-----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, PPGOa7zt59nvbB4XF/Zny8kZFAEWkGguWxA3PCBvDBgl7/cLaRwRjs7G9mH+wvrJ A0NxgEPh4U2eHsSHc4R+zg== 0000950123-04-009186.txt : 20040804 0000950123-04-009186.hdr.sgml : 20040804 20040803174502 ACCESSION NUMBER: 0000950123-04-009186 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01105 FILM NUMBER: 04949541 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 10-Q 1 y99567e10vq.txt FORM 10-Q . . . 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 JUNE 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-1105 AT&T CORP. A NEW YORK I.R.S. EMPLOYER CORPORATION NO. 13-4924710
ONE AT&T WAY, BEDMINSTER, NEW JERSEY 07921 TELEPHONE -- AREA CODE 908-221-2000 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] No [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN EXCHANGE ACT RULE 12d-2) YES [X] No [ ] AT JULY 30, 2004, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING: AT&T COMMON STOCK -- 794,714,883 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) REVENUE................................................ $ 7,636 $ 8,795 $15,626 $17,781 OPERATING EXPENSES Access and other connection............................ 2,481 2,708 5,119 5,406 Costs of services and products (excludes depreciation of $935, $965, $1,871 and $1,906 included below)..... 1,759 1,958 3,623 3,969 Selling, general and administrative.................... 1,763 1,837 3,507 3,758 Depreciation and amortization.......................... 1,231 1,197 2,481 2,383 Net restructuring and other charges.................... 54 66 267 70 ------- ------- ------- ------- Total operating expenses............................... 7,288 7,766 14,997 15,586 ------- ------- ------- ------- OPERATING INCOME....................................... 348 1,029 629 2,195 Other income (expense), net............................ 36 86 (138) 96 Interest (expense)..................................... (191) (296) (419) (628) ------- ------- ------- ------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST INCOME, NET EARNINGS RELATED TO EQUITY INVESTMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE............... 193 819 72 1,663 (Provision) benefit for income taxes................... (87) (308) 339 (605) Minority interest income............................... 1 -- 1 1 Net earnings related to equity investments............. 1 25 -- 6 ------- ------- ------- ------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE... 108 536 412 1,065 Cumulative effect of accounting change (net of income taxes of $(26))...................................... -- -- -- 42 ------- ------- ------- ------- NET INCOME............................................. $ 108 $ 536 $ 412 $ 1,107 ======= ======= ======= ======= WEIGHTED-AVERAGE SHARES USED TO COMPUTE EARNINGS PER SHARE: Basic.................................................. 794 787 794 786 Diluted................................................ 797 787 796 786 PER BASIC AND DILUTED SHARE: Earnings before cumulative effect of accounting change............................................... $ 0.14 $ 0.68 $ 0.52 $ 1.36 Cumulative effect of accounting change................. -- -- -- 0.05 ------- ------- ------- ------- EARNINGS PER BASIC AND DILUTED SHARE................... $ 0.14 $ 0.68 $ 0.52 $ 1.41 ======= ======= ======= ======= DIVIDENDS DECLARED PER COMMON SHARE.................... $0.2375 $0.1875 $0.4750 $0.3750 ======= ======= ======= =======
The notes are an integral part of the consolidated financial statements. 1 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AT AT JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ (DOLLARS IN MILLIONS) ASSETS Cash and cash equivalents................................... $ 2,459 $ 4,353 Accounts receivable, less allowances of $608 and $579....... 3,661 4,036 Deferred income taxes....................................... 971 715 Other current assets........................................ 1,397 744 ------- ------- TOTAL CURRENT ASSETS........................................ 8,488 9,848 Property, plant and equipment, net of accumulated depreciation of $36,191 and $34,300....................... 22,833 24,376 Goodwill.................................................... 4,781 4,801 Other purchased intangible assets, net of accumulated amortization of $381 and $320............................. 437 499 Prepaid pension costs....................................... 4,004 3,861 Other assets................................................ 3,275 4,603 ------- ------- TOTAL ASSETS................................................ $43,818 $47,988 ======= ======= LIABILITIES Accounts payable and accrued expenses....................... $ 2,920 $ 3,256 Compensation and benefit-related liabilities................ 1,458 1,783 Debt maturing within one year............................... 1,913 1,343 Other current liabilities................................... 2,274 2,501 ------- ------- TOTAL CURRENT LIABILITIES................................... 8,565 8,883 Long-term debt.............................................. 9,299 13,066 Long-term compensation and benefit-related liabilities...... 3,449 3,528 Deferred income taxes....................................... 5,452 5,395 Other long-term liabilities and deferred credits............ 2,998 3,160 ------- ------- TOTAL LIABILITIES........................................... 29,763 34,032 SHAREOWNERS' EQUITY Common stock, $1 par value, authorized 2,500,000,000 shares; issued and outstanding 794,593,329 shares (net of 171,981,708 treasury shares) at June 30, 2004 791,911,022 shares (net of 172,179,303 treasury shares) at December 31, 2003.................................................. 795 792 Additional paid-in capital.................................. 27,437 27,722 Accumulated deficit......................................... (14,299) (14,707) Accumulated other comprehensive income...................... 122 149 ------- ------- TOTAL SHAREOWNERS' EQUITY................................... 14,055 13,956 ------- ------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $43,818 $47,988 ======= =======
The notes are an integral part of the consolidated financial statements. 2 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, --------------------- 2004 2003 --------- --------- (DOLLARS IN MILLIONS) AT&T COMMON STOCK Balance at beginning of year.............................. $ 792 $ 783 Shares issued under employee plans........................ 2 4 Other..................................................... 1 1 -------- -------- Balance at end of period.................................... 795 788 -------- -------- ADDITIONAL PAID-IN CAPITAL Balance at beginning of year.............................. 27,722 28,163 Shares issued, net: Under employee plans................................... 46 71 Other.................................................. 15 16 Dividends declared..................................... (377) (295) Other.................................................. 31 25 -------- -------- Balance at end of period.................................... 27,437 27,980 -------- -------- ACCUMULATED DEFICIT Balance at beginning of year.............................. (14,707) (16,566) Net income................................................ 412 1,107 Treasury shares issued at less than cost.................. (4) -- -------- -------- Balance at end of period.................................... (14,299) (15,459) -------- -------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance at beginning of year.............................. 149 (68) Other comprehensive (loss) income......................... (27) 42 -------- -------- Balance at end of period.................................... 122 (26) -------- -------- TOTAL SHAREOWNERS' EQUITY................................... $ 14,055 $ 13,283 ======== ======== SUMMARY OF TOTAL COMPREHENSIVE INCOME: Income before cumulative effect of accounting changes..... $ 412 $ 1,065 Cumulative effect of accounting changes................... -- 42 -------- -------- Net income................................................ 412 1,107 Other comprehensive (loss) income......................... (27) 42 -------- -------- TOTAL COMPREHENSIVE INCOME.................................. $ 385 $ 1,149 ======== ========
AT&T accounts for treasury stock as retired stock. The amounts attributable to treasury stock at June 30, 2004 and December 31, 2003, were $(17,014) and $(17,026) million, respectively. We have 100 million authorized shares of preferred stock at $1 par value. The notes are an integral part of the consolidated financial statements. 3 AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, ---------------------- 2004 2003 ---------- --------- (DOLLARS IN MILLIONS) OPERATING ACTIVITIES Net income.................................................. $ 412 $1,107 Deduct: Cumulative effect of accounting change -- net of income taxes.................................................. -- 42 ------- ------ Income before cumulative effect of accounting change........ 412 1,065 Adjustments to reconcile income before cumulative effect of accounting change to net cash provided by operating activities: Net gains on sales of businesses and investments.......... (14) (37) Loss on early extinguishment of debt...................... 274 2 Net restructuring and other charges....................... 226 70 Depreciation and amortization............................. 2,481 2,383 Provision for uncollectible receivables................... 265 406 Deferred income taxes..................................... (181) 376 Net pretax losses related to equity investments........... -- (33) Decrease in receivables................................... 98 140 (Decrease) in accounts payable and accrued expenses....... (189) (308) Net change in other operating assets and liabilities...... (770) 336 Other adjustments, net.................................... (139) (47) ------- ------ NET CASH PROVIDED BY OPERATING ACTIVITIES................... 2,463 4,353 ------- ------ INVESTING ACTIVITIES Capital expenditures and other additions.................... (1,018) (1,629) Proceeds from sale or disposal of property, plant and equipment................................................. 25 23 Investment distributions and sales.......................... 36 101 Net dispositions (acquisitions) of businesses, net of cash disposed/acquired......................................... 8 (158) (Increase) in restricted cash............................... (1) (30) Other investing activities, net............................. 6 (27) ------- ------ NET CASH USED IN INVESTING ACTIVITIES....................... (944) (1,720) ------- ------ FINANCING ACTIVITIES Retirement of long-term debt, including redemption premiums.................................................. (3,210) (4,039) (Decrease) in short-term borrowings, net.................... (195) (1,270) Issuance of AT&T common shares.............................. 33 64 Dividends paid on common stock.............................. (377) (294) Other financing activities, net............................. 336 148 ------- ------ NET CASH USED IN FINANCING ACTIVITIES....................... (3,413) (5,391) ------- ------ Net (decrease) in cash and cash equivalents................. (1,894) (2,758) Cash and cash equivalents at beginning of year.............. 4,353 8,014 ------- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 2,459 $5,256 ======= ======
The notes are an integral part of the consolidated financial statements. 4 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. 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 for the year ended December 31, 2003. We have reclassified certain prior period amounts to conform to our current presentation, including the transfer of our remaining payphone business from the AT&T Consumer Services segment to the AT&T Business Services segment. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AT&T has a Long Term Incentive Program under which we grant stock options, performance shares, restricted stock and other awards in AT&T common stock, as well as an Employee Stock Purchase Plan. Effective January 1, 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," and we began to record stock-based compensation expense for all employee awards (including stock options) granted or modified after January 1, 2003. For awards issued prior to January 1, 2003, we apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our plans. Under APB Opinion No. 25, no compensation expense has been recognized for stock options. If AT&T had elected to recognize compensation costs based on the fair value at the date of grant of all awards granted prior to January 1, 2003, consistent with the provisions of SFAS No. 123, net income and earnings per share amounts would have been as follows:
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, ----------------- ------------------ 2004 2003 2004 2003 ------- ------- ------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net income............................................ $ 108 $ 536 $ 412 $1,107 ADD: Stock-based employee compensation included in reported results, net of income taxes............ 17 24 35 34 DEDUCT: Total stock-based compensation expense determined under the fair value method for all awards, net of income taxes.................................. (45) (61) (96) (109) ----- ----- ----- ------ Pro forma net income................................ $ 80 $ 499 $ 351 $1,032 ===== ===== ===== ====== Basic and diluted earnings per share.................. $0.14 $0.68 $0.52 $ 1.41 Pro forma basic and diluted earnings per share........ $0.10 $0.63 $0.44 $ 1.31
Pro forma stock-based compensation expense reflected above may not be indicative of future compensation expense that may be recorded. Future compensation expense may differ due to various factors, such as the number of awards granted and the market value of such awards at the time of grant. Pro forma income before cumulative effect of accounting change was $80 million and $499 million for the three months ended June 30, 2004 and 2003, respectively, and was $351 million and $990 million for the six months ended June 30, 2004 and 2003, respectively. 5 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Pro forma earnings per basic and diluted share before cumulative effect of accounting change were $0.10 and $0.63 for the three months ended June 30, 2004 and 2003, respectively, and were $0.44 and $1.26 for the six months ended June 30, 2004 and 2003, respectively. For a detailed discussion of significant accounting policies, please refer to AT&T's Form 10-K for the year ended December 31, 2003. 3. SUPPLEMENTARY FINANCIAL INFORMATION SUPPLEMENTARY BALANCE SHEET INFORMATION
AT&T AT&T BUSINESS CONSUMER TOTAL SERVICES SERVICES AT&T -------- -------- ------ (DOLLARS IN MILLIONS) Goodwill: Balance at January 1, 2004............................... $4,731 $70 $4,801 Translation adjustment................................... (17) -- (17) Other.................................................... (3) -- (3) ------ --- ------ Balance at June 30, 2004................................. $4,711 $70 $4,781 ====== === ======
CARRYING ACCUMULATED AMOUNT AMORTIZATION NET -------- ------------ ---- (DOLLARS IN MILLIONS) Amortizable Other Purchased Intangible Assets: Customer lists and relationships......................... $548 $162 $386 Other.................................................... 271 158 113 ---- ---- ---- Balance at December 31, 2003............................. $819 $320 $499 ==== ==== ==== Customer lists and relationships......................... $547 $202 $345 Other.................................................... 271 179 92 ---- ---- ---- Balance at June 30, 2004................................. $818 $381 $437 ==== ==== ====
The amortization expense associated with purchased intangible assets for the three and six months ended June 30, 2004, was $28 million and $61 million, respectively, and for the three and six months ended June 30, 2003, was $17 million and $33 million, respectively. Amortization expense for purchased intangible assets is estimated to be approximately $110 million for each of the years ending December 31, 2004, 2005 and 2006, and $80 million for each of the years ending December 31, 2007 and 2008. In July 2004, we announced a strategic change in our business focus away from traditional consumer services and towards business markets and emerging technologies. As a result of this strategic change, we are in the process of performing an evaluation of our goodwill as we believe this creates a "trigger event" necessitating such a review. We are in the process of determining if the carrying value of any of our reporting units exceeds its fair value ("step 1") under SFAS No. 142, "Goodwill and Other Intangible Assets." If we determine that the carrying value of any of our reporting units exceeds its fair value, we will then perform "step 2", which is to determine if the implied fair value of the reporting unit goodwill is less than the carrying value of this goodwill. If so, a goodwill impairment charge representing the difference between the implied fair value of the reporting unit goodwill and its associated carrying value will be recognized in the third quarter of 2004. 6 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) The strategic change in business focus also creates a "trigger event" for a review of our property, plant and equipment. In assessing impairments we follow the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." If the total of the expected future undiscounted cash flows is less than the carrying value of the asset and/or group of assets, a loss will be recognized for the difference between the fair value and the carrying value of the asset and/or group of assets in the third quarter of 2004. Other Current Assets: Recorded within other current assets as of June 30, 2004, was restricted cash of $503 million relating to private debt that matures in February 2005. This asset had a balance of $499 million at December 31, 2003, and was recorded in other assets. SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION
NET FOREIGN NET REVALUATION NET ACCUMULATED CURRENCY OF CERTAIN MINIMUM OTHER TRANSLATION FINANCIAL PENSION COMPREHENSIVE ADJUSTMENT INSTRUMENTS LIABILITY INCOME ----------- --------------- --------- ------------- (DOLLARS IN MILLIONS) Accumulated other comprehensive income (loss): Balance at January 1, 2004.......... $200 $25 $(76) $149 Change.............................. (19) (8) -- (27) ---- --- ---- ---- Balance at June 30, 2004............ $181 $17 $(76) $122 ==== === ==== ====
FOR THE SIX MONTHS ENDED JUNE 30, ------------ 2004 2003 ---- ----- (DOLLARS IN MILLIONS) Other comprehensive income(loss): Net foreign currency translation adjustment (net of income taxes of $11 and $(80))................................... $(19) $ 128 Net revaluation of certain financial instruments: Unrealized gains (losses)(net of income taxes of $(6) and $(60))................................................. 10 97 Recognition of previously unrealized (gains) losses (net of income taxes of $11 and $110)(1).................... (18) (177) Net minimum pension liability adjustment (net of income taxes of $3 in 2003)...................................... -- (6) ---- ----- Total other comprehensive (loss) income..................... $(27) $ 42 ==== =====
- --------------- (1) See below for a summary of recognition of previously unrealized (gains) losses on available-for-sale securities. 7 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------------- 2004 2003 -------------------- -------------------- PRETAX AFTER-TAXES PRETAX AFTER-TAXES ------ ----------- ------ ----------- Summary of Recognition of Previously Unrealized (Gains) Losses: Other income/expense, net: Sale/exchange of various securities........... $(12) $ (7) $(187) $(115) Other financial instrument activity........... (17) (11) (100) (62) ---- ---- ----- ----- Total recognition of previously unrealized (gains) losses................................ $(29) $(18) $(287) $(177) ==== ==== ===== =====
4. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE Basic earnings per common share (EPS) is computed by dividing income attributable to common shareowners by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution (considering the combined income and share impact) that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The potential issuance of common stock is assumed to occur at the beginning of the year (or at the time of issuance if later), and the incremental shares are included using the treasury stock method. The proceeds utilized in applying the treasury stock method consist of the amount, if any, to be paid upon exercise, the amount of compensation cost attributed to future service not yet recognized, and any tax benefits credited to paid-in-capital related to the exercise. These proceeds are then assumed to be used by AT&T to purchase common stock at the average market price during the period. The incremental shares (difference between the shares assumed to be issued and the shares assumed to be purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. Potentially dilutive securities for all periods presented were stock options and restricted stock units. No adjustments were made to income for the computation of diluted EPS. 5. NET RESTRUCTURING AND OTHER CHARGES Net restructuring and other charges of $54 million for the three months ended June 30, 2004, primarily consisted of business restructuring activities associated with employee separations related to AT&T Business Services. This activity resulted from the continued integration and automation of various functions within network operations, as well as reorganizations throughout our non-U.S. operations. This exit plan impacted approximately 625 employees (more than half of which were involuntary), approximately 35% of whom were managers. Net restructuring and other charges of $267 million for the six months ended June 30, 2004, were comprised of net business restructuring obligations of $145 million and real estate impairment charges of $122 million. The business restructuring activities consisted of $104 million of separation costs and $41 million of facility closing obligations. This exit plan impacted approximately 1,405 employees (the majority of which were involuntary) primarily within the AT&T Business Services segment as a result of integration and automation of various functions within network operations, as well as reorganizations throughout our non-U.S. operations. Slightly less than half of the employees impacted by this exit plan were managers. About 75% of the affected employees had left their positions as of June 30, 2004, with the remaining anticipated to exit our business by the end of the third quarter of 2004. In July 2004, we announced certain strategic changes that are anticipated to have a significant impact on our business. Such changes are anticipated to result in future headcount reductions (see note 12). The $41 million of facility closing reserves are associated with the consolidation of our real estate portfolio and reflect the present value of contractual lease obligations, net of estimated sublease income, 8 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) associated with vacant facilities resulting from workforce reductions and network equipment space that will not be used by AT&T. The real estate impairment charges of $122 million relate to the decision made during the first quarter of 2004 to divest five owned properties in an effort to further reduce costs and consolidate our real estate portfolio. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," an impairment charge was recorded within the Corporate and Other group to reduce the book value of the five properties to fair market value based on third party assessments (including broker appraisals). Two of these properties were sold in June 2004 and one additional property was sold in July 2004. We anticipate sales of the remaining properties will be completed by March 31, 2005. At June 30, 2004, these remaining properties were recorded as assets held-for-sale within other current assets on the balance sheet. The following table displays the activity and balances of the restructuring reserve account:
TYPE OF COST -------------------------------------- EMPLOYEE FACILITY SEPARATIONS CLOSINGS OTHER TOTAL ----------- -------- ----- ----- (DOLLARS IN MILLIONS) Balance at January 1, 2004........................ $ 156 $205 $2 $ 363 Additions....................................... 104 41 -- 145 Deductions...................................... (159) (58) -- (217) ----- ---- -- ----- Balance at June 30, 2004.......................... $ 101 $188 $2 $ 291 ===== ==== == =====
Deductions primarily reflected total cash payments of $185 million. These cash payments include cash termination benefits of $153 million and $32 million of facility closing reserve payments, which were funded primarily through cash from operations. Deductions also include a $26 million non-cash utilization of facility closing reserves. Such activity is reflective of the assignment of certain lease obligations associated with vacated facilities to third parties. Net restructuring and other charges for the three and six months ended June 30, 2003, were $66 million and $70 million, respectively. The year-to-date charge primarily consisted of $66 million recorded in the second quarter, which was comprised of $57 million of separation costs and $9 million of benefit plan curtailment costs associated with our management realignment efforts (impacting approximately 90 senior managers). 6. DEBT OBLIGATIONS LONG-TERM DEBT In March 2004, we completed the early retirement of $1.2 billion of $1.5 billion outstanding 6.5% Notes maturing in November 2006, which carried an interest rate of 7.25% at the time of retirement. The notes were repurchased with cash and resulted in a loss of $157 million recorded in other income (expense), net. In addition, during March 2004, we completed the early retirement of $928 million of our outstanding $1.8 billion 6.0% Euro Notes due November 2006, which carried an interest rate of 6.75% at the time of retirement. The notes were repurchased with cash and resulted in a net loss of $117 million recorded in other income (expense), net. The carrying value of these notes was $1.3 billion, including $0.4 billion in associated foreign currency mark-to-market adjustments. 7. FINANCIAL INSTRUMENTS In the normal course of business, we use various financial instruments, including derivative financial instruments, to manage our market risk associated with changes in interest rates, foreign currency rates and 9 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) equity prices. We do not use financial instruments for trading or speculative purposes. These instruments include letters of credit, guarantees of debt and certain obligations of former affiliates, interest rate swap agreements, foreign currency exchange contracts, option contracts, equity contracts and warrants. GUARANTEES AT&T provided a guarantee of an obligation that AT&T Wireless has to NTT DoCoMo. Under this guarantee, AT&T would have been secondarily liable for up to $3.65 billion, plus accrued interest, in the event AT&T Wireless was unable to satisfy its entire obligation to NTT DoCoMo. AT&T's guarantee expired on June 30, 2004, in accordance with the terms of the original agreement. INTEREST RATE SWAP AGREEMENTS We enter into interest rate swaps to manage our exposure to changes in interest rates. We enter into swap agreements to manage the fixed/floating mix of our debt portfolio in order to reduce aggregate risk of interest rate movements. These agreements involve the exchange of floating-rate for fixed-rate payments or the exchange of fixed-rate for floating-rate payments without the exchange of the underlying notional amount. Floating-rate payments and receipts are primarily tied to LIBOR (London Inter-Bank Offered Rate). The notional amount of our fixed-rate to floating-rate swaps was $750 million as of June 30, 2004, a decline of $250 million from December 31, 2003. This decline reflects the unwind of $250 million notional amount of fixed-to-floating interest rate swaps, which were designated as fair value hedges, in conjunction with the early retirement of $1.2 billion of long-term notes in March 2004 (see note 6). The weighted-average receive rate and pay rate for the outstanding fixed-to-floating interest rate swaps as of June 30, 2004, was 4.83% and 3.42%, respectively. In addition, we have combined interest rate, foreign currency swap agreements for foreign-currency-denominated debt, which hedge our risk to both interest rate and currency movements. As of June 30, 2004, the notional amount and fair value of these contracts were $1.6 billion and $561 million, respectively, compared with $2.5 billion and $1.0 billion, respectively, at December 31, 2003. The decreases in the notional amount and fair value of these agreements were primarily related to $928 million notional amount of combined interest rate foreign currency swap contracts, designated as cash flow hedges, which were unwound in March 2004 in connection with the early retirement of long-term Euro notes in March 2004 (see note 6). As a result of this unwind, we recognized $10 million of unrealized gains as part of the net gain (loss) on the early extinguishment of debt within other income (expense), net. In addition, we returned $50 million of cash collateral that we held at December 31, 2003, in connection with the unwind of these combined interest rate swap agreements. FOREIGN EXCHANGE We enter into foreign currency forward contracts to manage our exposure to changes in currency exchange rates related to foreign-currency-denominated transactions. As of June 30, 2004, the notional amount outstanding on these contracts was $1.7 billion, compared with $1.1 billion as of December 31, 2003. The increase in the notional amount was primarily attributable to an increase in our forward contract portfolio. In addition, in connection with the early retirement of long-term Euro notes in March 2004, we unwound $29 million of foreign currency forward contracts, which managed our exposure to additional interest required to be paid by us as a result of lowered credit ratings. As a result of this unwind, we recognized $6 million of unrealized gains as part of the net gain (loss) on the early extinguishment of debt within other income (expense), net. 10 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) EQUITY OPTION AND EQUITY SWAP CONTRACTS We enter into equity options and equity swap contracts, which are undesignated, to manage our exposure to changes in equity prices associated with various equity awards of previously affiliated companies. The notional amount relating to these contracts was $29 million as of June 30, 2004, compared with $91 million as of December 31, 2003. The decrease in the notional amount was primarily related to swaps on 1.7 million Comcast Corporation shares, which expired during the first quarter of 2004. DEBT SECURITIES As of June 30, 2004, the carrying value of our long-term debt (including currently maturing long-term debt), excluding capital leases, was $10.4 billion, compared with $13.4 billion at December 31, 2003. The market values associated with this debt were $10.5 billion and $14.8 billion as of June 30, 2004 and December 31, 2003, respectively. The decreases in the carrying value and fair value of debt were primarily attributed to early debt repurchases and scheduled repayments made in the first half of 2004. The carrying value of debt with an original maturity of less than one year approximates market value. The fair values of long-term debt were obtained based on quotes for these securities. 8. PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS We sponsor noncontributory defined benefit pension plans covering the majority of our U.S. employees. Our benefit plans for current and certain future retirees include health-care benefits, life insurance coverage and telephone concessions. The following table shows the components of net periodic benefit (credit) costs for our U.S. plans:
POSTRETIREMENT POSTRETIREMENT PENSION BENEFITS BENEFITS PENSION BENEFITS BENEFITS ----------------- --------------- ----------------- --------------- FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30, ----------------------------------- ----------------------------------- 2004 2003 2004 2003 2004 2003 2004 2003 ------- ------- ------ ------ ------- ------- ------ ------ (DOLLARS IN MILLIONS) Service cost -- benefits earned during the period................ $ 55 $ 57 $ 6 $ 7 $ 110 $ 114 $ 12 $ 13 Interest cost on benefit obligations...................... 233 229 90 83 460 470 179 166 Amortization of unrecognized prior service cost..................... 33 38 13 10 65 76 26 19 Credit for expected return on plan assets........................... (363) (359) (44) (36) (719) (719) (88) (69) Amortization of losses............. 1 1 25 19 2 2 50 37 Net curtailment loss*.............. -- 9 -- -- -- 9 -- -- ----- ----- ---- ---- ----- ----- ---- ---- Net period benefit (credit) cost... $ (41) $ (25) $ 90 $ 83 $ (82) $ (48) $179 $166 ===== ===== ==== ==== ===== ===== ==== ====
