10-Q 1 y60830e10-q.txt AT & T CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 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 32 Avenue of the Americas, New York, New York 10013-2412 Telephone - Area Code 212-387-5400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ..X No ... At April 30, 2002, the following shares of stock were outstanding: AT&T common stock - 3,598,611,312 shares 1 PART I - FINANCIAL INFORMATION AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- Revenue $ 12,023 $ 13,551 -------- -------- Operating Expenses Costs of services and products (excluding depreciation of $1,337 and $1,187 included below) 3,290 3,572 Access and other connection 2,808 3,151 Selling, general and administrative 2,585 2,794 Depreciation and amortization 1,895 2,412 Net restructuring and other charges 56 808 -------- -------- Total operating expenses 10,634 12,737 -------- -------- Operating income 1,389 814 Other (expense), net (162) (783) Interest (expense) (767) (879) -------- -------- Income (loss) from continuing operations before income taxes, minority interest and dividends on subsidiary preferred stock and net (losses) related to equity investments 460 (848) (Provision) for income taxes (266) (218) Minority interest and dividends on subsidiary preferred stock (57) 640 Net (losses) related to other equity investments (297) (57) Equity (losses) from Liberty Media Group - (697) -------- -------- (Loss) from continuing operations (160) (1,180) (Loss) from discontinued operations (net of income taxes of ($39)) - (68) --------- -------- (Loss) before extraordinary gain and cumulative effect of accounting changes (160) (1,248) Extraordinary gain (net of income taxes of $25) 41 - Cumulative effect of accounting changes (net of income taxes of $(530) and $578) (856) 904 -------- -------- Net (loss) (975) (344) Dividend requirements of preferred stock, net - (181) -------- -------- (Loss) attributable to common shareowners $ (975) $ (525) ======== ======== AT&T Common Stock Group: (Loss) from continuing operations per basic and diluted share $ (0.05) $ (0.17) (Loss) from discontinued operations per basic and diluted share - (0.02) Extraordinary gain per basic and diluted share 0.01 - Cumulative effect of accounting changes per basic and diluted share (0.24) 0.09 -------- -------- (Loss) per basic and diluted share $ (0.28) $ (0.10) ======== ======== Dividends declared $ 0.0375 $ 0.0375 AT&T Wireless Group: (Loss) from discontinued operations per basic and diluted share $ - $ (0.02) ======== ======== Liberty Media Group: (Loss) before cumulative effect of accounting change per basic and diluted share $ - $ (0.27) Cumulative effect of accounting change per basic and diluted share - 0.21 -------- -------- (Loss) per basic and diluted share $ - $ (0.06) ======== ========

See Notes to Consolidated Financial Statements 2 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS) (UNAUDITED)

AT AT MARCH 31, DECEMBER 31, 2002 2001 ---- ---- ASSETS Cash and cash equivalents $ 2,343 $ 10,592 Accounts receivable, less allowances of $810 and $827 7,347 7,736 Other receivables 1,520 1,645 Investments 477 668 Deferred income taxes 1,175 1,230 Other current assets 737 657 -------- -------- TOTAL CURRENT ASSETS 13,599 22,528 -------- -------- Property, plant and equipment, net of accumulated depreciation of $33,732 and $32,046 40,829 41,322 Goodwill, net of accumulated amortization of $1,307 in 2001 24,668 24,675 Franchise costs, net of accumulated amortization of $2,501 in 2001 41,381 42,819 Other purchased intangible assets, net of accumulated amortization of $724 and $647 2,145 2,222 Investments and related advances 21,790 23,818 Prepaid pension costs 3,391 3,337 Other assets 5,004 4,561 -------- -------- TOTAL ASSETS $152,807 $165,282 ======== ======== LIABILITIES Accounts payable $ 3,866 $ 4,744 Payroll and benefit-related liabilities 1,602 2,084 Debt maturing within one year 5,233 12,958 Other current liabilities 5,273 5,641 -------- -------- TOTAL CURRENT LIABILITIES 15,974 25,427 -------- -------- Long-term debt 39,070 40,527 Long-term benefit-related liabilities 3,590 3,594 Deferred income taxes 27,762 28,160 Other long-term liabilities and deferred credits 7,691 7,614 -------- -------- TOTAL LIABILITIES 94,087 105,322 -------- -------- Minority Interest 2,732 3,560 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T 4,723 4,720 SHAREOWNERS' EQUITY Common Stock: AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 3,566,313,758 shares (net of 851,814,745 treasury shares) at March 31, 2002 and 3,542,405,744 shares (net of 851,746,431 treasury shares) at December 31, 2001 3,566 3,542 Additional paid-in capital 52,682 51,964 Accumulated (deficit) (4,459) (3,484) Accumulated other comprehensive (loss) (524) (342) -------- -------- TOTAL SHAREOWNERS' EQUITY 51,265 51,680 -------- -------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $152,807 $165,282 ======== ========

See Notes to Consolidated Financial Statements 3 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (DOLLARS IN MILLIONS) (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- AT&T Common Shares Balance at beginning of year $ 3,542 $ 3,760 Shares issued, net: Under employee plans 3 4 For acquisitions - 44 Redemption of TCI Pacific preferred stock 20 - Other 1 1 ------- ------- Balance at end of period 3,566 3,809 ------- ------- AT&T Wireless Group Common Stock Balance at beginning of year - 362 Shares issued: Under employee plans - 1 ------- ------- Balance at end of period - 363 ------- ------- Liberty Media Group Class A Common Stock Balance at beginning of year - 2,364 Shares issued (acquired), net - 13 ------- ------- Balance at end of period - 2,377 ------- ------- Liberty Media Group Class B Common Stock Balance at beginning of year - 206 Shares issued (acquired), net - 6 -------- ------- Balance at end of period - 212 ------- ------- Additional Paid-In Capital Balance at beginning of year 51,964 90,496 Shares issued, net: Under employee plans 53 107 For acquisitions - 827 Redemption of TCI Pacific preferred stock 780 - Other* 11 290 Gain on issuance of common stock by affiliates - 25 Beneficial conversion value of preferred stock - 295 Dividends declared (134) - Other 8 5 ------- ------- Balance at end of period 52,682 92,045 ------- ------- (Accumulated Deficit)/Retained Earnings Balance at beginning of year (3,484) 7,408 Net (loss) (975) (344) Dividends declared - AT&T Common Stock Group - (143) Dividends accrued - preferred stock - (181) Treasury shares issued at less than cost - (8) ------- ------- Balance at end of period (4,459) 6,732 ------- -------

(CONTINUED) 4 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (CONT'D) (DOLLARS IN MILLIONS) (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- Accumulated Comprehensive (Loss) Balance at beginning of year (342) (1,398) Other comprehensive (loss) (182) (177) -------- -------- Balance at end of period (524) (1,575) -------- -------- Total Shareowners' Equity $ 51,265 $103,963 ======== ======== Summary of Total Comprehensive (Loss): Net (loss) $ (975) $ (344) Net foreign currency translation adjustment (net of income taxes of $(10) and $(136))(1) (18) (192) Net revaluation of securities: Unrealized gains (losses) (net of income taxes of $(191) and $(293))(1) (311) (494) Recognition of previously unrealized losses (gains) on available-for-sale securities (net of income taxes of $92 and $313)(2) 147 509 -------- -------- Comprehensive (Loss) $ (1,157) $ (521) ======== ========

* Liberty Media Group (LMG) shares issued for stock option exercise. AT&T accounts for treasury stock as retired stock. We have 100 million authorized shares of preferred stock at $1 par value. (1) In the first quarter of 2001, total comprehensive (loss) included LMG's foreign currency translation adjustments totaling $(149), net of applicable income taxes and unrealized gains (losses) on available-for-sale securities totaling $50, net of applicable income taxes. (2) See note (d) for a summary of the "Recognition of previously unrealized losses (gains) on available-for-sale securities" and the income statement line items impacted. See Notes to Consolidated Financial Statements 5 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- OPERATING ACTIVITIES Net (loss) $ (975) $ (344) Deduct: (Loss) from discontinued operations - (68) -------- ------- (Loss) from continuing operations (975) (276) Adjustments to reconcile (loss) from continuing operations to net cash provided by operating activities of continuing operations: Depreciation and amortization 1,895 2,412 Cumulative effect of accounting changes - net of income taxes 856 (904) Net losses related to other equity investments 482 131 Provision for uncollectible receivables 308 277 Deferred income taxes 248 (311) Cost method investment impairment charges 242 123 Net restructuring and other charges 56 796 Net revaluation of certain financial instruments 24 944 Net gains on sales of businesses and investments (10) (218) Minority interest and dividends on subsidiary preferred stock (19) (661) Extraordinary gain - net of income taxes (41) - Net equity losses from Liberty Media Group - 697 Put option mark-to-market charge - 63 Decrease in receivables 211 64 Decrease in accounts payable (701) (1,061) Net change in other operating assets and liabilities (1,040) (437) Other adjustments, net 81 (29) -------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 1,617 1,610 -------- ------- INVESTING ACTIVITIES Capital expenditures and other additions (1,506) (2,444) Investment contributions and purchases (10) (337) Investment distributions and sales 6 740 Proceeds from sale or disposal of property, plant and equipment 20 11 Net dispositions of businesses, net of cash disposed/acquired - 613 Other investing activities, net (81) (6) -------- ------- NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS (1,571) (1,423) -------- ------- FINANCING ACTIVITIES Decrease in short-term borrowings, net (6,328) (14,715) Retirement of long-term debt (1,900) (130) Dividends paid on common stock (133) (141) Dividends paid on preferred securities (22) (22) Proceeds from long-term debt issuances 49 - Issuance of AT&T common shares 38 61 Net issuance of treasury shares 1 15 Issuance of convertible preferred securities and warrants - 9,811 Issuance of AT&T Wireless Group common shares - 31 Other financing activities, net - 2 -------- ------- NET CASH USED IN FINANCING ACTIVITIES OF CONTINUING OPERATIONS (8,295) (5,088) -------- ------- Net cash provided by discontinued operations - 4,939 Net (decrease) increase in cash and cash equivalents (8,249) 38 Cash and cash equivalents at beginning of year 10,592 64 -------- ------- Cash and cash equivalents at end of period $ 2,343 $ 102 ======== =======

