,229 Accrued interest payable -- 70,004 Income taxes payable 7,056 5,584 Current portion of capital lease obligations (note 9) 3,952 1,930 Liabilities subject to compromise (note 8) 4,719,591 -- ----------- ----------- 5,010,950 408,038 Long-term debt (note 8) -- 4,655,077 Long-term portion of capital lease obligations (note 9) 16,601 17,661 Other long-term liabilities 47,547 45,110 Deferred foreign exchange (note 17(b)) 106,617 29,445 Shareholders' deficiency (note 10): Common shares 1,393,994 1,133,664 Warrants 496 709 Deficit (4,888,505) (1,526,079) ----------- ----------- (3,494,015) (391,706) ----------- ----------- $ 1,687,700 $ 4,763,625 =========== ===========
Reorganization proceedings and basis of presentation (note 1) Reconciliation to accounting principles generally accepted in the United States (note 23) Commitments and contingencies (note 24) Subsequent events (note 25) See accompanying notes to consolidated financial statements. On behalf of the Board: Director Director - ------------------------------------------- ------------------------------------------ Purdy Crawford James J. Meenan
1 AT&T CANADA INC. Consolidated Statements of Operations and Deficit (In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - --------------------------------------------------------------------------------
2002 2001 2000 ---- ---- ---- (Restated - note 2(g)) Revenue $ 1,488,145 $ 1,544,721 $ 1,505,378 Expenses: Service costs 931,949 1,005,790 1,034,860 Selling, general and administrative 333,004 385,966 411,947 Workforce reduction and provision for restructuring (note 12) 87,069 21,901 (10,249) Write-down of property, plant and equipment and goodwill (notes 5 and 6) 1,203,196 -- -- Depreciation and amortization 273,142 465,600 402,551 ----------- ----------- ----------- 2,828,360 1,879,257 1,839,109 ----------- ----------- ----------- Loss from operations (1,340,215) (334,536) (333,731) Other income (expense): Interest income 9,193 19,134 17,243 Interest expense (431,625) (401,114) (319,046) Foreign exchange loss (41,126) (10,097) -- Reorganization expenses (note 14) (7,065) -- -- Write-down of long-term investments and other assets (note 7(c)) (11,855) -- -- Other (note 13) (2,225) (10,797) 13,739 ----------- ----------- ----------- (484,703) (402,874) (288,064) ----------- ----------- ----------- Loss before minority interest and income taxes (1,824,918) (737,410) (621,795) Minority interest -- -- 104,274 Income taxes (note 15) 6,741 7,965 5,686 ----------- ----------- ----------- Loss for the year (1,831,659) (745,375) (523,207) Deficit, beginning of year: As previously reported (1,513,805) (780,704) (257,497) Adjustment for change in accounting policy for foreign exchange (note 2(g)) (12,274) -- -- ----------- ----------- ----------- As restated (1,526,079) (780,704) (257,497) Adjustment for change in accounting policy for goodwill (note 2(e)) (1,530,767) -- -- ----------- ----------- ----------- Deficit, end of year $(4,888,505) $(1,526,079) $ (780,704) =========== =========== =========== Basic and diluted loss per common share (note 2(j)) $ (17.95) $ (7.57) $ (5.48) =========== =========== =========== Weighted average number of common shares outstanding (in thousands) 102,047 98,406 95,561 =========== =========== ===========
See accompanying notes to consolidated financial statements. 2 AT&T CANADA INC. Consolidated Statements of Cash Flows (In thousands of Canadian dollars) Years ended December 31, 2002, 2001 and 2000 - --------------------------------------------------------------------------------
2002 2001 2000 ---- ---- ---- (Restated - note 2(g)) Cash provided by (used in): Operating activities: Loss for the year $(1,831,659) $(745,375) $(523,207) Adjustments required to reconcile loss to cash flows from operating activities: Depreciation and amortization 273,142 465,600 402,551 Write-down of property, plant and equipment and goodwill (notes 5 and 6) 1,203,196 -- -- Write-down of long-term investments and other assets (note 7(c)) 11,855 -- -- Accretion of Senior Discount Note interest 156,855 145,148 125,916 Amortization of debt issuance costs 10,807 15,661 16,248 Amortization of deferred gain on termination of cross-currency swaps and forward contracts (note 17(b)) (16,232) (4,264) -- Loss (gain) on sale of investments 1,502 8,894 (13,011) Minority interest -- -- (104,274) Deferred pension charge (note 16(a)) 8,661 5,074 2,690 Change in pension plan valuation allowance (note 16(a)) -- (31,934) 2,937 Unrealized foreign exchange loss 59,844 12,275 -- Other (1,422) 3,577 2,012 ----------- --------- --------- (123,451) (125,344) (88,138) Change in non-cash working capital (note 20) (24,308) 183,636 (80,411) ----------- --------- --------- Net cash generated by (used in) operating activities (147,759) 58,292 (168,549) Investing activities: Acquisitions, net of cash or bank indebtedness acquired -- (43,410) (197,867) Dispositions of investments, net of disposition costs 2,200 3,580 17,656 Additions to property, plant and equipment (143,865) (419,173) (560,404) Reductions (additions) to other assets 1,355 236 (1,164) Decrease to restricted investments -- -- 42,429 ----------- --------- --------- Net cash used in investing activities (140,310) (458,767) (699,350) Financing activities: Issue of share capital, net of issuance costs 259,022 48,243 35,206 Termination of cross-currency swaps and forward contracts (note 17(b)) 85,504 150,664 -- Draw from (repayment of) credit facility, net (170,000) (100,000) 270,000 Issues of long-term debt -- 781,959 355,912 Debt issue and credit facility costs (1,304) (6,230) (5,234) Decrease in other long-term liabilities (1,694) (5,054) (5,935) Repayment of capital lease (279) (1,695) (2,981) ----------- --------- --------- Net cash generated by financing activities 171,249 867,887 646,968 Effect of exchange rate changes on cash 68 1,295 187 ----------- --------- --------- Increase (decrease) in cash and cash equivalents (116,752) 468,707 (220,744) Cash and cash equivalents, beginning of year 537,294 68,587 289,331 ----------- --------- --------- Cash and cash equivalents, end of year $ 420,542 $ 537,294 $ 68,587 =========== ========= =========
Supplemental cash flow information (note 21) See accompanying notes to consolidated financial statements. 3 AT&T CANADA INC. Notes to Consolidated Financial Statements (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- AT&T Canada Inc. (the "Company") is a holding company, which engages in the telecommunications business in Canada through its subsidiaries, the most significant of which is its 69% owned operating subsidiary, AT&T Canada Corp. The Company's activities in the telecommunications business consist primarily of the development and construction of telecommunications networks for the provision of local and data services, internet and IT services and long-distance services to businesses in Canada. On October 8, 2002, all of the Company's Class A Voting Shares and Class B Non-Voting Shares, not already owned by AT&T Corp., were purchased by Brascan Financial Corporation and CIBC Financial Partners (the "Back-end"). As a result, the publicly traded Class B Deposit Receipts were de-listed by The Toronto Stock Exchange (the "TSX") and NASDAQ and are no longer publicly traded. 1. REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION: (a) Reorganization proceedings: On October 15, 2002 (the "Commencement Date"), the Company and certain of its subsidiaries, namely AT&T Canada Corp., AT&T Canada Telecom Services Company, AT&T Canada Fibre Canada Company, MetroNet Fibre US Inc., MetroNet Fibre Washington Inc. and Netcom Canada Inc. (collectively, the "AT&T Canada Companies"), voluntarily filed an application for creditor protection under the Companies' Creditors Arrangement Act ("CCAA") with the Ontario Superior Court of Justice, Toronto, Ontario, Canada (the "Court") and obtained an order from the Bankruptcy Court in the Southern District of New York (the "U.S. Court") under Section 304 of the U.S. Bankruptcy Code to recognize the CCAA proceedings in the United States. On January 22, 2003, the AT&T Canada Companies filed a Consolidated Plan of Arrangement and Reorganization (the "Plan") and related Management Information Circular with the Court. The purpose of the Plan is to restructure the balance sheet and equity of the AT&T Canada Companies, provide for the compromise, settlement and payment of liabilities of certain creditors of the AT&T Canada Companies and to simplify the operating corporate structure of the AT&T Canada Companies. The Plan provides for, amongst other things: (i) transactions that will result in a corporate structure with a new parent company ("New AT&T Canada"), which will own the existing holding company, AT&T Canada Inc. and a wholly owned operating subsidiary ("New OpCo"), which will be created as a consequence of the amalgamation of certain of the existing subsidiaries of AT&T Canada Inc.; 4 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 1. REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION (CONTINUED): (ii) the cancellation of all existing outstanding equity, including warrants and share purchase options of AT&T Canada Inc. and AT&T Canada Corp. for no consideration (notes 10 and 11); and (iii) the exchange and compromise of the senior notes of the Company (the "Senior Notes") and certain other affected claims ("Affected Creditors") for a combination of cash, which will not be less than $200 million, and 100% of the equity of New AT&T Canada upon emergence from CCAA. On February 20, 2003, the Plan was approved by the holders of the Senior Notes ("Noteholders"), and other affected creditors. On February 25, 2003, the Court issued an order sanctioning the Plan and the U.S. Court issued an order recognizing and enforcing the Court's sanction order. As a wholly owned subsidiary of AT&T Canada Inc., New OpCo will carry on the businesses formerly conducted by each of the Canadian AT&T Canada Companies. In effect, after the reorganization under the Plan, AT&T Canada Inc. will operate through one Canadian subsidiary instead of seven Canadian operating subsidiaries and AT&T Canada Inc. will become the wholly owned subsidiary of New AT&T Canada, whose principal asset consists of its ownership of all of the common shares of AT&T Canada Inc. Following the implementation of the Plan, the business and operations of AT&T Canada Inc. will not undergo any change as a result of New AT&T Canada becoming the top company in the corporate structure. The completion of the Plan and emergence from the CCAA proceedings ("Plan Implementation Date") is subject to a number of conditions, including that an appeal period of the Court's approval has expired with either no appeal commenced or a final determination made by the Court, and the receipt of certain exemption orders from securities regulatory authorities in Canada to provide that the shares of New AT&T Canada (the "New Shares") issued under the Plan will be freely tradeable, and the listing of the New Shares on the TSX. Two of the Company's wholly owned subsidiaries, Contour Telecom Inc. and Montage.DMC eBusiness Services, Inc., were excluded from the CCAA proceedings. Together, these entities generated less than 5% of consolidated revenues in 2002 and 2001 (2000 - 5%), and were an insignificant component of consolidated net loss and the Company's financial position for each of the years presented. 5 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 1. REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION (CONTINUED): (b) Basis of presentation: The consolidated financial statements have been prepared on a going concern basis in accordance with Canadian generally accepted accounting principles ("GAAP"). The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. There is doubt about the appropriateness of the use of the going concern assumption in the preparation of the consolidated financial statements because of the circumstances of the CCAA reorganization proceedings and circumstances giving rise to this event, including the Company's long-term debt which is in default. There can be no assurances that the Plan will be implemented as contemplated and that the Company will emerge from the CCCA proceedings. Also, there can be no assurances that even if the Plan is implemented, the Company will be a going concern post-emergence. The consolidated financial statements do not reflect significant adjustments that would be necessary in the carrying amount of assets and liabilities, the reported revenue and expenses, and the balance sheet classifications used if the going concern basis was not appropriate. The appropriateness of the going concern basis is dependent upon, among other things, implementation of the Plan, future profitable operations and the Company's ability to generate sufficient cash from operations and from financing arrangements to meet its obligations. If the Plan is implemented, New AT&T Canada will be required to perform a comprehensive revaluation of its balance sheet under the provisions of The Canadian Institute of Chartered Accountants ("CICA") Handbook Section ("HB") 1625, "Comprehensive Revaluation of Assets and Liabilities" ("fresh start accounting"). Under fresh start accounting, the Company's assets and liabilities will be recorded at management's best estimate of their fair values. The reported amounts in the accompanying consolidated financial statements could materially change, because they do not give effect to adjustments to the carrying amount of assets and liabilities that may ultimately result from the adoption of fresh start accounting to reflect assets and liabilities at their fair values. In particular, it is expected that there will be significant differences (either positive or negative) between the fair value and carrying amount as a result of fresh start accounting in the following areas: capital assets, deferred pension asset and long-term liabilities. 6 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES: The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada which, in the case of the Company, conform, in all material respects, with those in the United States, except as outlined in note 23. The consolidated financial statements include all assets and liabilities of the Company and its majority-owned subsidiaries. All intercompany transactions and balances have been eliminated on consolidation. 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 the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates. Significant estimates are used in determining, but not limited to, the recoverability of capital assets, allowance for doubtful accounts, provisions for workforce reduction and restructuring, provisions for contingent liabilities, liabilities subject to compromise, and income tax valuation allowances. Assessments of the recoverability of capital assets require estimates of useful lives, future cash flows, discount rates and terminal values. Management develops cash flow projections using assumptions that reflect the Company's planned courses of action and management's best estimate of the most probable set of economic conditions. When assessing the reasonableness of the assumptions, current information, currently prevailing economic conditions and trends are considered. Liabilities subject to compromise under the CCAA proceedings have been estimated based upon the Court-approved process to prove, administer and adjudicate claims. The claims of Noteholders have been determined in accordance with such process. Claims of other affected creditors and the amount recorded as liabilities have been estimated using the information provided by the Affected Creditors and management's assessment of the merits of the claims. Actual results may be materially different from assumptions used. The Company's significant accounting policies are as follows: (a) Cash and cash equivalents: Cash equivalents consist of investments in money market instruments with a maturity at the date of purchase of less than three months. Cash and cash equivalents are recorded at cost, which approximates current market value. 7 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (b) Revenue recognition: The Company derives its revenue primarily from data, local, internet and IT services and long-distance products and services. Products and services are sold either standalone or together as a multiple service arrangement or bundled solution. Components of multiple service arrangements are separately accounted for provided the elements have standalone value to the customer and the fair value of any undelivered elements can be reliably determined. The Company recognizes revenue once evidence of an arrangement exists, delivery has occurred, fees are fixed or determinable and collectability is probable. Revenue on long-distance and other usage-based products and services is recognized based upon minutes of traffic carried. Revenue on local, data, internet, IT services and other products and services is recognized as the services are provided in accordance with contract terms, including any customer acceptance provisions. Revenue from technical support and maintenance is recognized over the term of the contract during which the services are provided. (c) Accounts receivable securitization: The Company accounts for the transfer of receivables according to Accounting Guideline ("AcG") AcG-12, "Transfer of Receivables." The Company recognizes gains or losses on the transfer of receivables that qualify as sales and retains a subordinated retained interest in the accounts receivable transferred and ongoing servicing responsibilities. Losses on the sale of accounts receivable are recorded in the consolidated statements of operations and deficit at the date of sale. The amount of the losses depends in part on the carrying amount of the accounts receivable involved in the transfer, allocated between the accounts receivable sold and the Company's retained interest based on their relative fair value at the date of the transfer. The Company measures fair value based on the expected future cash receipts to be realized using management's best estimates of key assumptions for credit and dilution losses, collection term of the accounts receivable and the trust's contracted return. Any subsequent decline in the value of the retained interest other than a temporary decline, will be recorded in income. 8 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (d) Property, plant and equipment: Property, plant and equipment are recorded at cost. Included in telecommunications facilities and equipment are costs incurred in developing new networks or expanding existing networks, such as costs of acquiring rights-of-way and network design. Construction costs related to telecommunications facilities and equipment that are installed on rights-of-way granted by others are capitalized and depreciated over the lives of the rights-of-way. Interest is capitalized on assets under construction for more than three months at the Company's weighted average cost of debt. Telecommunications facilities and equipment are depreciated once the network is put in service. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Telecommunications facilities and equipment 3 - 20 years Buildings 13 - 40 years Other capital assets 4 - 40 years Equipment under capital leases 3 - 15 years Application software 1 - 7 years Leasehold improvements Term of lease
The carrying amount of property, plant and equipment is reviewed for impairment on an ongoing basis 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 expected future undiscounted cash flows and carrying amount of the asset. 9 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (e) Business combinations, goodwill and other intangible assets: Effective January 1, 2002, the Company adopted HB 3062, "Goodwill and Other Intangible Assets," and HB 1581, "Business Combinations." The new standards mandate the purchase method of accounting for business combinations and require that goodwill and indefinite-life intangible assets no longer be amortized but tested for impairment at least annually. The standards also specify criteria that intangible assets must meet to be recognized and reported apart from goodwill. The Company has adopted these new standards as at January 1, 2002 and discontinued amortization of all existing goodwill. Goodwill is allocated to reporting units and any potential goodwill impairment is identified by comparing the carrying value of a reporting unit with its fair value. If any potential impairment is indicated, then it is quantified by comparing the carrying value of goodwill to its fair value, based on the fair value of the assets and liabilities of the reporting unit. HB 3062 requires completion of a transitional goodwill impairment evaluation within six months of adoption. Under HB 3062, any transitional impairment loss is recognized as a charge to opening deficit at January 1, 2002. In 2002, the Company completed its transitional goodwill impairment test and determined that unamortized goodwill of $1,530.8 million, as at January 1, 2002, was impaired under the fair value approach. This amount was charged to opening deficit with a corresponding reduction in goodwill (note 6). Intangible assets that have definite lives are amortized over their estimated useful lives. Intangible assets are tested for impairment 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 expected future undiscounted cash flows and the carrying amount of the asset. 10 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): The following presents the effects on the year ended December 31, 2001 and 2000 as if the Company had retroactively adopted the change in accounting policy for non-amortization of goodwill discussed above:
2001 2000 ---- ---- Reported loss for the year $ (745,375) $ (523,207) Add back: goodwill amortization 109,186 94,427 ----------- ----------- Adjusted loss for the year $ (636,189) $ (428,780) =========== =========== Reported basic and diluted loss per share $ (7.57) $ (5.48) Add back: goodwill amortization 1.11 0.99 ----------- ----------- Adjusted basic and diluted loss per share $ (6.46) $ (4.49) =========== ===========
Prior to the adoption of HB 3062, goodwill and other intangible assets recorded at the date of acquisition were amortized on a straight-line basis over their estimated useful lives of 5 to 25 years. Goodwill and other intangible assets were reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows was less than the carrying amount of the asset, a loss was recognized for the difference between the expected future undiscounted cash flows and the carrying amount of the asset. (f) Debt issuance costs: Debt issuance costs are amortized on a straight-line basis over the terms of the related debt financing. (g) Foreign currency translation and hedging relationships: Foreign currency-denominated monetary items are translated into Canadian dollars at the exchange rate prevailing at the balance sheet date. Foreign currency-denominated non-monetary items are translated at the historical exchange rate. Transactions included in operations are translated at the average exchange rate for the period. Translation gains or losses are reflected in the consolidated statements of operations in the period in which they occur. 11 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Effective January 1, 2002, the Company adopted amended HB 1650, "Foreign Currency Translation," which eliminates the deferral and amortization of foreign currency translation gains and losses on long-term monetary items with a fixed or ascertainable life. Exchange gains and losses on long-term monetary items are included in income. At December 31, 2001, the Company had approximately $12.3 million (2000 - nil) of unamortized foreign exchange losses related to long-term debt. Upon adoption, deferred foreign exchange has been reduced by this amount, with a corresponding increase in opening deficit as of January 1, 2002. HB 1650 also requires restatement of prior periods, the effect of which was to increase the reported loss and loss per share for the year ended December 31, 2001 by $12.3 million (2000 - nil) and $(0.12) (2000 - nil), respectively. The Company hedges its exposure to foreign currency exchange rate risk on long-term debt from time to time, by designating existing foreign currency-denominated monetary assets as hedge instruments and, through the purchase of currency options, cross-currency swaps and forward exchange contracts. The Company accounts for these financial instruments as hedges and, as a result, foreign exchange gains and losses on hedge instruments are recorded in the same period as the corresponding gains and losses on the related long-term debt. Premiums paid to acquire currency options, cross-currency swaps and forward exchange contracts are deferred and amortized on a straight-line basis over the terms of the instruments. Changes in fair values of derivative instruments not designated as hedging instruments and ineffective portion of hedges, if any, are recognized in earnings in the current year. The Company's policy is to formally designate each derivative financial instrument as a hedge of a specifically identified debt instrument. The Company believes the derivative financial instruments are effective as hedges, both at inception and over the term of the instrument. Gains and losses on terminations of foreign currency derivative agreements are deferred under other current, or non-current, assets or liabilities on the balance sheet and amortized to foreign exchange gain (loss) over the remaining term of the underlying debt for which these derivative instruments were designated as cash flow hedges. In the event of early extinguishment of the related debt obligation, any realized or unrealized gain or loss from the derivative would be recognized in the consolidated statements of operations at the time of extinguishment. 12 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (h) Employee benefit plans: (i) Retirement benefits: The Company recognizes the costs of retirement benefits and post-employment benefits over the period in which employees render services in return for the benefits. The costs of defined benefit pensions and other retirement benefits earned by employees are actuarially determined using the projected benefit method prorated on credited service and management's best estimate of expected plan investment performance, salary escalation and retirement ages of employees. Changes in these assumptions could impact future pension expense. For the purpose of calculating the expected return on plan assets, those assets are valued using a market-related value. Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment, except for amendments to the post-retirement medical and dental benefits programs. The average remaining life expectancy of former employees is used for the post-retirement medical and dental benefits programs as no new members are allowed to join these plans. The excess of the cumulative unrecognized net gains (loss) over 10% of the greater of the benefit obligation and the market-related value of plan assets is amortized over the average remaining service period of active employees, except for the post-retirement medical and dental benefits programs where the average remaining life expectancy of former employees is used in the determination of the amortization period. When the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement. 13 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (ii) Stock-based compensation: Effective January 1, 2002, the Company adopted HB 3870, "Stock-based Compensation and Other Stock-based Payments," which requires that a fair value-based method of accounting be applied to all stock-based payments to non-employees and to employee awards that are direct awards of stock, awards that call for settlement in cash or other assets, or are stock appreciation rights that call for settlement by the issuance of equity instruments. HB 3870 permits the Company to continue its existing policy of treating all other employee and director stock options as capital transactions (the settlement method), but requires pro forma disclosure of net earnings and per share information as if the Company had accounted for these stock options under the fair value method (note 11). HB 3870 requires disclosure of the pro forma effect of awards granted after January 1, 2002. The Company has elected to include the pro forma effect of awards granted prior to January 1, 2002 in its disclosures. The fair value of stock options issued in the period is determined using the Black-Scholes option-pricing model for purposes of the pro-forma disclosures, and is allocated to compensation cost on a straight-line basis over the vesting period of the award. The adoption of the new section did not impact the consolidated financial statements. (iii) Employee Share Ownership Plan: Compensation expense is recognized for the Company's contributions to the Employee Share Ownership Plan. The Company's contributions are made through the issuance of Class B Non-Voting Shares from treasury. 14 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (i) Income taxes: The Company uses the liability method of accounting for income taxes. Future income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. When necessary, a valuation allowance is recorded to reduce future income tax assets to an amount where realization is more likely than not. Future income tax assets and liabilities are measured using enacted or substantively enacted tax laws and rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax laws and rates is recognized as part of the provision for income taxes in the period that includes the enactment date (or the period in which the changes in rates are substantively enacted). (j) Loss per common share: Effective January 1, 2001, the Company adopted retroactively the treasury stock method of calculating diluted earnings per share in accordance with HB 3500. The treasury stock method includes only those unexercised options and warrants where the average market price of the common shares during the period exceeds the exercise price of the options and warrants. In addition, this method assumes that the proceeds would be used to purchase common shares at the average market price during the period. The change in the method of calculation of loss per share did not impact basic and diluted loss per share for 2001 and 2000. As a result of net losses for the years ended December 31, 2002, 2001 and 2000, respectively, the effect of converting stock options and warrants has not been included in the calculation of diluted loss per common share because to do so would be anti-dilutive. 15 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (k) Recent pronouncements: (i) Effective January 1, 2003, the Company will adopt AcG-14, "Disclosure of Guarantees," which requires a guarantor to disclose significant information about guarantees it has provided, without regard to whether it will have to make any payments under the guarantees and in addition to the accounting and disclosure requirements of HB 3290, "Contingencies." The Guideline is generally consistent with disclosure requirements for guarantees in the United States (Financial Accounting Standard Board ("FASB") Interpretation No. 45) but, unlike the FASB's guidance, does not apply to product warranties and does not encompass recognition and measurement requirements. The Company has evaluated the impact of adoption of AcG-14 and the disclosures are included in note 23(b)(ii). (ii) In December 2002, the CICA issued HB 3063, "Impairment or Disposal of Long-Lived Assets" and revised HB 3475, "Disposal of Long-Lived Assets and Discontinued Operations." These sections supersede the write-down and disposal provisions of HB 3061, "Property, Plant and Equipment" and HB 3475, "Discontinued Operations." The new standards are consistent with U.S. GAAP. HB 3063 establishes standards for recognizing, measuring and disclosing impairment of long-lived assets held-for-use. An impairment is recognized when the carrying amount of an asset to be held and used, exceeds the projected future net cash flows expected from its use and disposal, and is measured as the amount by which the carrying amount of the asset exceeds its fair value. HB 3475 provides specific criteria for and requires separate classification for assets held-for-sale and for these assets to be measured at the lower of their carrying amounts or fair value, less costs to sell. HB 3475 also broadens the definition of discontinued operations to include all distinguishable components of an entity that will be eliminated from operations. HB 3063 is effective for the Company's 2004 fiscal year, however, early application is permitted. Revised HB 3475 is applicable to disposal activities committed to by the Company after May 1, 2003, however, early application is permitted. The Company is currently evaluating the effect of the adoption of these standards on its financial position, results of operations and cash flows. 16 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 3. ACQUISITIONS AND DISPOSITIONS: Details of business acquisitions during 2001 and 2000 are as follows. Consideration was satisfied in cash unless otherwise noted below.
2001 2000 ------- ---------------------------------------------- MONTAGE Contour Brak Netcom DMC (b) (c) (d) (e) (f) Current assets $15,493 $10,373 $ 4,044 $ 6,192 $ 3,993 Capital assets 4,717 7,093 548 -- 501 Other assets -- 694 990 5,545 -- Goodwill 51,029 70,032 29,554 66,892 92,309 ------- ------- ------- ------- ------- 71,239 88,192 35,136 78,629 96,803 Current liabilities 11,869 11,337 4,708 11,157 1,308 Long-term debt -- 6,875 202 -- -- ------- ------- ------- ------- ------- 11,869 18,212 4,910 11,157 1,308 ------- ------- ------- ------- ------- Purchase price $59,370 $69,980 $30,226 $67,472 $95,495 ======= ======= ======= ======= =======
(a) On May 1, 2001, the Company disposed of certain call centres. Proceeds on disposition were $3.6 million in cash. The disposition generated a loss on sale of $8.9 million. (b) Acquisition of MONTAGE eIntegration Inc.: On June 1, 2001, the Company acquired all of the issued and outstanding shares of MONTAGE eIntegration Inc. ("MONTAGE"). MONTAGE is a Canadian E-Business solutions integrator focused on transforming traditional organizations into connected enterprises through internet technologies. Consideration of $58.4 million was paid on closing, comprised of $13.7 million in cash and $44.7 million, represented by 967,355 Class B Non-Voting Shares of the Company. In addition, acquisition costs of $1.0 million were incurred. The vendors had the potential to earn up to an additional $30.0 million contingent upon the attainment by June 30, 2002 of certain specified performance targets. As determined at June 30, 2002, no additional consideration was earned. 17 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED): (c) Acquisition of Contour Telecom Inc. (Canada) (formerly TigerTel Inc.): On January 6, 2000, the Company acquired all of the issued and outstanding shares of Contour Telecom Inc. (Canada) (formerly TigerTel Inc. ("Contour")), a Canadian business telecommunications provider. (d) Acquisition of Brak Systems Inc.: On March 20, 2000, the Company acquired all of the issued and outstanding shares of Brak Systems Inc. ("Brak"), a Canadian internet security company. (e) Acquisition of Netcom Canada Holding Inc.: On April 10, 2000, the Company exercised its right to acquire the remaining 49% of issued and outstanding shares, not previously owned by the Company, of Netcom Canada Holding Inc. ("Netcom"), an internet service provider for U.S. $46.2 million (Cdn. $67.5 million) in cash. (f) Acquisition of DMC Inc.: On May 31, 2000, the Company acquired all of the issued and outstanding shares of DMC Inc. ("DMC"), a Canadian business specializing in the deployment of business-focused internet and E-Business strategies and solutions. Purchase consideration of $95.5 million, recorded at the date of acquisition, was funded by a combination of the issuance of 769,231 Class B Non-Voting Shares priced at market on date of acquisition and $50 million in cash. (g) Shared Technologies of Canada: On July 18, 2000, the Company reduced its ownership in Shared Technologies of Canada ("STOC") from 70% to 15%. Proceeds on disposition were $16.5 million: $13.6 million received in cash and a receivable of $2.9 million. STOC also repaid intercompany loans owing of $4.5 million. The disposition generated a gain on sale of $13.0 million before income taxes. During 2002, the Company disposed of its remaining 15% investment in STOC for net proceeds of $2.2 million (note 7(d)). 18 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED): Unaudited pro forma consolidated financial information: The following unaudited pro forma consolidated financial information reflects the acquisitions of Contour, Brak, Netcom, DMC and MONTAGE as if these transactions had occurred on January 1, 2000:
2001 2000 ---- ---- (Restated - note 2(g)) Revenue $ 1,568,655 $ 1,560,729 Expenses: Service costs 1,020,851 1,068,704 Selling, general and administrative expenses 395,208 430,368 Integration costs, provision for restructuring and workforce reduction 21,901 (10,249) Depreciation and amortization 470,309 422,780 ----------- ----------- Loss from operations (339,614) (350,874) Other income (expense): Interest expense, net (382,094) (302,064) Foreign exchange loss (10,097) -- Other income (expense) (6,989) 13,874 ----------- ----------- (399,180) (288,190) ----------- ----------- Loss before minority interest and income taxes (738,794) (639,064) Minority interest -- 101,983 Income taxes 9,580 6,073 ----------- ----------- Loss for the year $ (748,374) $ (543,154) =========== =========== Basic and diluted loss per common share $ (7.60) $ (5.68) =========== ===========
This financial information has not been adjusted to give effect to the dispositions of STOC and certain call centres on July 18, 2000 and May 1, 2001, respectively. The pro forma consolidated financial information has been provided for information purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisitions had been completed on January 1, 2000, or that may be reported in the future. 19 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 4. CASH AND CASH EQUIVALENTS:
2002 2001 ---- ---- Cash on deposit: Canadian dollar $ 78,551 $ 10,139 U.S. dollar 4,827 214 Short-term investments, at rates of interest varying between 1.25% and 3.08%: Canadian dollar 309,436 481,434 U.S. dollar 27,728 45,507 -------- -------- $420,542 $537,294 ======== ========
5. PROPERTY, PLANT AND EQUIPMENT:
Accumulated Net book 2002 Cost depreciation value ---- ---- ------------ ----- Telecommunications facilities and equipment $2,015,809 $1,326,781 $ 689,028 Land and buildings 147,554 96,257 51,297 Other capital assets 608,561 472,890 135,671 Equipment under capital leases 31,018 20,751 10,267 Application software 173,577 118,697 54,880 Leasehold improvements 31,317 19,761 11,556 ---------- ---------- ---------- $3,007,836 $2,055,137 $ 952,699 ========== ========== ==========
Accumulated Net book 2001 Cost depreciation value ---- ---- ------------ ----- Telecommunications facilities and equipment $2,060,341 $ 483,964 $1,576,377 Land and buildings 169,516 41,601 127,915 Other capital assets 600,911 254,104 346,807 Equipment under capital leases 28,542 6,430 22,112 Application software 163,253 73,965 89,288 Leasehold improvements 31,115 12,841 18,274 ---------- ---------- ---------- $3,053,678 $ 872,905 $2,180,773 ========== ========== ==========
20 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 5. PROPERTY, PLANT AND EQUIPMENT (CONTINUED): As of December 31, 2002, property, plant and equipment include $5.9 million (2001 - $16.9 million) of property, plant and equipment under construction that are not in service and, accordingly, have not been depreciated. Interest capitalized to property, plant and equipment during 2002 amounted to $0.3 million (2001 - $0.9 million) and has been calculated using the Company's weighted average cost of debt of 11.5% (2001 - 11.5%) applied to the monthly amount expended in networks in progress that are not in service. In the second quarter of 2002, the Company assessed the carrying amounts of its long-lived assets for impairment. The assessment was performed due to regulatory decisions issued in the first half of 2002 affecting the Company's business plan, the deterioration of the economic environment and the substantial decline in market value of companies in the telecommunications services sector. An impairment was assessed based on a comparison of the net recoverable amount, using projected future undiscounted cash flows, to the carrying amount of the long-lived assets. The impairment charge of $1,095.0 million for certain property, plant and equipment, predominately telecommunication facilities and equipment, was measured as the deficiency between the carrying amount and the net recoverable amount, and has been recorded as a charge to earnings and an increase in accumulated depreciation. An additional assessment for impairment of the carrying values of the Company's long-lived assets was performed due to the brand transition and changes in ownership as contemplated in the Plan in the fourth quarter of 2002. It was determined based on this assessment that projected future undiscounted cash flows exceeded the carrying amount of the Company's property, plant and equipment, and there was no further impairment. 21 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 6. GOODWILL AND OTHER INTANGIBLE ASSETS: (a) Goodwill: The change in the carrying amount of goodwill for the year ended December 31, 2002 is shown below:
Balance, Balance, December 31, Transitional Impairment December 31, 2001 impairment in 2002 Other 2002 ---- ---------- ------- ----- ---- Goodwill $1,639,065 $(1,530,767) $(108,228) $(70) $ -- ========== =========== ========= ==== ====
Net goodwill as at December 31, 2001 consisted of cost of $1,913.2 million less accumulated amortization of $274.1 million. In the second quarter of 2002, the Company completed its transitional goodwill impairment test as a result of adopting HB 3062, and determined that unamortized goodwill of $1,530.8 million as at January 1, 2002, was impaired under the fair value approach. The one-time transitional adjustment for the impairment assessment was charged to opening deficit with a corresponding reduction in goodwill. During the second quarter of 2002, the Company also performed an assessment for impairment of the carrying amount of its remaining goodwill due to the circumstances described in note 5. It was determined that the remaining unamortized goodwill of $108.2 million was also impaired under the fair value approach. (b) Other intangible assets: The following table summarizes the Company's other intangible assets for the year ended December 31:
Accumulated Net book 2002 Cost amortization value ---- ---- ------------ ----- Customer lists $ 4,025 $ 2,547 $1,478 Right-of-way agreements 702 148 554 Ghz licenses 7,904 2,371 5,533 Non-compete agreements 33,633 33,633 -- ------- ------- ------ $46,264 $38,699 $7,565 ======= ======= ======
22 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 6. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED):
Accumulated Net book 2001 Cost amortization value ---- ---- ------------ ----- Customer lists $ 4,016 $ 937 $ 3,079 Right-of-way agreements 702 111 591 Ghz licenses 7,904 1,581 6,323 Non-compete agreements 33,633 29,095 4,538 ------- ------- ------- $46,255 $31,724 $14,531 ======= ======= =======
Aggregate amortization expense for intangible assets with definite lives for the year ended December 31, 2002 was $6.7 million. The weighted average amortization period is six years, with estimated amortization expense for the next five years, as follows: 2003 $2,440 2004 827 2005 827 2006 827 2007 827
The Company did not have any intangible assets with an indefinite life as at December 31, 2002 and 2001. 7. OTHER ASSETS:
Accumulated Net book 2002 Cost amortization value ---- ---- ------------ ----- Debt issuance costs (note 7(e)) $79,303 $39,840 $39,463 Long-term investments, at cost, less write-downs (note 7(c)) 470 -- 470 Restricted cash (note 7(a)) 13,500 -- 13,500 Other (note 7(c)) 3,848 296 3,552 ------- ------- ------- $97,121 $40,136 $56,985 ======= ======= =======
23 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 7. OTHER ASSETS (CONTINUED):
Accumulated Net book 2001 Cost amortization value ---- ---- ------------ ----- Debt issuance costs $ 78,926 $ 27,602 $ 51,324 Retained interest on accounts receivable securitization (note 7(b)) 49,829 -- 49,829 Long-term investments, at cost 10,745 -- 10,745 Other 6,652 843 5,809 -------- -------- -------- $146,152 $ 28,445 $117,707 ======== ======== ========
(a) As at December 31, 2002, the Company has restricted cash comprising cash held in trust of $13.5 million, which represents further protection for the directors and officers of the Company with respect to their potential personal liability for certain statutory liabilities. The restrictions will terminate upon the earlier of (i) December 31, 2008 and (ii) three years from the date of the last claim being conclusively resolved. (b) In 2001, the Company sold accounts receivable under a securitization program with a special purpose trust for initial proceeds of $100 million and recorded a loss of $0.4 million, representing the cost relating to establishing the agreement at the date of the sale. Under the terms of the securitization agreement, the Company had the ability to sell certain of its accounts receivable on a revolving basis through securitization transactions at varying monthly limits. The maximum cash proceeds that could be funded under the program were $150 million. The accounts receivable pool consisted of the Company's trade accounts receivable for telecommunications products and services rendered. On February 20, 2002, the Company repurchased, for approximately $100 million, all of the outstanding accounts receivable sold under their securitization program. The securitization agreement included the requirement that the Company maintain an investment grade credit rating from both Moody's Investor Services Inc. and Standard & Poor's Rating Services. (c) In 2002, the Company determined there was an other than temporary decline in the value of its long-term investments and other assets, and recorded a write-down of $8.8 million and $3.1 million, respectively. The determination was based on recent market valuations. 24 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 7. OTHER ASSETS (CONTINUED): (d) In the second quarter of 2002, the Company sold its remaining interest in STOC for net proceeds of $2.2 million. (e) The Company recorded a write-off of $2.3 million of unamortized debt issuance costs related to the senior credit facility which was terminated on October 9, 2002 (see note 8(c)). 8. LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT: The liabilities subject to compromise as at December 31, 2002 and long-term debt as of December 31, 2001 are as follows:
Liabilities subject to Long-term compromise debt ---------- ---- Effective 2002 2001 interest rate Cdn. U.S. Cdn. U.S. ------------- ---- ---- ---- ---- 12% unsecured Senior Notes, maturing August 15, 2007 $ 356,237 $225,810 $ 395,988 $ 248,600 10.75% unsecured Senior Discount Notes, maturing November 1, 2007 11.04% 268,193 170,001 248,227 155,800 9.95% unsecured Senior Discount Notes, maturing June 15, 2008 11.24% 1,440,761 913,262 1,341,482 842,200 10.625% unsecured Senior Notes, maturing November 1, 2008 354,960 225,000 358,380 225,000 7.65% unsecured Senior Notes, maturing September 15, 2006 1,571,255 995,978 1,592,800 1,000,000 7.15% unsecured Senior Notes, maturing September 23, 2004 142,850 -- 150,000 -- 7.625% unsecured Senior Notes, maturing March 15, 2005 382,568 242,500 398,200 250,000 Senior Credit Facility -- -- 170,000 -- ----- ---------- -------- ---------- ---------- 4,516,824 4,655,077 Accrued interest payable 175,778 -- Accrued liabilities 8,220 -- Other liabilities 18,769 -- ----- ---------- -------- ---------- ---------- $4,719,591 $4,655,077 ===== ========== ======== ========== ==========
25 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 8. LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT (CONTINUED): (a) Liabilities subject to compromise under CCAA proceedings: Under the CCAA proceedings and the Plan, all of the Company's liabilities to creditors under the Senior Notes, including accrued interest thereon, and certain other affected claims at the Commencement Date, will be compromised subject to the implementation of the Plan. Such liabilities whose treatment and satisfaction are dependent on the outcome of the CCAA proceedings have been segregated and classified as liabilities subject to compromise in the consolidated financial statements. The Company has followed a court-approved process to prove, administer and adjudicate claims. Notices of claims were mailed to Affected Creditors in November 2002. The last date by which claims against the Company had to be filed with the court-appointed monitor, if the claimants wished to receive any distribution under the CCAA proceedings, was December 23, 2002 ("Claims Bar Date"). If a notice disputing the claim ("Dispute of Claim") had not been received by the Claims Bar Date, the Affected Creditor was deemed to have accepted the claim for both voting and distribution purposes under the Plan. Unknown creditors were also permitted to file a proof of claim by the Claims Bar Date. Separate claims procedures for Affected Creditors other than Noteholders have been established that differentiate claims for voting purposes and distribution purposes under the Plan. In connection with establishing claims by Noteholders, the Company sent notices to the indenture trustees of each series of Senior Notes, stating the aggregate accrued amount owing under the relevant series up to the Commencement Date. The indenture trustees confirmed the amounts owing under each series. As such, the claims of the Noteholders have been established for voting and distribution purposes pending implementation of the Plan. Pursuant to the CCAA proceedings, proofs of claim and Disputes of Claims ("Claims") were filed against the Company with the monitor. The Company either accepted the Claims or issued a notice of revision or disallowance for Claims that differ in nature, classification or amount from the Company's records. Where resolution cannot be reached with the Affected Creditor, the claims procedure provides for the adjudication of any disputes by the Court or a Court approved claims officer at the option of the Company. The decision of the Court or claims officer is final and binding pending implementation of the Plan. 26 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 8. LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT (CONTINUED): The amounts in total may vary from the stated amount of Claims that have been provided to the Company and may be subject to future adjustments depending on the resolution of Claims and/or determinations by the court. Additional claim amounts may also arise. As of February 25, 2003, 82 claims have been received from Affected Creditors excluding Noteholders. For distribution purposes, as of the same date, 27 Claims have been disallowed in their entirety and 35 Claims, totaling $15.9 million, have been allowed by the Company. The remaining 20 Claims, totaling $106.6 million, are being disputed. In addition, the Company has received five proofs of claim from certain warrant holders which are for unliquidated amounts. These claims have been disallowed by the Company. Upon implementation of the Plan, claims of Affected Creditors will be compromised and distributed. The determination and ultimate amount of distribution or settlement is subject to an implemented Plan and, therefore, is not currently determinable. The CCAA proceedings do not allow for principal and interest payments to be made on pre-filing Senior Notes of the Company without Court approval or until the Plan has been implemented. Accordingly, the interest generated subsequent to the Commencement Date no longer accrues to Noteholders and other Affected Creditors if the Plan is implemented. However, the Company has continued to accrue for interest expense on the pre-filing Senior Notes until the Plan is implemented and has classified the amount within liabilities subject to compromise. As at December 31, 2002, interest expense on pre-filing Senior Notes accrued but not paid for the period from October 15, 2002 to December 31, 2002 was $87.1 million. 27 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 8. LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT (CONTINUED): (b) Long-term debt: On October 15, 2002, the Company elected not to make interest payments on the Senior Notes totaling approximately U.S. $47.8 million, due on September 15, 2002, and approximately $5.4 million, due on September 23, 2002, related to its 7.65% Senior Notes and 7.15% Senior Notes, respectively, within 30 days from the scheduled interest payment date of the 7.65% Senior Notes. Accordingly, as of October 15, 2002, the Company was in default under the 7.65% Senior Notes and due to cross default provisions in all other series of Senior Notes, the Company has defaulted on all of its outstanding long-term debt. As a result, all of the outstanding long-term debt has either been accelerated or could be accelerated under the terms of the indentures governing these Senior Notes and thus declared due and payable. On September 24, 2002, the Company unwound all remaining outstanding swaptions and cross-currency swaps as provided for in the agreement, resulting in the Company receiving approximately Cdn. $84.9 million principal amount of certain of its outstanding Senior Notes in satisfaction of the counterparty's settlement obligation to the Company rather than receiving cash (note 17(b)). These Senior Notes are currently being held by the Company and have been recognized as a reduction to the long-term debt outstanding. (c) Senior Credit Facility (the "Facility"): On May 24, 2002, the Facility was amended reducing the total facility from $600 million to $400 million. Subsequently, on August 15, 2002, the Facility was amended reducing the total facility from $400 million to approximately $200 million. On October 9, 2002, the Facility agreement was terminated and the Company repaid the approximately $200 million of outstanding draws, of which $30 million was drawn under the Facility in 2002. 28 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 9. CAPITAL LEASE OBLIGATIONS: The following is a schedule, by year, of the future minimum lease payments for capital leases, together with the balance of the obligation, as at December 31, 2002: 2003 $ 4,819 2004 2,176 2005 1,881 2006 1,850 2007 1,850 2008 and thereafter 18,500 ---------- Total minimum lease payments 31,076 Less imputed interest at rates varying from 7.5% to 11.8% 10,523 ---------- Balance of the obligations 20,553 Less current portion 3,952 ---------- $ 16,601 ==========
10. SHARE CAPITAL: On October 8, 2002, Brascan Financial Corporation and CIBC Capital Partners completed the purchase of all of the outstanding shares of the Company that AT&T Corp. did not previously own for Cdn. $51.21 per share, in cash (the "Back-end"). Upon completion of the Back-end, 1519888 Ontario Limited, a wholly owned subsidiary of Tricap Investments Corp., itself a wholly owned subsidiary of Brascan Financial Corp., had approximately a 63% equity interest and a 50% voting interest in the Company, and 1520034 Ontario Limited, a wholly owned subsidiary of CIBC Capital Partners ("CIBC") had approximately a 6% equity interest and approximately a 27% voting interest in the Company. AT&T Corp. retained the balance of its ownership of the Company, which represents approximately a 31% equity interest and a 23% voting interest, and has a call right on CIBC's voting shares. Subsequent to the closing of the Back-end, one of the Company's warrant holders exercised warrants that resulted in the issuance of approximately 17,000 Class B Non-Voting Shares. Following the closing of the Back-end on October 8, 2002 the Company's Class B Deposit Receipts were de-listed by the TSX and NASDAQ. 29 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 10. SHARE CAPITAL (CONTINUED): (a) Authorized: Common: Unlimited number of convertible Class A Voting Shares without nominal or par value, each Class A Share has one vote, and unlimited number of Class B Non-Voting Shares without nominal or par value. Other than with respect to voting rights and conversion rights, the two classes of common shares have identical rights. Each Class A Voting Share may, under certain circumstances at the option of the holder, be converted into one Class B Non-Voting Share. Each Class B Non-Voting Share may, under certain circumstances at the option of the holder, be converted into one Class A Voting Share. The holders of Common Shares are entitled to receive dividends, as determined by the Board of Directors, subject to the rights of the holders of the Preferred Shares. The holders of Common Shares are also entitled to participate equally in the event of liquidation of the Company, subject to the rights of the holders of the Preferred Shares. Preferred: Unlimited number of Non-Voting Preferred Shares without nominal or par value. The Preferred Shares may be issued in one or more series. The Board of Directors of the Company may fix the number of shares in each series and designate rights, privileges, restrictions, conditions and other provisions. The Preferred Shares shall be entitled to preference over any other shares of the Company with respect to the payment of dividends and in the event of liquidation of the Company. Upon all the restrictions of the foreign ownership of voting shares being removed by an amendment to the Telecommunications Act, the Class B Non-Voting Shares will be converted into Class A Voting Shares on a one-for-one basis. 30 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 10. SHARE CAPITAL (CONTINUED): (b) Outstanding: Common shares:
Number of shares (000's) Voting Non-Voting Class A Class B Total ------- ------- ----- Balances, December 31, 1999 310 93,561 93,871 Issued - options (note 11) -- 1,959 1,959 Issued for acquisitions (note 3(f)) -- 769 769 Issued - warrants (note 10(c)) -- 155 155 Issued - ESOP (note 11) -- 40 40 ------- --------- --------- Balances, December 31, 2000 310 96,484 96,794 Issued - options (note 11) -- 2,097 2,097 Issued for acquisitions (note 3(b)) -- 967 967 Issued - warrants (note 10(c)) -- 121 121 Issued - ESOP (note 11) -- 27 27 ------- --------- --------- Balances, December 31, 2001 310 99,696 100,006 Issued - options (note 11) -- 7,133 7,133 Issued - warrants (note 10(c)) -- 53 53 Issued - ESOP (note 11) -- 24 24 ------- --------- --------- Balances, December 31, 2002 310 106,906 107,216 ======= ========= =========
31 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 10. SHARE CAPITAL (CONTINUED): Common shares:
Class Voting A Non-Voting B Total - ----- -------- ------------ ----- Balances, December 31, 1999 $ 416 $ 956,281 $ 956,697 Issued - options (note 11) -- 33,629 33,629 Issued for acquisitions (note 3(f)) -- 45,385 45,385 Issued - warrants (note 10(c)) -- 620 620 Issued - ESOP (note 11) -- 2,734 2,734 ---------- ---------- ---------- Balances, December 31, 2000 416 1,038,649 1,039,065 Issued - options (note 11) -- 48,244 48,244 Issued for acquisitions (note 3(b)) -- 44,666 44,666 Issued - warrants (note 10(c)) -- 483 483 Issued - ESOP (note 11) -- 1,206 1,206 ---------- ---------- ---------- Balances, December 31, 2001 416 1,133,248 1,133,664 Issued - options (note 11) -- 259,022 259,022 Issued - warrants (note 10(c)) -- 213 213 Issued - ESOP (note 11) -- 1,095 1,095 ---------- ---------- ---------- Balances, December 31, 2002 $ 416 $1,393,578 $1,393,994 ========== ========== ==========
The Plan contemplates the cancellation of all outstanding classes of shares without compensation as of the Plan Implementation Date (note 1). 32 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 10. SHARE CAPITAL (CONTINUED): (c) Warrants:
Number Amount (000's) ------- --------- Balances, December 31,1999 132 $ 1,812 Exercised for shares (45) (620) ------- --------- Balances, December 31, 2000 87 1,192 Exercised for shares (35) (483) ------- --------- Balances, December 31, 2001 52 709 Exercised for shares (16) (213) ------- --------- Balances, December 31, 2002 36 $ 496 ======= =========
Warrants entitle the holder thereof to acquire 3.429 Class B Non-Voting Shares at an exercise price of U.S. $0.01, expiring August 15, 2007. The warrants were issued as part of the issue of the 12% Senior Notes described in note 8. The Plan contemplates the cancellation of all warrants as of the Plan Implementation Date (note 1). 11. SHARE PURCHASE OPTIONS: The Board of Directors established two stock option plans under which options to purchase Class B Non-Voting Shares are granted to directors, officers and employees of the Company. Pursuant to the stock option plans, 17.5 million Class B Non-Voting Shares have been reserved for options. These options were granted at exercise prices estimated to be at least equal to the fair value of Class B Non-Voting Shares, vest over a three-year period and generally expire five years from the date of grant. 33 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 11. SHARE PURCHASE OPTIONS (CONTINUED): In accordance with the Company's stock option plans, all unvested outstanding stock options became vested and exercisable on September 28, 2002 as a result of the Back-end. The Company received $225.4 million in proceeds on October 8, 2002 when 5.8 million of employee options were exercised. Subsequent to the Back-end, no more options were issued under these plans.