- --------------- * Included in net restructuring and other charges. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. We are impacted by the Act since we sponsor postretirement health care plans that provide prescription drug benefits. We have elected to defer recognition of the Act in accordance with Financial Accounting Standards Board (FASB) Staff Position ("FSP") No. FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and 11 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Modernization Act of 2003." As a result, any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost do not reflect the effects of the Act on the plans. On May 19, 2004, the FASB issued FSP No. FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." This Staff Position supersedes FSP No. FAS 106-1 and provides guidance on accounting for the effects of the new Medicare prescription drug legislation by employers whose prescription drug benefits are actuarially equivalent to the drug benefit under Medicare Part D. The provisions of FSP No. FAS 106-2 are effective for the first interim or annual period beginning after June 15, 2004, and accordingly, we plan to adopt them effective July 1, 2004. The FSP provides two alternative methods of transition, either retroactive application to the date of enactment or, the method we have selected, prospective application from the date of adoption. Federal regulations for determining actuarial equivalence have not yet been issued in either proposed or final form, which impacts our ability to estimate the full adoption effects of the FSP. Despite the lack of final federal regulations, we believe that the prescription drug benefits provided to a specific portion of our postretirement benefit plan participants would be deemed to be actuarially equivalent to Medicare Part D benefits based on the benefits provided under the plan. The estimated impact upon adoption for this group will be a reduction in the accumulated postretirement benefit obligation of approximately $150 million to $175 million, which will be amortized to income over time as an actuarial gain. In addition, we will realize a reduction in net periodic postretirement benefit cost (recorded within SG&A and costs of services and products) of approximately $10 million over the second half of 2004. Without a firm definition of actuarial equivalence, we are unable to determine if the prescription drug benefits provided to the remaining plan participants are actuarially equivalent to Medicare Part D benefits and are therefore unable to quantify any potential impact at this time. 9. INCOME TAXES During February 2004, the subsidiaries of AT&T Latin America were sold to Telefonos de Mexico S.A. de C.V., or Telmex, and the AT&T Latin America plan of liquidation became effective. As a result, we no longer needed a portion of the valuation allowance established in 2002 attributable to the book and tax basis difference related to our investment in AT&T Latin America, and recorded an income tax benefit of $371 million in the first quarter of 2004. The effective tax rate of (469.0)% in the first half of 2004 was positively impacted by 513.7 percentage points due to this reversal. 10. COMMITMENTS AND CONTINGENCIES In the normal course of business we are subject to proceedings, lawsuits and other claims, including proceedings under laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at June 30, 2004. However, if these matters are adversely settled, such amounts could be material to our consolidated financial statements. We have been named as a defendant in a consolidated group of purported securities class action lawsuits filed in the United States District Courts for the District of New Jersey on behalf of persons who purchased shares of AT&T common stock from October 25, 1999 through May 1, 2000. These lawsuits allege, among other things, that during the period referenced above, we made materially false and misleading statements and omitted to state material facts concerning our future business prospects. The consolidated complaint seeks unspecified damages. Similar claims have been asserted by plaintiffs against us in two derivative actions, which were dismissed by the New Jersey federal court on January 7, 2004. In early June 2004, the court granted AT&T's motion for summary judgment (in part) in these cases and dismissed a substantial portion of this case by narrowing the class period and rejecting a number of the allegations upon which plaintiffs 12 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) complaint was based. We believe that the remaining complaints are without merit and intend to defend them vigorously. On April 21, 2004, the Federal Communications Commission (FCC) ruled against a petition we filed in October 2002, in which we asked the FCC to confirm that our long distance phone-to-phone Internet Protocol (IP) telephony services are exempt from terminating access charges and lawfully terminated over end user local services. The total interstate and intrastate access savings we obtained on AT&T long distance phone-to-phone IP telephony services since the first quarter of 2000 through the date of the ruling was approximately $250 million. As a result of this ruling, we began paying terminating access charges on long distance phone-to-phone IP telephony calls. The FCC did not make any determination regarding the appropriateness of retroactive application of its ruling. The FCC left the matter to be decided on a fact specific, case-by-case basis. On April 22, 2004, SBC Communications, Inc. (SBC) filed suit against us in federal district court in Missouri seeking recovery of an estimated $141 million in interstate and intrastate access charges that SBC alleges AT&T avoided by delivering long distance calls to SBC for termination over SBC local facilities, together with interest and punitive damages. In addition, on May 5, 2004, Qwest Corporation filed a similar complaint against AT&T in federal district court in Colorado seeking "tens of millions of dollars in access charges." While no additional lawsuits have been filed, other incumbent local exchange carriers may assert similar claims. We believe that we have a number of defenses to these claims and intend to defend against them vigorously. Another petition that is pending before the FCC relates to enhanced prepaid card service. Because of the nature of our enhanced prepaid card service (consisting first of a call to our prepaid card platform where the customer interacts with advertising content and then a second call from the platform to the called party), we pay access charges on the call to the enhanced prepaid card platform and on the call from the enhanced prepaid card platform based on the jurisdiction of each call. This does not impact the amount of access charges we pay on enhanced prepaid card calls when the persons communicating are in different states from each other and from the enhanced platform, but generally results in lower access charges when the persons are both in the same state and the enhanced platform is in a different state. In addition, because our prepaid card calls are offered as an enhanced service, we do not make Universal Service Fund (USF) contributions on revenue derived from these calls. Given that we cannot predict with certainty how the FCC will rule on our petition, and the FCC's recent decision to decline to address issues of retroactivity in the case of phone-to-phone IP, it should be noted that the current classification of AT&T's enhanced prepaid card service has generated approximately $290 million in access savings since the third quarter of 2002, and approximately $150 million in USF contribution savings since the beginning of 1999, compared with the cost that would have been incurred by a basic prepaid card offering. Since these savings have permitted us to sell prepaid cards to consumers and distributors at prices below what otherwise would have been possible, an adverse ruling by the FCC on the prepaid card petition would therefore increase the future cost of providing prepaid cards and may materially adversely affect future sales of prepaid cards, as well as potentially exposing us to retroactive liability, penalties and interest. In March 2004, the United States Court of Appeals for the District of Columbia vacated a number of recent FCC rulings made in connection with the Triennial Review Order, including the FCC's delegation to state commissions of decisions over impairment as applied to mass market switching and certain transport elements. That decision was stayed until June 16, 2004. On June 4, 2004, the Court of Appeals announced it would not extend that stay. On June 9, 2004, the Office of the Solicitor General informed the FCC that it had decided not to appeal the D.C. Circuit decision vacating the FCC's local telephone unbundling rules. On July 22, 2004, AT&T announced that we will be shifting our focus away from traditional consumer services, and we will no longer be investing to acquire new residential local and stand-alone long distance customers (see note 12). 13 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 11. SEGMENT REPORTING Our results are segmented according to the customers we service: AT&T Business Services and AT&T Consumer Services. Our existing segments reflect certain managerial changes that were implemented during 2004. We transferred our remaining payphone business from AT&T Consumer Services to AT&T Business Services. AT&T Business Services provides a variety of communication services to various sized businesses and government agencies including long distance, international, toll-free and local voice, including wholesale transport services, as well as data services and Internet protocol and enhanced (IP&E) services, which includes the management of network servers and applications. AT&T Business Services also provides outsourcing solutions and other professional services. AT&T Consumer Services provides a variety of communication services to residential customers. These services include traditional long distance voice services, such as domestic and international dial services (long distance or local toll calls where the number "1" is dialed before the call) and calling card services. Transaction services, such as prepaid card and operator-assisted calls, are also offered. Collectively, these services represent stand-alone long distance and are not offered in conjunction with any other service. AT&T Consumer Services also provides dial-up Internet services and all distance services, which bundle long distance, local and local toll. The balance of AT&T's operations is included in a "Corporate and Other" group. This group primarily reflects corporate staff functions and the elimination of transactions between segments. Total assets for our reportable segments include all assets, except intercompany receivables. Nearly all prepaid pension assets, taxes and corporate-owned or leased real estate are held at the corporate level and therefore are included in the Corporate and Other group. Capital additions for each segment include capital expenditures for property, plant and equipment, additions to internal-use software (which are included in other assets) and additions to nonconsolidated investments. Generally, AT&T accounts for inter-segment transactions at market prices. AT&T Business Services sells services to AT&T Consumer Services at cost-based prices, which approximate average market prices. These sales are recorded by AT&T Business Services as contra-expense. 14 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) REVENUE
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, --------------- ----------------- 2004 2003 2004 2003 ------ ------ ------- ------- (DOLLARS IN MILLIONS) AT&T Business Services Long distance voice services................... $2,386 $2,895 $ 4,999 $ 5,878 Local voice services........................... 404 384 793 719 ------ ------ ------- ------- Total voice services........................... 2,790 3,279 5,792 6,597 Data services.................................. 1,690 1,943 3,405 3,899 IP&E services.................................. 565 509 1,118 998 ------ ------ ------- ------- Total data and IP&E services................... 2,255 2,452 4,523 4,897 Outsourcing, professional and other services... 566 697 1,168 1,393 ------ ------ ------- ------- Total AT&T Business Services..................... 5,611 6,428 11,483 12,887 AT&T Consumer Services Stand-alone long distance voice and other services.................................... 1,327 1,894 2,789 3,984 Bundled services............................... 684 460 1,329 884 ------ ------ ------- ------- Total AT&T Consumer Services..................... 2,011 2,354 4,118 4,868 ------ ------ ------- ------- Total reportable segments........................ 7,622 8,782 15,601 17,755 ------ ------ ------- ------- Corporate and Other.............................. 14 13 25 26 ------ ------ ------- ------- Total revenue.................................... $7,636 $8,795 $15,626 $17,781 ====== ====== ======= =======
RECONCILIATION OF OPERATING INCOME TO INCOME BEFORE INCOME TAXES, MINORITY INTEREST INCOME, NET EARNINGS RELATED TO EQUITY INVESTMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, ------------- ------------- 2004 2003 2004 2003 ---- ------ ---- ------ (DOLLARS IN MILLIONS) AT&T Business Services................................ $152 $ 601 $235 $1,200 AT&T Consumer Services................................ 240 485 611 1,118 ---- ------ ---- ------ Total reportable segments........................... 392 1,086 846 2,318 Corporate and Other................................... (44) (57) (217) (123) ---- ------ ---- ------ Operating income...................................... 348 1,029 629 2,195 Other income (expense), net........................... 36 86 (138) 96 Interest (expense).................................... (191) (296) (419) (628) ---- ------ ---- ------ Income before income taxes, minority interest income, net earnings related to equity investments and cumulative effect of accounting change.............. $193 $ 819 $ 72 $1,663 ==== ====== ==== ======
15 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) ASSETS
AT AT JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ (DOLLARS IN MILLIONS) AT&T Business Services...................................... $32,468 $34,202 AT&T Consumer Services...................................... 885 1,062 ------- ------- Total reportable segments................................. 33,353 35,264 Corporate and Other*........................................ 10,465 12,724 ------- ------- Total assets................................................ $43,818 $47,988 ======= =======
- --------------- * Includes cash of $2.1 billion at June 30, 2004, and $4.0 billion at December 31, 2003. CAPITAL ADDITIONS
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, ------------- ------------- 2004 2003 2004 2003 ----- ----- ---- ------ (DOLLARS IN MILLIONS) AT&T Business Services................................. $463 $763 $933 $1,401 AT&T Consumer Services................................. 15 19 28 41 ---- ---- ---- ------ Total reportable segments............................ 478 782 961 1,442 Corporate and Other.................................... 2 8 4 12 ---- ---- ---- ------ Total capital additions................................ $480 $790 $965 $1,454 ==== ==== ==== ======
GEOGRAPHIC INFORMATION
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, --------------- ----------------- 2004 2003 2004 2003 ------ ------ ------- ------- (DOLLARS IN MILLIONS) Revenue(l) United States(2)................................. $7,242 $8,407 $14,851 $17,009 International.................................... 394 388 775 772 ------ ------ ------- ------- Total revenue.................................... $7,636 $8,795 $15,626 $17,781 ====== ====== ======= =======
AT AT JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ (DOLLARS IN MILLIONS) Long-Lived Assets(3) United States(2)............................................ $26,195 $27,758 International............................................... 1,856 1,918 ------- ------- Total long-lived assets..................................... $28,051 $29,676 ======= =======
- --------------- (1) Revenue is reported in the geographic area in which it originates. (2) Includes amounts attributable to operations in Puerto Rico and the Virgin Islands. (3) Long-lived assets include property, plant and equipment, net, goodwill and other purchased intangibles, net. 16 AT&T CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Reflecting the dynamics of our business, we continually review our management model and structure, which may result in additional adjustments to our operating segments in the future. 12. SUBSEQUENT EVENTS On July 22, 2004, we announced that as a result of recent changes in regulatory policy governing local telephone service, we will be shifting our focus away from traditional consumer services, and we will no longer be investing to acquire new residential local and stand-alone long distance customers. We plan to concentrate our investments going forward on business markets and emerging technologies. In July 2004, Moody's and Fitch lowered our long-term credit ratings to Ba1 and BB+, respectively, and lowered our short-term credit and commercial paper ratings to NP (not prime) and B, respectively. In August 2004, Standard & Poor's (S&P) lowered our long-term credit rating to BB+ and lowered our short-term credit and commercial paper rating to B. The rating actions by Moody's and S&P triggered a 100 basis point interest rate step-up on approximately $6.5 billion in notional amount of debt net of foreign currency hedge offsets. This step-up is effective for interest payment periods that will begin after November 2004, resulting in an expected increase in interest expense of approximately $10 million in 2004 and $70 million in 2005. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AT&T CORP. AND SUBSIDIARIES FORWARD-LOOKING STATEMENTS This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies, capital and other expenditures, competitive positions, availability of capital, growth opportunities for new and existing products, benefits from new technologies, availability and deployment of new technologies, plans and objectives of management, and other matters. Statements in this document that are not historical facts are hereby identified as "forward-looking statements" for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "estimate," "project," "intend," "expect," "believe," "plan," and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or Form 8-K of AT&T may include forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made by or on behalf of AT&T, including with respect to the matters referred to above. These forward-looking statements are necessarily estimates, reflecting the best judgment of senior management that rely on a number of assumptions concerning future events, many of which are outside of our control, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this document. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation: - the impact of existing, new and restructured competitors in the markets in which we compete, including competitors that may offer less expensive products and services, desirable or innovative products, technological substitutes, or have extensive resources or better financing, - the impact of oversupply of capacity resulting from excessive deployment of network capacity, - the ongoing global and domestic trend toward consolidation in the telecommunications industry, which may have the effect of making the competitors of these entities larger and better financed and afford these competitors with extensive resources and greater geographic reach, allowing them to compete more effectively, - the effects of vigorous competition in the markets in which we operate, which may decrease prices charged and change customer mix and profitability, - the ability to establish a significant market presence in new geographic and service markets, - the availability and cost of capital, - the impact of any unusual items resulting from ongoing evaluations of our business strategies, - the requirements imposed on us or latitude allowed to competitors by the Federal Communications Commission (FCC) or state regulatory commissions under the Telecommunications Act or other applicable laws and regulations, - the effects of our announcement that we will stop investing in traditional consumer services and will no longer compete for residential local and stand-alone long distance customers, - the validity or invalidity of portions of the FCC's Triennial Review Order, and the Office of the Solicitor General's decision not to appeal the United States Court of Appeals for the District of Columbia's action to vacate various related FCC rulings, 18 - the risks associated with technological requirements; wireless, internet, Voice over Internet Protocol (VoIP) or other technology substitution and changes; and other technological developments, - the risks associated with the repurchase by us of debt or equity securities, which may adversely affect our liquidity or creditworthiness, - the results of litigation filed or to be filed against us, and - the possibility of one or more of the markets in which we compete being impacted by changes in political, economic or other factors, such as monetary policy, legal and regulatory changes, war, terrorism or other external factors over which we have no control. The discussion and analysis that follows provides information management believes is relevant to an assessment and understanding of AT&T's consolidated results of operations for the three and six months ended June 30, 2004 and 2003, and financial condition as of June 30, 2004 and December 31, 2003. OVERVIEW AT&T Corp. (AT&T) is among the world's communications leaders, providing voice and data communications services to large and small businesses, consumers and government agencies. We provide domestic and international long distance, regional and local communications services, data and Internet communications services. Our operating environment in 2004 remains competitive and challenging. During the first half of 2004, we continued to see the effects of industry oversupply and the associated impacts on pricing behavior in the business marketplace. Recent escalation in competitive pricing continued to drive down the average price per minute in both the retail and wholesale long distance voice businesses. This, coupled with a continued mix shift from higher priced retail minutes to lower priced wholesale minutes, will persist in pressuring AT&T Business Services revenue and margin performance. Similarly, data services revenue continues to be negatively impacted by competitive pricing pressure and weak demand, primarily in bandwidth and packet services. As a result, we expect the full year revenue decline for AT&T Business Services will exceed our previously forecasted decline of 4% to 7%. AT&T Consumer Services also continues to be negatively impacted by competition and substitution (consumers using wireless or Internet services in lieu of a wireline call). Additionally, while we have experienced some success with our bundled offers, recent regulatory developments have resulted in the reassessment of our consumer acquisition initiatives as discussed below, and while we will continue to provide our existing customers with quality service, we will no longer invest to acquire new customers. We have projected that AT&T Consumer Services will experience a high-teens rate of revenue decline compared with 2003. We expect operating margins for AT&T Consumer Services to be in the mid-teens. As a result of the weakness in both AT&T Business Services and AT&T Consumer Services, we expect total company revenue to be between $29.5 billion and $30.5 billion in 2004, and expect full-year 2004 consolidated operating income between $1.0 billion and $1.4 billion (excluding net restructuring and other charges). Despite the operating environment, we remain focused on controlling our costs and have made substantial progress in areas such as headcount reductions. We are continuing to invest in our business prudently, focusing on making the necessary investments in automation and process improvements. We expect to have approximately $1.8 billion in capital expenditures for 2004. We have continued to reduce debt levels and we believe the strength of our balance sheet will continue to provide us with the flexibility to make investments in our business. However, recent changes in regulatory policy governing local service have forced us to reassess the way we do business. As a result, in July 2004, we announced that we will be shifting our focus away from traditional consumer services such as wireline residential services, and we will no longer be investing to acquire new residential local and stand-alone long distance customers. We plan to concentrate our investments going forward on business markets and emerging technologies. 19 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of the critical accounting estimates we identified that we believe require significant judgment in the preparation of our consolidated financial statements, please refer to AT&T's Form 10-K for the year ended December 31, 2003. CONSOLIDATED RESULTS OF OPERATIONS REVENUE
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, --------------- ----------------- 2004 2003 2004 2003 ------ ------ ------- ------- (DOLLARS IN MILLIONS) AT&T Business Services........................... $5,611 $6,428 $11,483 $12,887 AT&T Consumer Services........................... 2,011 2,354 4,118 4,868 Corporate and Other.............................. 14 13 25 26 ------ ------ ------- ------- Total revenue.................................... $7,636 $8,795 $15,626 $17,781 ====== ====== ======= =======
Total REVENUE decreased $1.2 billion, or 13.2%, in the second quarter of 2004, and decreased $2.2 billion, or 12.1%, in the first half of 2004, compared with the same periods in 2003. The decreases were primarily driven by continued declines in stand-alone long distance voice revenue of approximately $1.1 billion in the second quarter of 2004, and $2.0 billion in the first half of 2004, compared with the same periods in 2003. These declines are reflective of increased competition, which has led to lower prices and loss of market share, a decline in business retail volumes, the impact of substitution, and consumer migration to lower priced products and calling plans. The decline in stand-alone long distance voice revenue was partially offset by strength in business wholesale volumes. Total long distance voice volumes (including long distance volumes sold as part of a bundled product) decreased approximately 4% for the second quarter of 2004 and approximately 3% for the six months ended June 30, 2004, compared with the respective periods in 2003, primarily due to declines in business retail and consumer long distance volumes, partially offset by growth in lower-priced business wholesale. Also contributing to the revenue decline was lower data services revenue of $0.2 billion in the second quarter of 2004, and $0.4 billion in the six months ended June 30, 2004, compared with the respective periods in 2003, resulting from pricing pressure coupled with competitive losses and weak demand. Partially offsetting the declines in stand-alone long distance voice and data revenue was an increase in bundled services revenue (primarily local and long distance voice) at AT&T Consumer Services of $0.2 billion in the second quarter of 2004, and $0.4 billion in the first half of 2004 compared with the same periods in 2003, resulting from continued subscriber growth. Revenue by segment is discussed in greater detail in the Segment Results section. 20 OPERATING EXPENSES
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, --------------- ----------------- 2004 2003 2004 2003 ------ ------ ------- ------- (DOLLARS IN MILLIONS) Access and other connection...................... $2,481 $2,708 $ 5,119 $ 5,406 Costs of services and products................... 1,759 1,958 3,623 3,969 Selling, general and administrative.............. 1,763 1,837 3,507 3,758 Depreciation and amortization.................... 1,231 1,197 2,481 2,383 Net restructuring and other charges.............. 54 66 267 70 ------ ------ ------- ------- Total operating expenses......................... $7,288 $7,766 $14,997 $15,586 ====== ====== ======= ======= Operating income................................. $ 348 $1,029 $ 629 $ 2,195 Operating margin................................. 4.6% 11.7% 4.0% 12.3%
Included within ACCESS AND OTHER CONNECTION EXPENSES are costs we pay to connect calls using the facilities of other service providers, as well as the Universal Service Fund contributions and per-line charges mandated by the FCC. We pay domestic access charges to local exchange carriers to complete long distance calls carried across the AT&T network and terminated on a local exchange carrier's network. We also pay local connectivity charges for leasing components of local exchange carrier networks in order to provide local service to our customers. International connection charges paid to telephone companies outside of the United States to connect international calls are also included within access and other connection expenses. Universal Service Fund contributions are charged to all telecommunications carriers by the FCC based on a percentage of state-to-state and international services revenue to provide affordable services to eligible customers. In addition, the FCC assesses charges on a per-line basis. Since most of the Universal Service Fund contributions and per-line charges are passed through to the customer, a reduction in these expenses generally results in a corresponding reduction in revenue. Access and other connection expenses decreased $0.2 billion, or 8.4%, in the second quarter of 2004 and declined $0.3 billion, or 5.3%, for the first half of 2004, compared with the same periods of 2003. Domestic access charges declined $0.3 billion for the second quarter, primarily due to lower volumes, lower Universal Service Fund contributions resulting from the decline in long distance revenue, as well as changes in product mix (including whether calls are interstate versus intrastate). Also contributing to the quarterly decline were lower rates, including the impact of settlements, resulting in part from a greater proportion of calls that have non-access incurring terminations (such as when a call terminates over our own network or over a leased line), as well as from rate negotiations and more efficient network usage. Domestic access charges fell $0.5 billion for the year-to-date period, primarily due to changes in product mix, lower rates and more efficient network usage, as well as lower Universal Service Fund contributions and reduced volumes. The quarterly and year-to-date declines in domestic access charges were partially offset by increases in local connectivity costs of $0.1 billion for the quarter and $0.2 billion for the first half of 2004, primarily as a result of subscriber increases due to new state entries and increased penetration into existing states. COSTS OF SERVICES AND PRODUCTS include the costs of operating and maintaining our networks, the provision for uncollectible receivables and other service-related costs, including cost of equipment sold. Costs of services and products decreased $0.2 billion, or 10.2%, in the second quarter of 2004 and declined $0.3 billion, or 8.7%, in the first six months of 2004, compared with the comparable prior year periods. The declines were primarily driven by the overall impact of lower revenue and related costs, including cost cutting initiatives. Also contributing to the decline was a lower provision for uncollectible receivables resulting from improved collections and lower revenue. Partially offsetting this decline was the impact of a weak U.S. dollar. 21 SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES decreased $0.1 billion, or 4.1%, in the second quarter of 2004 and declined $0.3 million, or 6.7%, in the first six months of 2004 compared with the comparable prior year periods. The decline was primarily attributable to cost control efforts throughout AT&T, as well as reduced customer care volumes at AT&T Consumer Services resulting from a reduction in the number of residential customers. Cost control efforts included headcount reductions as well as continued process improvements. These declines were partially offset by increased advertising and marketing spending on new initiatives, primarily on our Voice over Internet Protocol (VoIP) offering. DEPRECIATION AND AMORTIZATION EXPENSES increased $34 million, or 2.9%, in the second quarter of 2004 and rose $0.1 billion, or 4.1%, in the first six months of 2004 compared with same periods in 2003. These increases were primarily due to a higher asset base, which includes a greater proportion of shorter-lived assets. In addition, higher asset impairments during 2004 contributed to the increase in depreciation and amortization expenses. Capital expenditures were $0.5 billion and $0.8 billion for the three months ended June 30, 2004 and 2003, respectively, and were $1.0 billion and $1.5 billion for the six months ended June 30, 2004 and 2003, respectively. We continue to focus the majority of our capital spending on our advanced services offerings of Internet protocol and enhanced (IP&E) services and data services, both of which include managed services, as well as business local voice services. In the second quarter of 2004, NET RESTRUCTURING AND OTHER CHARGES of $54 million were primarily comprised of business restructuring obligations associated with employee separations. This activity resulted from the continued integration and automation of various functions within network operations, as well as reorganizations throughout our non-U.S. operations. This exit plan impacted about 625 employees (more than half of which were involuntary), approximately 35% of whom were managers. Obligations in the amount of $52 million were recorded in AT&T Business Services and $2 million in the Corporate and Other group. Net restructuring and other charges of $267 million for the six months ended June 30, 2004, were comprised of net business restructuring obligations of $145 million and real estate impairment charges of $122 million. The business restructuring activities consisted of $104 million of separation costs and $41 million of facility closing obligations. This exit plan impacted approximately 1,405 employees (the majority of which were involuntary) primarily within the AT&T Business Services segment as a result of integration and automation of various functions within network operations, as well as reorganizations throughout our non-U.S. operations. Slightly less than half of the employees associated with this exit plan were managers. About 75% of the affected employees had left their positions as of June 30, 2004, with the remaining anticipated to exit our business by the end of the third quarter of 2004. The $41 million of facility closing reserves are associated with the consolidation of our real estate portfolio and reflect the present value of contractual lease obligations, net of estimated sublease income, associated with vacant facilities resulting from workforce reductions and network equipment space that will not be used by AT&T. These exit plans are not expected to yield cash savings (net of severance benefit payouts) or a benefit to operating income (net of the restructuring charge recorded) in 2004; however, we expect to realize roughly $140 million of annual cash savings and benefit to operating income in subsequent years, upon completion of the exit plans. The real estate impairment charges of $122 million related to the decision made during the first quarter of 2004 to divest five owned properties in an effort to further reduce costs and consolidate our real estate portfolio. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," an impairment charge was recorded within the Corporate and Other group to reduce the book value of the five properties to fair market value based on third party assessments (including broker appraisals). Two of these properties were sold in June 2004 and one additional property was sold in July 2004. We anticipate the sales of the remaining properties will be completed by March 31, 2005. At June 30, 2004, these remaining properties were recorded as assets held-for-sale within other current assets on the balance sheet. Net restructuring and other charges for the three and six months ended June 30, 2003, were $66 million and $70 million, respectively. The year-to-date charge primarily consisted of $66 million recorded in the second quarter, which was comprised of $57 million of separation costs and $9 million of benefit plan 22 curtailment costs associated with our management realignment efforts (impacting approximately 90 senior managers). OPERATING INCOME decreased $0.7 billion, or 66.2%, in the second quarter of 2004 and declined $1.6 billion, or 71.4%, in the first half of 2004, compared with the same periods in 2003. OPERATING MARGIN was 4.6% in the second quarter of 2004 compared with 11.7% in the second quarter of 2003 and 4.0% in the first half of 2004, compared with 12.3% in the first half of 2003. The margin declines were primarily due to decreased revenue coupled with a slower rate of decline in operating expenses. This reflected pricing pressures, substitution and a shift from higher-margin business retail voice and data services and residential long distance services to lower-margin services, including advanced services and business wholesale. Higher net restructuring and other charges also contributed to the year-to-date decline.