The notes are an integral part of the consolidated financial statements. 6 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) (UNAUDITED) A) BASIS OF PRESENTATION The consolidated financial statements have been prepared by AT&T Corp. (AT&T) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments necessary for a fair statement of the consolidated results of operations, financial position and cash flows for each period presented. The consolidated results for interim periods are not necessarily indicative of results for the full year. These financial results should be read in conjunction with AT&T's Form 10-K/A for the year ended December 31, 2001. We have reclassified certain prior period amounts to conform to our current presentation. B) RESTRUCTURING OF AT&T On October 25, 2000, AT&T announced a restructuring plan designed to fully separate or issue separately tracked stocks intended to reflect the financial performance and economic value of each of AT&T's four major operating units. On December 19, 2001, AT&T and Comcast Corporation (Comcast) announced an agreement to combine AT&T Broadband with Comcast. Under the terms of the agreement, AT&T will spin-off AT&T Broadband and simultaneously merge it with Comcast, forming a new company to be called AT&T Comcast Corporation (AT&T Comcast). AT&T shareowners will receive a number of shares of AT&T Comcast common stock based on an exchange ratio calculated pursuant to a formula specified in the merger agreement. If determined as of the date of the merger agreement, the exchange ratio would have been approximately 0.34, assuming the AT&T shares held by Comcast are included in the number of shares of AT&T common stock outstanding. Assuming Comcast retains its AT&T shares and converts them into exchangeable preferred stock of AT&T as contemplated by the merger agreement, the exchange ratio would be approximately 0.35. Assuming certain conditions, AT&T shareowners will own an approximate 55% economic stake and an approximate 61% voting interest in the new company, calculated as of the date of the merger agreement. The merger of AT&T Broadband and Comcast is subject to regulatory review, approval by both companies' shareowners and certain other conditions, and is expected to close by the end of 2002. AT&T also intends to proceed with the creation of a tracking stock for its AT&T Consumer Services business, which is expected to be distributed to AT&T shareowners following shareowner approval. AT&T has not yet determined the timing of the distribution, which may be made within a year of shareowner approval or may be made thereafter, depending on market conditions. Additionally, the AT&T board of directors could decide not to proceed with the distribution of the tracking stock, or could proceed at a time or in a manner different from its current intentions. On May 14, 2002, the company filed with the SEC, a joint AT&T/Comcast proxy seeking shareowner approval of the AT&T Broadband and Comcast merger and the creation of the AT&T Consumer Services tracking stock. In addition, the proxy also asks shareowners to consider an amendment to AT&T's charter to effect a one-for-five reverse stock split of AT&T common stock at the discretion of the AT&T Board. The purpose of the reverse stock split is to seek to adjust the trading prices of AT&T common stock following the various transactions to effect AT&T's restructuring plan, including the AT&T Comcast transaction. These restructuring activities are complicated and involve a substantial number of steps and transactions, including obtaining various approvals, such as Internal Revenue Service (IRS) rulings. AT&T anticipates, however, that the transactions associated with AT&T's restructuring plan will be tax-free to U.S. shareowners. Future financial conditions, superior alternatives or other factors may arise or occur that make it inadvisable to proceed with part or all of AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring plan may not occur as we currently expect or in the time-frames that we currently contemplate, or at all. Alternative forms of restructuring, including sales of interests in these businesses, would reduce what is available for distribution to AT&T shareowners in the restructuring. On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a separate, independently traded company. On August 10, 2001, AT&T completed the split-off of Liberty Media Corporation as an independent, publicly traded company. 7 C) SIGNIFICANT ACCOUNTING POLICIES STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" Effective January 1, 2002, AT&T adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and indefinite-lived intangible assets no longer be amortized, but instead be tested for impairment at least annually. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. In addition, the amortization period of intangible assets with finite lives will no longer be limited to 40 years. We have determined that our franchise costs are indefinite-lived assets, as defined in SFAS No. 142, and therefore are not subject to amortization beginning in 2002. In accordance with SFAS No. 142, goodwill was tested for impairment by comparing the fair value of our reporting units to their carrying values. As of January 1, 2002, the fair value of the reporting units' goodwill exceeded their carrying value, and therefore no impairment loss was recognized upon adoption. Franchise costs were tested for impairment as of January 1, 2002, by comparing the fair value to the carrying value (at the market level). An impairment loss of $0.9 billion, net of taxes of $0.5 billion, or $0.24 per basic and diluted share was recorded by AT&T Broadband in the first quarter of 2002 and included in the "Cumulative effect of accounting changes" in the Consolidated Statement of Operations. The following table presents the impact of SFAS No. 142 on net (loss) income and (loss) earnings per share had the standard been in effect for the first quarter of 2001.

AT&T COMMON STOCK AT&T WIRELESS LIBERTY MEDIA GROUP GROUP GROUP TOTAL FOR THE THREE MONTHS ENDED MARCH 31, ----------------------------------------------------------------------------- NET (LOSS) INCOME: 2002 2001 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- ---- ---- Reported (loss) from continuing operations before extraordinary gain and cumulative effect of accounting changes $ (160) $ (483) $ - $ - $ - $(697) $(160) $(1,180) Add back amortization, net of tax: Goodwill * - 211 - - - 152 - 363 Equity method excess basis - 50 - - - 215 - 265 Franchise costs - 199 - - - 1 - 200 ------ ------ ------ ----- ----- ----- ----- ------- Adjusted (loss) from continuing operations before extraordinary gain and cumulative effect of accounting changes $ (160) $ (23) $ - $ - $ - $(329) $(160) $ (352) Reported (Loss) from discontinued operations - (61) - (7) - - - (68) Add back discontinued operations amortization, net of tax - 81 - 9 - - - 90 Extraordinary gain 41 - - - - - 41 - Cumulative effect of accounting changes (856) 359 - - - 545 (856) 904 ------ ------ ------ ----- ----- ----- ----- ------ ADJUSTED NET (LOSS) INCOME $ (975) $ 356 $ - $ 2 $ - $ 216 $(975) $ 574 ====== ====== ====== ===== ===== ===== ===== ====== BASIC AND DILUTED (LOSS) EARNINGS PER SHARE: Reported basic and diluted (loss) per share from continuing operations before extraordinary gain and cumulative effect of accounting changes $(0.05) $(0.17) $ - $ - $ $(0.27) - Add back amortization, net of tax: Goodwill * - 0.06 - - - 0.06 Equity method excess basis - 0.01 - - - 0.08 Franchise costs - 0.05 - - - - ------ ------ ------ ----- ----- ------ Adjusted basic and diluted (loss) per share from continuing operations before extraordinary gain and cumulative effect of accounting changes $(0.05) $(0.05) $ - $ - $ - $(0.13) Reported (Loss) from discontinued operations - (0.02) - (0.02) - - Add back discontinued operations amortization, net of tax - 0.02 - 0.03 - - Extraordinary gain 0.01 - - - - - Cumulative effect of accounting change (0.24) 0.09 - - - 0.21 ----- ----- ------ ------ ---- ------ ADJUSTED BASIC AND DILUTED (LOSS) EARNINGS PER SHARE $(0.28) $ 0.04 $ - $ 0.01 $ - $ 0.08 ====== ====== ====== ====== === ======

* Goodwill amortization is net of the Excite@Home minority interest impact on goodwill. 8 During the first quarter of 2002, goodwill declined $7 as a result of foreign currency translation adjustments. Goodwill as of March 31, 2002, as allocated to reportable segment is as follows: CARRYING AMOUNT --------------- AT&T Broadband $ 19,361 AT&T Business Services 5,237 AT&T Consumer Services 70 --------- Total Goodwill $ 24,668 ========= Identifiable intangible assets as of March 31, 2002 are comprised of: GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION -------------- ------------- Non-amortizable intangible assets: Franchise costs $ 41,381 $ - Amortizable other purchased intangible assets: Customer lists and relationships 2,727 662 Other 142 62 ---------- ------- Total identifiable intangible assets $ 44,250 $ 724 ========== ======= The amortization expense associated with other purchased intangible assets for the three months ended March 31, 2002 was $67. Amortization expense for other purchased intangible assets is estimated to be approximately $270 for the year ended December 31, 2002, $260 for the year ended December 31, 2003, $250 for each of the years ended December 31, 2004 and 2005 and $240 for the year ended December 31, 2006. 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 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all long-lived assets, including discontinued operations, and consequently amends Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The adoption had no impact on AT&T's results of operations, financial position or cash flows. For a detailed discussion of significant accounting polices, please refer to AT&T's Form 10-K/A for the year ended December 31, 2001. D) SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS) ON AVAILABLE-FOR-SALE SECURITIES AT&T has investment holdings classified as "available-for-sale" under the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These securities are carried at fair value with any unrealized gains or losses, net of income taxes, included within other comprehensive income as a component of shareowners' equity. Under SFAS No. 115, when the "available-for-sale" securities are sold or when we believe a decline in the investment value is other-than-temporary, the previously unrealized gains or losses are recognized in earnings in Other income (expense) in the Consolidated Statement of Operations. In addition, upon the adoption in January 2001, of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," we reclassified certain securities to "trading," resulting in the recognition in earnings of previously unrealized losses. Following is a summary of the previously unrealized losses (gains) on available-for-sale securities that were recognized in the income statement and the line items impacted for the three months ended March 31, 2002 and 2001. 9

RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS) ON AVAILABLE-FOR-SALE SECURITIES ----------------------------- FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- PRETAX AFTER-TAX PRETAX AFTER-TAX AT&T GROUP: ------ --------- ------ --------- Other expense, net: Reclassification of securities to "trading" in conjunction with the adoption of SFAS No. 133 $ - $ - $1,154 $ 713 Sale of various securities - - (195) (121) Other-than-temporary investment impairments 239 147 - - LIBERTY MEDIA GROUP: Equity (losses) from Liberty Media Group: Sale of various securities - - 7 4 Cumulative effect of accounting change - - (144) (87) ------- ------ ------ ------ Total recognition of previously unrealized losses (gains) on available-for-sale securities $239 $147 $ 822 $ 509 ====== ====== ====== ======

E) DISCONTINUED OPERATIONS Pursuant to APB No. 30, the consolidated financial statements of AT&T reflect the disposition of AT&T Wireless, which was split-off from AT&T on July 9, 2001, as discontinued operations. Accordingly, the revenue, costs and expenses, and cash flows of AT&T Wireless through June 30, 2001, the effective split-off date for accounting purposes, have been excluded from the respective captions in the 2001 Consolidated Statements of Operations and Consolidated Statements of Cash Flows and have been reported as "(Loss) from discontinued operations," net of applicable income taxes; and as "Net cash provided by discontinued operations." Revenue from discontinued operations was $3,212 for the three months ended March 31, 2001. Interest expense of $83 for the three months ended March 31, 2001 was allocated to discontinued operations based on the debt of AT&T Corp. that was attributable to AT&T Wireless. F) CONCERT AND AT&T CANADA At March 31, 2002, through a joint venture, AT&T and British Telecommunications plc (BT) had an approximate 31% equity ownership in AT&T Canada. AT&T's interest in this joint venture was approximately 21.52%. Subsequent to the unwind of Concert, which occurred on April 1, 2002, AT&T's interest in AT&T Canada will increase to 31%. AT&T has the right to trigger, at any time, the purchase by AT&T or another entity the remaining equity of AT&T Canada for the Back-end Price which is the greater of the floor price (Cdn $49.35 per share as of March 31, 2002) and the fair market value. The floor price accretes at 4% each quarter, commencing on June 30, 2000. In the event foreign ownership restrictions in Canada are lifted, in whole or in part, prior to June 30, 2003, AT&T is required to purchase the outstanding shares (to the extent permitted by any remaining foreign ownership restrictions) at the Back-end Price. If foreign ownership restrictions in Canada are not lifted and we do not exercise the call right by June 30, 2003, the shares would be put up for auction, and AT&T would have to make the shareholders whole for the amount, if any, by which the Back-End Price exceeds the proceeds received in auction. In 2001, AT&T recorded charges reflecting the difference between the underlying value of AT&T Canada shares and the price AT&T has committed to pay for them, including the 4% accretion of the floor price. In the first quarter of 2002, AT&T recorded a $0.2 billion after-tax charge ($0.3 billion pretax) reflecting further deterioration in the underlying value of AT&T Canada as well as the accretion of the floor price. The charge is included in "Net (losses) related to other equity investments" in the Consolidated Statement of Operations and the related liability within "Other long-term liabilities and deferred credits" in the Consolidated Balance Sheet. The purchase commitment will continue to be evaluated against the difference between the contractual floor price and underlying value of AT&T Canada shares, which could result in the recognition of additional future charges in the amount of approximately $0.8 billion, assuming that the commitment is executed on June 30, 2003. As of March 31, 2002, the aggregate amount that AT&T would need to pay to complete its obligation related to AT&T Canada is approximately $3.3 billion. This obligation may be settled using cash or AT&T common stock, or any combination thereof. 10 On October 16, 2001, AT&T announced a decision to unwind Concert, its global venture with BT, which was launched in January 2000. Under the partnership termination agreement, each of the partners generally will reclaim the customer contracts and assets that were initially contributed to the joint venture, including international transport facilities and gateway assets. In addition, AT&T will assume certain other assets that BT originally contributed to the joint venture. On April 1, 2002, the Concert joint venture was officially unwound and the venture's assets and customer accounts were distributed back to the parent companies. At March 31, 2002, AT&T had a 50% ownership interest in Concert and a 21.52% ownership interest in AT&T Canada (through a joint venture). Summarized financial information for the three months ended March 31, 2002 and 2001 for these investments accounted for under the equity method was as follows: CONCERT FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- Revenue $ 1,579 $ 1,839 Operating income (loss) 19 (38) (Loss) from continuing operations before extraordinary gain and cumulative effect of accounting changes (245) (251) Net (loss) (245) (251) AT&T CANADA FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- Revenue $ 241 $ 255 Operating (loss) (33) (51) (Loss) from continuing operations before extraordinary gain and cumulative effect of accounting changes (100) (103) Net (loss) $ (100) $ (100) G) NET RESTRUCTURING AND OTHER CHARGES During the first quarter of 2002, AT&T recorded $56 of net restructuring and other charges for restructuring and exit costs associated with AT&T Broadband's efforts to reorganize and streamline certain centralized and field functions. The $56 is comprised of headcount reductions of $42 associated with employee separation costs resulting from this exit plan, $27 in connection with facility closings and $4 for other charges. Approximately 900 employees will be involuntarily separated in conjunction with this exit plan, approximately 75% of which are management and 25% are non-management. More than 15% of the employees affected by this exit plan have left their positions as of March 31, 2002, with the remaining reductions occurring throughout the remainder of 2002. Termination benefits of approximately $6 were paid to employees during the first quarter of 2002 related to this exit plan. These charges were partially offset by the reversal of $17 related to the business restructuring plan from the second quarter of 2001, primarily due to the redeployment of certain employees to different functions within AT&T Broadband. The following table displays the activity and balances of the restructuring reserve account from January 1, 2002 to March 31, 2002:

TYPE OF COST EMPLOYEE FACILITY SEPARATIONS CLOSINGS OTHER TOTAL ----------- -------- ----- ----- Balance at January 1, 2002 $ 508 $ 316 $ 19 $ 843 Additions 42 27 4 73 Deductions (147) (19) - (166) ----- ----- ----- ------ Balance at March 31, 2002 $ 403 $ 324 $ 23 $ 750 ===== ===== ===== ======

Deductions reflect cash payments of $142, of which $123 was for cash termination benefits primarily funded through cash from operations. Deductions also reflect a reversal of $17 related to the second quarter 2001 business restructuring plan and $7 primarily due to the issuance of common stock to satisfy restricted stock obligations that vested upon separation, primarily to executives. During the first quarter of 2001, AT&T recorded $808 of net restructuring and other charges, which included $739 of asset impairment charges related to Excite@Home, and $69 for restructuring and exit costs which consisted of $59 for cash severance costs, $6 related to facility closings and $4 related to termination of lease obligations. 11 The asset impairment charges included $600 recorded by Excite@Home associated with goodwill impairment of various acquisitions, primarily Excite, and a related goodwill impairment charge of $139 recorded by AT&T associated with its acquisition goodwill of Excite@Home. The impairment resulted from the continued weakness of the online media market that Excite@Home operated in. Since we consolidated, but only owned approximately 23% of Excite@Home, 77% of the charge recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in our March 31, 2001 Consolidated Statement of Operations as "Minority interest and dividends on subsidiary preferred stock." Excite@Home was deconsolidated from AT&T's results on September 30, 2001. The $59 of cash severance costs were primarily a result of synergies created by the MediaOne merger related to approximately 2,350 employees. Approximately 10% of the individuals were management employees and 90% were non-management employees. H) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE (Loss) earnings attributable to the different classes of AT&T common stock are as follows:

AT&T COMMON STOCK AT&T WIRELESS LIBERTY MEDIA GROUP GROUP GROUP ----- ----- ----- FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- (Loss) from continuing operations $ (160) $(483) $ - $ - $ - $(697) Dividend requirements of preferred stock - (181) - - - - (Loss) from continuing operations attributable to common shareowners (160) (664) - - - (697) (Loss) from discontinued operations - (61) - (7) - - Extraordinary gain 41 - - - - - Cumulative effect of accounting changes (856) 359 - - - 545 ------ ----- ----- ----- ----- ------ Net (loss) attributable to common shareowners $ (975) $(366) $ - $ (7) $ - $ (152) ====== ===== ===== ===== ===== ======

Basic loss per share for AT&T Common Stock Group was computed by dividing AT&T Common Stock Group loss by the weighted-average number of shares outstanding of 3,546 million and 3,805 million, for the three months ended March 31, 2002 and 2001, respectively. Since AT&T recorded a loss from continuing operations for the three months ended March 31, 2002 and 2001, the diluted loss per share is the same as basic, as any potentially dilutive securities would be antidilutive to continuing operations. At March 31, 2002 and 2001, potentially dilutive securities outstanding included shares issuable for stock options, convertible quarterly income preferred securities, TCI Pacific Communications, Inc. preferred securities and the settlement of AT&T's commitment to purchase the public shares of AT&T Canada. Basic loss per share from discontinued operations for AT&T Wireless Group for the three months ended March 31, 2001, was computed by dividing losses attributable to AT&T Wireless Group by the weighted-average number of shares outstanding of AT&T Wireless Group of 363 million. AT&T Wireless was split-off from AT&T in July 2001. Basic loss per share for LMG was computed by dividing the loss attributable to LMG by the weighted-average number of shares outstanding of LMG of 2,574 million for the three months ended March 31, 2001. LMG was split-off from AT&T in August 2001. I) CONVERTIBLE PREFERRED STOCK On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for 812,512 shares of a new class of AT&T preferred stock with a par value of $1 per share. On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group, these preferred shares were converted into AT&T Wireless common stock. In the first quarter of 2001, we recorded dividend requirements on this preferred stock of $0.2 billion. The preferred stock dividend represented interest in connection with the DoCoMo preferred stock as well as accretion of the beneficial conversion feature (BCF) associated with this preferred stock. The BCF was recorded upon the issuance of the preferred stock and represented the excess of the fair value of the preferred shares issued over the proceeds received. 12 J) DEBT OBLIGATIONS During 2001, AT&T initiated a 364-day accounts receivable securitization program providing for up to $2.7 billion of funding, limited by monthly eligible receivables. Under the program, AT&T Business Services' and AT&T Consumer Services' accounts receivable were sold on a discounted, revolving basis, to a special purpose, wholly-owned subsidiary of AT&T, which assigns interests in such receivables to unrelated third-party financing entities. The securitization proceeds were recorded as a borrowing and included in "Debt maturing within one year" in the Consolidated Balance Sheets. In the first quarter of 2002, AT&T paid down $2.1 billion of the borrowings. At March 31, 2002 and December 31, 2001, such short-term notes totaled $0.2 billion and $2.3 billion, respectively. During the first quarter of 2002, AT&T called $1.3 billion of TCI Communications Financing I and II, MediaOne Financing Trust A and B and MediaOne Finance II preferred securities for early redemption. This redemption resulted in a gain on early extinguishment of debt recorded as an extraordinary gain of $41 million, net of tax ($66 million pretax), or $0.01 per basic and diluted share. The gain represents the difference between the carrying value of the debt and the cash paid to extinguish the debt. K) RELATED PARTY TRANSACTIONS AT&T has various related party transactions with Concert. Included in "Revenue" in the Consolidated Statements of Operations for both the first quarter of 2002 and 2001 was $0.3 billion for services provided to Concert. Included in "Access and other connection" in the Consolidated Statements of Operations 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 $0.5 billion for both the three months ended March 31, 2002 and 2001, respectively. Included in "Accounts receivable" in the Consolidated Balance Sheets at March 31, 2002 and December 31, 2001, was $0.5 and $0.4 billion, respectively, related to telecommunications transactions with Concert. Included in "Accounts payable" in the Consolidated Balance Sheets was $0.2 billion related to transactions with Concert at March 31, 2002 and December 31, 2001. Included in "Other receivables" in the Consolidated Balance Sheets at March 31, 2002 and December 31, 2001, was $0.7 billion and $0.8 billion, respectively, related to administrative transactions performed on behalf of Concert. Included in "Other current liabilities" in the Consolidated Balance Sheets at March 31, 2002 and December 31, 2001, was $0.8 billion and $0.9 billion, respectively, related to administrative transactions performed by Concert on our behalf. During 2001, we had various related party transactions with LMG. Included in "Costs of services and products" in the Consolidated Statement of Operations were programming expenses related to services from LMG. These expenses amounted to $82 for the three months ended March 31, 2001. L) SEGMENT REPORTING AT&T's results are segmented according to the way we manage our business: AT&T Business Services, AT&T Consumer Services and AT&T Broadband. Our existing segments reflect certain managerial changes that were implemented during 2002. The changes primarily include the following: revenue previously recorded by the AT&T Business Services segment as "Internal Revenue" for services provided to certain other AT&T units and then eliminated within the Corporate & Other group, is now recorded as a contra-expense by AT&T Business Services; the results of certain corporate units previously included in the Corporate & 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 & Other group were transferred to the appropriate segments. All prior periods have been restated to reflect these changes. 13 Reflecting the dynamics of our business, we continuously review our management model and structure that may result in additional adjustments to our operating segments in the future.

FOR THE THREE MONTHS REVENUE ENDED MARCH 31, 2002 2001 ---- ---- AT&T Business Services external revenue $ 6,445 $ 6,937 AT&T Business Services internal revenue 83 159 --------- -------- Total AT&T Business Services revenue 6,528 7,096 AT&T Consumer Services external revenue 3,125 4,007 AT&T Broadband external revenue 2,436 2,461 AT&T Broadband internal revenue 3 4 -------- -------- Total AT&T Broadband revenue 2,439 2,465 -------- -------- Total reportable segments 12,092 13,568 Corporate and Other (a) (69) (17) -------- - -------- Total revenue $ 12,023 $ 13,551 ======== ========

(a) Includes revenue related to Excite@Home of $0.1 billion for the first quarter of 2001. RECONCILIATION OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO INCOME BEFORE INCOME TAXES

FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- AT&T Business Services $ 452 $ 1,006 AT&T Consumer Services 832 1,318 AT&T Broadband (425) (1,542) ------ ------- Total reportable segments 859 782 Corporate and Other (a) (195) (323) Deduct: Pretax minority interest and dividends on subsidiary preferred stock (82) 559 Pretax (losses) related to other equity investments (481) (131) Interest (expense) (767) (879) ------- -------- Income (loss) from continuing operations before income taxes, minority interest and dividends on subsidiary preferred stock and net (losses) related to equity investments $ 460 $ (848) ===== =======

(a) Includes $(0.3) billion related to Excite@Home for the first quarter of 2001.

ASSETS AT MARCH 31, AT DECEMBER 31, 2002 2001 ---- ---- AT&T Business Services $ 39,683 $ 40,316 AT&T Consumer Services 1,883 2,141 AT&T Broadband 100,573 103,060 ------- ------- Total reportable segments 142,139 145,517 Corporate and Other: Other segments 1,132 1,145 Prepaid pension costs 3,389 3,329 Deferred income taxes 865 960 Other corporate assets (a) 5,282 14,331 --------- -------- Total assets $ 152,807 $165,282 ========= ========

(a) 2001 amount includes cash of $10.4 billion. M) GUARANTEE OF PREFERRED SECURITIES Prior to AT&T's acquisition of TCI and MediaOne, TCI and MediaOne issued mandatorily redeemable preferred securities through subsidiary trusts that held subordinated debt securities of TCI and MediaOne. In the first quarter of 2002, AT&T called mandatorily redeemable preferred securities issued by TCI Communications Financing I and II, MediaOne Financing A and B, and MediaOne Finance II for early redemption. As of March 31, 2002, AT&T provides a full and unconditional guarantee on outstanding securities issued by TCI 14 Communications Financing IV and MediaOne Finance III. At March 31, 2002, $204 of TCI Communications Financing IV securities were outstanding, and were redeemed on April 1, 2002. At March 31, 2002, $504 of MediaOne Finance III securities were outstanding. AT&T CORP. CONSOLIDATING CONDENSED BALANCE SHEET AS OF MARCH 31, 2002 (DOLLARS IN MILLIONS)