Number of Exercise Weighted options prices average (000' s) per share exercise price -------- --------- -------------- Outstanding, December 31, 1999 10,019 $ 2.25 - $ 58.25 $ 28.17 Granted 3,760 42.70 - 90.00 56.28 Cancelled (1,342) 2.25 - 90.00 47.97 Exercised (1,959) 0.50 - 45.10 17.19 -------- ------------------ --------- Outstanding, December 31, 2000 10,478 2.25 - 90.00 37.80 Granted 996 44.20 - 47.96 45.67 Cancelled (587) 14.00 - 90.00 49.42 Exercised (2,097) 2.25 - 45.10 22.79 -------- ------------------ --------- Outstanding, December 31, 2001 8,790 2.25 - 90.00 41.39 Granted 846 37.99 - 48.05 43.38 Cancelled (810) 14.00 - 90.00 53.29 Exercised (7,133) 2.25 - 51.00 36.28 -------- ------------------ --------- Outstanding, December 31, 2002 1,693 17.25 - 90.00 58.10 ======== ================== =========
At December 31, 2002, 1.7 million options (2001 - 4.9 million; 2000 - 4.2 million) were exercisable at a weighted average exercise price of $58.10 per share (2001 - $35.80; 2000 - $22.83). The Plan contemplates the termination of all unexercised options under these plans as of the Plan Implementation Date, without compensation (note 1). 34 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 11. SHARE PURCHASE OPTIONS (CONTINUED): The following table summarizes information concerning options outstanding and exercisable at December 31, 2002:
Options outstanding and exercisable ----------------------------------- Weighted average remaining Weighted Range of Number contractual average exercise outstanding life exercise prices (000's) (years) price - ------ ------- ------- ----- $17.00 - $45.00 9 1.8 $ 37.40 $45.01 - $54.00 717 2.2 53.28 $54.01 - $63.00 495 2.4 56.27 $63.01 - $72.00 408 2.2 65.50 $72.01 - $81.00 21 2.2 74.73 $81.01 - $90.00 43 2.2 85.49 - --------------- ----- ------ -------- 1,693 2.2 58.10 ===== ====== ========
As permitted by HB 3870, the Company did not adopt the fair value method of accounting for its employee stock option awards. The standard requires the disclosure of pro forma loss for the year and loss per share as if the Company had accounted for employee stock options under the fair value method. Had the Company adopted the fair value method for employee stock options using the fair value method described in note 2(h), loss for the year and loss per share would have increased for the year ended December 31, 2002 as indicated below: Loss attributable to common shareholders - as reported $(1,831,659) Stock-based compensation expense (24,677) ----------- Loss attributable to common shareholders - pro forma $(1,856,336) =========== Basic and diluted loss per common share - as reported $ (17.95) Basic and diluted loss per common share - pro forma (18.19) =========== Weighted average number of shares outstanding (in thousands) 102,047 ===========
The pro forma stock-based compensation expense recorded during the year related to grants issued subsequent to January 1, 2002 totalled $1.5 million or ($0.02) per share. 35 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 11. SHARE PURCHASE OPTIONS (CONTINUED): For purposes of the above pro forma disclosures, options granted were valued using the Black-Scholes option pricing model with the following weighted average assumptions:
2002 2001 2000 ---- ---- ---- Risk-free interest rate (%) 4.8% 5.1% 6.2% Expected volatility (%) 31.3% 35.7% 5.4% Expected life (in years) 1.23 5 5 Expected dividends -- -- -- ---- ---- ----
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option pricing models also require estimates, which are highly subjective, including expected volatility of the underlying stock. The Company bases estimates of volatility on historical stock prices. Changes in assumptions can materially affect estimates of fair values. Options granted during the year had a weighted average fair value of $7.21 (2001 - $18.33; 2000 - $15.16). Employee Share Ownership Plan ("ESOP"): The ESOP offered all full-time permanent employees the opportunity to purchase securities of the Company. Employees were able to contribute between 1% and 5% of their salary to buy units in a single stock mutual fund, the Company's Stock Fund, which in turn held only Class B Non-Voting Shares. The Company contributed the equivalent of 25% of participant contributions per quarter. The Company's contributions were made through the issuance of Class B Non-Voting Shares from treasury. 200,000 Class B Non-Voting Shares have been authorized for issuance for this purpose. In 2002, the Company issued 23,396 shares (2001 - 26,592; 2000 - 40,253) under the plan and recorded compensation expense of $1.1 million (2001 - $1.2 million; 2000 - $2.7 million). Effective August 31, 2002, the plan was terminated. 36 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 12. WORKFORCE REDUCTION AND PROVISION FOR RESTRUCTURING: (a) 2002:
Provision, Net Cash December 31, provision drawdown Reclassifications 2002 --------- -------- ----------------- ---- Provision for restructuring: 2002 Workforce reduction costs $ 52,925 $(30,400) $ -- $22,525 2002 Facilities consolidation 34,144 (3,167) (18,185) 12,792 -------- -------- -------- ------- $ 87,069 $(33,567) $(18,185) $35,317 ======== ======== ======== =======
In 2002, the Company implemented a cost reduction initiative to bring the Company's cost structure in line with its current and projected revenue base, and to allocate resources to further enhance services provided to its established customer base. As a result, the Company recorded a provision of $87.0 million related to these activities. The charge of $87.0 million is comprised of $52.9 million for employee severance and $34.1 million related to facilities consolidation. Employee severance costs are the result of a reduction in workforce of approximately 1,250 personnel, achieved through terminations, attrition and non-renewal of contract personnel. These personnel were from various areas across the Company, including network services, customer service, marketing, sales and administration. As at December 31, 2002, 1,217 workforce reductions had been completed and $30.4 million of the employee severance costs have been paid. The remaining liability balance of $22.5 million at December 31, 2002 represents salary continuance payments in accordance with employee severance agreements and/or statutory minimum severance requirements. 37 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 12. WORKFORCE REDUCTION AND PROVISION FOR RESTRUCTURING (CONTINUED): The provision for facilities consolidation of $34.1 million comprised an initial provision of $34.4 million which was reduced by $0.3 million as certain facilities were subleased earlier than planned. The provision for facilities consolidation represents management's best estimate of the deficiency of expected sublease recoveries over costs associated with certain leased premises being exited as a result of the restructuring plan. These facility leases will expire between 2002 and 2012. The provision will be drawn down over the remaining term of the leases. As at December 31, 2002, the provision was drawn down by $3.2 million. Pursuant to the CCAA proceedings described in note 1, the liabilities related to certain unused leased premises will be compromised and $18.2 million of the provision for facility consolidation costs has been reclassified to liabilities subject to compromise (note 8(a)). Of the remaining provision, $5.0 million has been included in other long-term liabilities. (b) 2001: During 2001, management approved and carried out a workforce reduction plan and recorded a provision of $21.9 million for severance and benefits related to the termination of approximately 650 personnel, achieved through terminations, attrition and non-renewal of contract personnel. The personnel terminated were from various areas across the Company, including marketing, network services, customer service, internet and IT services and administration. The Company had substantially completed the terminations as at December 31, 2001. During 2002, the remaining provision of $6.3 million was drawn down. (c) 2000: In 2000, the Company adjusted charges recorded in 1999 as a result of negotiation of lower expenditures than originally anticipated and the impact of changes in the real estate market that made it uneconomical to exit certain properties and recorded a reversal of previously recorded charges of $10.2 million. In 2001, the remaining balance of the 1999 charge was drawn down through payments related to lease contract penalties and settlement of lawsuits. The related activities have been completed. 38 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 13. OTHER INCOME (EXPENSE):
2002 2001 2000 ---- ---- ---- Gain (loss) on disposition of STOC (note 7(d)) $ (1,502) $ -- $13,011 Loss on disposition of certain call centres (note 3(a)) -- (8,894) -- Other (723) (1,903) 728 -------- -------- ------- $ (2,225) $(10,797) $13,739 ======== ======== =======
14. REORGANIZATION EXPENSES: The Company incurred the following pretax charges for expenses associated with its reorganization under the Plan, as described in note 1:
2002 ---- Professional fees and other costs $ 7,440 Interest earned on cash accumulated during CCAA proceedings (375) ------- $ 7,065 =======
Professional fees and other costs include legal, financial advisory, accounting and consulting fees incurred subsequent to the filing of the application for creditor protection under the CCAA. 39 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 15. INCOME TAXES: The Company uses the liability method of accounting for income taxes. The tax effects of temporary differences that give rise to significant portions of future income tax assets and liabilities are as follows:
2002 2001 ---- ---- Future tax assets: Future income tax deductions $ 93,172 $ 56,244 Operating loss carryforwards 755,624 794,172 Deferred foreign exchange 65,569 28,774 Accounting depreciation booked in excess of amount claimed for tax 409,945 -- ----------- --------- Total future tax assets 1,324,310 879,190 Future tax liabilities: Deferred pension asset (21,997) (14,748) Debt and share issue costs (9,847) (6,717) Tax depreciation claimed in excess of depreciation booked -- (119,926) ----------- --------- Total future tax liabilities (31,844) (141,391) ----------- --------- 1,292,466 737,799 Valuation allowance (1,292,466) (737,799) ----------- --------- Net future income tax assets $ -- $ -- =========== =========
40 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 15. INCOME TAXES (CONTINUED): The reconciliation of the tax provision for income taxes, which consists only of current taxes, to amounts computed by applying federal and provincial tax rates to loss before minority interest and provision for income taxes is as follows:
2002 2001 2000 ---- ---- ---- Computed at combined statutory rate $(702,593) 38.5% $(308,238) 41.8% $(270,481) 43.5% Tax effect of: Expenses not deductible for income tax purposes 15,293 (0.8)% 4,210 (0.5)% 1,639 (0.3)% Write-off and amortization of non-deductible goodwill 41,697 (2.3)% 46,117 (6.3)% 41,419 (6.6)% Income not taxable for income tax purposes (3,128) 0.2% (891) 0.1% (1,867) 0.3% Large Corporations Tax 6,741 (0.4)% 7,965 (1.1)% 5,686 (0.9)% Reduction in tax assets as a result of loss expiry 5,253 (0.3)% 149,809 (20.3)% 153,670 (24.7)% Effect of reduction in tax rates 90,073 (5.0)% 149,317 (20.2)% 149,917 (24.1)% Change in valuation allowance 554,667 (30.4)% (51,180) 6.9% (126,568) 20.3% Other (1,262) 0.1% 10,856 (1.5)% 52,271 (8.4)% --------- ----- --------- ----- --------- ----- $ 6,741 (0.4)% $ 7,965 (1.1)% $ 5,686 (0.9)% ========= ===== ========= ===== ========= =====
At December 31, 2002, the Company has non-capital losses of approximately $2.252 billion, available to reduce future years' taxable income, including any gain on the settlement of liabilities subject to compromise, which expire as follows: 2003 $ 190,900 2004 172,100 2005 308,300 2006 169,300 2007 586,700 2008 519,400 2009 255,900 2010 49,900 ---------- $2,252,500 ==========
Certain amendments to tax filings may be made to avoid the expiry of losses that would otherwise expire in 2003. 41 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 16. EMPLOYEE BENEFITS: The Company provides a number of retirement benefits, including defined benefit plans, providing pension, other retirement and post-employment benefits to most of its employees. (a) The total expense (income) for the Company's defined benefit plans is as follows:
2002 2001 2000 Plans providing pension benefits $8,661 $(26,860) $5,627 Plans providing other benefits 952 505 474 ====== ======== ======
The average remaining service periods of the active employees covered by the pension plans range from 11 to 13 years (2001 - 10 to 14 years; 2000 - 10 to 12 years). The average remaining service period of the active employees covered by the post-retirement life insurance program is 13 years (2001 - 13 years; 2000 - 13 years). 42 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 16. EMPLOYEE BENEFITS (CONTINUED): The average remaining life expectancy of the former employees covered by the post-retirement medical and dental insurance programs is 15 years (2001 - n/a; 2000 - n/a). Information about the Company's defined benefit and other retirement benefit plans as at December 31, 2002, 2001 and 2000, in aggregate, is as follows:
2002 2001 2000 ---- ---- ---- Pension Other Pension Other Pension Other benefit benefit benefit benefit benefit benefit plans plans plans plans plans plans ----- ----- ----- ----- ----- ----- Accrued benefit obligation: Balance, beginning of year $ 535,475 $ 6,152 $ 477,665 $ 5,390 $ 443,824 $ 5,965 Interest cost 34,260 728 34,158 379 33,218 353 Actuarial loss (gain) 134 (335) 46,514 374 32,146 (1,012) Current service cost 7,069 173 7,543 227 6,769 213 Employees' contributions 2,826 -- 2,867 -- 2,397 -- Plan amendments -- 5,638 4,711 -- 1,031 -- Benefits paid (48,521) (416) (38,349) (192) (37,320) (129) Settlements -- -- -- -- (4,400) -- Curtailment loss (gain) 120 (263) 366 (26) -- -- --------- -------- --------- ------- --------- ------- Balance, end of year $ 531,363 $ 11,677 $ 535,475 $ 6,152 $ 477,665 $ 5,390 ========= ======== ========= ======= ========= ======= Plan assets: Fair value, beginning of year $ 488,727 $ -- $ 541,237 $ -- $ 528,069 $ -- Actual return on plan assets (43,975) -- (24,716) -- 44,953 -- Employer contributions 18,824 416 7,688 192 7,538 129 Accrued employer contributions 5,093 -- -- -- -- -- Employees' contributions 2,826 -- 2,867 -- 2,397 -- Benefits paid (48,521) (416) (38,349) (192) (37,320) (129) Settlements -- -- -- -- (4,400) -- --------- -------- --------- ------- --------- ------- Fair value, end of year $ 422,974 $ -- $ 488,727 $ -- $ 541,237 $ -- ========= ======== ========= ======= ========= =======
43 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 16. EMPLOYEE BENEFITS (CONTINUED):
2002 2001 2000 ---- ---- ---- Pension Other Pension Other Pension Other benefit benefit benefit benefit benefit benefit plans plans plans plans plans plans ----- ----- ----- ----- ----- ----- Funded status - plan surplus (deficit) $(108,389) $(11,677) $(46,748) $(6,152) $ 63,572 $(5,390) Unrecognized actuarial loss (gain) 165,491 (1,334) 87,110 (1,061) (21,940) (1,510) Unrecognized prior service costs 3,328 5,262 4,812 -- 928 -- --------- -------- -------- ------- -------- ------- Accrued benefit asset (liability) 60,430 (7,749) 45,174 (7,213) 42,560 (6,900) Valuation allowance (note 16(b)) -- -- -- -- (31,934) -- --------- -------- -------- ------- -------- ------- Accrued benefit asset (liability), net of valuation allowance $ 60,430 $ (7,749) $ 45,174 $(7,213) $ 10,626 $(6,900) ========= ======== ======== ======= ======== =======
The accrued benefit liability for other benefit plans is included in other long-term liabilities. The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations are as follows (weighted average assumptions as of December 31, 2002, 2001 and 2000):
2002 2001 2000 Pension Other Pension Other Pension Other benefit benefit benefit benefit benefit benefit plans plans plans plans plans plans ----- ----- ----- ----- ----- ----- Discount rate 6.5% 6.5% 6.5% 6.5% 7.0% 7.0% Expected long-term rate of return on plan assets 7.75% -- 8.0% -- 8.0% -- Rate of compensation increase 3.5% -- 3.5% -- 3.5% -- ===== ===== ===== ===== ===== =====
44 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 16. EMPLOYEE BENEFITS (CONTINUED): The Company's net benefit plan expense for the year ended December 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000 ---- ---- ---- Pension Other Pension Other Pension Other benefit benefit benefit benefit benefit benefit plans plans plans plans plans plans ----- ----- ----- ----- ----- ----- Current service cost $ 7,069 $ 173 $ 7,543 $ 227 $ 6,769 $ 213 Interest cost 34,260 728 34,158 379 33,218 353 Expected return on plan assets (38,335) -- (38,711) -- (37,397) -- Prior service costs amortization 475 376 574 -- 103 -- Valuation allowance (reversed) provided against accrued benefit asset (note 16(b)) -- -- (31,934) -- 2,937 -- Actuarial loss (gain) recognized 2,363 (62) (24) (75) (3) (92) Curtailment loss 2,829 (263) 1,534 (26) -- -- -------- ----- -------- ----- -------- ----- Net benefit plan expense (income) $ 8,661 $ 952 $(26,860) $ 505 $ 5,627 $ 474 ======== ===== ======== ===== ======== =====
(b) Change in valuation allowance: An accrued benefit asset arises when the accumulated cash contributions to a pension plan exceed the accumulated pension expense. The accrued benefit asset on an employer's books is comprised of two components: (i) plan surplus (i.e., the excess of the fair value of the plan assets over the accrued benefit obligation of the plan); and (ii) net unrecognized (gains) losses (i.e., the sum of the unamortized past service costs, actuarial (gains) and losses and any transitional (asset) or transitional obligation). 45 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 16. EMPLOYEE BENEFITS (CONTINUED): The expected future benefit from a surplus is generally the present value of employer contribution holidays expected in future years. However, if there is a net unrecognized loss, the accrued benefit asset will be expected to decrease over time due to the amortization of the net unrecognized loss. As a result, the accrued benefit asset on an employer's books cannot exceed the sum of the expected employer future benefit and any net unrecognized losses. When the accrued benefit asset first exceeds the limit, a valuation allowance is established in order to keep the accrued benefit asset on an employer's books at the limit. In future accounting periods, any change in the valuation allowance is recorded through the consolidated statements of operations. At December 31, 2000, the accrued benefit asset relating to the Company's defined benefit pension plans was affected by the limit and contained a cumulative valuation allowance of $31.9 million. The impact of negative returns on plan assets in the Company's defined benefit pension plans was an elimination of the pension surplus and generation of unamortized losses at December 31, 2001. Under generally accepted accounting principles, the limit on the accrued benefit asset is required to be increased by the amount of the losses that will be charged as an expense in future years, resulting in a reduction in the valuation allowance and a credit to the pension expense amount of the Company. The impact of the above is that the valuation allowance of $31.9 million was no longer required and was recognized in income in 2001. At December 31, 2002, the Company had unfunded solvency deficits under its defined benefit pension plans of approximately $135 million. The Company is required to fund this deficit over a five-year period. 17. FINANCIAL INSTRUMENTS: (a) Fair values of financial assets and liabilities: The fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and accrued interest payable approximate their carrying values due to the short-term nature of these instruments. The settlement amount of liabilities subject to compromise is not determinable and will be subject to the Plan approved by the Court (note 8). The fair value of the Senior Notes, including the attached warrants, at December 31, 2002, was approximately $743.0 million (2001 - $3,022.1 million), based on current trading values. 46 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 17. FINANCIAL INSTRUMENTS (CONTINUED): Certain foreign currency financial instruments were unwound in the second quarter of 2002 and the remaining foreign currency financial instruments were unwound on September 24, 2002. (b) Foreign currency risk: The Company is exposed to foreign currency fluctuations on its U.S. dollar-denominated debt, cash and cash equivalents. As described below, in May and September 2002, the Company monetized all remaining outstanding swaptions, cross-currency swaps and forward contracts. The deferred gains are being recognized in income over the remaining original contractual term to maturity of the underlying debt for which these derivatives were designated as cash flow hedges. On September 24, 2002, the Company received approximately Cdn. $84.9 million in face value of its outstanding Senior Notes in satisfaction of the counterparty's settlement obligation to the Company. The Senior Notes are currently being held by the Company and have been recognized as a reduction to the long-term debt outstanding (note 8(b)). In 2001, the Company monetized certain foreign currency options, cross-currency swaps and a forward contract. The net deferred gain is being recognized in earnings over the remaining original contractual term to maturity of the underlying debt for which the derivatives were designated as cash flow hedges. The above transactions are summarized as follows:
Deferred Amount Deferred Notional Loss gain (loss) recognized gain (loss) value Proceeds on (gain) December 31, during December 31, (U.S.dollars) monetization on unwind 2001 2002 2002 ------------- ------------ --------- ---- ---- ---- 2001: May $1,208,401 $ 123,964 $ (33,708) $ 29,529 $ (6,687) $ 22,842 November 207,040 26,700 84 (84) 8 (76) ---------- --------- --------- -------- --------- --------- $1,415,441 $ 150,664 $ (33,624) $ 29,445 (6,679) 22,766 ========== ========= ========= 2002: May $1,784,500 $ 85,504 $ (46,899) -- (5,751) 41,148 September 994,581 84,866 (76,340) -- (3,802) 72,538 ---------- --------- --------- -------- --------- --------- $2,779,081 $ 170,370 $(123,239) 29,445 $ (16,232) 136,452 ========== ========= ========= ========= Less current portion of deferred foreign exchange gains -- 29,835 ---------- --------- --------- -------- --------- --------- Deferred foreign exchange gain $ 29,445 $ 106,617 ========== ========= ========= ======== ========= =========
47 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 17. FINANCIAL INSTRUMENTS (CONTINUED): As at December 31, 2001, the Company held the following financial instruments to hedge the following financings:
Foreign Foreign Canadian currency exchange equivalent Financial obligation rates interest rate Fair Debt instruments notional Maturity weighted weighted market instrument type value date average average value - ---------- ---- ----- ---- ------- ------- ----- (In millions) (In millions) 10.75% Cross- Notes currency November 1, Cdn. $1.5702 swaps U.S. $170.0 2007 to U.S. $1.00 11.24% $(2.8) 9.95% Cross- Notes currency June 15, Cdn. $1.5276 swaps U.S. $970.0 2008 to U.S. $1.00 9.73% $ 71.5 7.65% Cross- Notes currency September 15, Cdn. $1.4977 swaps U.S. $500.0 2006 to U.S. $1.00 7.72% $ 47.4 7.625% Cross- Notes currency March 15, Cdn. $1.5489 swaps U.S. $250.0 2005 to U.S. $1.00 7.87% $ 5.7 12% Forward Notes exchange February 28, Cdn. $1.5532 contract U.S. $250.0 2002 to U.S. $1.00 n/a $ 10.1 10.625% Forward Notes exchange February 28, Cdn. $1.5532 contract U.S. $225.0 2002 to U.S. $1.00 n/a $ 9.0 ------ $140.9 ======
In addition to the financial instruments above, the Company held foreign currency options with a fair value of ($2.1) million, comprising assets of $28.1 million offset by liabilities of $30.2 million. 48 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 17. FINANCIAL INSTRUMENTS (CONTINUED): (c) Interest rate risk: The following table summarizes the Company's exposure to interest rate risk.