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, -------------- ------------ 2004 2003 2004 2003 ----- ----- ----- ---- (DOLLARS IN MILLIONS) Other income (expense), net.............................. $36 $86 $(138) $96
OTHER INCOME (EXPENSE), NET, in the second quarter of 2004 was $36 million compared with $0.1 billion in the second quarter of 2003. The unfavorable variance of $50 million was primarily due to lower investment related income and lower net gains on sales of businesses and investments, primarily the sale of Time Warner Telecom stock in the second quarter of 2003. Other income (expense), net, in the first half of 2004 was expense of $0.1 billion compared with income of $0.1 billion in the first half of 2003. The unfavorable variance can be primarily attributed to $0.3 billion of losses on the early repurchase of long-term debt in the first half of 2004. In the first half of 2003, debt was also early repurchased. However, a $0.2 billion loss associated with the early retirement of long-term debt was offset by a $0.2 billion gain associated with the early retirement of exchangeable notes that were indexed to AT&T Wireless common stock. Also, in 2004, investment related income and net gains on sales of businesses and investments declined $0.1 billion, compared with the first half of 2003. Partially offsetting these unfavorable variances was a $0.1 billion write-down in 2003 of the residual value of certain aircraft as a result of financial difficulties in the airline industry. Further contributing to the offset were settlements, in the first half of 2004, associated with businesses previously disposed. We continue to hold $0.6 billion of investments in leveraged leases, including leases of commercial aircraft, which we lease to domestic airlines as well as to aircraft related companies. Should the financial difficulties in the U.S. airline industry lead to further bankruptcies or lease restructurings, we could record additional losses associated with our aircraft lease portfolio. In addition, in the event of bankruptcy or renegotiation of lease terms, if any portion of the non-recourse debt is canceled, such amounts would result in taxable income to AT&T and accordingly a cash tax expense.
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, ------------- ------------- 2004 2003 2004 2003 ----- ----- ----- ----- (DOLLARS IN MILLIONS) Interest (expense)................................. $(191) $(296) $(419) $(628)
INTEREST (EXPENSE) decreased 35.3%, or $0.1 billion, in the second quarter of 2004 compared with the second quarter of 2003, and decreased 33.2%, or $0.2 billion, in the first half of 2004 compared with the first 23 half of 2003. The declines are reflective of our continuing deleveraging activities, which included significant early debt redemptions in 2003 and 2004.
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, ------------- --------------- 2004 2003 2004 2003 ----- ----- ------- ----- (DOLLARS IN MILLIONS) (Provision) benefit for income taxes.............. $ (87) $(308) $ 339 $(605) Effective tax rate................................ 44.4% 37.7% (469.0)% 36.4%
The EFFECTIVE TAX RATE is the provision for income taxes as a percentage of income before income taxes. The effective tax rate in the second quarter of 2004 was negatively impacted by a catch-up effect resulting from an increase in the estimated annual 2004 effective tax rate as a result of lower projected annual income before income taxes relative to our estimated permanent differences. The effective tax rate in the first half of 2004 was positively impacted by 513.7 percentage points due to the reversal of a portion of the valuation allowance we recognized in 2002 attributable to the book and tax basis difference related to our investment in AT&T Latin America. During February 2004, the subsidiaries of AT&T Latin America were sold to Telefonos de Mexico S.A. de C.V., or Telmex, and the AT&T Latin America plan of liquidation became effective. As a result, we no longer needed a portion of the valuation allowance and recorded an income tax benefit of $0.4 billion in the first quarter of 2004. As we continue to assess developments in our tax position, additional federal tax benefits may be recorded for all or a portion of the remaining AT&T Latin America tax benefit of $40 million not recognized. The effective tax rate in the first half of 2003 was positively impacted by 2.4 percentage points due to the recognition of tax benefits recorded in connection with the exchange and sale of our remaining interest in AT&T Wireless common stock.
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, -------------- ------------- 2004 2003 2004 2003 ----- ----- ----- ---- (DOLLARS IN MILLIONS) Cumulative effect of accounting change.................... $ -- $ -- $ -- $42
Effective January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," resulting in $42 million of income, net of income taxes of $26 million, as the CUMULATIVE EFFECT of this accounting principle. This standard requires that obligations that are legally enforceable and unavoidable, and are associated with the retirement of tangible long-lived assets, be recorded as liabilities when those obligations are incurred, with the amount of the liability initially measured at fair value. We historically included in our group depreciation rates an amount related to the cost of removal for certain assets. However, such amounts are not legally enforceable or unavoidable; therefore, the cumulative effect impact primarily reflects the reversal of such amounts accrued in accumulated depreciation. SEGMENT RESULTS Our results are segmented according to the customers we service: AT&T Business Services and AT&T Consumer Services. The balance of our continuing operations is included in a Corporate and Other group. This group primarily reflects corporate staff functions and the elimination of transactions between segments. The discussion of segment results includes revenue, operating income, capital additions and total assets. Operating income is the primary measure used by our chief operating decision makers to measure our operating results and to measure segment profitability and performance. See note 11 to our consolidated financial statements for a reconciliation of segment results to consolidated results. Total assets for each segment include all assets, except intercompany receivables. Nearly all prepaid pension assets, taxes and corporate-owned or leased real estate are held at the corporate level, and therefore are included in the Corporate and Other group. Capital additions for each segment include capital 24 expenditures for property, plant and equipment, additions to internal-use software and additions to nonconsolidated investments. Our existing segments reflect certain managerial changes that were implemented during 2004. We transferred our remaining payphone business from AT&T Consumer Services to AT&T Business Services. Reflecting the dynamics of our business, we continuously review our management model and structure, which may result in additional adjustments to our operating segments in the future. AT&T BUSINESS SERVICES AT&T Business Services provides a variety of global communications services to small and medium-sized businesses, large domestic and multinational businesses and government agencies. These services include long distance, international, toll-free and local voice, including wholesale transport services (sales of services to service resellers), as well as data services and Internet protocol and enhanced (IP&E) services, which includes the management of network servers and applications. AT&T Business Services also provides outsourcing solutions and other professional services.
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, --------------- ----------------- 2004 2003 2004 2003 ------ ------ ------- ------- (DOLLARS IN MILLIONS) Revenue(1) Long distance voice services................... $2,386 $2,895 $ 4,999 $ 5,878 Local voice services........................... 404 384 793 719 ------ ------ ------- ------- Total voice services............................. 2,790 3,279 5,792 6,597 Data services.................................. 1,690 1,943 3,405 3,899 IP&E services.................................. 565 509 1,118 998 ------ ------ ------- ------- Total data and IP&E services(2).................. 2,255 2,452 4,523 4,897 Outsourcing, professional and other services..... 566 697 1,168 1,393 ------ ------ ------- ------- Total revenue.................................... $5,611 $6,428 $11,483 $12,887 Operating income................................. $ 152 $ 601 $ 235 $ 1,200 Capital additions................................ $ 463 $ 763 $ 933 $ 1,401
AT AT JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ (DOLLARS IN MILLIONS) Total assets................................................ $32,468 $34,202
- --------------- (1) Revenue includes equipment and product sales of $64 million and $70 million for the three months ended June 30, 2004 and 2003, respectively, and $138 and $140 for the six months ended June 30, 2004 and 2003, respectively. (2) Prior to June 30, 2004, data services revenue included all international managed services. Effective June 30, 2004, international managed services revenue was divided into data services and IP&E services, consistent with the classifications of domestic managed services. As a result, data services revenue and IP&E services revenue for prior periods have been restated to reflect this reclassification. Such reclassification had no impact on total data and IP&E services revenue, or total revenue. Adjusted for this reclassification, data services revenue for the three months ended March 31, 2004, December 31, 2003, September 30, 2003 and March 31, 2003, was $1,715 million, $1,847 million, $1,874 million and $1,956 million, respectively; and IP&E services revenue for the same periods was $553 million, $554 million, $550 million and $489 million, respectively. 25 REVENUE AT&T Business Services revenue decreased $0.8 billion, or 12.7%, in the second quarter of 2004 and $1.4 billion, or 10.9%, in the first half of 2004, compared with the same prior year periods. Long distance voice revenue in the second quarter of 2004 declined $0.5 billion, or 17.6%, and declined $0.9 billion, or 15.0%, in the first half of 2004, compared with the same prior year periods. The declines were driven by a decrease in the average price per minute in both the retail and wholesale businesses combined with a decline in retail volumes, primarily due to the impacts of competition and substitution. Partially offsetting these declines was an increase in lower-priced wholesale minutes. Total long distance volumes were flat in the second quarter of 2004 and grew about 1% in the first half of 2004, compared with the same prior year periods. Data services revenue for the second quarter of 2004 declined 13.0%, or $0.3 billion, compared with the second quarter of 2003, and declined 12.7%, or $0.5 billion, for the six months ended June 30, 2004, compared with the six months ended June 30, 2003. These declines were primarily driven by competitive pricing pressure and weak demand, primarily in bandwidth and packet services. The decrease is reflective of a rise in cancellations of private line and packet services, as customers continue to evaluate the overall efficiency and effectiveness of their own networks (network grooming), combined with the migration to more cost-effective and technologically advanced IP&E services. Excluding equipment and product sales, data services revenue declined 13.3% in the second quarter of 2004 and decreased 12.9% in the six months ended June 30, 2004, compared with the comparable prior year periods. Outsourcing, professional and other services revenue decreased $0.1 billion, or 18.9%, in the second quarter of 2004 compared with the second quarter of 2003. For the six months ended June 30, 2004, outsourcing, professional and other services revenue decreased $0.2 billion, or 16.2%, compared with the six months ended June 30, 2003. The decrease in both periods was due to contract terminations and renegotiations. Excluding equipment and product sales, outsourcing, professional and other services revenue declined 19.2% in the second quarter of 2004, and decreased 16.7% in the six months ended June 30, 2004, compared with the comparable prior year periods. IP&E services revenue increased $56 million, or 11.3%, in the second quarter of 2004, and increased $0.1 billion, or 12.2%, in the six months ended June 30, 2004, compared with the same prior year periods. The increase was primarily attributable to growth in our customer base associated with advanced products such as IP-enabled frame and E-VPN (Enhanced Virtual Private Network). Excluding equipment and product sales, IP&E services revenue increased 13.6% in the second quarter of 2004 compared with the second quarter of 2003, and increased 12.5% in the six months ended June 30, 2004, compared with the six months ended June 2003. Local voice services revenue grew $20 million, or 5.0% in the second quarter of 2004, and grew $0.1 billion, or 10.1%, in the six months ended June 30, 2004, compared with the same prior year periods. This growth reflects our continued focus on increasing the utilization of our existing footprint including growth of our "All-in-One" bundled offer to small businesses. There were over 4.6 million access lines in service at June 30, 2004, an increase of more than 85,000 since the end of the first quarter of 2004. OPERATING INCOME Operating income declined $0.4 billion, or 74.7%, in the second quarter of 2004, compared with the second quarter of 2003, and declined $1.0 billion, or 80.4%, in the six months ended June 30, 2004, compared with the six months ended June 30, 2003. These declines were primarily due to decreases in the long distance voice and data businesses resulting from the impacts of competition, which led to pricing pressures and declining retail volumes, and substitution. Partially offsetting these declines were ongoing cost control efforts. Operating margin decreased to 2.7% in the second quarter of 2004, and to 2.0% for the first half of 2004, from 9.3% in both the second quarter and first half of 2003. The downward margin trend is primarily reflective of the declining higher-margin long distance retail voice and data businesses, coupled with the shift to lower-margin advanced services and wholesale services. 26 Operating margin of 2.7% in the second quarter of 2004 increased 1.3 percentage points, compared with a margin of 1.4% in the first quarter of 2004, reflecting favorable access expense settlements in the second quarter of 2004. As competitive pricing pressures are expected to continue throughout the year, this favorable margin trend is not expected to continue in the second half of 2004. OTHER ITEMS Capital additions were $0.5 billion in the second quarter of 2004, and were $1.0 billion for the six months ended June 30, 2004. We continue to concentrate the majority of capital spending on our advanced services offerings of IP&E services and data services, both of which include managed services, as well as local services. Total assets declined $1.7 billion, or 5.1%, at June 30, 2004, from December 31, 2003, primarily driven by lower net property, plant and equipment, as a result of depreciation during the period, partially offset by capital expenditures. This decline was also attributable to lower accounts receivable driven by lower revenue and improved cash collections. AT&T CONSUMER SERVICES AT&T Consumer Services provides a variety of communication services to residential customers. These services include traditional long distance voice services such as domestic and international dial services (long distance or local toll calls where the number "1" is dialed before the call) and calling card services. Transaction services, such as prepaid card and operator-assisted calls, are also offered. Collectively, these represent stand-alone long distance services and are not offered in conjunction with any other service. In addition, AT&T Consumer Services provides dial-up Internet services and all distance services, which bundle long distance, local and local toll.