ELIMINATION GUARANTOR GUARANTOR GUARANTOR TCI MEDIA-ONE AND AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED PARENT TCI MEDIAONE IV III SUBSIDIARIES ADJUSTMENTS AT&T CORP. -------- ---------- ---------- ---------- --------- ------------- -------------- ------------- ASSETS Cash and cash equivalents... $ 2,113 $ 4 $ 226 $ 2,343 Receivables................. 15,230 47,795 (54,158) 8,867 Investments................. 477 477 Other current assets........ 900 110 889 204 11 371 (573) 1,912 TOTAL CURRENT ASSETS........ 18,243 114 889 204 11 48,869 (54,731) 13,599 Property, plant & equipment, net............ 8,418 130 32,281 40,829 Franchise costs, net........ 20 19 41,342 41,381 Goodwill, net............... 70 2,526 22,072 24,668 Investments and related advances.................. 121,969 13,781 39,689 66,042 (219,691) 21,790 Other assets................ 5,516 125 516 9,080 (4,697) 10,540 TOTAL ASSETS................ $154,236 $ 14,169 $43,104 $204 $527 $219,686 $(279,119) $152,807 LIABILITIES Debt maturing within one year...................... $31,784 $ 1,234 $525 $9,761 $(38,275) $5,233 Other current liabilities... 7,401 525 311 11 10,374 (7,881) 10,741 TOTAL CURRENT LIABILITIES... 39,185 1,759 836 204 11 20,135 (46,156) 15,974 Long-term debt.............. 23,344 10,371 679 504 15,510 (11,338) 39,070 Deferred income taxes....... 982 26,780 27,762 Other long-term liabilities and deferred credits...... 6,791 97 25 6,393 (2,025) 11,281 TOTAL LIABILITIES........... 70,302 12,227 1,540 204 515 68,818 (59,519) 94,087 Minority Interest........... 2,732 2,732 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T........ 4,723 4,723 SHAREOWNERS' EQUITY AT&T Common Stock........... 3,566 3,566 Preferred stock issued to subsidiaries.............. 10,559 (10,559) - Other shareowners' equity... 65,086 1,942 41,564 12 148,136 (209,041) 47,699 TOTAL SHAREOWNERS' EQUITY... 79,211 1,942 41,564 12 148,136 (219,600) 51,265 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY....... $154,236 $14,169 $43,104 $204 $527 $219,686 $(279,119) $152,807

15 AT&T CORP. CONSOLIDATING CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2002 (DOLLARS IN MILLIONS)

ELIMINATION GUARANTOR GUARANTOR GUARANTOR TCI MEDIA-ONE AND AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED PARENT TCI MEDIAONE IV III SUBSIDIARIES ADJUSTMENTS AT&T CORP. ------ --- -------- -- --- ------------ ----------- ---------- Revenue................... $4,002 $ - $ - $ - $ - $ 8,531 $(510) $ 12,023 Operating Expenses Costs of services and products................ 651 3,138 (499) 3,290 Access and other connection.............. 1,393 1,426 (11) 2,808 Selling, general and administrative.......... 606 195 (2) 1,786 2,585 Depreciation and amortization............ 460 20 1,415 1,895 Net restructuring and other charges........... 56 56 Total operating expenses.. 3,110 215 (2) 7,821 (510) 10,634 Operating income (loss).. 892 (215) 2 710 1,389 Other income (expense), net..................... 127 11 203 5 11 97 (616) (162) Interest (expense) benefit (801) (160) (24) (5) (11) (382) 616 (767) Income (loss) from continuing operations before income taxes, minority interest, and dividends on subsidiary preferred stock, and net (losses) earnings related to other equity investments............. 218 (364) 181 425 460 (Provision) benefit for income taxes............ (74) 139 (69) (262) (266) Minority interest and dividends on subsidiary preferred stock......... (40) (17) (57) Net (losses) earnings related to other equity investments............. 204 (360) (851) (284) 994 (297) Equity (losses) from Liberty Media Group..... (Loss) income from continuing operations... 308 (585) (739) (138) 994 (160) (Loss) from discontinued operations (net of income taxes)........... - (Loss) income before extraordinary gain and cumulative effect of accounting change....... 308 (585) (739) (138) 994 (160) Extraordinary gain (net of income taxes)........ 41 41 Cumulative effect of accounting change (net of income taxes) (856) (856) Net (loss) income......... 308 (544) (739) (994) 994 (975) Dividend requirements of preferred stock, net.... - (Loss) income attributable to common shareowners............... $308 $ (544) $ (739) $ - $ - $ (994) $ 994 $ (975)

16 AT&T CORP. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (DOLLARS IN MILLIONS)

ELIMINATION GUARANTOR GUARANTOR GUARANTOR TCI MEDIA-ONE AND AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED PARENT TCI MEDIAONE IV III SUBSIDIARIES ADJUSTMENTS AT&T CORP. -------- ---------- ---------- --------- -------- ------------- ------------- ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF CONTINUING OPERATIONS... $ 71 $ (200) $ (779) $ 2,525 $ 1,617 INVESTING ACTIVITIES Capital expenditures and other additions......... (177) (58) (1,271) (1,506) Other..................... (4,153) (850) 792 845 3,301 (65) NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS... (4,330) (908) 792 (426) 3,301 (1,571) FINANCING ACTIVITIES Proceeds from debt from AT&T.................... 2,463 (2,463) Retirement of long-term debt.................... (501) (1,399) (1,900) Retirement of AT&T debt... (320) (131) 451 (Decrease) increase in short-term borrowings, net..................... (4,233) (104) (25) (1,966) (6,328) (Decrease) increase in short-term borrowings from AT&T, net.......... 2,216 (927) (1,289) Other..................... (1,525) 1,458 (67) NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS... (4,043) 1,112 (25) (2,038) (3,301) (8,295) Net (decrease) increase in cash and cash equivalents............. (8,302) 4 (12) 61 (8,249) Cash and cash equivalents at beginning of year.... 10,415 12 165 10,592 Cash and cash equivalents at end of period........ $ 2,113 $ 4 $ - $ - $ - $ 226 $ - $ 2,343

17 AT&T CORP. CONSOLIDATING CONDENSED BALANCE SHEET AS OF DECEMBER 31, 2001 (DOLLARS IN MILLIONS)

MEDIA MEDIA MEDIA MEDIA ELIMINATION TCI TCI TCI -ONE -ONE -ONE -ONE AND GUARANTOR GUARANTOR GUARANTOR FINAN- FINAN- FINAN- FIAN- FINAN- FINAN- FINAN- NON- CONSOLI- CONSOLI- AT&T SUBSIDIARY SUBSIDIARY CING CING CING CING CING CING CING GUARANTOR DATION DATED PARENT TCI MEDIAONE I II IV A B II III SUBSIDIARIES ADJUSTMENTS AT&T CORP. -------- ---------- --------- ---- ------ ----- ----- ------ ------ ----- ------------ ----------- --------- ASSETS Cash and cash equivalents..... $ 10,415 $ - $ 12 $ - $ - $ - $ - $ - $ - $ - $ 165 $ - $ 10,592 Receivables....... 11,682 44,516 (46,817) 9,381 Investments....... 668 668 Deferred income taxes........... 729 501 1,230 Other current assets.......... 302 71 689 527 513 204 31 29 220 11 (45) (1,895) 657 TOTAL CURRENT ASSETS.......... 23,128 71 701 527 513 204 31 29 220 11 45,805 (48,712) 22,528 Property, plant & equipment, net.. 8,580 135 32,607 41,322 Franchise costs, net............. 20 42,799 42,819 Goodwill, net..... 70 2,526 22,079 24,675 Investment in Liberty Media Group and related receivables, net - Investments and related advances 130,219 12,747 41,413 63,996 (224,557) 23,818 Other assets...... 5,445 91 21 16 16 516 8,835 (4,820) 10,120 Net assets of discontinued operations...... - TOTAL ASSETS...... $167,442 $ 13,064 $ 44,640 $ 527 $ 513 $ 204 $ 52 $ 45 $ 236 $527 $216,121 $(278,089) $165,282 LIABILITIES Debt maturing within one year. $ 34,195 $616 $753 $ 527 $ 513 $ 204 $ 30 $ 28 $ 214 $ 8,985 $ (33,107) $ 12,958 Liability under put options..... - Other current liabilities..... 8,763 597 59 1 1 6 11 11,419 (8,388) 12,469 TOTAL CURRENT LIABILITIES..... 42,958 1,213 812 527 513 204 31 29 220 11 20,404 (41,495) 25,427 Long-term debt.... 23,810 9,866 676 504 14,640 (8,969) 40,527 Deferred income taxes........... 1,147 934 26,079 28,160 Other long-term liabilities and deferred credits 6,850 45 23 7,378 (3,088) 11,208 TOTAL LIABILITIES. 74,765 11,124 2,445 527 513 204 31 29 220 515 68,501 (53,552) 105,322 Minority Interest. 3,560 3,560 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T......... 4,720 4,720 SHAREOWNERS' EQUITY AT&T Common Stock. 3,542 3,542 AT&T Wireless Group common stock........... - Liberty Media Group Class A Common Stock.... - Liberty Media Group Class B Common Stock.... - Preferred stock issued to subsidiaries.... 10,559 (10,559) - Other shareowners' equity.......... 73,856 1,940 42,195 21 16 16 12 144,060 (213,978) 48,138 TOTAL SHAREOWNERS' EQUITY.......... 87,957 1,940 42,195 21 16 16 12 144,060 (224,537) 51,680 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY.......... $167,442 $ 13,064 $ 44,640 $ 527 $ 513 $ 204 $ 52 $ 45 $ 236 $527 $216,121 $(278,089) $165,282

18 AT&T CORP. CONSOLIDATING CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2001 (DOLLARS IN MILLIONS)

MEDIA MEDIA MEDIA MEDIA ELIMINATION TCI TCI TCI -ONE -ONE -ONE -ONE AND GUARANTOR GUARANTOR GUARANTOR FINAN- FINAN- FINAN- FINAN- FINAN- FINAN- FINAN- NON- CONSOLI- CONSOLI- AT&T SUBSIDIARY SUBSIDIARY CING CING CING CING CING CING CING GUARANTOR DATION DATED PARENT TCI MEDIAONE I II IV A B II III SUBSIDIARIES ADJUSTMENTS AT&T CORP. -------- ---------- --------- ---- ------ ----- ----- ------ ------ ----- ------------ ----------- ---------- Revenue......... $4,975 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 9,174 $ (598) $ 13,551 Operating Expenses Costs of services and products...... 855 3,247 (530) 3,572 Access and other connection.... 1,682 1,525 (56) 3,151 Selling, general and administrative 467 122 4 2,202 (1) 2,794 Depreciation and amortization.. 431 13 19 1,949 2,412 Net restructuring and other charges....... 808 808 Total operating expenses...... 3,435 135 23 9,731 (587) 12,737 Operating income (loss). 1,540 (135) (23) (557) (11) 814 Other income (expense), net (504) 45 669 11 12 4 1 1 5 11 158 (1,196) (783) Interest (expense) benefit....... (1,319) (465) (78) (11) (12) (4) (1) (1) (5) (11) (164) 1,192 (879) Income (loss) from continuing operations before income taxes, minority interest and dividends on subsidiary preferred stock, and net (losses) earnings related to other equity investments... (283) (555) 568 (563) (15) (848) (Provision) benefit for income taxes.. 114 210 (224) (318) (218) Minority interest and dividends on subsidiary preferred stock......... (40) (1) 681 640 Equity (losses) from Liberty Media Group... (697) (697) Net (losses) earnings related to other equity investments.... 1,886 (1,649) (1,266) (56) 1,028 (57) (Loss) income from continuing operations.... 1,677 (2,692) (922) (256) 1,013 (1,180) (Loss) income from discontinued operations (41) (27) (68) (net of income taxes) (Loss) income before cumulative effect of accounting change 1,677 (2,692) (922) (297) 986 (1,248) Cumulative effect of accounting change (net of income taxes) 508 545 540 (689) 904 Net (loss)income 2,185 (2,147) (382) (986) 986 (344) Dividend requirements of preferred stock, net.... (181) (181) (Loss) income attributable to common shareowners... $ 2,004 $ (2,147) $ (382) $ - $ - $ - $ - $ - $ - $ - $ (986) $ 986 $ (525)