Fixed interest rate maturing within ----------------------------------- Floating After Non-interest 2002 rate 1 year 1 - 5 years 5 years bearing - ---- ---- ------ ----------- ------- ------- FINANCIAL ASSETS: Cash and cash equivalents $ 420,542 $ -- $ -- $ -- $ -- Accounts receivable -- -- -- -- 166,434 FINANCIAL LIABILITIES: Current liabilities -- 3,952 -- -- 287,407 Capital leases -- -- 16,601 -- Liabilities subject to compromise -- -- 2,721,103 1,795,721 202,767 ========== ========== ========== ========== ========== Fixed interest rate maturing within ----------------------------------- Floating After Non-interest 2001 rate 1 year 1 - 5 years 5 years bearing - ---- ---- ------ ----------- ------- ------- FINANCIAL ASSETS: Cash and cash equivalents $ 537,294 $ -- $ -- $ -- $ -- Accounts receivable -- -- -- -- 70,640 FINANCIAL LIABILITIES: Current liabilities -- -- -- -- 406,108 Capital leases -- 1,930 17,661 -- -- Long-term debt 170,000 -- 2,127,672 2,357,404 -- ========== ========== ========== ========== ==========
49 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 17. FINANCIAL INSTRUMENTS (CONTINUED): (d) Credit risk: The Company's financial instruments that are exposed to credit risk are cash and cash equivalents, accounts receivable and financial instruments used for hedging purposes. Cash and cash equivalents, which consist of investments in highly liquid, highly secure money market instruments, are on deposit at major financial institutions. Credit risk with respect to accounts receivable is limited due to the large number of customers to which the Company provides services. 18. SEGMENTED INFORMATION: The Company currently operates in one operating segment, the telecommunications industry in Canada. The Company offers a number of products, delivered through its integrated fibre optics networks, sold by a national sales force, agents and telemarketers and provisioned by one operations group. The Company makes decisions and evaluates financial performance primarily based on product revenue. Revenue by product is as follows:
- --------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------- Data $ 457,962 $ 485,031 $ 465,407 Local 235,095 209,207 177,424 Internet and IT Services 195,600 171,852 129,865 Other 26,693 20,843 32,643 - --------------------------------------------------------------------- 915,350 886,933 805,339 Long distance 572,795 657,788 700,039 - --------------------------------------------------------------------- $1,488,145 $1,544,721 $1,505,378 =====================================================================
During the years ended December 31, 2002, 2001 and 2000, no customers of the Company individually represented more than 10% of the Company's revenue. 50 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 19. RELATED PARTY TRANSACTIONS: Services are exchanged between the Company and its shareholders and certain of their subsidiaries. These transactions are in the normal course of operations and are measured at the exchange amounts being the amounts agreed to by the parties. Transactions with the above related parties were as follows:
- ----------------------------------------------- 2002 2001 2000 - ----------------------------------------------- Revenue $162,153 $146,759 $114,278 Expenses 95,999 100,900 117,173 ===============================================
Amounts due from and to the above related parties are as follows:
- ------------------------------------------- 2002 2001 - ------------------------------------------- Accounts receivable $23,672 $14,958 Accounts payable 17,399 22,297 ===========================================
20. CHANGE IN NON-CASH WORKING CAPITAL:
- ----------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------- Accounts receivable $ (45,965) $ 184,114 $ 10,469 Other current assets (8,891) (986) 1,734 Other assets (13,500) -- -- Accounts payable (16,249) (20,663) (110,155) Accrued liabilities (48,070) (1,576) 18,977 Accrued interest payable 104,778 21,544 3,349 Income taxes payable 1,472 438 (4,785) Other long-term liabilities 2,117 765 -- - ------------------------------------------------------------------------ $ (24,308) $ 183,636 $ (80,411) ========================================================================
51 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 21. SUPPLEMENTAL CASH FLOW INFORMATION:
- ---------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------- Supplemental cash flow information: Interest paid $ 157,931 $ 213,890 $ 165,362 Income taxes paid 9,258 6,241 7,148 Supplemental disclosures of changes in non-cash investing and financing activities: Accrued liabilities and accounts payable incurred for the acquisition of property, plant and equipment (10,461) (15,476) (60,291) Extinguishment of bonds on termination of swaps (note 17(b)) 84,866 -- -- Capital lease obligations incurred for the purchase of networks and equipment -- -- 560 Class B Non-Voting Shares issued for acquisitions -- 44,666 45,385 Class B Non-Voting Shares issued for conversion of warrants 213 483 620 Class B Non-Voting Shares issued for the Company's contributions to the Employee Share Ownership Plan 1,096 1,206 2,734 ==============================================================================================
22. RECLASSIFICATION OF PRIOR PERIODS AMOUNTS: Certain amounts presented in 2001 and 2000 have been reclassified to conform with the presentation adopted for 2002. 52 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES: The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP") which, in the case of the Company, conform in all material respects with those in the United States ("U.S. GAAP"), except as outlined below: (a) Consolidated statements of operations, consolidated statements of comprehensive loss and consolidated balance sheets: The application of U.S. GAAP would have the following effect on loss for the year, deficit, basic and diluted loss per common share as reported:
- --------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- (as restated note 2(g)) Loss for the year, Canadian GAAP $(1,831,659) $ (745,375) $ (523,207) Stock-based compensation expense (note 23(a)(ii)) (330) (15,023) (4,364) Depreciation and amortization (note 23(a)(vi)) 10,899 -- -- Impairment of property, plant and equipment (note 23(a)(vi)) (161,000) -- -- Gain (loss) on derivative instruments (note 23(a)(iii)) 22,519 (12,034) -- Change in valuation allowance (note 23(a)(iv)) -- (31,934) -- - --------------------------------------------------------------------------------------------------------------------------------- Loss for the year, U.S. GAAP before accounting changes (1,959,571) (804,366) (527,571) Cumulative effect of accounting change, adoption of SFAS 133 (note 23(a)(iii)) -- 4,028 -- Cumulative effect of accounting change, adoption of SFAS 142 (note 23(a)(v)) (1,530,767) -- -- - --------------------------------------------------------------------------------------------------------------------------------- Loss for the year, U.S. GAAP (3,490,338) (800,338) (527,571) Opening deficit, U.S. GAAP (1,594,518) (794,180) (266,609) - --------------------------------------------------------------------------------------------------------------------------------- Ending deficit, U.S. GAAP $(5,084,856) $(1,594,518) $ (794,180) ================================================================================================================================= Basic and diluted loss per common share under U.S. GAAP: Before accounting change $ (19.20) $ (8.17) $ (5.52) Cumulative effect of accounting change (15.00) 0.04 -- - --------------------------------------------------------------------------------------------------------------------------------- $ (34.20) $ (8.13) $ (5.52) ================================================================================================================================= Weighted average number of common shares outstanding (in thousands) 102,047 98,406 95,561 =================================================================================================================================
53 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): U.S. GAAP also requires disclosure of a statement of comprehensive income (loss). Comprehensive income (loss) generally encompasses all changes in shareholders' equity, except those arising from transactions with shareholders:
- -------------------------------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------------------- Loss for the year, U.S. GAAP $(3,490,338) $ (800,338) $ (527,571) Other comprehensive income, net of tax of nil: Cumulative effect of accounting change on adoption of SFAS 133 (note 23(a)(iii)) -- 21,990 -- Unrealized gain on derivative instruments (note 23(a)(iii)) 90,055 10,397 -- Minimum pension liability (note 23(a)(iv)) (112,354) -- -- - -------------------------------------------------------------------------------------- Comprehensive loss, U.S. GAAP $(3,512,637) $ (767,951) $ (527,571) ======================================================================================
The following table indicates the differences between the amounts of consolidated balance sheet items determined in accordance with Canadian and U.S. GAAP:
- ------------------------------------------------------------------------------------------------------------------------------- 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- U.S. Canadian U.S. Canadian GAAP GAAP Difference GAAP GAAP Difference - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Financial derivatives $ -- $ -- $ -- $ 138,773 $ -- $ 138,773 Property, plant and equipment 802,598 952,699 (150,101) 2,180,773 2,180,773 -- Deferred pension asset (liability) (83,858) 60,430 (144,288) 13,240 45,174 (31,934) Deferred foreign exchange -- -- -- -- 144,287 (144,287) LIABILITIES AND SHAREHOLDERS' DEFICIENCY Accrued liabilities 204,210 234,549 30,339 266,778 267,229 451 Deferred foreign exchange -- 106,617 106,617 -- 29,445 29,445 Common shares and additional capital 1,422,824 1,393,994 (28,830) 1,162,164 1,133,664 (28,500) Accumulated other comprehensive income 10,088 -- (10,088) 32,387 -- (32,387) Deficit (5,084,856) (4,888,505) 196,351 (1,594,518) (1,526,079) 68,439 ===============================================================================================================================
54 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): (i) Consolidated statements of cash flows: Canadian GAAP permits the disclosure of a subtotal of the amount of funds provided by (used in) operations before changes in non-cash working capital items in the consolidated statements of cash flows. U.S. GAAP does not permit this subtotal to be included. (ii) Stock-based compensation expense: For U.S. GAAP purposes, the Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretive guidance. Accordingly, compensation expense for U.S. GAAP purposes has been recognized at the date of share purchases or option grants at the amount by which the quoted market price of the stock exceeds the amount an employee must pay to acquire the stock. During the year, the Company recorded stock compensation expense of $0.3 million (2001 - $1.4 million; 2000 - $4.4 million) as a result of accelerating the vesting period of certain employee stock option awards that would have otherwise expired unexercisable pursuant to their original terms. In addition, the Company recorded nil (2001 - $13.6 million; 2000 - nil) in stock compensation expense as a result of extending the expiry date of certain employee stock option awards. U.S. GAAP also requires that pro forma net loss and loss per share information be reported annually as if the Company had adopted the fair value approach under the Statement of Financial Accounting Standard ("SFAS") No. 123. 55 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): Had the Company determined compensation expense costs based on the fair value at the date of grant for stock options under SFAS No. 123, loss attributable to common shareholders and basic loss per share would have increased as indicated below.
- ---------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------- Loss attributable to common shareholders, U.S. GAAP - as reported $(3,490,338) $ (800,338) $ (527,571) Add stock-based employee compensation expense included in reported net loss 330 15,023 4,364 Deduct total stock-based employee compensation expense determined under fair value-based method for all rewards (24,677) (56,158) (54,993) - ---------------------------------------------------------------------------------- Loss attributable to common shareholders, U.S. GAAP - pro forma $(3,514,685) $ (841,473) $ (578,200) ================================================================================== Loss per common share - as reported $ (34.20) $ (8.13) $ (5.52) Loss per common share - pro forma (34.44) (8.55) (6.05) ================================================================================== Weighted average number of common shares outstanding (in thousands) 102,047 98,406 95,561 ==================================================================================
In 2002, 846,000 (2001 - 996,939; 2000 - 3,760,500) options with a weighted average fair value of $7.21 (2001 - $18.33; 2000 - $15.16) were granted, and valued for pro forma disclosure purposes using the following weighted average assumptions:
- ------------------------------------------------------------------ 2002 2001 2000 - ------------------------------------------------------------------ Risk-free interest rate (%) 4.8% 5.1% 6.2% Expected volatility (%) 31.3% 35.7% 5.4% Expected life (in years) 1.23 5 5 Expected dividends -- -- -- ==================================================================
56 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): (iii) Gain (loss) on derivative instruments: For U.S. GAAP reporting purposes, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 ("SFAS No. 133") on January 1, 2001. SFAS 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. 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 accumulated other comprehensive income ("AOCI") and are recognized in the income statement when the hedged item affects earnings. Changes in fair values of derivative instruments not designated as hedging instruments and ineffective portion of hedges, if any, are recognized in earnings in the current year. On adoption, the Company recognized a one-time transition gain of $26.0 million, which represented the net effect of recognizing the market value of the Company's derivative portfolio of $84.5 million (consisting of assets of $98.2 million and liabilities of $13.7 million), the derecognition of the unamortized balance of swaption premiums of $17.6 million and the derecognition of deferred foreign exchange losses of $40.9 million as at December 31, 2000. The portion of the one-time transition gain that relates to derivatives designated and qualifying as cash flow hedges, totaling $22.0 million, was recognized in the AOCI account and will be reclassified into earnings over the life of the underlying hedged items, of which the last expires in June 2008. The portion of the one-time transition gain related to derivatives not designated as hedges, totaling $4.0 million, was recognized in earnings as the cumulative effect of the accounting change on adoption of SFAS No. 133. 57 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): For the year ended December 31, 2002, as a result of SFAS No. 133 relative to Canadian GAAP, the Company realized a net gain of $22.5 million (2001 - loss of $12.0 million) due to the net effect of foreign exchange gains on debt not hedged under U.S. GAAP of $20.1 million, the favourable net change in time value of the swaptions of $4.7 million, offset by the unfavourable net change in the fair market value of derivatives not designated as hedging instruments of $(0.4) million, and the net difference between the amortization of deferred gains on unwound swaps under U.S. and Canadian GAAP of $(1.9) million. For the year ended December 31, 2001, as a result of SFAS No. 133 relative to Canadian GAAP, the Company realized a net loss of $12.0 million due to the unfavourable change in time value of the swaptions of $12.1 million, the net gain in the fair market value of foreign exchange forward contracts not designated as hedging instruments of $(39.4) million, the effect of foreign exchange losses on the related debt of $44.3 million, the reversal of amortization of option premiums recorded under Canadian GAAP of $(5.4) million and recognition of $(3.9) million of a deferred gain relating to unwound swaps, offset by the reversal of the amortization of the deferred gain under Canadian GAAP of $4.3 million. Foreign currency risk: As at December 31, 2002, as a result of the transactions described below, the Company held no derivative financial instruments. As at December 31, 2001, the Company had designated derivatives with a net notional value of U.S. $1,890 million (composed of derivatives to purchase U.S. $2,097 million and derivatives to sell U.S. $207 million) as cash flow hedges which hedged the foreign currency risk of cash flows relating to U.S. dollar-denominated debt with a face value of the same amount. These cash flow hedges were highly effective in hedging foreign currency rate risk. The fair value of the derivatives designated as cash flow hedges was $119.7 million, consisting of assets of $159.9 million and liabilities of $40.2 million. 58 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): Other derivatives: In addition, at December 31, 2001, the Company held foreign exchange forward contracts with a notional value totaling U.S. $475 million that were not eligible to be designated as effective hedges, since the term of the contracts did not match the underlying debt being hedged and, therefore, the changes in their market value were recorded in earnings. As at December 31, 2001, the fair value of the foreign exchange contracts was $19.1 million. Termination of derivative contracts: In May 2002, the Company unwound certain swaptions, cross-currency swaps and forward contracts with notional value totaling U.S. $1,784.5 million for proceeds of $85.5 million (note 17(b)). The related AOCI balances of the derivatives unwound represented a gain of $37.5 million. This gain is being recognized in earnings over the remaining original contractual term to maturity of the underlying debt for which these derivatives were designated as cash flow hedges. On September 24, 2002, the Company unwound all remaining outstanding swaptions and cross-currency swaps with a notional value of U.S. $994.6 million, and in accordance with their terms, the Company received approximately Cdn. $84.9 million in face value of its outstanding Senior Notes in satisfaction of the counterparties' obligations to the Company. The Senior Notes are currently being held by the Company. The related AOCI balances of the derivatives unwound represented a gain of $76.4 million. The gain of $76.4 million is being recognized in earnings over the remaining original contractual term to maturity of the underlying debt for which these derivatives were designated as cash flow hedges. The termination of these hedges resulted in an increase in the Company's overall foreign currency exposure. In May 2001, the Company unwound certain swaptions, cross-currency swaps and a forward contract. The related AOCI balances of the derivatives unwound represented a deferred gain of $29.6. This gain is being recognized in earnings over the remaining original contractual term to maturity of the underlying debt for which these derivatives were designated as cash flow hedges. 59 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): The gains to be recognized related to the above monetizations in future periods are as follows: ------------------------------------------------------- 2003 $ 27,418 2004 27,418 2005 23,872 2006 21,092 2007 16,232 2008 and thereafter 6,410 ------------------------------------------------------- $ 122,442 =======================================================