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, --------------- --------------- 2004 2003 2004 2003 ------ ------ ------ ------ (DOLLARS IN MILLIONS) Revenue Stand-alone long distance voice and other services...................................... $1,327 $1,894 $2,789 $3,984 Bundled services................................. 684 460 1,329 884 ------ ------ ------ ------ Total revenue...................................... $2,011 $2,354 $4,118 $4,868 Operating income................................... $ 240 $ 485 $ 611 $1,118 Capital additions.................................. $ 15 $ 19 $ 28 $ 41
AT AT JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ (DOLLARS IN MILLIONS) Total assets................................................ $885 $1,062
REVENUE AT&T Consumer Services revenue declined $0.3 billion, or 14.6%, in the second quarter of 2004 and declined $0.7 billion, or 15.4%, in the first half of 2004, compared with the same prior year periods. The decline in both periods was primarily due to stand-alone long distance voice services, which decreased $0.6 billion to $1.3 billion in the second quarter of 2004 and decreased $1.2 billion to $2.7 billion in the first half of 2004, largely due to the impact of ongoing competition, which has led to a loss of market share, and substitution. In addition, stand-alone long distance voice services have been negatively impacted by the continued migration of customers to lower priced optional calling plans and other products offered by AT&T, such as bundled services. Partially offsetting the declines in stand-alone long distance voice services were pricing actions we implemented, including a monthly fee that we began billing in mid-2003 to recover costs, such as certain access charges and property taxes, and targeted price increases during 2004. Partially offsetting 27 the overall revenue decline was an increase in bundled revenue. Bundled revenue rose $0.2 billion to $0.7 billion in the second quarter of 2004, and rose $0.4 billion to $1.3 billion in the first half of 2004, compared with the same prior year periods, reflecting an increase in subscribers primarily due to new markets entered into, as well as increased penetration in existing markets. The increase in bundled revenue includes amounts previously incorporated in stand-alone long distance voice revenue for existing customers that migrated to bundled offers. Total long distance calling volumes (including long distance volumes sold as part of a bundle) declined approximately 18% in the second quarter of 2004, and approximately 19% in the first half of 2004, compared with the same prior year periods, as a result of competition and wireless and Internet substitution. We provided stand-alone long distance voice services to more than 24.5 million customers at June 30, 2004, compared with more than 30.3 million customers at December 31, 2003. We provided local service to more than 4.6 million customers as of June 30, 2004, compared with more than 3.9 million customers as of December 31, 2003. As a result of recent changes in regulatory policy governing local telephone service, we announced that we will be shifting our focus away from traditional consumer services, such as wireline residential telephone services, and we will no longer invest to acquire new residential local and stand-alone long distance customers. We will continue to provide our existing customers with quality service. OPERATING INCOME Operating income declined $0.2 billion, or 50.6%, in the second quarter of 2004 and declined $0.5 billion, or 45.4%, in the six months ended June 30, 2004, compared with the same periods in 2003. Operating margin declined to 11.9% in the second quarter of 2004 from 20.6% in the second quarter of 2003, and declined to 14.8% for the first half of 2004 from 23.0% for the first half of 2003. The margin declines were largely driven by lower margins within our stand-alone long distance voice business, primarily due to declines in revenue coupled with a lower rate of decline in operating expenses, particularly within selling, general and administrative expenses. Partially offsetting the declines in stand-alone long distance margins were pricing actions taken. In addition, operating margins declined due to increased spending on new initiatives, including our Voice over Internet Protocol (VoIP) offering. OTHER ITEMS Total assets declined $0.2 billion at June 30, 2004, from December 31, 2003. The decline was primarily due to lower accounts receivable, reflecting lower revenue and improved cash collections. CORPORATE AND OTHER This group primarily reflects the results of corporate staff functions, brand licensing fee revenue and the elimination of transactions between segments.
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, ------------- ------------- 2004 2003 2004 2003 ----- ----- ----- ----- (DOLLARS IN MILLIONS) Revenue................................................ $ 14 $ 13 $ 25 $ 26 Operating (loss)....................................... $(44) $(57) $(217) $(123) Capital additions...................................... $ 2 $ 8 $ 4 $ 12
AT AT JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ (DOLLARS IN MILLIONS) Total assets................................................ $10,465 $12,724
28 OPERATING (LOSS) Operating (loss) decreased $13 million to $44 million for the quarter ended June 30, 2004, and increased $0.1 billion to $0.2 billion in the first half of 2004, compared with the same periods in 2003. The $0.1 billion increase in operating (loss) for the year-to-date period was primarily due to a real estate impairment charge recorded in the first quarter of 2004 to write-down held-for-sale facilities, some of which were sold during the second quarter of 2004. OTHER ITEMS Total assets decreased $2.3 billion to $10.5 billion at June 30, 2004, from December 31, 2003. This decrease was primarily driven by a lower cash balance of $1.9 billion at June 30, 2004, primarily resulting from debt repurchases and scheduled repayments made in the first half of 2004. FINANCIAL CONDITION
AT AT JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ Total assets................................................ $43,818 $47,988 Total liabilities........................................... $29,763 $34,032 Total shareowners' equity................................... $14,055 $13,956
TOTAL ASSETS decreased $4.2 billion, or 8.7%, to $43.8 billion at June 30, 2004, compared with December 31, 2003. This decrease was largely driven by a $1.9 billion decrease in cash and cash equivalents. Property, plant and equipment declined $1.5 billion primarily as a result of depreciation during the period coupled with a real estate impairment charge, partially offset by capital expenditures. Exclusive of a $0.7 billion reclassification of restricted cash and hedge receivable to other current assets relating to debt maturing in 2005, other assets declined $0.6 billion primarily due to the settlement of a foreign currency swap associated with the Euro debt repurchase in the first quarter of 2004. Accounts receivable declined $0.4 billion driven by lower revenue and improved cash collections. These declines were partially offset by a deferred income tax benefit of $0.4 billion recorded in the first quarter of 2004 in conjunction with the reversal of a portion of the valuation allowance attributable to our prior investment in AT&T Latin America. TOTAL LIABILITIES decreased $4.3 billion, or 12.5%, to $29.8 billion at June 30, 2004, compared with December 31, 2003. This decrease was primarily the result of $3.2 billion in lower debt balances, reflecting the early retirement of $2.1 billion face value of debt and $0.4 billion of associated mark-to-market adjustments, coupled with scheduled repayments of debt amounting to $0.6 billion. Accounts payable and accrued expenses declined $0.3 billion as payments were made against year-end capital and other accruals. Also contributing to the decline were lower short-term compensation and benefit-related liabilities of $0.3 billion primarily attributable to the payment of year-end bonus and salary accruals and employee separation reserves. Additionally, other current liabilities declined $0.2 billion primarily due to a decline in income taxes payable. TOTAL SHAREOWNERS' EQUITY increased $0.1 billion, or 0.7%, to $14.1 billion at June 30, 2004, compared with December 31, 2003. This increase was primarily due to net income, partially offset by dividends declared. 29 LIQUIDITY
FOR THE SIX MONTHS ENDED JUNE 30, --------------------- 2004 2003 --------- --------- (DOLLARS IN MILLIONS) CASH FLOWS: Provided by operating activities.......................... $ 2,463 $ 4,353 (Used in) investing activities............................ (944) (1,720) (Used in) financing activities............................ (3,413) (5,391) ------- ------- Net (decrease) in cash and cash equivalents............... $(1,894) $(2,758) ======= =======
Net cash provided by operating activities of $2.5 billion for the six months ended June 30, 2004, declined $1.9 billion, from $4.4 billion in the comparable prior year period, which was in part driven by a decrease in operating income reflective of the declining stand-alone long distance voice and data businesses. The downward trend in cash generated by operating activities was also impacted by a $0.7 billion decline in income tax refunds received in the first half of 2004 compared with the same prior year period. AT&T's investing activities resulted in a net use of cash of $0.9 billion in the six months ended June 30, 2004, compared with $1.7 billion in the first six months of 2003, primarily reflecting a reduction in capital expenditures. During the first half of 2004, net cash used in financing activities was $3.4 billion, compared with $5.4 billion in the first half of 2003. In the first half of 2004, we made net payments of $3.4 billion to reduce debt (including redemption premiums and foreign currency mark-to-market payments), primarily reflecting the early termination of debt, and paid dividends of $0.4 billion. Reflected as an other financing item was the receipt of approximately $0.4 billion for the settlement of a combined interest rate foreign currency swap agreement in conjunction with the early repayment of Euro notes in the first half of 2004 (such repayment is included as retirement of long-term debt). During the first half of 2003, we made net payments of $5.3 billion to reduce debt, including the early termination of debt, paid dividends of $0.3 billion and received $0.1 billion of cash collateral related to favorable positions of certain combined interest rate foreign currency swap agreements. WORKING CAPITAL AND OTHER SOURCES OF LIQUIDITY At June 30, 2004, our working capital ratio (current assets divided by current liabilities) was 0.99. At June 30, 2004, we had a $2.0 billion syndicated 364-day credit facility available to us that was entered into on October 8, 2003. This credit facility provides the option to extend the maturity of any borrowings outstanding under the facility for an additional 364-day period beyond October 7, 2004. No borrowings are currently outstanding under the facility. Up to $0.3 billion of the facility can be utilized to support letters of credit, which reduces the amount available. As of June 30, 2004, approximately $0.2 billion of letters of credit were supported by the facility. No assurance can be given that the facility will be renewed and if the facility is renewed it may be for a substantially lesser amount and/or on substantially less favorable terms. If the facility is not renewed, we would expect to be required to post cash collateral to support the letters of credit previously supported by the facility. In July 2004, we renewed our AT&T Business Services and AT&T Consumer Services 364-day customer accounts receivable securitization facilities. Together the programs provide up to $1.35 billion of available financing, limited by eligible receivables balances, which vary month to month. Proceeds from the securitizations are recorded as borrowings and included in short-term debt. At June 30, 2004, approximately $0.2 billion was outstanding. The credit facility and the securitization facilities contain a financial covenant that requires AT&T to meet a debt-to-EBITDA ratio (as defined in the agreements) not exceeding 2.25 to 1 and an EBITDA-to-net 30 interest expense ratio (as defined in the agreements) of at least 3.50 to 1 for four consecutive quarters ending on the last day of each fiscal quarter. At June 30, 2004, we were in compliance with these covenants. We anticipate continuing to fund our operations in 2004 primarily with cash and cash equivalents on hand, as well as with cash from operations. If economic conditions worsen or do not improve and/or competition and product substitution accelerate beyond current expectations, our cash flows from operations would decrease, negatively impacting our liquidity. However, we believe our access to the capital markets is adequate to provide the flexibility we desire in funding our operations. Sources of liquidity, in addition to our substantial cash and cash equivalents on hand, include $2.4 billion remaining under a universal shelf registration; a $1.35 billion securitization program (limited by eligible receivables); and a $2.0 billion credit facility, which expires on October 6, 2004. In light of recent lowering of our commercial paper ratings discussed below, there is no longer any assurance that we will continue to have any significant access to the commercial paper market. The maximum amount of commercial paper outstanding during the first half of 2004 was approximately $1.0 billion. We cannot provide any assurances that any or all of these other sources of funding will be available at the time they are needed or in the amounts required. CREDIT RATINGS AND RELATED DEBT IMPLICATIONS Since the end of the second quarter, AT&T's long-term and short-term and commercial paper credit ratings have been lowered by Standard & Poor's (S&P), Moody's and Fitch, as reflected in the table below. The rating actions by S&P and Moody's triggered a 100 basis point interest rate step-up on approximately $6.5 billion in notional amount of debt net of foreign currency hedge offsets. This step-up is effective for interest payment periods that will begin after November 2004, resulting in an expected increase in interest expense of approximately $10 million in 2004 and $70 million in 2005. Currently, none of AT&T's ratings are under review or on CreditWatch for further downgrade.