19 AT&T CORP. CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (DOLLARS IN MILLIONS)

MEDIA MEDIA MEDIA MEDIA ELIMINATION TCI TCI TCI -ONE -ONE -ONE -ONE AND GUARANTOR GUARANTOR GUARANTOR FINAN- FINAN- FINAN- FINAN- FINAN- FINAN- FINAN- NON- CONSOLI- CONSOLI- AT&T SUBSIDIARY SUBSIDIARY CING CING CING CING CING CING CING GUARANTOR DATION DATED PARENT TCI MEDIAONE I II IV A B II III SUBSIDIARIES ADJUSTMENTS AT&T CORP. -------- ---------- --------- ---- ------ ----- ----- ------ ------ ----- ------------ ----------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF CONTINUING OPERATIONS...... $(173) $(854) $(71) $ 2,745 $ (37) $ 1,610 INVESTING ACTIVITIES Capital expenditures and other additions....... (254) (2,190) (2,444) Other............. (692) 935 229 (2,656) 3,205 1,021 NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS...... (946) 935 229 (4,846) 3,205 (1,423) FINANCING ACTIVITIES Proceeds from debt from AT&T.. 101 (101) Retirement of AT&T debt....... (158) (1,006) 1,164 Issuance of convertible preferred securities and warrants........ 9,811 9,811 (Decrease)increase in short-term borrowings, net (14,760) (81) 126 (14,715) (Decrease)increase in short-term borrowings from AT&T,net......... 4,849 (4,849) Other............. 1,118 (1,287) (15) (184) NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS...... 1,119 (81) (158) (2,167) (3,801) (5,088) Net cash provided by discontinued operations 4,306 633 4,939 Net increase in cash and cash equivalents..... 38 38 Cash and cash equivalents at beginning of year............ 64 64 Cash and cash equivalents at end of period... $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 102 $ - $ 102