(iv) Benefit plan: In 2001, the Company recognized a gain under Canadian GAAP of $31.9 million from the reversal of the valuation allowance on the accrued benefit asset relating to its defined benefit pension plan. The reversal of the valuation allowance is not permitted under U.S. GAAP and, accordingly, the gain has been reversed in the consolidated statements of operations for U.S. GAAP reporting purposes. Under U.S. GAAP, SFAS No. 87, "Employers Accounting for Pensions," the Company is required to record an additional minimum pension liability when the benefit plans' accumulated benefit obligation exceeds the plans' assets by more than the amounts previously accrued for as pension costs. Under U.S. GAAP, these charges are recorded as a reduction to shareholders' equity, as a component of accumulated other comprehensive loss. In 2002, the Company recorded a minimum liability of $112.4 million (2001 and 2000 - nil). (v) Business combinations, goodwill and other intangible assets: Effective January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," issued by the Financial Accounting Standards Board ("FASB") in July 2001, which are substantially consistent with equivalent Canadian HB 1581, "Business Combinations," and HB 3062, "Goodwill and Other Intangible Assets," except that under U.S. GAAP, any transitional impairment charge is recognized in earnings as a cumulative effect of a change in accounting principles. The accounting policy is described in note 2(e). 60 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): (vi) Accounting for the impairment or disposal of long-lived assets: Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of 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" ("Opinion 30"), for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale. It also provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). There was no effect on adoption of SFAS No. 144, effective January 1, 2002, on the Company's results of operations and financial position. In June 30, 2002, a write-down of property, plant and equipment was recorded (note 5) and resulted in a U.S. GAAP difference as described below. SFAS No. 144 requires the measurement of an impairment charge to be based on the excess of the carrying value over the fair value of the assets, while Canadian GAAP measures the impairment as the excess of the carrying value over the net recoverable amount of the assets. The Company assessed the fair value of the affected asset group based on the market price for similar functionality and changes in the intended use of the asset group and asset group's remaining life given changes to the Company's strategy. The difference in the basis of measurement resulted in an additional impairment charge of $161 million under U.S. GAAP recorded in the second quarter of 2002. For the year ended December 31, 2002, depreciation expense is $10.9 million less under U.S. GAAP as a result of the difference in measuring the impairment charge. 61 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): (b) Other disclosures: (i) Accounts receivable are net of an allowance for doubtful accounts of $20.2 million (2001 - $24.3 million) at December 31, 2002. (ii) In addition to the commitments and contingencies described in note 24, the Company has also provided routine indemnifications, whose terms range in duration and often are not explicitly defined. These indemnifications relate to adverse effects due to changes in tax laws, infringements by third parties related to intellectual property, and under certain supplier agreements, losses arising from claims by third parties against suppliers, including customers, in connection with the use of services and related equipment by the third party. The maximum amounts from these indemnifications cannot be reasonably estimated. Historically, the Company has not made significant payments related to these indemnifications. The Company has also indemnified a third party in connection with a marketing agreement, and has determined that the potential maximum loss is not significant. The Company has also indemnified certain financial advisors regarding liability they may incur as a result of their activity as advisors to the Company or the Company's Noteholders. The Company continues to monitor the conditions that are subject to guarantees and/or indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under any guarantees and indemnifications when those losses are estimable. 62 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): (iii) Recently issued accounting standards: In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The Company is currently evaluating the impact of adoption on the consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The Company is currently evaluating the impact of adoption on the consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. There was no effect on adoption of SFAS No. 146 on the Company's results of operations and financial position for 2002 and prior years. 63 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), which requires certain disclosures of obligations under guarantees. The disclosure requirements of FIN 45 are effective for the Company's year ended December 31, 2002 and are included in note 23(b)(ii) to these consolidated financial statements. Effective for 2003, FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees entered into or modified after December 31, 2002, based on the fair value of the guarantee. The Company has not determined the impact of the measurement requirements of FIN 45. In November 2002, the Emerging Issues Task Force reached a consensus on Issue 00-21, addressing how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (a) the delivered item has value to the customer on a standalone basis; (b) there is objective and reliable evidence of the fair value of undelivered items; and (c) delivery of any undelivered item is probable. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. The Company is currently evaluating the impact of adoption on the consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. 64 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED): In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The application of this Interpretation will not have a material effect on the Company's financial statements. 24. COMMITMENTS AND CONTINGENCIES: (a) Contractual commitments: Under the terms of its operating lease agreements for fibre optics maintenance, operating facilities, equipment rentals and minimum purchase commitments under supply contracts and customer contracts, the Company is committed to make the following payments for the years ending December 31, as follows: ----------------------------------------------------------------- 2003 $ 159,883 2004 106,891 2005 90,570 2006 47,881 2007 37,944 Thereafter 252,316 ----------------------------------------------------------------- $ 695,485 =================================================================
65 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 24. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED): (b) Contingent liabilities: (i) Professional fees: Upon successful completion of the Plan, the Company is required to pay success fees to certain financial advisors. These fees will consist of: (a) a fixed restructuring transaction fee of U.S. $10.0 million, and (b) a transaction fee, equal to 0.75% of the fair market value of all cash and/or other securities received by the Noteholders pursuant to the Plan. The total amount of these fees due upon successful implementation of the Plan will be reduced by the monthly payments made to these financial advisors during 2002 to emergence from CCAA. These success fees have not been accrued as at December 31, 2002 because payment is contingent on successful implementation of the Plan. (ii) Litigation: As a result of the Company's CCAA filing, virtually all pending pre-petition litigation against the Company is currently stayed. A significant portion of the Company's pending pre-petition litigation will be dealt with during the CCAA proceedings as described in note 8. In the normal course of operations, the Company may be subject to litigation and claims from customers, suppliers and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse effect on the financial position of the Company. (c) Letters of credit: In the normal course of business, the Company issues letters of credit in compliance with its right-of-way agreements with various municipalities and utility companies. In general, the terms of the letter of credit permit the municipality or the utility company to draw on the letter of credit to recover any losses incurred under the right-of-way agreement, as defined. As at December 31, 2002, the Company had letters of credit outstanding of $1.3 million with nil drawn. 66 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 24. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED): (d) Collective bargaining agreement: As at December 31, 2002, approximately 21% or 847 employees of the Company were union members covered by collective bargaining agreements. The union employees of the Company are currently represented by two unions, the Canadian Auto Workers ("CAW") Local 2000 and the United Steelworkers of America ("UWSA") TC Local 1976. The collective bargaining agreements are effective from January 1, 2001 to December 31, 2003. In 2003, the Company will need to negotiate new collective agreements with its union partners. 25. SUBSEQUENT EVENTS: In order to facilitate the reorganization pursuant to the Plan, on January 16, 2003, AT&T Canada entered into the Sale and Call Agreement with New OpCo, Canada Corp., AT&T Corp., AT&T Canada Holdings Limited Partnership ("AT&T LP"), Brascan Financial Corporation, Tricap Investments Corporation and 1519888 Ontario Limited ("BCo"), whereby AT&T LP agreed to sell all of its direct and indirect ownership interests in both AT&T Canada and Canada Corp. to BCo. BCo has granted a call option (the "Option") to New OpCo to buy the shares it acquires from AT&T LP representing a direct and indirect ownership interest in Canada Corp. (other than the shares of AT&T Canada) for a purchase price of $0.15 million. The Option is exercisable on or at any time after March 15, 2003. In the event that New OpCo does not exercise the Option before the implementation of the Plan, New OpCo has agreed to pay $0.15 million to BCo upon implementation of the Plan. On February 17, 2003 AT&T Corp. sold all of its direct and indirect ownership interest in Canada Corp. to BCo. On January 17, 2003, the Company announced it had established a new commercial agreement with AT&T Corp. The new commercial agreements among other things, require AT&T Canada to launch a new brand name by September 9, 2003, and to cease use of the AT&T brand by no later than December 31, 2003. In addition, these agreements provide a timeframe for continuity of the Company's global connectivity, technology platform and product suite, and maintain network ties between the two companies for the benefit of customers. These agreements enable AT&T Canada and AT&T Corp. to continue working together on a non-exclusive basis, and provide the Company the ability to forge additional supplier relationships that will enhance its connectivity and product offerings. Also, these arrangements recognize AT&T Corp.'s ability to serve Canadian customers directly, including competing with AT&T Canada. 67 AT&T CANADA INC. Notes to Consolidated Financial Statements (continued) (Tabular amounts in thousands of Canadian dollars, except per share amounts) Years ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------- 25. SUBSEQUENT EVENTS (CONTINUED): On February 20, 2003, the Plan was approved by the Company's Noteholders and its other Affected Creditors. On February 25, 2003, the Court issued an order sanctioning the Plan and the U.S. Court issued an order recognizing and enforcing the Court's sanction order. 68 EX-99.4 28 e84804exv99w4.txt LIBERTY MEDIA CORPORATION FINANCIAL STATEMENTS Exhibit 99.4 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) ======= ======= ======= =======
EX-99.5 29 e84804exv99w5.txt CONCERT B.V. FINANCIAL STATEMENTS EXHIBIT 99.5 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners' of Concert B.V. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, shareowners' equity and comprehensive loss and cash flows present fairly, in all material respects, the financial position of Concert, B.V. and its subsidiaries (the "Company") at December 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. PricewaterhouseCoopers LLP McLean, Virginia May 1, 2002 CONCERT, B.V. CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
ASSETS AT DECEMBER 31, ------------------------- (UNAUDITED) 2001 2000 -------- ----------- Current assets: Cash and cash equivalents $ 105 $ 127 Accounts receivable: Trade third parties, less allowances of $146 and $36 (unaudited) 2,539 1,825 Trade related parties 768 1,670 Other third parties, less allowance of $4 and $1 (unaudited) 80 222 Other related parties 54 444 Loans and interest due from related parties 159 328 Prepaid expenses and other 39 36 ------- ------- Total current assets 3,744 4,652 Property and equipment, net 1,744 3,753 Intangible and other assets, net 14 949 ------- ------- Total assets $ 5,502 $ 9,354 ======= ======= LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Trade accounts payable and accrued expenses: Third parties $ 2,694 $ 2,450 Related parties 1,076 1,942 Accrued employee related costs 361 107 Capital lease obligation 15 15 Deferred revenue 81 47 Income and value added taxes payable 69 116 ------- ------- Total current liabilities 4,296 4,677 Accrued employee related costs, net of current portion -- 68 Capital lease obligation, net of current portion 29 41 Deferred revenue, net of current portion 46 39 Deferred income taxes 1 9 Long-term debt related parties -- 1,950 ------- ------- Total liabilities 4,372 6,784 ------- ------- Commitments and contingencies (Note 10) Shareowners' equity: Class A ordinary shares, par value 100 NLG; 300,000 shares authorized; 125,101 shares issued and outstanding at December 31, 2001; 125,100 shares issued and outstanding at December 31, 2000 (unaudited) 6 6 Class B ordinary shares, par value 400 NLG; 300,000 shares authorized; 125,101 shares issued and outstanding at December 31, 2001; 125,100 shares issued and outstanding at December 31, 2000 (unaudited) 24 24 Additional paid-in capital 5,476 3,355 Accumulated deficit (4,425) (816) Contribution receivable -- (22) Accumulated comprehensive income 49 23 ------- ------- Total shareowners' equity 1,130 2,570 ------- ------- Total liabilities and shareowners' equity $ 5,502 $ 9,354 ======= =======
The accompanying notes are an integral part of these financial statements. 1 CONCERT, B.V. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ------------ (UNAUDITED) 2001 2000 ---- ---- Net revenue $ 6,189 $ 7,748 Operating expenses: Access, interconnection and network 5,128 5,836 Selling, general and administrative 1,345 1,058 Asset write-offs 2,625 -- Depreciation and amortization 665 525 ------- ------- Total operating expenses 9,763 7,419 ------- ------- Operating loss (3,574) 329 Other income (expense): Interest income 19 36 Interest expense, net (76) (106) Loss on foreign currency transactions, net (50) (90) Other (expense) income (28) 34 ------- ------- Total other expense (135) (126) ------- ------- (Loss) income before income taxes (3,709) 203 Income tax benefit (provision) 76 (98) Minority interest 24 (2) ------- ------- Net (loss) income $(3,609) $ 103 ======= =======
The accompanying notes are an integral part of these financial statements. 2 CONCERT, B.V. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ------------ (UNAUDITED) 2001 2000 ---- ---- Class A ordinary shares: Balance at beginning of year $ 6 $ -- 125,100 shares issued to AT&T in connection with the formation of the Global Venture (Note 3) -- 6 1 share issued to AT&T in connection with the conversion of the AT&T Term Loan to equity (Note 3) -- -- ------- ------- Balance at end of year 6 6 ------- ------- Class B ordinary shares: Balance at beginning of year (125,100 shares) 24 24 1 share issued in connection with the conversion of the BT Term Loan to equity (Note 3) -- -- ------- ------- Balance at end of year 24 24 ------- ------- Additional paid-in capital: Balance at beginning of year 3,355 1,360 Shares issued in connection with the formation of the Global Venture (Note 3) -- 1,726 Cash contributions (Note 3) -- 256 Other non-cash contributions from shareowners (Note 3) -- 43 Contribution receivable from shareowner (Note 3) -- 22 Estimated income taxes paid on behalf of shareowners (Note 3) -- (52) Conversion of AT&T and BT Term Loans to equity (Note 3) 2,121 -- ------- ------- Balance at end of year 5,476 3,355 ------- ------- Accumulated deficit: Balance at beginning of year (816) (919) Net (loss) income (3,609) 103 ------- ------- Balance at end of year (4,425) (816) ------- ------- Contribution receivable: Balance at beginning of year (22) -- Cash contribution receivable from shareowner -- (22) Cash contribution received from shareowner 22 -- ------- ------- Balance at end of year -- (22) ------- ------- Accumulated comprehensive income: Balance at beginning of year 23 37 Foreign currency translation adjustment 26 (14) ------- ------- Balance at end of year 49 23 ------- ------- Total shareowners' equity $ 1,130 $ 2,570 ======= ======= Comprehensive (loss) income: Net (loss) income $(3,609) $ 103 Foreign currency translation adjustment, less income taxes of $8 and $(4) (unaudited), respectively 18 (10) ------- ------- Total comprehensive (loss) income $(3,591) $ 93 ======= =======
The accompanying notes are an integral part of these financial statements. 3 CONCERT, B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ------------ (UNAUDITED) 2001 2000 ---- ---- Cash flows from operating activities: Net (loss) income $(3,609) $ 103 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 665 525 Bad debt expense 85 40 Unrealized foreign exchange losses, net 43 91 Deferred taxes (8) 1 Minority interest share of net (loss) income (24) 2 Asset write-offs 2,625 -- Other non-cash items 23 9 Changes in operating assets and liabilities: Accounts receivable: Trade third parties (838) (1,758) Trade related parties 902 43 Other third parties 142 (202) Other related parties 390 (420) Interest due from related parties 9 10 Prepaid expenses and other (1) 55 Trade accounts payable and accrued expenses: Third parties 332 1,152 Related parties (629) 1,140 Accrued employee related costs 188 244 Income and value added taxes payable (18) 84 Deferred revenue 41 86 Other assets and liabilities 19 12 ------- ------- Net cash provided by operating activities 337 1,217 ------- ------- Cash flows from investing activities: Acquisition of property and equipment (438) (1,108) Loans to related parties (1,015) (437) Repayments of loans due from related parties 1,163 130 Other investing activities (20) (78) ------- ------- Net cash used in investing activities (310) (1,493) ------- ------- Cash flows from financing activities: Proceeds from issuance of long-term debt related parties -- 1,000 Principal payments on long-term debt related parties -- (906) Proceeds from capital contributions from related party 22 308 Proceeds from the issuance of notes payable 217 -- Payments on accrued interest to related party (217) -- Cash overdraft (46) 48 Estimated income taxes paid on behalf of shareowners -- (52) Payments on capital lease obligation (13) (3) Other financing activities (11) -- ------- ------- Net cash (used) provided by financing activities (48) 395 ------- ------- Net effects of foreign currency on cash (1) -- ------- ------- Net decrease in cash and cash equivalents for the year (22) 119 Cash and cash equivalents, beginning of year 127 8 ------- ------- Cash and cash equivalents, end of year $ 105 $ 127 ======= =======
The accompanying notes are an integral part of these financial statements. 4 CONCERT, B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ------------ (UNAUDITED) 2001 2000 ---- ---- Supplemental disclosure of cash flow information: Cash paid for interest, including interest capitalized $ 217 $ 6 Cash paid for income taxes, including amounts paid on behalf of shareowners of $0 and $52 (unaudited), respectively $ 25 $ 70 Non-cash investing and financing activities: Payment due for the purchase of assets from related parties $ 11 $ 23 Equipment acquired under capital lease $ -- $ 59 Non-cash contributions by related parties $ -- $ 43 Non-cash contributions in connection with the formation of the Global Venture $ -- $1,680 Conversion of long-term debt and related accrued interest - related parties $2,121 $ --