SHORT-TERM LONG-TERM CREDIT RATING AGENCY RATING RATING OUTLOOK - -------------------- ---------- --------- -------- Standard & Poor's.................................... B BB+ Negative Fitch................................................ B BB+ Negative Moody's.............................................. NP Ba1 Negative
Our access to capital markets as well as the cost of our borrowings are affected by our debt ratings. The recent rating actions discussed above and further debt rating downgrades will require us to pay higher rates on certain existing debt and have required us to post cash collateral for certain interest-rate swaps in which we were in a net payable position. Further downgrades may require us to post collateral for certain equity swaps. Additionally, if our debt ratings are further downgraded, our access to the capital markets may be further restricted and/or such replacement financing may be more costly or have additional covenants than we had in connection with our debt at June 30, 2004. In addition, the market environment for financing in general, and within the telecommunications sector in particular has been adversely affected by economic conditions and bankruptcies of other telecommunications providers. AT&T Corp. is generally the obligor for debt issuances. However, there are some instances where AT&T Corp. is not the obligor, for example, the securitization facilities and certain capital leases. The total debt of these entities, which are fully consolidated, is approximately $0.3 billion at June 30, 2004, and is included within short-term and long-term debt. CASH REQUIREMENTS Our cash needs for 2004 will be primarily related to capital expenditures, repayment of debt and payment of dividends. We expect our capital expenditures for 2004 to be approximately $1.8 billion. In the first half of 2004, we completed the repurchase, for cash, of $1.2 billion of our $1.5 billion outstanding 6.5% Notes maturing in November 2006, which carried an interest rate of 7.25% at the time of retirement. Also, we repurchased, for cash, $0.9 billion of our outstanding $1.8 billion 6.0% Euro Notes due 31 November 2006, which carried an interest rate of 6.75% at the time of retirement. The $0.9 billion Euro denominated notes represents the original U.S. dollar issuance amount and excludes the foreign currency mark-to-market adjustments that were hedged. These redemptions are part of our plan, as announced in January 2004, to repurchase up to $3.0 billion of debt, which may take the form of calls, tender offers or open market transactions and is expected to be completed subject to market conditions during 2004. The transactions completed during the first half of 2004 are expected to save approximately $0.1 billion in interest expense in 2004. CONTRACTUAL CASH OBLIGATIONS We have contractual obligations to purchase certain goods or services from various other parties. During the first half of 2004, we entered into contracts under which we are legally obligated for payment of approximately $70 million in 2004. Also during the first half of 2004, we entered into contracts under which we have calculated the minimum obligation for such agreements based on termination fees that can be paid to exit the contract. Further, during this period, we exited certain contracts that contained termination fees that were renegotiated and not paid. The net effect of this activity on termination fees, which are considered to be the minimum obligation under the contracts, in each year would be an increase of approximately $83 million in 2004, $76 million in 2005, $64 million in 2006, $98 million in 2007, $88 million in 2008, or $50 million in 2009 and beyond. OTHER COMMERCIAL COMMITMENTS AT&T provided a guarantee of an obligation that AT&T Wireless has to NTT DoCoMo. Under this guarantee, AT&T would have been secondarily liable for up to $3.65 billion, plus accrued interest, in the event AT&T Wireless was unable to satisfy its entire obligation to NTT DoCoMo. AT&T's guarantee expired on June 30, 2004, in accordance with the terms of the original agreement. RISK MANAGEMENT We are exposed to market risk from changes in interest and foreign exchange rates, as well as changes in equity prices associated with previously affiliated companies. In addition, we are exposed to market risk from fluctuations in prices of securities. On a limited basis, we use certain derivative financial instruments, including interest rate swaps, foreign exchange contracts, combined interest rate foreign currency contracts, 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. NEW ACCOUNTING PRONOUNCEMENTS On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. We are impacted by the Act since we sponsor postretirement health care plans that provide prescription drug benefits. We have elected to defer recognition of the Act in accordance with Financial Accounting Standards Board (FASB) Staff Position ("FSP") No. FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." As a result, any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost do not reflect the effects of the Act on the plans. On May 19, 2004, the FASB issued FSP No. FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." This Staff Position supersedes FSP No. FAS 106-1 and provides guidance on accounting for the effects of the new Medicare prescription drug legislation by employers whose prescription drug benefits are actuarially equivalent to the drug benefit under Medicare Part D. The provisions of FSP No. FAS 106-2 are effective for the first interim or annual period beginning after June 15, 2004, and accordingly, we plan to adopt them effective 32 July 1, 2004. The FSP provides two alternative methods of transition, either retroactive application to the date of enactment or, the method we have selected, prospective application from the date of adoption. Federal regulations for determining actuarial equivalence have not yet been issued in either proposed or final form, which impacts our ability to estimate the full adoption effects of the FSP. Despite the lack of final federal regulations, we believe that the prescription drug benefits provided to a specific portion of our postretirement benefit plan participants would be deemed to be actuarially equivalent to Medicare Part D benefits based on the benefits provided under the plan. The estimated impact upon adoption for this group will be a reduction in the accumulated postretirement benefit obligation of approximately $150 million to $175 million, which will be amortized to income over time as an actuarial gain. In addition, we will realize a reduction in net periodic postretirement benefit cost (recorded within SG&A and costs of services and products) of approximately $10 million over the second half of 2004. Without a firm definition of actuarial equivalence, we are unable to determine if the prescription drug benefits provided to the remaining plan participants are actuarially equivalent to Medicare Part D benefits and are therefore unable to quantify any potential impact at this time. SUBSEQUENT EVENTS On July 22, 2004, we announced that as a result of recent changes in regulatory policy governing local telephone service, we will be shifting our focus away from traditional consumer services, and we will no longer be investing to acquire new residential local and stand-alone long distance customers. We plan to concentrate our investments going forward on business markets and emerging technologies. In July 2004, Moody's and Fitch lowered our long-term credit ratings to Ba1 and BB+, respectively, and lowered our short-term credit and commercial paper ratings to NP (not prime) and B, respectively. In August 2004, S&P lowered our long-term credit rating to BB+ and lowered our short-term credit and commercial paper rating to B. The rating actions by Moody's and S&P triggered a 100 basis point interest rate step-up on approximately $6.5 billion in notional amount of debt net of foreign currency hedge offsets. This step-up is effective for interest payment periods that will begin after November 2004, resulting in an expected increase in interest expense of approximately $10 million in 2004 and $70 million in 2005. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we completed an evaluation, under the supervision and with the participation of our management including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 or 15d-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in alerting them timely to material information required to be included in our Exchange Act filings. There have not been any changes in our internal controls over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15 or l5d-15 or otherwise that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. 33 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Refer to Part 1, Footnote 10, "Commitments and Contingencies" for discussion of certain legal proceedings. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The following table contains information about our purchases of our equity securities during the second quarter of 2004. ISSUER PURCHASES OF EQUITY SECURITIES
MAXIMUM NUMBER TOTAL NUMBER OF (OR APPROXIMATE SHARES (OR UNITS) DOLLAR VALUE) OF PURCHASED AS SHARES OR UNITS THAT TOTAL NUMBER OF AVERAGE PRICE PART OF PUBLICLY MAY YET BE SHARES (OR UNITS) PAID PER SHARE ANNOUNCED PLANS PURCHASED UNDER THE PERIOD PURCHASED(1) (OR UNIT) OR PROGRAMS PLANS OR PROGRAMS - ------ ----------------- --------------- ----------------- --------------------- April 1, 2004 to April 30, 2004..... 7,799 $18.8087 0 0 May 1, 2004 to May 31, 2004........... 13,064 $16.9591 0 0 June 1, 2004 to June 30, 2004........... 10,875 $16.7853 0 0 Total.............. 31,738 $17.3541 0 0
- --------------- (1) Represents restricted stock units redeemed to pay taxes related to the vesting of restricted stock units awarded under employee benefit plans. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS (a) The annual meeting of the shareholders of the registrant was held on May 19, 2004. (b) Election of Directors
VOTES -------------- NOMINEE FOR WITHHELD - ------- --- -------- (MILLIONS) William F. Aldinger......................................... 600 68 Kenneth T. Derr............................................. 610 57 David W. Dorman............................................. 645 23 M. Kathryn Eickoff.......................................... 622 45 Herbert L. Henkel........................................... 648 20 Frank C. Herringer.......................................... 600 68 Shirley Ann Jackson......................................... 606 61 Jon C. Madonna.............................................. 627 41 Donald F. McHenry........................................... 619 48 Tony L. White............................................... 621 47
34 (c) Holders of common shares voted at this meeting on the following matters, which were set forth in the registrant's proxy statement dated March 25, 2004. (i) Ratification of Auditors
FOR AGAINST ABSTAIN ------- ------- ------- Ratification of the firm of PricewaterhouseCoopers, LLP as the independent auditors to audit the registrant's financial statements for the year 2004.(*)............. 620 37 11 (94.39)% (5.61)%
(ii) Shareholders' Proposals
FOR AGAINST ABSTAIN NON-VOTE ------ ------- ------- -------- AT&T 2004 Long Term Incentive Program(*)........ 416 123 12 117 (77.17)% (22.83)% Establish Term Limits For Directors(*).......... 30 508 13 117 (5.66)% (94.34)% Poison Pill Provision(*)........................ 358 179 14 117 (66.65)% (33.35)% Separate the Chair and CEO Position(*).......... 138 400 12 117 (25.65)% (74.35)% Executive Compensation(*)....................... 48 486 17 117 (8.95)% (91.05)%
- --------------- (*) Percentages are based on the total common shares voted. Approval of this proposal required a majority of the votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
EXHIBIT NUMBER ------- 10(iii)(A)1 AT&T 2004 Long Term Incentive Plan (incorporated by reference to Exhibit 4.1 to Form S-8 filed on May 26, 2004, File No. 1-1105) 10(iii)(A)2 AT&T Senior Officer Severance Plan effective October 9, 1997, as amended October 30, 1997 (incorporated by reference to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105), and as amended, restated and renamed AT&T Senior Officer Separation Plan as of January 1, 2003 including Form of Amendment of Appendix A of AT&T Senior Officer Severance Plan dated as of July 28, 2003 (incorporated by reference to Exhibit 10(iii)(A)5 to Form 10-Q for third quarter 2003, File No. 1-1105). AT&T Senior Officer Separation Plan as amended and restated May 19, 2004 10(iii)(A)3 Summary of actions taken to amend the definition of "Change in Control" in AT&T benefit plans and programs generally 10(iii)(A)4 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993 (incorporated by reference to Exhibit (10) (iii)(A)6 to Form 10-K for 1993, File No. 1-1105). AT&T Corp. Deferred Compensation Plan for Non-Employee Directors as amended May 18, 2004 12 Computation of Ratio of Earnings to Fixed Charges 31.1 Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
35
EXHIBIT NUMBER ------- 31.2 Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Forms 8-K: During the second quarter of 2004, the following Forms 8-K were filed and/or furnished: Form 8-K dated April 22, 2004, was filed pursuant to Item 5 (Other Events and Regulation FD disclosure) Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and Item 12 (Results of Operations and Financial Condition) on April 26, 2004. 36 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 and Controller Date: August 3, 2004 37 EXHIBIT INDEX
EXHIBIT NUMBER ------- 10(iii)(A)1 AT&T 2004 Long Term Incentive Plan (incorporated by reference to Exhibit 4.1 to Form S-8 filed on May 26, 2004, File No. 1-1105) 10(iii)(A)2 AT&T Senior Officer Severance Plan effective October 9, 1997, as amended October 30, 1997 (incorporated by reference to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105), and as amended, restated and renamed AT&T Senior Officer Separation Plan as of January 1, 2003 including Form of Amendment of Appendix A of AT&T Senior Officer Severance Plan dated as of July 28, 2003 (incorporated by reference to Exhibit 10(iii)(A)5 to Form 10-Q for third quarter 2003, File No. 1-1105). AT&T Senior Officer Separation Plan as amended and restated May 19, 2004 10(iii)(A)3 Summary of actions taken to amend the definition of "Change in Control" in AT&T benefit plans and programs generally 10(iii)(A)4 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993 (incorporated by reference to Exhibit (10)(iii)(A)6 to Form 10-K for 1993, File No. 1-1105). AT&T Corp. Deferred Compensation Plan for Non-Employee Directors as amended May 18, 2004 12 Computation of Ratio of Earnings to Fixed Charges 31.1 Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
38 EX-10.III.A.2 2 y99567exv10wiiiwaw2.txt AT&T SENIOR OFFICER SEVERANCE PLAN EXHIBIT 10(iii)(A)2 AT&T SENIOR OFFICER SEPARATION PLAN PLAN DOCUMENT AND SUMMARY PLAN DESCRIPTION (AMENDED AND RESTATED AS OF MAY 19, 2004) THIS DOCUMENT, LIKE ALL COMPANY PLANS, PERSONNEL POLICIES OR PRACTICES, IS NOT A CONTRACT OF EMPLOYMENT. IT IS NOT INTENDED TO CREATE, AND IT SHOULD NOT BE CONSTRUED TO CREATE, ANY CONTRACTUAL RIGHTS TO CONTINUED EMPLOYMENT, EITHER EXPRESS OR IMPLIED, BETWEEN THE COMPANY AND ITS EMPLOYEES. AT AT&T CORP., THE EMPLOYMENT RELATIONSHIP WITH EMPLOYEES COVERED BY THIS PLAN IS "AT-WILL." THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON, AND THE COMPANY RESERVES THE RIGHT TO TERMINATE ANY EMPLOYEE'S EMPLOYMENT, WITH OR WITHOUT CAUSE, AT ANY TIME FOR ANY REASON, SUBJECT TO THE RIGHTS OF ELIGIBLE SENIOR OFFICERS TO BENEFITS PROVIDED BY THIS PLAN. IN THE EVENT THERE IS A CONFLICT BETWEEN STATEMENTS IN THIS PLAN AND THE TERMS OF ANY OTHER BENEFIT PLAN, POLICY, OR PRACTICE, THE APPLICABLE BENEFIT PLAN, POLICY OR PRACTICE PROVIDING THE BENEFITS IN QUESTION WILL CONTROL. AT&T CORP. RESERVES THE RIGHT, AT ANY TIME, TO MODIFY, SUSPEND, CHANGE, OR TERMINATE ITS EMPLOYEE BENEFIT PLANS OR EXECUTIVE LEVEL INCENTIVE, BENEFIT AND/OR PERQUISITE PLANS, PROGRAMS, POLICIES OR PRACTICES. AT&T Senior Officer Separation Plan Proprietary (Restricted) 1 AT&T SENIOR OFFICER SEPARATION PLAN PLAN DOCUMENT AND SUMMARY PLAN DESCRIPTION A. OVERVIEW The AT&T Senior Officer Separation Plan, which includes the attached Appendix A, Appendix B and Appendix C, (collectively, the "Plan"), which was originally adopted as of October 9, 1997 and periodically amended, is now amended and restated, effective May 19, 2004 ("Effective Date"). The Plan is designed to provide certain supplemental payments and benefit enhancements to eligible Officers (as defined below) of AT&T Corp. ("AT&T") and certain of its Affiliates (as defined below) who are designated by the Board of Directors of AT&T Corp. (the "Board") as eligible to participate in this Plan ("Senior Officers"), and whose employment is terminated under circumstances set forth in this Plan. In this Plan, AT&T, or in the event of a "Change in Control" of AT&T Corp., as that term is defined in the AT&T 2004 Long Term Incentive Program ("CIC"), the successor to AT&T, and its subsidiaries and Affiliates, are referred to collectively as the "Company". A Senior Officer will become eligible for benefits under this Plan only if the conditions for eligibility, as set forth in Section E of this Plan, are met. Appendix A to this Plan contains certain specific provisions for the operation of the Plan following a CIC which become operative as a result of the CIC, including provisions regarding eligibility to receive benefits. This Plan supersedes all prior versions of the AT&T Senior Officer Separation Plan (previously named the AT&T Senior Officer Severance Plan). Except as otherwise expressly provided pursuant to this Plan, this Plan shall be construed and administered in a manner which avoids duplication of compensation and benefits which may be provided under any other plan, program, policy, or other arrangement. In the event a Participant is covered by any other plan, program, policy, individually negotiated agreement or other arrangement, in effect as of his or her Final Payroll Date, that may duplicate the