N) RECENT ACCOUNTING PRONOUNCEMENTS 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 future value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. For AT&T, this means that the standard will be adopted on January 1, 2003. AT&T does not expect that the adoption of this statement will have a material impact on AT&T's results of operations, financial position or cash flows. On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13 and Technical Corrections." SFAS No. 145 eliminates the requirement (in SFAS No. 4) that gains and losses from the extinguishments of debt be aggregated and classified as extraordinary items, net of the related income tax. An entity is not prohibited from classifying such gains and losses as extraordinary items, as long as they meet the criteria of APB No. 30. In addition, SFAS No. 145 requires sales-lease back treatment for certain modifications of a capital lease that result in the lease being classified as an operating lease. The rescission of SFAS No. 4 is effective for fiscal years beginning after May 15, 2002, which for AT&T would be January 1, 2003. Earlier application is encouraged. Any gain or loss on extinguishment of debt that was previously classified as an extraordinary item would be reclassified to 20 other income (expense). The remainder of the statement is generally effective for transactions occurring after May 15, 2002. AT&T does not expect that the adoption of SFAS No. 145 will have a material impact on AT&T's results of operations, financial position or cash flows. O) SUBSEQUENT EVENTS On April 25, 2002, AT&T and Pharmacia Corporation (Pharmacia) announced that Pharmacia will purchase AT&T's headquarters facility and corporate conference center in Basking Ridge, New Jersey, for $200. The transaction is expected to be completed in July 2002, and will result in a pretax gain of approximately $35 to $50 for AT&T. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW AT&T Corp. (AT&T or the company) is among the world's communications leaders, providing voice, data and video communications services to large and small businesses, consumers and government agencies. We provide domestic and international long distance, regional and local communications services, cable (broadband) television and Internet communication services. RESTRUCTURING OF AT&T On October 25, 2000, AT&T announced a restructuring plan designed to fully separate or issue separately tracked stocks intended to reflect the financial performance and economic value of each of AT&T's four major operating units. On December 19, 2001, AT&T and Comcast Corporation (Comcast) announced an agreement to combine AT&T Broadband with Comcast. Under the terms of the agreement, AT&T will spin-off AT&T Broadband and simultaneously merge it with Comcast, forming a new company to be called AT&T Comcast Corporation (AT&T Comcast). AT&T shareowners will receive a number of shares of AT&T Comcast common stock based on an exchange ratio calculated pursuant to a formula specified in the merger agreement. If determined as of the date of the merger agreement, the exchange ratio would have been approximately 0.34, assuming the AT&T shares held by Comcast are included in the number of shares of AT&T common stock outstanding. Assuming Comcast retains its AT&T shares and converts them into exchangeable preferred stock of AT&T as contemplated by the merger agreement, the exchange ratio would be approximately 0.35. Assuming certain conditions, AT&T shareowners will own an approximate 55% economic stake and an approximate 61% voting interest in the new company, calculated as of the date of the merger agreement. The merger of AT&T Broadband and Comcast is subject to regulatory review, approval by both companies' shareowners and certain other conditions, and is expected to close by the end of 2002. AT&T also intends to proceed with the creation of a tracking stock for its AT&T Consumer Services business, which is expected to be distributed to AT&T shareowners following shareowner approval. AT&T has not yet determined the timing of the distribution, which may be made within a year of shareowner approval or may be made thereafter, depending on market conditions. Additionally, the AT&T board of directors could decide not to proceed with the distribution of the tracking stock, or could proceed at a time or in a manner different from its current intentions. On May 14, 2002, the company filed with the SEC, a joint AT&T/Comcast proxy seeking shareowner approval of the AT&T Broadband and Comcast merger and the creation of the AT&T Consumer Services tracking stock. In addition, the proxy also asks shareowners to consider an amendment to AT&T's charter to effect a one-for-five reverse stock split of AT&T common stock at the discretion of the AT&T Board. The purpose of the reverse stock split is to seek to adjust the trading prices of AT&T common stock following the various transactions to effect AT&T's restructuring plan, including the AT&T Comcast transaction. These restructuring activities are complicated and involve a substantial number of steps and transactions, including obtaining various approvals, such as Internal Revenue Service (IRS) rulings. AT&T anticipates, however, that the transactions associated with AT&T's restructuring plan will be tax-free to U.S. shareowners. Future financial conditions, superior alternatives or other factors may arise or occur that make it inadvisable to proceed with part or all of AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring plan may not occur as we currently expect or in the time-frames that we currently contemplate, or at all. Alternative forms of restructuring, 21 including sales of interests in these businesses, would reduce what is available for distribution to AT&T shareowners in the restructuring. On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a separate, independently traded company. On August 10, 2001, AT&T completed the split-off of Liberty Media Corporation (LMG) as an independent, publicly traded company. TRACKING STOCKS In 2001, AT&T had tracking stocks that reflected the financial performance of LMG and AT&T Wireless Group. The shares initially issued tracked approximately 100% and 16% of the performance of LMG and AT&T Wireless Group, respectively. In 2001, the earnings attributable to AT&T Wireless Group are excluded from the earnings available to AT&T Common Stock Group and are reflected as "(Loss) from discontinued operations," net of applicable taxes in the Consolidated Statement of 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, are referred to as the AT&T Common Stock Group and are represented by AT&T common stock. We did not have a controlling financial interest in LMG for financial accounting purposes; therefore, our ownership in LMG was reflected as an investment accounted for under the equity method in AT&T's consolidated financial statements. The amounts attributable to LMG are reflected in the accompanying Consolidated Statement of Operations and Cash Flows as "Equity (losses) from Liberty Media Group" prior to its split-off from AT&T. AT&T Wireless Group was an integrated business of AT&T, and LMG was a combination of certain assets and businesses of AT&T; neither was a stand-alone entity prior to its split-off from AT&T. FORWARD-LOOKING STATEMENTS This document may contain forward-looking statements with respect to AT&T's restructuring plan, financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, network build out and upgrade, competitive positions, availability of capital, growth opportunities for existing products, benefits from new technologies, availability and deployment of new technologies, plans and objectives of management, and other matters. These forward-looking statements, including, without limitation, those relating to the future business prospects, revenue, working capital, liquidity, capital needs, network build out, interest costs and income, are necessarily estimates reflecting the best judgment of management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements including, without limitation: o the risks associated with the implementation of AT&T's restructuring plan, which is complicated and involves a substantial number of different transactions each with separate conditions, any or all of which may not occur as we currently intend, or which may not occur in the timeframe we currently expect, o the risks associated with each of AT&T's main business units, operating as independent entities as opposed to as part of an integrated telecommunications provider following completion of AT&T's restructuring plan, including the inability of these groups to rely on the financial and operational resources of the combined company and these groups having to provide services that were previously provided by a different part of the combined company, o the impact of existing and new competitors in the markets in which these groups compete, including competitors that may offer less expensive products and services, 22 desirable or innovative products, technological substitutes, or have extensive resources or better financing, o the impact of oversupply of capacity resulting from excessive deployment of network capacity, o 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, o the effects of vigorous competition in the markets in which the company operates, which may decrease prices charged, increase churn and change customer mix, profitability and average revenue per user, o the ability to enter into agreements to provide services, and the cost of entering new markets necessary to provide services, o the ability to establish a significant market presence in new geographic and service markets, o the availability and cost of capital and the consequences of increased leverage, o the impact of any unusual items resulting from ongoing evaluations of the business strategies of the company, o 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, o the risks associated with technological requirements, technology substitution and changes and other technological developments, o the results of litigation filed or to be filed against the company, o the possibility of one or more of the markets in which the company competes being impacted by changes in political, economic or other factors, such as monetary policy, legal and regulatory changes or other external factors over which these groups have no control, and o the risks related to AT&T's investments and joint ventures. The words "estimate," "project," "intend," "expect," "believe," "plan" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. Moreover, in the future, AT&T, through its senior management, may make forward-looking statements about the matters described in this document or other matters concerning AT&T. The discussion and analysis that follows provides information management believes is relevant to an assessment and understanding of AT&T's consolidated results of operations for the three months ended March 31, 2002 and 2001, and financial condition as of March 31, 2002 and December 31, 2001. CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS AT&T's financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Management continually evaluates its estimates and judgments including those related to revenue recognition, allowances for doubtful accounts, useful lives of property, plant and equipment, internal use software and intangible assets, investments, derivative contracts, pension and other postretirement benefits and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. 23 Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting polices that may involve a higher degree of judgment or complexity, please refer to AT&T's Form 10-K/A for the year ended December 31, 2001. CONSOLIDATED RESULTS OF OPERATIONS The comparison of first quarter 2002 results with the corresponding period in 2001 was impacted by events, such as net cable dispositions. For example, in 2001, we disposed of several cable systems, which were therefore not included in 2002, but were included in the prior year results until the date of disposition. Year-over-year comparison was also impacted by the deconsolidation of At Home Corp. (Excite@Home). In 2001, Excite@Home was fully consolidated for the period January 1, 2001, through September 28, 2001, the date Excite@Home filed for Chapter 11 bankruptcy protection. As a result of the bankruptcy and AT&T removing its members from the Excite@Home board of directors, AT&T no longer consolidated Excite@Home as of September 30, 2001. REVENUE FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) AT&T Business Services $ 6,528 $ 7,096 AT&T Consumer Services 3,125 4,007 AT&T Broadband 2,439 2,465 Corporate and Other (69) (17) -------- -------- Total revenue $12,023 $13,551 ======== ======== Total revenue for the three months ended March 31, 2002 decreased 11.3%, or $1.5 billion, compared with the first quarter of 2001. The decline was primarily driven by accelerating declines in long distance voice revenue of approximately $1.6 billion and an approximate $0.5 billion impact of net cable dispositions and the deconsolidation of Excite@Home. Partially offsetting the decline was increased revenue of $0.5 billion from AT&T Broadband, primarily high-speed data, telephony and digital video and growth in data, Internet protocol (IP), managed services and local services within AT&T Business Services. Revenue by segment is discussed in more detail in the segment results section. OPERATING EXPENSES FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Costs of services and products $3,290 $3,572 Cost of services and products include the costs of operating and maintaining our networks, costs to support our outsourcing contracts (including cost of equipment sold), programming for cable services, the provision for uncollectible receivables and other service-related costs. These costs decreased $0.3 billion, or 7.9%, in the first quarter of 2002 compared with the first quarter of 2001. Approximately $0.3 billion of the decrease was due to net cable dispositions and the deconsolidation of Excite@Home. Also contributing to this decrease was approximately $0.2 billion resulting from lower revenue and volumes in AT&T Business Services and AT&T Consumer Services. These decreases were partially offset by approximately $0.1 billion in higher costs at AT&T Broadband, primarily due to higher cable programming costs. 24 FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Access and other connection $2,808 $3,151 Access and other connection expenses decreased 10.9%, or $0.3 billion, to $2.8 billion in the first quarter of 2002 compared with the first quarter of 2001. Included within access and other connection expenses are costs we pay to connect calls on the facilities of other service providers, as well as the Universal Service Fund contributions and multi-line per line charges mandated by the FCC. Approximately $0.2 billion of this reduction was driven by reductions in access rates for long distance calls, lower international connection rates and lower per line charges. Also contributing to this decrease was approximately $0.2 billion in lower Universal Service Fund contributions due to lower revenue and lower long distance volumes primarily in AT&T Consumer Services. These reductions were offset by slightly higher local connectivity costs. FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Selling, general and administrative $2,585 $2,794 Selling, general and administrative (SG&A) expenses decreased $0.2 billion, or 7.5%, in the first quarter of 2002, compared with the first quarter of 2001. Approximately $0.1 billion of the decrease was due to expenses associated with net cable dispositions in the first quarter of 2001 and the deconsolidation of Excite@Home. Also contributing to the decrease were lower costs associated with cost control efforts and decreased customer care and billing expenses of approximately $0.3 billion primarily from AT&T Consumer Services, AT&T Broadband and AT&T Business Services. Partially offsetting this decrease were lower pension credits resulting from decreased returns on plan assets and expenses related to transaction costs associated with AT&T's restructuring announced in October 2000 of approximately $0.1 billion. FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Depreciation and amortization $1,895 $2,412 Depreciation and amortization expense declined $0.5 billion, or 21.4%, in the first quarter of 2002 compared with the first quarter of 2001. The decline was primarily due to the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" as of January 1, 2002, which eliminated amortization of goodwill and franchise costs. In the first quarter of 2001, we recorded $0.6 billion of amortization expense on goodwill and franchise costs. The deconsolidation of Excite@Home and the net cable dispositions also contributed to the decline. The decline was partially offset by increased depreciation expense due to a higher asset base resulting from continued infrastructure investment. FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Net restructuring and other charges $ 56 $808 During the first quarter of 2002, AT&T recorded $56 million of net restructuring and other charges for restructuring and exit costs associated with AT&T Broadband's efforts to reorganize and streamline certain centralized and field functions. The $56 million is comprised of headcount reductions of $42 million associated with employee separation costs resulting from this exit plan, $27 million in connection with facility closings and $4 million for other charges. Approximately 900 employees will be involuntarily separated in conjunction with this exit plan, approximately 75% of which are management and 25% are non-management. More than 15% of the employees affected by this exit plan have left their positions as of March 31, 2002, with the remaining reductions occurring throughout the remainder of 2002. Termination benefits of approximately $6 million were paid to employees during the first quarter of 2002 related to this exit plan. These charges were partially offset by the reversal of $17 million related to the business restructuring plan from the second quarter of 2001, primarily due to the redeployment of certain employees to different functions within AT&T Broadband. This restructuring and exit plan is expected to yield cash savings of approximately $4 million (net of severance benefit payouts) in 2002. In subsequent years, the net cash savings will continue to increase, due to the timing of actual separations and associated payments, until the completion of the exit plan at which time we expect to yield approximately $65 million of cash savings per year. Additionally, there will be no 25 benefit to operating income (net of the restructuring charges recorded) in 2002. In subsequent years, the operating income benefit will continue to increase, due to the timing of actual separations, until the completion of the exit plan at which time we expect a benefit to operating income of approximately $74 million per year. During the first quarter of 2001, AT&T recorded $808 million of net restructuring and other charges, which included $739 million of asset impairment charges related to Excite@Home, and $69 million for restructuring and exit costs which consisted of $59 million for cash severance costs, $6 million related to facility closings and $4 million related to termination of lease obligations. The asset impairment charges included $600 million recorded by Excite@Home associated with goodwill impairment of various acquisitions, primarily Excite, and a related goodwill impairment charge of $139 million recorded by AT&T associated with its acquisition goodwill of Excite@Home. The impairment resulted from the continued weakness of the online media market that Excite@Home operated in. Since we consolidated, but only owned approximately 23% of Excite@Home, 77% of the charge recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in our March 31, 2001 Consolidated Statement of Operations as "Minority interest and dividends on subsidiary preferred stock." Excite@Home was deconsolidated from AT&T's results on September 30, 2001. The $59 million of cash severance costs were primarily a result of synergies created by the MediaOne merger related to approximately 2,350 employees. Approximately 10% of the individuals were management employees and 90% were non-management employees. FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Operating income $1,389 $814 Operating income increased $0.6 billion, or 70.7%, in the first quarter of 2002 compared with the first quarter of 2001. The increase was primarily attributable to the impact of the deconsolidation of Excite@Home and net cable dispositions of $0.9 billion as well as a decrease in depreciation and other amortization expense of $0.5 billion due to the adoption of SFAS No. 142, as of January 1, 2002, which eliminated amortization of goodwill and franchise costs. Significantly offsetting these increases were the accelerating declines in the long distance business. FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Other (expense), net $(162) $(783) Other expense, net for the first quarter of 2002 was $0.2 billion, compared with $0.8 billion in the first quarter of 2001, a decrease in expense of $0.6 billion. The decrease resulted from the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" in the first quarter of 2001. In conjunction with the adoption, we reclassified certain investment securities, which support debt that is indexed to those securities, from "available-for-sale" to "trading," resulting in a pretax charge of $1.2 billion reflecting the initial reclassification. This decrease was partially offset by increased expense in 2002 of $0.2 billion related to the revaluation of certain financial instruments. Also offsetting the decrease in expense were lower net gains on sale of businesses and investments of $0.2 billion and higher cost investment impairment charges of $0.1 billion, primarily related to our investments in Vodafone ADRs and Time Warner Telecom. 