The accompanying notes are an integral part of these financial statements. 5 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) 1. ORGANIZATION DESCRIPTION OF THE BUSINESS Concert B.V., a private limited liability company established in Amsterdam, the Netherlands, on October 20, 1998, through the Concert global group of companies (collectively, "Concert" or the "Company"), provides global communications services to multi-national companies, traditional and emerging carriers, wholesalers and Internet service providers. Concert's core business offering and products include the sale of International Direct Dial (IDD), Select, Wholesale, Transit and other voice services, International Bandwidth, Data, IP and domestic services to multi-national customers. The ultimate parent company from inception to January 4, 2000 was British Telecommunications plc. ("BT"). On January 5, 2000, the Company became jointly owned by AT&T, Corp. ("AT&T") and BT, pursuant to the provisions of the Framework and Closing Agreements dated October 23, 1998 and November 22, 1999, respectively, as amended and effective for purposes of forming a joint venture ("The Global Venture" or "GV") on January 5, 2000. As part of the GV formation, as discussed further in Note 3, BT and AT&T (collectively, "the Parents") contributed certain assets, liabilities and economic benefits and risks of certain contracts. The contribution of assets, liabilities and contract rights was accounted for using the Parents' cost basis at January 5, 2000. Concert's operations are separated into the following business units: Global Accounts ("GA"), Global Markets ("GM"), International Carrier Services ("ICS"), Global Products ("GP"), and Networks & Systems ("N&S"). GA provides a named set of approximately 270 multinational corporations ("MNC") with global telecommunication sales and service. Customers are primarily in the finance, petrochemical, pharmaceutical, and information technology industry sectors. Global Accounts' customers have a single point of contact with responsibility for everything from service procurement to problem resolution, through a Global Account Manager with a full support team of service network designers, field engineers and billing specialists. GM provides international communications services through a network of over 50 distributors, (including the Parents) to multinational companies, and other business customers and institutions worldwide. Products include a range of Bandwidth (international private line), Data (international frame relay, packet and ATM services), Voice (freephone, virtual network services, global software-defined networks) and value-added IP ("Internet Protocol") services. 6 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) ICS is responsible for international voice traffic management and correspondent carrier relations for the Parents. In addition, ICS offers telecommunications services to traditional and emerging carriers, wholesalers and internet service providers worldwide. The unit manages the profit and loss of a wholesale voice cross-border service portfolio that includes international wholesale product platforms as well as switched transit and hubbing services. GP develops and manages the Concert portfolio of retail services sold by GA, the Parents, and other distributors. This organization creates innovative solutions in network-based corporate communication services. Emphasis is on the delivery of leading edge international services and applications. The functional areas in this organization include product management, service, marketing and strategy. N&S is responsible for designing, building, managing and maintaining Concert's global network, as well as delivering all aspects of customer service. The N&S unit is the interface with in-country domestic suppliers for access, whether with AT&T or BT in their home markets, or with local network providers in other countries. N&S is also responsible for the integration of networks, technical platforms and systems (including development), along with their associated processes. TERMINATION OF THE GV On October 15, 2001, AT&T, BT and Concert entered into binding agreements (collectively the "Termination Agreements"), which, upon closing, resulted in Concert's acquisition of 100% of AT&T's equity interest ("AT&T Shares") in Concert, in exchange for certain assets, liabilities, contracts, customers and other items of Concert ("Transferred Assets"). After completion of certain conditions, closing occurred on April 1, 2002 ("Close" or "Closing"). Upon Closing, as consideration for the AT&T Shares, a portion of the assets, liabilities, contracts, customers and other operational items transferred to AT&T. The Transferred Assets consisted primarily of those items that were contributed by AT&T in connection with the formation of the GV, in addition to certain assets and obligations that were purchased, generated or developed during the operation of the GV. The remaining business is now wholly owned by BT. As a result of the April 1, 2002 transaction described above, the financial position, results of operations and cash flows included in these financial statements are not representative of the remaining Concert business from April 1, 2002 forward. 7 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) CONTINUING OPERATIONS In order for Concert to continue its global operations, Concert has entered into commercial arrangements with AT&T at Closing. The purpose of these arrangements is to provide Concert the ability to offer telecommunication services in geographic regions where Concert will no longer have the operating assets as a result of the movement of the Transferred Assets to AT&T. LIQUIDITY In accordance with the Termination Agreements, a funding plan for supporting the operations of the Company between October 15, 2001 and the Close and a series of Transition Projects that will continue post Close was established. With minimal exceptions, this funding plan requires the Parents to equally fund operations through Close and the completion of the Transition Projects. Post Close, BT confirmed that sufficient funding will be available for Concert to meet its financial obligations up to and through March 31, 2003. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S.) and include the accounts of Concert and its majority-owned subsidiaries. All material inter-company accounts and transactions have been eliminated in the consolidated financial statements. Certain balances in the prior year have been reclassified to conform to the presentation adopted in the current year. The unaudited Consolidated Balance Sheet as of December 31, 2000, the unaudited Statement of Operations, Shareowners' Equity and Comprehensive (Loss) Income and Cash Flows for the year ended December 31, 2000 have been prepared in accordance with generally accepted accounting principles. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. 8 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) 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 amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. FOREIGN CURRENCY TRANSLATION Concert maintains its consolidated financial statements in U.S. dollars. Income statement amounts are translated at average exchange rates for the year and assets and liabilities are translated at year-end exchange rates for operations that prepare financial statements in currencies other than the U.S. dollar. These translation adjustments are presented as a component of accumulated other comprehensive (loss) income within shareowners' equity. Gains and losses from foreign currency transactions are included in net (loss) income. REVENUE RECOGNITION Concert records net revenue in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," and Emerging Issues Task Force No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent", which provide guidance on the recognition, presentation and disclosure of revenue in financial statements. Prior to October 15, 2001, the Company reported revenue generated from MNC Domestic services on a gross basis. This was based upon a number of key facts including customer ownership, economic risk, price control and the Company's intent to migrate the contractual relationship from the Parents direct to Concert. In connection with the decision to unwind the GV, a number of these factors changed and the Company has concluded the appropriate presentation for MNC domestic sales, post October 15, 2001 should be on a net basis. This change in presentation resulted in a reduction in net revenue, accounts receivable, operating expenses and accounts payable related party for the year ended December 31, 2001 of $299. Concert recognizes revenue from the sale of International Direct Dial (IDD), Select, Wholesale, Transit and other Voice services, International Bandwidth, Data, MNC Domestic and IP services when persuasive evidence of an arrangement exists, delivery has occurred or services are provided, prices are fixed and determinable and collection is reasonably assured. Revenue is recognized as services are provided net of amounts that will be neither billed nor 9 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) collected. Amounts invoiced to customers, including sub-sea capacity, prior to the relevant criteria for revenue recognition being satisfied, are included in deferred revenue which is included in the accompanying consolidated balance sheet. ADVERTISING Costs of advertising and promotions, excluding cash incentives used to acquire customers, are expensed as incurred. Advertising and promotional expenses were $45 and $38 (unaudited) for the years ended December 31, 2001 and 2000, respectively. CASH AND CASH EQUIVALENTS Concert considers all highly liquid investments having original maturities of ninety days or less at the date of acquisition to be cash equivalents. The carrying value of cash equivalents approximates fair value. PROPERTY AND EQUIPMENT Property and equipment, which includes capitalized leases, are stated at cost, net of depreciation and amortization. Expenditures for improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Expenditures for construction of network systems and other projects prior to the asset being ready for its intended use are reflected as construction in progress. Capitalized costs include costs incurred under the construction contracts, labor and interest. Total interest cost incurred for the years ended December 31, 2001 and 2000 were $99 and $133 (unaudited), respectively. Interest capitalized on construction in progress for the years ended December 31, 2001 and 2000 were $23 and $27 (unaudited), respectively. Costs incurred relating to the evaluation of new projects, prior to the date the development of the project becomes probable, are expensed as incurred. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets, with the exception of leasehold improvements and assets acquired through capital leases, which are depreciated over the lesser of the estimated useful lives of the asset or the term of the lease. The following are Concert's depreciable asset categories and their estimated useful lives: 10 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) Network and other equipment 3 to 20 years Software developed for internal use 3 years Buildings and leasehold improvements 5 to 40 years Administrative Assets 1 to 7 years
When assets are sold or retired, the cost and related accumulated depreciation are eliminated from the accounts and the resultant, gain or loss is included in other income (expense). INTANGIBLE ASSETS Intangible assets include goodwill, and customer lists. Amounts contributed by the shareowners' as goodwill is the excess of the purchase price over the fair value of net assets acquired in a business combination accounted for under the purchase method. Concert amortizes goodwill on a straight-line basis over 20 years. Customer lists are amortized over 5 years. In accordance with Accounting Principles Board Opinion No. 17, "Intangible Assets", Concert continues to evaluate the amortization periods of the Company's intangible assets to determine whether events or circumstances warrant revised amortization periods. SOFTWARE DEVELOPED FOR INTERNAL USE Certain development costs, including external direct costs of materials and services and payroll costs for employees devoting time to the projects associated with internal-use software are capitalized in accordance with Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Development or Obtained for Internal Use". These costs are included within property and equipment and are amortized over a period of three years beginning when the asset is ready for its intended use. Costs incurred prior to technological feasibility, as well as maintenance and training costs are expensed as incurred. For the years ended December 31, 2001 and 2000, Concert capitalized costs of $198 and $117 (unaudited), respectively, related to software development. Research and development costs are expensed as incurred. Concert recorded $154 and $83 (unaudited) as research and development costs for the years ended December 31, 2001 and 2000, respectively. 11 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of", long-lived assets, identifiable intangibles and goodwill related to those assets, are reviewed for impairment 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 long-lived assets, related intangible assets and goodwill, then a loss is recognized for the difference between the fair value and carrying amount of the identifiable tangible, intangible assets and goodwill being evaluated. See note 4 for a discussion on asset impairments for the year ended December 31, 2001. SUB-SEA CABLE CAPACITY In connection with the formation of the GV, the Parents contributed sub-sea cable assets to Concert. These amounts have been recorded as Property and Equipment and are being depreciated over their remaining useful lives. In the normal course of business, Concert enters into transactions to acquire the right to use sub-sea cable assets or services. Dependent on the nature of the assets or services received, Concert accounts for the transaction as either a service contract or as a lease arrangement. If the services received do not meet the criteria of a lease, Concert accounts for the services received in accordance with accepted service contract accounting by recognizing the cost of the service offering over the term of the arrangement. If the assets received meet the criteria of a lease, Concert accounts for the arrangement in accordance with SFAS No. 13, "Accounting For Leases" (see note 10). DERIVATIVE FINANCIAL INSTRUMENTS Concert enters into foreign currency forward contracts to manage the risk of foreign currency exchange rate fluctuations. All foreign currency contracts are marked-to-market on a current basis with respective gains or losses recognized in other income (expense). The gains or losses on foreign currency contracts serve to offset (partially, or completely, depending on the nature of the instruments entered into in relation to the underlying assets) the impact of the revaluation of the underlying assets or liabilities (receivables or payables) that are recorded within Concert's financial statements in currencies other than U.S dollars. 12 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject Concert to concentration of credit risk consist principally of cash and cash equivalents, and accounts receivable. Concert maintains its cash and cash equivalents with high-quality financial institutions which, at times, may exceed federally insured limits. Concert has accounts receivable and loans receivable from its Parents, which exceed 10% of the December 31, 2001 and 2000 accounts receivable and loans receivable balances. Receivable balances due from the Parents at December 31, 2001 and 2000 are $2,247 and $3,470 (unaudited), respectively. No other customers represented more than 10% of accounts receivable at December 31, 2001 and 2000. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of Concert's financial instruments, including cash and cash equivalents, accounts receivable, loans and interest receivable, accounts payable and accrued expenses are carried at cost which approximates fair value due to the relative short maturities of these instruments. The fair value of Concert's long-term debt due to the Parents at December 31, 2000 is $1,812 (unaudited). INCOME TAXES Concert, B.V. is recognized as a partnership for U.S. income tax purposes, therefore Concert has not recorded current or deferred income taxes in the accompanying financial statements related to its U.S. operations. Concert's foreign subsidiaries recognize current and deferred income taxes using tax laws enacted in each local jurisdiction. Deferred taxes are recognized using the asset and liability approach in accordance with SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method, deferred income taxes are recognized for differences between the carrying amounts and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. Concert establishes a valuation allowance on net deferred tax assets when it is more likely than not that such assets will not be realized. 13 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) RECENT 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. Management is in the process of evaluating what impact the adoption of SFAS No. 141 will have on the Company's financial statements. 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 of the standard 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 the Company as of January 1, 2002. Management is in the process of evaluating the effect that this statement will have on the Company's financial statements. 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. Management is in the process of evaluating the effect that this statement will have on the Company's financial statements. 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 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 14 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except share data) ________ 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 Concert as of January 1, 2002. Management is in the process of evaluating the effect that this statement will have on the Company's financial statements. 3. RELATED PARTY TRANSACTIONS A substantial portion of Concert's business is transacted between the Company and its Parents. The majority of the terms and conditions, including renewal periods and renegotiation rights applicable to those business transactions, have been contractually agreed between the Parents. Below is a summary of the transactions between Concert and its Parents and the amounts included from those transactions in the Consolidated Statement of Operations for the years ended December 31, 2001 and 2000:
(Unaudited) 2001 2000 ---- ---- Net revenue $2,522 $3,274 Operating expenses 2,491 2,340 Other expense 81 94
Revenue earned from the Parents includes the sale of IDD, Wholesale, and other Voice services, International Bandwidth, Data, and IP services. Operating expenses relate to the cost of inland domestic services, network service, system support, maintenance and provisioning, international termination charges, US and UK domestic backhaul, billing and customer care, certain employee related costs and other general services inclusive of all related tax and regulatory charges. Other expenses include interest income and interest expense relating to the Parental loans and other commercial arrangements and settlements between Concert and BT. 15 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except share data) ________ As part of Concert's formation, provisions were included in the framework and closing agreement which required the Parents to reimburse Concert for certain costs under their commercial arrangements. During the years ended December 31, 2001 and 2000, Concert was to be reimbursed $30 and $346 (unaudited), respectively. These amounts are recorded as a reduction of operating and other expenses. Balances included in the Consolidated Balance Sheets at December 31, 2001 and 2000 for transactions with each Parent are as follows:
(Unaudited) 2001 2000 ---- ---- Accounts receivable, net $ 768 $1,670 Other related party receivables 54 444 Loans and interest due from related parties 159 328 Accounts payable and accrued expenses 1,076 1,942 Long-term debt -- 1,950
Included within trade-third parties accounts receivable balance at December 31, 2001 are amounts due from the Parents as part of their role as Concert's billing and collection service provider. In this role, the Parents bill and collect certain revenue streams on Concert's behalf. These revenues and receivables are not generated from the sale of product or services to the Parents and therefore, they have been classified as third party accounts receivable. Amounts included in the Consolidated Balance Sheet for such items at December 31, 2001 and 2000 are $1,266 and $1,028 (unaudited), respectively. Excluded from related party trade accounts payable and accrued expenses are amounts due to the Parents for payments, which the Parents make to unrelated third parties on Concert's behalf. Such payments consist primarily of property and equipment purchases and net settlement payments to third party carriers. At December 31, 2001 and 2000, $775 and $690 (unaudited), respectively, is included in trade third party accounts payables and accrued expenses for these items. 16 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- CONTRIBUTIONS UPON FORMATION As discussed in Note 1, in connection with the GV formation, the Parents contributed certain assets, liabilities and the economic benefits and risks of certain contracts. The initial contributions to the GV have been accounted for using predecessor or carryover basis. The January 5, 2000 contributions of the Parents, including minority interest of $44 (unaudited), are summarized below:
(Unaudited) Cash and cash equivalents $ 52 Accounts receivable, net 44 Prepaid expenses and other 2 Property and equipment 1,785 Intangible and other assets 67 -------- Total assets $ 1,950 ======== Accounts payable and accrued expenses $ 172 Income and value added taxes payable 2 -------- Total liabilities $ 174 ======== Net Assets $ 1,776 ========
