-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KIvi2Z0/CO9OINEuqCbzwgo1rK3izhuQSzmG7p8FtYaZ7wi+VHWpMVWXis2MeELt iOOlTh99Xq3zGdqRI8siJA== 0000005907-04-000160.txt : 20041007 0000005907-04-000160.hdr.sgml : 20041007 20041007164258 ACCESSION NUMBER: 0000005907-04-000160 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20041007 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Cost Associated with Exit or Disposal Activities ITEM INFORMATION: Material Impairments ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041007 DATE AS OF CHANGE: 20041007 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01105 FILM NUMBER: 041070611 BUSINESS ADDRESS: STREET 1: ONE AT&T WAY CITY: BEDMINSTER STATE: NJ ZIP: 07921 BUSINESS PHONE: 9082212000 MAIL ADDRESS: STREET 1: ONE AT&T WAY CITY: BEDMINSTER STATE: NJ ZIP: 07921 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 8-K 1 eightk100704.txt AT&T CORP. 8-K DATED OCTOBER 7, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: October 7, 2004 AT&T CORP. (Exact Name of Registrant as Specified in Charter) New York (State or Other Jurisdiction of Incorporation) 1-1105 13-4924710 (Commission File Number) (IRS Employer Identification No.) One AT&T Way, Bedminster, New Jersey 07921 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (908) 221-2000 Not Applicable (Former Name or Former Address, If Changed Since Last Report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (See General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION. On October 7, 2004, AT&T Corp. ("AT&T") issued a press release announcing asset impairment and restructuring charges. A copy of the press release is attached as Exhibit 99.1. The information contained in this Item 2.02 and Exhibit 99.1 shall not be deemed "filed" for purposes of Section 18 of the Securities Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing. ITEM 2.05. COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. See item 8.01 the contents of which are incorporated herein by reference. ITEM 2.06. MATERIAL IMPAIRMENTS. In July 2004, AT&T announced a strategic change in our business focus away from traditional consumer services and towards business markets and emerging technologies. As a result of this strategic change, we performed an evaluation of our long-lived assets including property, plant and equipment (PP&E) and internal use software (IUS), as this strategic change created a "triggering event" necessitating such a review. In assessing impairments we follow the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We operate an integrated telecommunications network; therefore we performed our testing of the asset group at the entity level, as this is the lowest level for which identifiable cash flows are available. In performing the test, we determined that the total of the expected future undiscounted cash flows directly related to the existing service potential of the asset group was less than the carrying value of the asset group; therefore an impairment charge was required. The amount of the impairment charge represented the difference between the fair value of the asset group and its associated carrying value. We calculated the fair value of our asset group with the assistance of an independent third party valuation specialist using discounted cash flows. The discounted cash flows calculation was made utilizing various assumptions and estimates regarding future revenue and expenses, cash flows and discount rates. Per SFAS No. 144, the forecasts were developed without contemplation of investments in new products. We determined that a $11.4 billion impairment charge to PP&E and IUS was necessary on October 7, 2004. The impairment charge resulted from sustained pricing pressure and the evolution of services toward newer technologies in the business market as well as changes in the regulatory environment, which led to a shift away from traditional consumer services. The charge was non-cash and will not result in future cash expenditures. The strategic change in business focus also created a "triggering event" for a review of our goodwill. We follow the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" for determining and measuring impairments. SFAS No. 142 indicates that if other types of assets (in addition to goodwill) of a reporting unit are being tested for impairment at the same time as goodwill, then those assets are to be tested for impairment prior to performing the goodwill impairment testing. Accordingly, the PP&E and IUS impairment charge noted above reduced the carrying value of the reporting units when performing the impairment test for goodwill. The goodwill impairment test requires us to estimate the fair value of our overall business enterprise down to the reporting unit level. We estimate fair value using both a discounted cash flows model, as well as an approach using market comparables, both of which are weighted equally to determine fair value. Under the discounted cash flows method, we utilize estimated long-term revenue and cash flows forecasts, as well as assumptions of terminal value, together with an applicable discount rate to determine fair value. Under the market approach, fair value was determined by comparing our reporting units to similar businesses (or guideline companies). We then compared the carrying value of our reporting units to their fair value. Since the fair value of the reporting units exceeded their carrying amounts, no goodwill impairment charge was recorded. ITEM 8.01. OTHER EVENTS. On October 7, 2004, AT&T announced that during the third quarter of 2004 we will record net restructuring and other charges of $1.1 billion, primarily consisting of employee separation costs related to both AT&T Business Services and AT&T Consumer Services, including $0.3 billion of benefit plan curtailment costs. This activity resulted from the continued integration and automation of various functions within network operations and the strategic change we announced in July 2004. These exit plans will impact approximately 11,200 employees (the majority of which were involuntary terminations). Approximately 60% of the employees impacted by this exit plan are managers. We anticipate that approximately two-thirds of the employees associated with these exit plans will be notified or will leave their positions by the end of 2004. ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS. (C) EXHIBITS EXHBIT 99.1 - Press release dated October 7, 2004 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AT&T Corp. By: /s/ C. R. Reidy ---------------------------- Christopher R. Reidy Vice President - Controller October 7, 2004 Exhibit Index Exhibit No. Description 99.1 Press release dated October 7, 2004 EX-99 2 eightk100704exh991.txt EXH. 99.1 - PRESS RELEASE DATED OCTOBER 7, 2004 Exhibit 99.1 [AT&T LOGO OMITTED] News Release - -------------------------------------------------------------------------------- AT&T CONTINUES RESTRUCTURING AND COST REDUCTION EFFORTS o Non-cash asset impairment charge of $11.4 billion o Continued workforce reductions, resulting in 3Q04 charge of $1.1 billion o Year end net debt to be under $7.0 billion FOR RELEASE THURSDAY, OCTOBER 7, 2004 BEDMINSTER, N.J. -- AT&T (NYSE: T) today announced a series of restructuring actions as the company continues its transformation in the rapidly changing communications industry. The company said that the previously announced review of its assets will result in an asset impairment charge in the third quarter of 2004. The asset impairment results from sustained pricing pressure and the evolution of services toward newer technologies in the business market as well as changes in the regulatory environment, which led to a shift away from traditional consumer services. As a result, AT&T will take a non-cash charge of approximately $11.4 billion in the third quarter of 2004 to recognize the asset impairment. This action will reduce AT&T's depreciation expense by approximately $1.0 billion in the second half of 2004. AT&T also said that as a result of its decision to stop marketing traditional residential services, as well as corporate transformation initiatives, it will significantly exceed its previously estimated workforce-reduction target of 8 percent in 2004. The company now expects to reduce total headcount by more than 20 percent in 2004. Approximately three quarters of the employees affected in 2004 have already been notified or departed earlier this year. As a result of ongoing workforce reductions, the company will record a restructuring charge in the third quarter of approximately $1.1 billion. "In response to recent regulatory developments and a highly competitive market, we have made some tough decisions to reduce our workforce and cut costs," said AT&T Chairman and CEO Dave Dorman. "Ongoing investments in our network and systems around the world have allowed us to significantly improve customer-service metrics while driving industry-leading productivity." AT&T's acceleration of workforce reductions and other cost cutting initiatives are having a positive impact on profitability across the business. The company is beginning to benefit from lower marketing expense as it scales back its traditional consumer operation. As a result, the company said it anticipates a significant improvement in consumer operating margin, excluding restructuring charges, in the third quarter of 2004 when compared with the second quarter of 2004. Despite industry pricing pressure and its ongoing transformation, AT&T expects to continue to generate significant cash flow in line with its previously established targets for 2004. AT&T is on course to finish the year with net debt of under $7.0 billion, a reduction of almost 50 percent over the past two years. Citing strong cash flow generation, the company said it sees ample flexibility to invest in the business, maintain a strong balance sheet and continue to return value to its shareholders. AT&T's dividend represented about a quarter of the company's free cash flow during the first half of 2004. The company said it is presently evaluating further uses of surplus cash flow as it nears the completion of its 2004 debt-buyback program. # # # About AT&T AT&T (www.att.com) For more than 125 years, AT&T (NYSE "T") has been known for unparalleled quality and reliability in communications. Backed by the research and development capabilities of AT&T Labs, the company is a global leader in local, long distance, Internet and transaction-based voice and data services. AT&T 'Safe Harbor' The foregoing contains "forward-looking statements" which are based on management's beliefs as well as on a number of assumptions concerning future events made by and information currently available to management. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside AT&T's control, that could cause actual results to differ materially from such statements. For a more detailed description of the factors that could cause such a difference, please see AT&T's filings with the Securities and Exchange Commission. AT&T disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This information is presented solely to provide additional information to further understand the results of AT&T. Non-GAAP Reconciliations Net Debt AT&T now expects its net debt balance to be under $7 billion by year-end. Expected net debt consists of estimated total debt of approximately $10.5 billion, net of estimated cash (including restricted cash) and estimated foreign exchange fluctuations of more than $3.5 billion. The components of net debt may fluctuate as AT&T continuously evaluates debt-and cash-management strategies; however these shifts should not have a significant impact on net debt. EBITDA, less capital expenditures For the Year Ended Dec. 31, 2004 ------------- (dollars in billions; all numbers are approximate) EBITDA, less capital expenditures $ 4.5 Add capital expenditures 1.8 ------------- EBITDA, less restructuring charges 6.3 Less other cash expenses (a) (1.4)-(1.3) Changes in working capital and other assets and liabilities (0.2)-(0.1) ------------- Projected cash provided by operating activities $ 4.7-4.9 (a) Other cash expenses primarily include taxes, interest expense and business restructuring charge payments. EBITDA (earnings before interest, taxes, depreciation and amortization) is calculated as operating income less depreciation and amortization. AT&T uses EBITDA, less capital expenditures (excluding asset impairments and net restructuring and other charges) as a supplementary method for determining and forecasting cash flow generation. Our definition of EBITDA, less capital expenditures does not take into consideration cash generated or used in other investing and financing activities, but rather is designed to reflect cash available for these activities. Free cash flow is defined as cash flow provided by operating activities less cash used for capital expenditures and other additions. - -------------------------------------------------------------------------------- AT&T is providing information on net debt, EBITDA, less capital expenditures, and free-cash flow because these measures are commonly used by the investment community for evaluation purposes. Net debt, EBITDA, less capital expenditures, and free cash flow should be considered in addition to, but not in lieu of, other measures of liquidity and cash flows reported in accordance with generally accepted accounting principles. Additionally, they may not be comparable to similarly captioned measures reported by other companies. -----END PRIVACY-ENHANCED MESSAGE-----