26 FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Interest (expense) $(767) $(879) Interest expense decreased 12.7%, or $0.1 billion, in the first quarter of 2002 compared with the first quarter of 2001. The decrease was primarily due to a lower average debt balance in the first quarter of 2002, compared with the first quarter of 2001, reflecting the company's debt reduction efforts. FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) (Provision) for income taxes $(266) $(218) The provision for income taxes increased $48 million, or 22.3%, in the first quarter of 2002 compared with the first quarter of 2001. The increase was primarily due to higher income before income taxes in the first quarter of 2002 compared with the first quarter of 2001, largely offset by lower net non tax-deductible items in the first quarter of 2002. The effective tax rate for the first quarter of 2002 was 57.8%, compared with a negative 25.7% for the prior year quarter. The first quarter 2002 effective tax rate was negatively impacted by non tax-deductible expenses, including costs associated with AT&T's restructuring plans, as well as the operational losses of AT&T Latin America, for which the company is unable to record tax benefits. The first quarter 2001 effective tax rate was impacted by a charge associated with the adoption of SFAS No. 133, as well as a non tax-deductible asset impairment charge recorded by Excite@Home. In addition, the first quarter 2001 effective tax rate was negatively impacted by the consolidation of operational losses of Excite@Home, for which the company was unable to record tax benefits, and non tax-deductible goodwill amortization. FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Minority interest and dividends on subsidiary preferred stock $(57) $640 Minority interest and dividends on subsidiary preferred stock, which are recorded net of income taxes, represents an adjustment to AT&T's income to reflect the less than 100% ownership of consolidated subsidiaries as well as dividends on preferred stock issued by subsidiaries of AT&T. The company recorded $0.1 billion of expense in the first quarter of 2002 and $0.6 billion of income in the first quarter of 2001. Income recorded in the first quarter of 2001 primarily reflects losses generated by Excite@Home, including an asset impairment charge, that were attributable to the approximately 77% of Excite@Home not owned by AT&T. In the first quarter of 2002, Excite@Home was not consolidated; therefore we no longer recorded minority interest income (expense) related to Excite@Home. The income tax benefit recorded on minority interest and dividends on subsidiary preferred stock was $25 million and $81 million for the first quarter of 2002 and 2001, respectively. FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Equity (losses) from Liberty Media Group $ - $(697) As a result of the split-off of LMG on August 10, 2001, we no longer record the results of LMG. FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Net (losses) related to other equity investments $(297) $(57) Net losses related to other equity investments, which are recorded net of income taxes, were $297 million in the first quarter of 2002 compared with $57 million in the first quarter of 2001, an increase of $240 million. The increase in losses was driven primarily by a $338 million pretax charge recorded in the first quarter of 2002 related to the estimated loss on AT&T's commitment to purchase the shares of AT&T Canada not owned by AT&T. This charge reflects further deterioration in the underlying value of AT&T Canada as well as accretion of the floor price of AT&T's obligation to purchase AT&T Canada shares. In addition, $105 million (pretax) of the increase in losses was due to the net impact of lower equity earnings relating to Cablevision and Net2Phone as a result of these investments being accounted for under the equity method in the first quarter of 2001 and the cost method in 2002. 27 The income tax benefit recorded on net losses related to other equity investments was $184 million in the first quarter of 2002 and $74 million in the first quarter of 2001, an increase of $111 million. The amortization of excess basis associated with nonconsolidated investments, recorded as a reduction of income, totaled $80 million in 2001. 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 THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Extraordinary gain - net of income taxes $ 41 $ - During the first quarter of 2002, AT&T called $1.3 billion of trust originated preferred securities for early redemption, resulting in a gain on early extinguishment of debt of $41 million, net of $25 million of income taxes. The gain represents the difference between the carrying value of the debt and the cash paid to extinguish the debt. FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Cumulative effect of accounting changes - net of income taxes $ (856) $ 904 Cumulative effect of accounting changes, net of applicable income taxes, was a loss of $0.9 billion in the first quarter of 2002 compared with a gain of $0.9 billion in the first quarter of 2001. Effective January 1, 2002, we adopted SFAS No. 142 and 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 of $0.9 billion, net of income taxes of $0.5 billion was recorded in the first quarter of 2002. The cumulative effect of accounting change related to the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," net of applicable income taxes, in the first quarter of 2001 was comprised of $0.4 billion for AT&T Group (other than LMG) and $0.5 billion for LMG. The $0.4 billion recorded by AT&T, excluding LMG, was attributable primarily to fair value adjustments of equity derivative instruments related to 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 THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) Dividend requirements of preferred stock, net $ - $ (181) Dividend requirements of preferred stock were $0.2 billion in the first quarter of 2001. The preferred stock dividend represented interest in connection with convertible preferred stock issued to NTT DoCoMo in January of 2001 as well as accretion of the beneficial conversion feature associated with this preferred stock. The beneficial conversion feature was recorded upon the issuance of the NTT DoCoMo preferred stock and represented the excess of the fair value of the preferred shares issued over the proceeds received. On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group, these preferred shares were converted into AT&T Wireless common stock and accordingly were no longer outstanding. 28 FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- AT&T Common Stock Group - per basic and diluted share: (Loss) - continuing operations $ (0.05) $ (0.17) Total (loss) $ (0.28) $ (0.10) In the first quarter of 2002, AT&T Common Stock Group had a loss from continuing operations before extraordinary gain and cumulative effect of accounting changes per diluted share of $0.05, compared with a loss of $0.17 in the first quarter of 2001. The increase of $0.12 was primarily driven by favorable variances in other expense, net, and operating income, net of minority interest as well as decreased dividend requirements of preferred stock. Such favorable impacts were partially offset by an unfavorable variance in net losses related to other equity investments. In the first quarter of 2002, the total loss per share of AT&T Common Stock Group of $0.28 included a loss from continuing operations as discussed above of $0.05, a loss related to the cumulative effect of accounting change of $0.24, offset by an extraordinary gain of $0.01. In the first quarter of 2001, the total loss per share of AT&T Common Stock Group of $0.10 included a loss from continuing operations as discussed above of $0.17, a loss from discontinued operations of $0.02 and income related to the cumulative effect of accounting change of $0.09. In the first quarter of 2001, Liberty Media Group reported a loss of $0.06, which included income of $0.21 related to the cumulative effect of accounting change. In the first quarter of 2001, AT&T Wireless group reported a loss of $0.02. SEGMENT RESULTS In support of the services we provide, we segment our results by the operating units that support our primary lines of business: AT&T Business Services, AT&T Consumer Services and AT&T Broadband. The balance of AT&T's operations, excluding LMG, is included in a corporate and other category. LMG was split-off from AT&T in August 2001. EBIT and EBITDA are the primary measures used by AT&T's chief operating decision makers to measure AT&T's operating results and to measure segment profitability and performance. AT&T calculates EBIT as operating income (loss) plus other income (expense), minority interest and dividends on subsidiary preferred stock and net pretax earnings (losses) related to other equity investments. EBITDA is defined as EBIT, excluding minority interest and dividends on subsidiary preferred stock other than Excite@Home's minority interest, plus depreciation and amortization. Interest expense and income taxes are not factored into the segment profitability measure used by the chief operating decision makers; therefore, trends for these items are discussed on a consolidated basis. Management believes EBIT and EBITDA are meaningful to investors because they provide analyses of operating results using the same measures used by AT&T's chief operating decision makers. In addition, we believe that both EBIT and EBITDA allow investors a means to evaluate the financial results of each segment in relation to total AT&T. EBIT for AT&T was $664 million and $459 million for the three months ended March 31, 2002 and 2001, respectively. EBITDA for AT&T was $2,641 million and $2,890 million for the three months ended March 31, 2002 and 2001, respectively. Our calculations of EBIT and EBITDA may or may not be consistent with the calculation of these measures by other public companies. EBIT and EBITDA should not be viewed by investors as an alternative to generally accepted accounting principles (GAAP) measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. In addition, EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flow. The discussion of segment results includes revenue, EBIT, EBITDA, capital additions and total assets. The discussion of EBITDA for AT&T Broadband is modified to exclude other income (expense) and net pretax earnings (losses) related to equity investments. Total assets for each segment generally include all assets, except intercompany receivables. Prepaid pension assets and corporate-owned or leased real estate are generally held at the corporate level, and therefore are included in the corporate and other group. The loss from discontinued operations is not reflected in the corporate and other group. Capital additions for each segment include capital expenditures for property, plant and equipment, internal-use software, additions to nonconsolidated investments and increases in franchise costs. 29 Our existing segments reflect certain managerial changes that were implemented during 2002. The changes primarily include the following: revenue previously recorded by the AT&T Business Services segment as "Internal Revenue" for services provided to certain other AT&T units and then eliminated within the Corporate & Other group, is now recorded as a contra-expense by AT&T Business Services; the results of certain corporate units previously included in the Corporate & 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 & Other group were transferred to the appropriate segments. All prior periods have been restated to reflect these changes. Reflecting the dynamics of our business, we continuously review our management model and structure, and make adjustments to our operating segments accordingly. AT&T BUSINESS SERVICES AT&T Business Services offers a variety of global communications services to small and medium-sized businesses, large domestic and multinational businesses and government agencies. AT&T Business' services include long distance, international, toll-free and local voice; data and IP networking; managed networking services and outsourcing solutions; and wholesale transport services (sales of services to service resellers). FOR THE THREE MONTHS ENDED MARCH 31, DOLLARS IN MILLIONS 2002 2001 ---- ---- External revenue Service revenue $ 6,347 $ 6,866 Equipment and product sales revenue 98 71 ------- --------- Total external revenue 6,445 6,937 Internal revenue 83 159 ------- --------- Total revenue $ 6,528 $ 7,096 ======= ========= EBIT $ 452 $ 1,006 EBITDA $ 1,536 $ 2,029 OTHER ITEMS Capital additions $ 576 $ 1,282 AT AT MARCH 31, DECEMBER 31, 2002 2001 --------- ------------ Total assets $39,683 $ 40,316 REVENUE AT&T Business Services revenue decreased $0.6 billion, or 8.0%, in the first quarter of 2002 compared with the first quarter of 2001. The decrease was primarily due to a decline in long distance voice revenue of approximately $0.7 billion offset by an increase of $0.2 billion in data/IP/managed services, including equipment sales, and local voice services. Long distance voice services revenue decreased approximately 19% in the first quarter of 2002 compared with the first quarter of 2001. The decrease was primarily driven by a lower average price per minute reflecting the competitive forces within the industry as well as a wholesale-retail product mix shift, due to growth in the lower priced wholesale markets such as wireless. Long distance voice minute volumes were relatively flat for the first quarter of 2002 compared with the first quarter of 2001. Data/IP/managed services, excluding equipment sales, increased approximately 5.0% in the first quarter of 2002 compared with the first quarter of 2001. When we include equipment sales, these services increased approximately 6.0%. Growth was driven by packet services (IP, frame relay and ATM) partially offset by a decline in domestic private line service. Local voice services revenue grew nearly 17% in the first quarter of 2002 compared with the first quarter of 2001 as we continue to focus on increasing the utilization of our existing footprint. AT&T added more than 100,000 access lines in the first quarter of 2002 bringing the total number of access lines in service to more than 3 million. Access lines enable AT&T to provide local service to customers by allowing direct connection from customer equipment to the AT&T network. 30 AT&T Business Services internal revenue decreased $0.1 billion, or 47.5%, for the first quarter of 2002 compared with the first quarter of 2001. This decrease was primarily due to the split-off of AT&T Wireless on July 9, 2001, as these sales are now reported as external revenue. EBIT/EBITDA EBIT and EBITDA declined $0.6 billion and $0.5 billion respectively, or 55.1% and 24.3%, respectively, in the first quarter of 2002 compared with the first quarter of 2001. These declines primarily reflect the impact of lower prices within the long distance voice business, which includes pricing pressures from competition as well as a shift to lower margin products. In addition, the decline reflects a $0.3 billion charge recorded during the first quarter of 2002 related to AT&T's obligation to purchase the outstanding shares of AT&T Canada. These reductions were partially offset by cost savings from headcount reductions. OTHER ITEMS Capital additions decreased $0.7 billion, or 55.1%, in the first quarter of 2002 compared with the first quarter of 2001 as we continue to maintain a disciplined focus on capital spending. This decline reflects significantly lower capital expenditures on our core network and at AT&T Latin America in the first quarter of 2002 compared with the first quarter of 2001. Total assets decreased $0.6 billion, or 1.6%, at March 31, 2002, compared with December 31, 2001. The decrease reflects lower net property, plant and equipment and a reduction in investments and related advances primarily resulting from losses related to our equity investment in Concert. AT&T CONSUMER SERVICES AT&T Consumer Services provides a variety of communications services to residential customers including domestic and international long distance; transaction-based long distance, such as operator-assisted service and prepaid phone cards; local and local toll (intrastate calls outside the immediate local area); and dial-up Internet. FOR THE THREE MONTHS ENDED MARCH 31, DOLLARS IN MILLIONS 2002 2001 ------ ------ Revenue $3,125 $4,007 EBIT $ 832 $1,318 EBITDA $ 873 $1,365 OTHER ITEMS Capital additions $ 28 $ 22 AT MARCH AT DECEMBER 31, 31, 2002 2001 -------- --------------- Total assets $1,883 $2,141 REVENUE AT&T Consumer Services revenue declined $0.9 billion, or 22.0%, in the first quarter of 2002 compared with the first quarter of 2001. The decline was primarily due to a $0.9 billion decline in 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 were negatively impacted by ongoing competition, which has led to a loss of market share, and an acceleration of wireless and e-mail product substitution. In addition, the continued migration of customers to lower-priced products, including prepaid cards, and optional calling plans has negatively impacted traditional long distance voice services revenue. Partially offsetting these revenue declines was revenue growth of $0.1 billion for prepaid card and local services. Calling volumes declined at a mid-teens percentage rate in the first quarter of 2002 as a result of the acceleration of competition and substitution, partially offset by prepaid card usage. 