Under the Framework Agreement, Concert receives the economic benefit and risk associated with contracts assigned to the GV by AT&T and BT. Property and equipment contributed by the Parents consists primarily of Trans-Atlantic and Trans-Pacific sub-sea cable assets and related telecommunications network equipment. Included in the intangible and other assets contributed by the Parents is $65 (unaudited) related to rights to acquire capacity on a cable system in the Asia Pacific region. At December 31, 2001, Concert has activated $30 of this capacity and reclassified the balance to property and equipment, and is amortizing this amount over 15 years. The Company has reviewed the carrying value of the remaining cable capacity rights of $35, which will revert back to AT&T, as set forth in the Termination Agreements (Note 1) and concluded that neither the Company nor AT&T intends to activate this capacity. Therefore, the Company has written off the remaining carrying value of the capacity rights and has included the write-off within the Consolidated Statements of Operations in operating expenses. 17 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- LOANS DUE FROM RELATED PARTIES On December 15, 2000, Concert extended a loan facility ("BT Loan Receivable") to BT. The BT Loan Receivable facility expires on December 15, 2003. Any outstanding principal balance is repayable on the expiration date of the facility. Interest is accrued monthly, based on a 365 day year, at the rate of a three month London Inter-bank Offered Rate ("LIBOR") plus 40 basis points, which is measured at the beginning of each quarter, or 4.94% and 6.58% (unaudited) at December 31, 2001 and 2000, respectively. The principal balance of the BT Loan Receivable was $67 and $181 (unaudited) at December 31, 2001 and 2000, respectively. Interest accrued during the facility period is payable on the first business day of the following calendar year. During 2001, BT made principal payments of $399 and took advances of $297. Accrued interest at December 31, 2001 and interest income recorded during 2001 was $9 and $9, respectively. Interest income accrued for 2000 was immaterial. Subsequent to December 31, 2001, all amounts due under the BT Loan Receivable were paid to Concert. On August 30, 2000, Concert extended a loan facility ("AT&T Loan Receivable") to AT&T. The AT&T Loan Receivable facility expires on August 30, 2003. Any outstanding principal balance is repayable on the expiration date of the facility. Interest is accrued monthly, based on a 360 day year, at the rate of a three month LIBOR (on USD deposits) plus 40 basis points, which is calculated at the beginning of each quarter, or 3.0% and 7.20% (unaudited) at December 31, 2001 and 2000, respectively. Interest accrued during the facility period is payable on the first business day of the following calendar year. Accrued interest at December 31, 2001 and 2000 was $3 and $2 (unaudited), respectively. Interest income recorded during 2001 and 2000 was $5 and $6 (unaudited), respectively. The principal balance of the AT&T Loan Receivable was $80 and $126 (unaudited) at December 31, 2001 and 2000, respectively. During 2001, AT&T made principal payments of $764 and took advances of $718. Subsequent to December 31, 2001, all amounts due under the AT&T Loan Receivable were paid to Concert. LOANS DUE TO RELATED PARTIES On November 29, 2001, in connection with the Termination Agreement, through a series of transactions AT&T and BT converted to equity the outstanding amounts of the AT&T Term Loan, BT Term Loan and amounts equal to the related accrued interest of $1,113 and $1,008, respectively. Prior to the conversion, accrued interest of $113 and $104 on the AT&T and BT Term Loans, respectively was paid. Subsequent to this transaction, the AT&T and BT Term Loans were cancelled and terminated. 18 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- During January 2000, Concert renewed a $904 term loan facility ("BT Term Loan") with BT. The BT Term Loan, as amended, will expire on January 18, 2003. Interest accrues daily on the basis of the actual number of days elapsed and a 365 day year, at the rate of the three month LIBOR plus 40 basis points, which is measured at the beginning of each quarter, or 4.94% and 6.58% (unaudited) at December 31, 2001 and 2000, respectively. Accrued interest payable at December 31, 2001 and 2000 was zero and $60 (unaudited), respectively. Interest expense recorded during the years ended December 31, 2001 and 2000 on the BT Term Loan was $49 and $60 (unaudited), respectively. During January 2000, Concert entered into a $1,000 term loan facility ("AT&T Term Loan") with a wholly owned subsidiary of AT&T. The AT&T Term Loan was drawn down during January and February 2000, in separate advances totaling $1,000. The AT&T Term Loan, as amended, will expire on January 18, 2003. Interest is accrued daily on the basis of the actual number of days elapsed and a 360 day year, at the rate of a three month LIBOR plus 40 basis points, which is calculated at the beginning of each quarter, or 3.00% and 7.20% (unaudited) at December 31, 2001 and 2000, respectively. Accrued interest payable at December 31, 2001 and 2000 was zero and $67 (unaudited), respectively. Interest expense recorded during the years ended December 31, 2001 and 2000 on the AT&T Term Loan was $46 and $67 (unaudited), respectively. The AT&T Term Loan is denominated in a currency other than the Company's functional currency. Accordingly, the carrying value of the loan is subject to foreign exchange rate risk. Concert recorded an unrealized foreign currency loss on the AT&T Term Loan in the amount of $47 and $92 (unaudited) for the years ended December 31, 2001 and 2000, respectively, which is included in loss on foreign currency transactions, net on the Consolidated Statements of Operations. OTHER TRANSACTIONS WITH OR ON BEHALF OF THE PARENTS During the year ended December 31, 2000, the Parents made additional contributions of buildings in the amount of $41 (unaudited), cash and contribution receivable in the amount of $278 (unaudited) and other assets of $2 (unaudited). Concert also paid $52 (unaudited) of estimated income taxes on behalf of its Parents in accordance with applicable tax laws and regulations. On July 1, 2000, Concert acquired certain assets and assumed certain liabilities of AT&T Global Markets Europe ("GME") for $72 (unaudited). Of the purchase price, $50 (unaudited) was paid during 2000 with the balance paid in 2001 and 2002. This transaction resulted in Concert acquiring the customer base, customer lists, related receivables and 19 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- obligations for the data and voice services provided to third parties by GME. The Company recorded liabilities of approximately $163 (unaudited), accounts receivable and other assets of approximately $147 (unaudited) and an intangible asset for the customer base of approximately $88 (unaudited). The Company is amortizing the identifiable intangible asset over five years. In December 2001, the Company completed negotiations to settle certain receivables and payables, which arose post GV formation, in dispute with the Parents. Against the total net unresolved disputes registered at December 31, 2001, Concert reserved $141 as an estimated loss in the accompanying Consolidated Balance Sheets and Consolidated Statements of Operations. The final resolution of this issue has concluded that the reserves were sufficient to close all parental disputes at December 31, 2001. 4. PROPERTY AND EQUIPMENT As of December 31, 2001 and 2000, property and equipment consists of the following:
(Unaudited) 2001 2000 ------- ------- Network and other equipment $ 2,016 $ 2,656 Construction in progress 222 1,162 Software developed for internal use 345 256 Administrative assets 233 149 ------- ------- 2,816 4,223 Less accumulated depreciation and amortization (1,072) (470) ------- ------- Property and equipment, net $ 1,744 $ 3,753 ======= =======
Property and equipment under capital lease is $59 at December 31, 2001 and 2000 (unaudited) and consist primarily of sub-sea cable assets and related equipment. Accumulated depreciation at December 31, 2001 and 2000, related to property and equipment under capital lease, was $4 and zero (unaudited), respectively. These assets are being amortized over the shorter of their estimated useful lives or the related lease term. Depreciation and amortization expense related to property and equipment for the years ended December 31, 2001 and 2000 amounted to $602 and $470 (unaudited), respectively. In connection with the execution of the Termination Agreements discussed in Note 1, it has been determined that certain of the Company's development projects will no longer be 20 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- continued. Accordingly, certain development assets have been abandoned. A charge of $35 was recorded for these projects during 2001 and is included in operating expenses on the Consolidated Statement of Operations. Additionally, as a result of the decision to unwind the GV, certain assets have been identified which remain functional, and are required in the GV's operations, but which will not be required by either Parent after Close. As of October 15, 2001, the date of the Termination Agreements, management has accelerated the depreciation on these assets such that they will be fully depreciated at Close. Accelerated depreciation of approximately $22 was recorded during the year ended December 31, 2001. During 2001, events and circumstances within the telecommunications industry occurred, including the October 15, 2001 announcement by AT&T and BT to terminate the GV, which indicated that the carrying amount of the Company's long-lived assets and related intangible assets may not be recoverable. Accordingly, the Company prepared an undiscounted cash flow analysis to determine if an impairment existed at the balance sheet date. The analysis was prepared assuming Concert would continue in existence as constituted before the signing of the Termination Agreement dated October 15, 2001. The cash flows used in this hypothetical model assumed the assets were to be held and used and was provided by former Concert B.V. employees, now working for either AT&T or BT and may not be realized by the Company, AT&T or BT. The total future undiscounted cash flows in this analysis were less than the carrying amount included in the accompanying Consolidated Balance Sheet of the underlying long-lived assets and intangible assets at December 31, 2001. Accordingly, an impairment loss of $2,535 was recorded in the Consolidated Statements of Operations. This loss represents the amount by which the carrying amount of the long-lived assets, related intangible assets and goodwill being evaluated exceeded the fair value of the underlying assets. The estimated fair value of the long-lived assets at December 31, 2001 was determined through the use of discounted cash flow analysis. Given the nature of the Company's assets and operations, the cash flow analysis was prepared at the entity level, which is the asset level for which the lowest level of cash flows was identifiable. As a result, the Company has written off goodwill prior to making any reduction of the carrying amounts of the impaired long-lived assets and other identifiable intangible assets. As the impairment loss exceeds the carrying amount of goodwill, at December 31, 2001, goodwill totaling $690 has been fully written off. The remaining portion of the impairment 21 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- loss, has been allocated to customer lists and then among the Company's property and equipment, $56 and $1,789, respectively. 5. INTANGIBLE ASSETS As of December 31, 2001 and 2000, Concert's intangible assets consisted of the following:
(Unaudited) 2001 2000 ----- ----- Goodwill $ -- $ 795 Customer lists and other -- 86 ----- ----- -- 881 Less accumulated amortization -- (51) ----- ----- Intangible assets, net $ -- $ 830 ===== =====
Amortization related to intangible assets for the years ended December 31, 2001 and 2000 amounted to $63 and $55 (unaudited), respectively. As described in Note 4, the Company recorded an impairment loss during the year ended December 31, 2001 which resulted in the reduction of the intangible asset values to zero. During 2000, the Company purchased $20 (unaudited) of prepaid capacity rights for cash included in Intangible and other assets on the Consolidated Balance Sheets. During 2001, the financial conditions of the provider indicated probable non-performance of the commitment by the provider. The Company wrote-off the prepayment of $20 and included the result in operating expenses on the Consolidated Statements of Operations for the year ended December 31, 2001. 6. SHAREOWNERS' EQUITY The authorized share capital amounts of the Company as of December 31, 2001 and 2000 consists of 300,000 of each Class A and Class B ordinary shares with an authorized par value of NLG 150. Class A ordinary share issued capital amounts to $6 and consists of 125,101 ordinary shares with a par value of NLG 100 per share. Class B ordinary share issued capital amounts to $24 and consists of 125,101 ordinary shares with a par value of NLG 400 per share. Notwithstanding the difference in par value, the Class A shares and the Class B shares have identical rights. 22 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- On November 29, 2001, in connection with the Termination Agreements, the Company issued one Class A share, with a par value of NLG 100 to AT&T in consideration for the outstanding AT&T Term Loan and related accrued interest (as described in Note 3) of $1,113. The Company also issued one Class B share, with a par value of NLG 400 to BT in consideration for the outstanding BT Term Loan and related accrued interest (as described in Note 3) of $1,008. On January 5, 2000, in connection with the formation of the GV, Concert B.V. became the ultimate parent company of the Global Venture. Concurrent with the formation of the GV, BT retained their ownership of 125,100 Class B shares, and 125,100 Class A shares were issued to AT&T for its contribution. 7. EMPLOYEE BENEFIT PLANS 401(k) PLAN Concert maintains a defined contribution retirement savings plan under Section 401(k) of the United States of America Internal Revenue Code. This plan, covering substantially all US-based employees meeting the minimum age and service requirements, allows participants to defer a portion of their annual compensation on a pre and post-tax basis. Under the plan, Concert will match 66.7% of every dollar the employee contributes up to a maximum of 6% of the employee's annual base salary. The company matches both employee pre and after-tax contributions. Concert contributions to the plan for the years ended December 31, 2001 and 2000 totaled $11 and $11 (unaudited), respectively. PENSION PLAN Concert maintains a non-contributory defined benefit pension plan ("Cash Balance") covering the majority of its US-based employees. Concert also maintains a Supplemental Executive Retirement Plan (the "SERP"). The Plans were effective January 5, 2000. The Cash Balance plan is a non-contributory defined benefit pension plan. Employees are eligible to participate in the Cash Balance plan if they are compensated by salary or commission or by a combination of both. Retirement benefits are normally payable upon reaching age 65. Pension trust contributions are made to trust funds held for the sole benefit of plan participants. Each participant is assigned a nominal cash balance account that grows by pay credits and interest credits. Benefits are paid in either a lump sum or annuity form of payment based upon the election of the employee. 23 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- The following table shows the change in benefit obligation, change in plan assets, funded status, accrued benefit cost, and components of the net periodic benefit cost for the Cash Balance and SERP included in the accompanying financial statements for the years ended December 31, 2001 and 2000:
(Unaudited) 2001 2000 -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 8 $ -- Service cost 9 6 Interest cost -- -- Actuarial loss 2 2 Benefits paid (1) -- Additional benefit based on estimated future salary levels -- -- Curtailment 2 -- -------- -------- Benefit obligation at end of year $ 20 $ 8 ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ -- $ -- Actual return on plan assets -- -- Employer contribution 9 -- Benefits paid (1) -- -------- -------- Fair value of plan assets at end of year $ 8 $ -- ======== ======== FUNDED STATUS, AT DECEMBER 31 $ (12) $ (8) UNRECOGNISED NET LOSS, AT DECEMBER 31 3 2 -------- -------- ACCRUED BENEFIT COST, AT DECEMBER 31 $ (9) $ (6) ======== ======== COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 9 $ 6 Interest cost -- -- Expected return on plan assets -- -- Amortisation of net loss -- -- Curtailment charge 2 -- -------- -------- Net periodic benefit cost $ 11 $ 6 ======== ========
24 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- The following rates and assumptions were used in the measurement of the pension benefit obligations at December 31, 2001 and 2000:
(Unaudited) 2001 2000 ---- ---- Weighted average discount rate 7.25% 7.50% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 5.50% 6.00%
In connection with Concert's Reduction in Force Programs (see Note 8), curtailment accounting was applied as of December 31, 2001 with respect to the 743 participants scheduled to terminate service with a vested benefit during 2002 as part of the Reduction in Force Program. The resultant increase in the projected benefit obligation is treated as a curtailment loss and recognized immediately as a component of 2001 expense. Certain Concert employees previously employed by BT or AT&T continue to participate in their respective parent's cash balance pension plans. These employees are not eligible to participate in the Concert cash balance plan, and Concert makes payments to the parents on behalf of these employees. These payments are included in operating expenses on the Consolidated Statement of Operations. 8. EMPLOYEE TERMINATION CHARGES On April 5, 2001, Concert announced a Reduction in Force program. As a result of this program, Concert terminated 389 employees across various levels throughout the Company. In connection with the Termination Agreements described in Note 1, Concert announced an additional Reduction in Force program. This program called for the termination of 1,770 employees to be effected in three phases. All employees effected by the reduction in force program were notified of their termination date and were advised of the amount of their termination benefits on or before December 31, 2001. The Company recorded a charge for employee termination benefits of $172 in 2001 related to these activities. This amount is included in operating expenses in the Consolidated Statements of Operations. At December 31, 2001, the Company had $136 included in accrued employee related costs on the Consolidated Balance Sheet related to employee termination benefits and expects to pay these amounts through 2002. 25 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- 9. INCOME TAXES The provision for (benefit from) income taxes for the years ended December 31, 2001 and 2000 are comprised of the following:
(Unaudited) 2001 2000 ---- ---- Current $(68) $ 97 Deferred (8) 1 ---- ---- Income tax (benefit) expense $(76) $ 98 ==== ====
Deferred income tax liabilities are taxes that Concert expects 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. The following is a summary of the significant U.S. and foreign items giving rise to components of Concert's deferred tax assets and liabilities at December 31, 2001 and 2000:
(Unaudited) 2001 2000 -------- -------- Assets: Deductible items $ 75 $ 87 Less: valuation allowance (75) (42) -------- -------- Net deferred tax asset -- 45 Liabilities: Depreciation (1) (54) -------- -------- Total deferred tax liability $ (1) $ (9) ======== ========
At December 31, 2001 and 2000, Concert had net operating loss carryforwards of $14 and $200 (unaudited), respectively, generated primarily in the United Kingdom. Due to UK net operating loss carryover statutory provisions, it is unlikely the Company will recognize the benefit of these losses. The change in valuation allowance reflects the determination that a tax benefit related to the net operating losses will not be recognized. 26 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- A reconciliation between the statutory federal income tax rate and the effective rate of income taxes for the years ended December 31, 2001 and 2000 is as follows:
(Unaudited) 2001 2000 ----- ---- United States federal statutory income tax rate 35.0% 35.0% Benefit of United States partnership status (8.1)% (10.5)% Non-United States net income (23.3)% (5.5)% Non-deductible charges (0.7)% 26.7% Other (0.9)% 2.6% ----- ---- Effective income tax rate 2.0% 48.3% ===== ====
10. COMMITMENTS AND CONTINGENCIES In the normal course of business, Concert is subject to proceedings, lawsuits and other claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, Concert is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact which may exist with respect to these matters at December 31, 2001. Concert believes that after final disposition, any monetary liability or financial impact beyond that provided for at December 31, 2001 will not be material to Concert's operations, financial position or cash flows. Concert leases office facilities, network facilities, airplanes, and copier equipment under operating leases that expire in various years through 2013. In addition, Concert leases capacity on telecommunication cables classified as capital leases. Future minimum annual payments under capital leases and non-cancelable operating leases with initial terms of one year or more consist of the following at December 31, 2001: 27 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) --------
Capital Operating Years ending December 31, Leases Leases ---------- ------------ 2002 $ 16 $ 34 2003 16 28 2004 14 23 2005 - 18 2006 - 15 Thereafter - 51 ---------- ------------ Total minimum lease payments 46 $ 169 ============ Less amount reported as interest (2) Less current portion (15) ---------- Capital lease obligations, net of current portion $ 29 ==========
Expenses for operating leases, including month to month leases, amounted to $118 and $111 (unaudited) for the years ended December 31, 2001 and 2000, respectively. Concert also incurs costs with its Parents for accommodation expenses, under separate commercial agreements. Rent expense, under these agreements amounted to $44 and $42 (unaudited) for the years ended December 31, 2001 and 2000, respectively. In addition, Concert has month to month lease agreements for shared network accommodations with third parties. Rent expense for the years ended December 31, 2001 and 2000 under these agreements was $26 and $49 (unaudited), respectively. 11. DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business, Concert uses derivative financial instruments for purposes other than trading. Concert does not use derivative financial instruments for speculative purposes. These instruments are limited to foreign currency exchange contracts. Foreign currency exchange contracts are used to manage Concert's exposure to changes in currency exchange rates related to foreign-currency-denominated transactions. In 2001, this consisted principally of British pounds sterling, European Union currency ("EURO") and Japanese Yen contracts related to international carrier settlements, intercompany loans and reimbursement from European distribution channels. Concert has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. By their nature, derivative instruments involve risk, including the credit risk of non-performance by counterparties. At December 31, 2001, it is management's opinion that there is no significant risk of loss in the event of non-performance of the counterparties to these 28 CONCERT, B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) -------- financial instruments. Concert controls its exposure to credit risk through credit approvals, credit limits and monitoring procedures. Concert does not have any significant exposure to any individual counter-party, nor any major concentration of credit risk related to any derivative financial instruments. Foreign currency forward contracts amounted to $324 and $157 (unaudited) to purchase foreign currencies and $247 and $63 (unaudited) to sell foreign currencies at December 31, 2001 and 2000, respectively, resulting in net unrealized gains of $4 and $2 (unaudited) for the years ended December 31, 2001 and 2000, respectively. All of these contracts mature in 2002. Gains and losses on these contracts are recorded in earnings in other income (expense), net and offset gains and losses from the revaluation of the underlying assets and liabilities recorded in currencies other than the Company's functional currency. 29 -----END PRIVACY-ENHANCED MESSAGE-----