31 EBIT/EBITDA EBIT declined $0.5 billion, or 36.9%, and EBITDA declined $0.5 billion, or 36.1%, in the first quarter of 2002 compared with the first quarter of 2001. EBIT and EBITDA margins declined to 26.6% and 27.9%, from 32.9% and 34.1% in the first quarter of 2002 compared with the first quarter of 2001, respectively. Customers generate less revenue as they substitute long distance calling with wireless and e-mail services and migrate to lower priced calling plans and lower margin products. However, the associated billing, customer care and fixed costs remain, resulting in lower EBIT margins. OTHER ITEMS Capital additions in the first quarter of 2002 were about the same as in the first quarter of 2001. Total assets declined $0.3 billion to $1.9 billion at March 31, 2002, compared with $2.1 billion at December 31, 2001. The decline was primarily due to lower accounts receivable, reflecting lower revenue. AT&T BROADBAND AT&T Broadband offers a variety of services through our cable broadband network, including traditional analog video and advanced services such as high-speed data (HSD) service, broadband telephony service and digital video service. FOR THE THREE MONTHS ENDED MARCH 31, ------------------------- DOLLARS IN MILLIONS 2002 2001 -------- --------- External revenue $ 2,436 $ 2,461 Internal revenue 3 4 -------- -------- Total revenue $ 2,439 $ 2,465 ======== ======== EBIT $ (425) $ (1,542) EBITDA excluding other income* $ 465 $ 394 OTHER ITEMS Capital additions $ 748 $ 910 AT MARCH 31, AT DECEMBER 31, 2002 2001 ------------ --------------- Total assets $100,573 $103,060 *EBITDA for AT&T Broadband excludes pretax earnings (losses) related to equity investments and other income (expense). REVENUE Broadband revenue declined $26 million, or 1.1%, for the three months ended March 31, 2002 compared with the first quarter of 2001. Approximately $0.3 billion of the decline was due to net cable dispositions. The decline was almost entirely offset by $0.2 billion of growth from advanced services (HSD, broadband telephony and digital video) as well as $0.1 billion of growth in other video services, primarily basic cable. The increase in basic cable revenue was primarily due to a basic video rate increase of approximately $80 million on January 1, 2002, partially offset by approximately $30 million from a loss of basic subscribers in the first quarter of 2002. At March 31, 2002, Broadband serviced 13.4 million basic cable customers, passing 24.9 million homes, compared with 15.9 million basic cable customers, passing 28.1 million homes at March 31, 2001. At March 31, 2002, we provided digital video service to 3.7 million customers, HSD service to 1.6 million customers and broadband telephony service to 1.1 million customers. This compares with 3.1 million digital-video customers, 1.3 million HSD customers, and 0.7 million broadband telephony customers at March 31, 2001. EBIT/EBITDA The EBIT deficit for the three months ended March 31, 2002 decreased $1.1 billion from the comparable prior year period deficit of $1.5 billion. The decrease in the deficit was largely due to a $1.2 billion charge due to the adoption of SFAS No. 133 taken in the first quarter of 2001. In conjunction with the adoption, we reclassified certain 32 investment securities from "available-for-sale" to "trading". The decline was also due to lower depreciation and other amortization expense of $0.3 billion primarily as a result of the adoption of SFAS No. 142. These declines were partially offset by $0.3 billion of lower gains from the sales of businesses and investments and ongoing valuation of certain financial instruments, lower income from equity investments of $0.1 billion and $0.1 billion higher investment impairment charges in the first quarter of 2002. EBITDA, which excludes pretax earnings (losses) from equity investments and other income (expense), was $0.5 billion for the three months ended March 31, 2002, an improvement of $0.1 billion, or 17.9%, from the comparable prior year period. This improvement was primarily due to improved EBITDA of $0.2 billion for advanced services (primarily broadband telephony and HSD), partially offset by net cable dispositions of $0.1 billion. OTHER ITEMS Capital additions decreased $0.2 billion, or 17.8%, to $0.7 billion for the three months ended March 31, 2002, from $0.9 billion for the comparable prior year period. This decrease was primarily driven by a decline in capital expenditures combined with decreased infusions into non-consolidated investments. The first quarter 2002 spending was primarily related to the growth and support of advanced services and plant upgrade expenditures. Total assets at March 31, 2002, were $100.6 billion compared with $103.1 billion at December 31, 2001. The decrease in total assets was primarily due to a $1.4 billion impairment charge of franchise costs upon the adoption of SFAS No. 142 and the net unfavorable mark-to-market adjustments of $0.9 billion on non-consolidated investments and certain derivative instruments. CORPORATE AND OTHER This group reflects the results of corporate staff functions, the elimination of transactions between segments, as well as the results of Excite@Home. FOR THE THREE MONTHS ENDED MARCH 31, ------------------------ DOLLARS IN MILLIONS 2002 2001 -------- -------- External revenue $ 17 $ 146 Internal revenue (86) (163) --- ---- Total revenue $ (69) $ (17) ======= ======= EBIT $ (195) $ (323) EBITDA $ (99) $ (142) OTHER ITEMS Capital additions $ 10 $ 188 AT MARCH 31, AT DECEMBER 31, 2002 2001 ------------ --------------- Total assets $10,668 $19,765 REVENUE Revenue for corporate and other decreased $0.1 billion in the first quarter of 2002 compared with the first quarter of 2001. The decrease is largely due to the impact of the deconsolidation of Excite@Home of $0.1 billion. Partially offsetting this decline in revenue were lower internal revenue eliminations of $0.1 billion as a result of the split-off of AT&T Wireless on July 9, 2001, partially offset by increased internal sales from AT&T Business Services to AT&T Broadband. EBIT/EBITDA EBIT and EBITDA deficits declined $0.1 billion and $43 million, respectively, to deficits of $0.2 billion and $0.1 billion, respectively, in the first quarter of 2002 compared with the first quarter of 2001. The decline was largely due to the impact of the deconsolidation of Excite@Home of $0.3 billion on both EBIT and EBITDA. The declines were partially offset by $0.1 billion of expense related to the on-going valuation activity of certain financial instruments and greater cost investment impairment charges; a lower pension credit (income) of $0.1 billion and lower net gains on sales of investments of $0.1 billion. 33 OTHER ITEMS Capital additions decreased $0.2 billion in 2002. The decrease was primarily attributable to the impact of the deconsolidation of Excite@Home of $0.1 billion as well as decreased purchases of non-consolidated investments of $0.1 billion. Total assets decreased $9.1 billion, to $10.7 billion in the first quarter of 2002. The decrease was primarily driven by a lower cash balance held at March 31, 2002 that reflected the pay down of debt. LIQUIDITY FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (DOLLARS IN MILLIONS) CASH FLOWS: Provided by operating activities $ 1,617 $ 1,610 Used in investing activities (1,571) (1,423) Used in financing activities (8,295) (5,088) Provided by discontinued operations - 4,939 Net cash provided by operating activities of $1.6 billion for the three months ended March 31, 2002, was primarily due to $3.1 billion of income from continuing operations, excluding non-cash income items, partially offset by net changes in other operating assets and liabilities of $1.0 billion and a decrease in accounts payable of $0.7 billion. Net cash provided by operating activities of $1.6 billion for the three months ended March 31, 2001, was primarily due to income from continuing operations, excluding non-cash income items and the adjustment for net gains on sales of businesses of $3.0 billion, partially offset by a decrease in accounts payable of $1.1 billion and net changes in other operating assets and liabilities of $0.4 billion. AT&T's investing activities resulted in a net use of cash of $1.6 billion for the three months ended March 31, 2002, compared with $1.4 billion for the comparable period in 2001. In the first quarter of 2002, AT&T spent $1.5 billion on capital expenditures. For the three months ended March 31, 2001, AT&T spent approximately $2.4 billion on capital expenditures and $0.3 billion on non-consolidated investments, primarily infusions into existing cable investments. In addition, AT&T received approximately $0.7 billion from the sales of various investments and $0.6 billion primarily from the net dispositions of businesses. For the three months ended March 31, 2002, net cash used in financing activities was $8.3 billion, compared with $5.1 billion for the three months ended March 31, 2001. In the first quarter of 2002, AT&T made net payments of $8.2 billion to reduce debt. In the first quarter of 2001, AT&T made net payments of $14.8 billion to reduce debt and received $9.8 billion from the issuance of convertible preferred stock to NTT DoCoMo. At March 31, 2002, we had current assets of $13.6 billion and current liabilities of $16.0 billion. The current assets were primarily comprised of trade and other receivables of $8.9 billion and cash of $2.3 billion. The current liabilities were primarily comprised of other current liabilities of $5.3 billion, debt maturing within one year of $5.2 billion and accounts payable of $3.9 billion. We expect to fund our operations primarily with cash from operations, cash on hand, commercial paper and our securitization program. If economic conditions worsen or do not improve and/or competition and product substitution accelerate beyond current expectations, our cash flow from operations would decrease, negatively impacting our liquidity. On April 1, 2002, AT&T called the TCI Financing IV trust originated preferred securities of $0.2 billion. This amount was included within "Debt maturing within one year" in the Consolidated Balance Sheet at March 31, 2002. On February 27, 2002, AT&T signed an agreement with AT&T Latin America (ALA) that restructured approximately $725 million of ALA's short-term and long-term debt and preferred stock held by AT&T, plus accrued interest and dividends. At March 31, 2002, $25 million of the $725 million financing was not drawn. ALA's senior secured vendor financing of $298 million became effective on March 27, 2002. The AT&T-provided debt and preferred facilities are subordinated to the ALA senior secured vendor financing. The agreement between AT&T and ALA, which also took effect on March 27, 2002, extends the maturity and redemption dates of all ALA debt and preferred stock payable to AT&T to October 2008. ALA may be required to make earlier prepayments of debt or redemptions of preferred stock out of the net proceeds of certain future equity and debt offerings. In 34 addition, while the vendor financing is outstanding, the agreement defers interest payments on all AT&T debt and dividend payments on AT&T preferred stock until October 2008. If the proposed spin-off of AT&T Broadband occurs as currently structured, the debt of TCI and MediaOne will be included in the net assets spun-off and will be included in AT&T Comcast. The amount of this third-party debt at March 31, 2002, was $17.3 billion. The intercompany debt of AT&T Broadband payable to AT&T that is outstanding at the time of the spin-off will be repaid immediately prior to the spin-off. At March 31, 2002 such intercompany debt amounted to approximately $6.0 billion. In addition, AT&T's quarterly convertible income preferred securities, which had a book value of $4.7 billion at March 31, 2002, will be included in the net assets spun-off and will be included in AT&T Comcast. Contractual Cash Obligations In 2001, AT&T recorded a liability of $3.0 billion reflecting the estimated loss on AT&T's commitment to purchase the publicly-owned shares of AT&T Canada. As of March 31, 2002, the aggregate amount that AT&T would need to pay to complete its obligation related to AT&T Canada is approximately $3.3 billion. We do not know the timing or amounts we will have to pay in connection with this obligation as it may be settled using cash or AT&T common stock, or any combination thereof. The purchase commitment will continue to be evaluated against the difference between the contractual floor price and underlying value of AT&T Canada shares, which could result in the recognition of additional future liabilities in the amount of approximately $0.8 billion, assuming that the commitment is executed on June 30, 2003. AT&T has contractual obligations to utilize network facilities from local exchange carriers with terms greater than one year. These contracts are based on volumes and have penalty fees if certain volume levels are not met. We assessed our minimum exposure based on penalties to exit the contracts. At December 31, 2001, penalties to exit these contracts in any given year totaled approximately $1.5 billion. This amount increased to approximately $1.7 billion at March 31, 2002, primarily as a result of the company entering into additional contracts. FINANCIAL CONDITION MARCH 31, DECEMBER 31, 2002 2001 ---------- ------------ DOLLARS IN MILLIONS Total assets $ 152,807 $ 165,282 Total liabilities 94,087 105,322 Total shareowners' equity 51,265 51,680 Total assets decreased $12.5 billion, or 7.5%, to $152.8 billion at March 31, 2002 from $165.3 billion at December 31, 2001. This decrease was largely driven by an $8.2 billion reduction in cash primarily due to the net repayment of debt. Also contributing to the decrease were lower investments and related advances due to unfavorable mark-to-market adjustments on monetized investments and permanent impairments on certain investments as well as lower franchise costs as a result of an impairment recorded in connection with the adoption of SFAS No. 142. Total liabilities decreased $11.2 billion, or 10.7%, to $94.1 billion at March 31, 2002 from $105.3 billion at December 31, 2001. This decrease was primarily a result of $9.2 billion in lower debt primarily reflecting the pay down of short-term debt as well as favorable mark-to-market adjustments on certain derivatives embedded in debt that are indexed to various investments. Minority interest decreased $0.8 billion, or 23.3%, to $2.7 billion at March 31, 2002, from $3.6 billion at December 31, 2001. This decrease was primarily due to the exchange of a portion of TCI Pacific shares for AT&T shares. Total shareowners' equity decreased $0.4 billion, or 0.8%, to $51.3 billion at March 31, 2002 from $51.7 billion at December 31, 2001. This decrease was primarily due to a reduction in retained earnings resulting from net losses. These reductions were partially offset by an increase in additional paid-in capital resulting from the exchange of TCI Pacific shares for AT&T shares. 35 In March 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 $0.1 billion for the entire amount of the dividends declared. The ratio of total debt to total capital for AT&T (total debt divided by total debt and equity) was 43.6% at March 31, 2002, compared with 47.7% at December 31, 2001. For purposes of this calculation, equity includes the convertible trust preferred securities and subsidiary redeemable preferred stock. In addition, included in total debt was approximately $7.6 billion and $8.6 billion of notes at March 31, 2002 and December 31, 2001, respectively, which are exchangeable into or collateralized by securities we own. Excluding this debt, the debt ratio at March 31, 2002, was 39.1%, compared with 43.4% at December 31, 2001. The company's debt reduction efforts drove the decreases in the debt ratios. RISK MANAGEMENT We are exposed to market risk from changes in interest and foreign exchange rates. 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. Assuming a 10% downward shift in interest rates at March 31, 2002, the fair value of unhedged debt would have increased by approximately $1.4 billion. RECENT ACCOUNTING PRONOUNCEMENTS 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 future value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. For AT&T, this means that the standard will be adopted on January 1, 2003. AT&T does not expect that the adoption of this statement will have a material impact on AT&T's results of operations, financial position or cash flows. On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13 and Technical Corrections." SFAS No. 145 eliminates the requirement (in SFAS No. 4) that gains and losses from the extinguishments of debt be aggregated and classified as extraordinary items, net of the related income tax. An entity is not prohibited from classifying such gains and losses as extraordinary items, as long as they meet the criteria of Accounting Principles Board Opinion (APB) 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." In addition, SFAS No. 145 requires sales-lease back treatment for certain modifications of a capital lease that result in the lease being classified as an operating lease. The rescission of SFAS No. 4 is effective for fiscal years beginning after May 15, 2002, which for AT&T would be January 1, 2003. Earlier application is encouraged. Any gain or loss on extinguishment of debt that was previously classified as an extraordinary item would be reclassified to other income (expense). The remainder of the statement is generally effective for transactions occurring after May 15, 2002. AT&T does not expect that the adoption of SFAS No. 145 will have a material impact on AT&T's results of operations, financial position or cash flows. SUBSEQUENT EVENTS Effective April 1, 2002, Concert was unwound. Pursuant to the partnership termination agreement, each of the partners generally reclaimed the customer contracts and assets that were initially contributed to the joint venture. On April 25, 2002, AT&T and Pharmacia Corporation (Pharmacia) announced that Pharmacia will purchase AT&T's headquarters facility and corporate conference center in Basking Ridge, New Jersey, for $200 million. The transaction is expected to be completed 36 in July 2002, and will result in a pretax gain of approximately $35 to $50 million for AT&T. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges (b) Reports on Forms 8-K Form 8-K dated January 4, 2002 was filed pursuant to Item 5 and Item 7 on January 4, 2002. Form 8-K dated February 5, 2002 was filed pursuant to Item 5 and Item 7 was filed on February 5, 2002. Form 8-K dated February 21, 2002 was filed pursuant to Item 5 and Item 7 on February 21, 2002. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1034, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AT&T Corp. /s/ N.S. Cyprus --------------------------------------- By: N.S. Cyprus Vice President and Controller (Principal Accounting Officer) Date: May 15, 2002 38