Severance Payment provided for in Section F.1, and/or certain of the post-termination benefits provided for in Sections F.2 - F.17, or the Severance Payment provided in Section 5 of Appendix A and/or certain of the post-termination benefits provided in Sections 6 - 17 of Appendix A, the Executive Vice President - Human Resources is specifically empowered to reduce or eliminate the duplicative benefits provided for under the Plan. In taking such action, the Executive Vice President - Human AT&T Senior Officer Separation Plan Proprietary (Restricted) 2 Resources will be guided by the principles that (1) such a Participant will otherwise be treated, for the purpose of the Sections specified above, no more or no less favorably than are other Participants who are not covered by such other plan, program, policy, individually negotiated agreement or other arrangement and (2) the provisions of such other plan, program, policy, individually negotiated agreement or other arrangement (including, but not limited to, a special individual pension, a special deferral account and/or a special equity based grant) which are not duplicative of the Severance Payment provided for in Section F.1 and/or the post-termination benefits specified in Sections F.2 - F.17, or the Severance Payment provided for in Section 5 of Appendix A and/or certain of the post-termination benefits provided for in Section 6 - 17 of Appendix A, will not be considered in determining elimination and/or reductions in Plan benefits. B. DEFINITIONS For purposes of this Plan: "Affiliate" means any entity that is within AT&T's controlled group of corporations within the meaning of Section 1563 of the Internal Revenue Code of 1986, as amended (the "Code"). "Cause" means: (i) commission of a crime, or conviction of a crime, including by a plea of guilty or nolo contendere, involving theft, fraud, dishonesty or moral turpitude; (ii) intentional or grossly negligent disclosure of confidential or trade secret information of the Company to anyone not entitled to such information; (iii) omission or dereliction of any statutory or common law duty of loyalty to the Company; (iv) violation of the Company's Code of Conduct or any other written Company policy; or (v) repeated failure to carry out the Senior Officer's duties despite specific instruction to do so. "Eligible for Retirement-Related Benefits" means that a Participant, or a CIC Eligible Senior Officer, has satisfied the minimum age and service requirements for the benefits provided under the terms of the AT&T Corp. Postretirement Welfare Benefits Plan, or the successor to such plan, as amended from time to time, as of his or her Final Payroll Date. AT&T Senior Officer Separation Plan Proprietary (Restricted) 3 "Final Payroll Date" means the date the Participant or the CIC Eligible Senior Officer actually terminates employment with the Company in accordance with the terms and conditions of this Plan, including Appendix A, if applicable. "Good Reason" shall mean the occurrence of either of the following events without the Senior Officer's express written consent: (i) the material reduction of the Senior Officer's authority or responsibility; or (ii) a Reduction in Compensation (as defined below). Whether a reduction in a Senior Officer's authority or responsibility is material shall be determined in accordance with the criteria set forth below in the definition of Reduction in Authority or Responsibility; provided, however, that (1) the Company's decision not to continue an Executive Committee (or similar governance body); or (2) changes in reporting relationships; or (3) a reduction in the Participant's business unit's budget or a reduction in the Participant's business unit's head count, by themselves, do not constitute Good Reason. "Officer" means a management employee classified as an Officer (MGRO or MGROC) in the compensation job leveling structure of a Participating Company. "Participant" means a senior management employee who has been designated by the Board (or the successor to the Board) as an individual who is eligible to participate in this Plan. "Participant Notification Form" means the form indicating that a Senior Officer has been designated as an individual whose employment is being terminated pursuant to the terms of this Plan, or who has elected to terminate employment for Good Reason. "Reduction in Authority or Responsibility" - shall mean: (i) the assignment to the Senior Officer of any duties materially inconsistent in any respect with the Senior Officer's position (including status, offices, titles and reporting requirements), and that detract from or reduce the authority, duties or responsibilities to which the Senior Officer was assigned immediately prior to the date of such change in such Senior Officer's authority, duties or responsibilities; or (ii) any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities. "Reduction in Authority or Responsibility" shall not include: AT&T Senior Officer Separation Plan Proprietary (Restricted) 4 (a) an isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company promptly after receipt of notice thereof given by the Senior Officer; or (b) any temporary reduction in authority or responsibility while the Senior Officer is absent from active service on any approved disability or approved leave of absence. By way of example, and not by way of limitation, Reduction in Authority or Responsibility shall include: (1) The removal of any division, business or operating unit or other business organization from the direct managerial responsibility of the Senior Officer, or (2) The material reduction in the size or scope of responsibility or operating budget of any division, business or operating unit or other business organization for which the Senior Officer has direct managerial responsibility, or (3) A reduction in the Senior Officer's authority to legally bind the Company under the Company's Schedule of Authorization, as in effect immediately prior to the Change in Control, without first obtaining any additional authority or approval. "Reduction in Compensation" shall mean a reduction in the Participant's "Total Annual Compensation" (defined as the sum of the Participant's Annual Base Salary Rate, Target Annual Bonus and Target Annual Long Term Incentive Compensation (or their equivalent within the context of a successor employer's compensation plans and programs)) for any calendar or fiscal year, as applicable, to an amount that is less than the Senior Officer's Total Annual Compensation that existed immediately prior to such reduction. For purposes of this definition, a Senior Officer's Target Annual Bonus shall mean the value determined by multiplying the Senior Officer's Target Annual Bonus percentage in effect on the day preceding any Reduction in Compensation by the Senior Officer's annual base salary rate in effect on the day preceding the Reduction in Compensation. For purposes of this definition, a Senior Officer's Target Annual Long Term Incentive Compensation shall mean, the total value of the annual equity-based incentive compensation grants to the Senior Officer, including the following: (a) "full value equity" compensation, including but not limited to restricted stock, restricted stock units ("RSUs"), performance shares and cash equivalents and (b) "non-full value equity" based compensation including, but not limited to, stock AT&T Senior Officer Separation Plan Proprietary (Restricted) 5 options and stock appreciation rights, in each case granted as part of the Senior Officer's annual compensation, assuming 100% performance achievement if such grants include performance criteria, and shall not include any special one-time or periodic grants or awards, granted or awarded as part of a hiring package or retention program, agreement or arrangement: (a) The value of each "full value equity" grant, if any, shall be the fair market value ("FMV") of such grant on the date the grant is approved by the Compensation and Employee Benefits Committee of the AT&T Board of Directors, by such other management committee or committee of the AT&T Board of Directors, or by the duly authorized officers of the successor to AT&T Corp. (for the purpose of this definition, separately and collectively referred to as the "Committee"). The FMV of each "full value equity" grant shall be determined by multiplying the number of related AT&T common shares by the applicable average of the daily high and low sale prices of AT&T common shares on the New York Stock Exchange, or by multiplying the number of related common shares of the successor to AT&T by the applicable average of the daily high and low sale prices of such successor's common shares on the New York Stock Exchange or other national exchange on which such shares are listed, as appropriate, for the date the grant was approved by the Committee. (b) The value of each "non-full value equity" grant, such as stock options and stock appreciation rights ("SARs"), shall equal the per option or per SAR value on the date the grant was approved by the Committee, based on Black Scholes estimates (or such other option-pricing model, deemed acceptable by the Financial Accounting Standards Board for valuing options and SARs and utilized by the Committee when considering such grant) multiplied by the number of related AT&T common shares in such grant, and/or other such amounts determined in the same manner and approved by the Committee for the year in which the grant being valued was granted. (c) For this purpose, the Black Scholes value and FMV of the respective components of AT&T Target Annual Long Term Incentive Compensation shall be updated annually as approved by the Committee. "Rule of 65" shall have the same meaning ascribed to such term in Article 2 of the AT&T Corp. Postretirement Welfare Benefits Plan. "Termination Year" means the calendar year during which the Participant's or CIC Eligible Senior Officer's Final Payroll Date occurs. AT&T Senior Officer Separation Plan Proprietary (Restricted) 6 C. TYPE OF PLAN This Plan is intended to be, and shall be interpreted as an unfunded employee welfare benefit plan under Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Section 2520.104-24 of the Department of Labor Regulations, maintained primarily for the purpose of providing employee welfare benefits, to the extent that it provides welfare benefits and, under Sections 201, 301 and 401 of ERISA, as a plan that is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, to the extent that it provides other benefits. D. PLAN PARTICIPATION An Officer shall participate in this Plan if he or she is designated by the Board (or the successor to the Board) as being eligible to participate in the Plan. The Board, or its delegate, shall have complete discretionary authority to remove an individual from participation and eligibility for benefits under the Plan. For a period of two years following a CIC, an individual cannot be removed from Participation. The Board, or its delegate, shall have complete discretionary authority to determine if and when, and to what organizations, positions and groups of senior management employees, this Plan is to be applied. E. ELIGIBILITY TO RECEIVE BENEFITS 1. BASIC ELIGIBILITY REQUIREMENTS A Participant or CIC Eligible Senior Officer will receive the payments and benefits described in this Plan, including any benefits that may be provided pursuant to the terms of Appendix A hereto, only if the conditions listed in clause (i) or (ii) and the condition listed in clause (iii) below are satisfied: (i) The Senior Officer terminates his or her employment with the Company at the initiation of the Company, in accordance with the terms and conditions of this Plan, other than (a) with eligibility for benefits under any AT&T long term disability plan, or (b) for Cause. A Senior Officer, other than a CIC Eligible Senior Officer, shall receive a Participant Notification Form that shall indicate his or her termination pursuant to the terms of this Plan. The Participant Notification Form shall include the Participant's Final Payroll Date; or (ii) The Senior Officer elects to terminate his or her employment with the Company for Good Reason, having satisfied the Notification provisions set forth below and having obtained the Company's agreement that AT&T Senior Officer Separation Plan Proprietary (Restricted) 7 the Senior Officer has Good Reason to terminate employment, or, in the absence of such agreement, having successfully arbitrated his or her claim that Good Reason occurred, pursuant to the provisions of Section M. In such event, the Senior Officer shall receive a Participant Notification Form which shall include the Participant's Final Payroll Date; and (iii) The Senior Officer executes a Waiver and Release ("Release") (a copy of which is attached as Appendix B), and the time during which the Senior Officer may revoke the Release has expired without revocation. Notwithstanding the foregoing, the Senior Officer shall remain subject to the forfeiture and repayment provisions set forth in Section J of this Plan. 2. NOTIFICATION REQUIREMENTS FOR TERMINATION FOR GOOD REASON In the event a Senior Officer determines that Good Reason exists to elect to terminate his or her employment with the Company, the Senior Officer must notify the Executive Vice President - Human Resources in writing of the specific event which the Senior Officer believes constitutes Good Reason within thirty (30) days of the occurrence of such event. Within ten (10) business days of the Company's receipt of such written notice, the Company shall notify the Senior Officer that it agrees or disagrees with the Senior Officer's determination that the event specified in the Senior Officer's notice constitutes Good Reason. The Company shall have thirty (30) days from its receipt of the Senior Officer's written notice in which to remedy any event specified in such notice as constituting Good Reason. The Company's notification that it agrees with the Senior Officer's determination shall state whether or not it will take action to remedy the event constituting Good Reason. In the event the Company notifies the Senior Officer that it agrees with the Senior Officer's determination that the event specified in the Senior Officer's notice constitutes Good Reason, but will not take action to remedy the event, the Senior Officer shall receive a Participant Notification Form within five business days thereafter, which shall include the Participant's Final Payroll Date, which date shall be two weeks from the date of delivery of the Participant Notification Form, or such earlier or later date as the Company and the Senior Officer shall mutually agree. In the event the Company notifies the Senior Officer that it disagrees with the Senior Officer's determination that the event specified in the Senior Officer's notice constitutes Good Reason, or in the event the Senior Officer believes that the corrective actions taken by the Company fail to adequately address the event claimed to constitute Good Reason specified in the Senior Officer's notice, the procedures set forth in Sections L and M of this Plan shall apply. Under such AT&T Senior Officer Separation Plan Proprietary (Restricted) 8 circumstances, the Senior Officer may elect to terminate his or her employment and continue to pursue a claim for benefits by following the procedures set forth in Sections L and M of this Plan. The date the Senior Officer elects to terminate his or her employment shall be his or her Final Payroll Date. If the Senior Officer elects to remain employed while pursuing his or her claim for benefits, and such claim or arbitration is ultimately concluded in the Senior Officer's favor, the Senior Officer shall receive a Participant Notification Form, which shall include the Participant's Final Payroll Date. F. PLAN PAYMENTS AND BENEFITS A Participant who satisfies the conditions for receipt of benefits or payments under Section E shall be entitled to the following: 1. SEVERANCE PAYMENT A Participant shall receive a severance payment under this Section F.1 that will equal two hundred percent (200%) of the sum of (i) the Participant's annual base salary rate, plus (ii) the Participant's target annual incentive, (such sum to be referred to as the "Severance Payment"), in each case, determined as of the Participant's Final Payroll Date, as indicated on the Participant Notification Form; provided, however, that if a Participant's termination for Good Reason results from a Reduction in Compensation, a Participant's base salary and target annual incentive shall be determined as of the date immediately prior to such Reduction in Compensation. The Severance Payment will be paid in a single lump sum as soon as administratively feasible after expiration of the revocation period indicated in the Participant's Release without revocation, unless deferral of such Severance Payment is elected in accordance with Section F.2 below. 2. DEFERRAL OPTION The Participant may elect to defer receipt of the Severance Payment. The Participant's written deferral election must be submitted to the AT&T Executive Benefits Organization not later than the day prior to the date on which the Release is executed. A copy of the deferral election form to be completed is attached as Appendix C. Deferral may be for a period of up to five (5) years following the Participant's Final Payroll Date, in whole year increments. Payout of the deferred Severance Payment may be in the form of a lump sum, or up to a maximum of five (5) approximately equal annual installments, as indicated on the deferral election form. The first installment from the deferred account (or the single payment, if the Participant so elected), including interest thereon, will be paid by the end of the calendar quarter which immediately follows the calendar quarter in which the first, second, third, fourth or fifth anniversary (as so elected by the Participant) of the Participant's Final Payroll Date occurs. All unpaid deferred amounts will AT&T Senior Officer Separation Plan Proprietary (Restricted) 9 continue to accrue interest at the rate of return set forth below. In the event of a Participant's death prior to the payment of all deferred amounts, the unpaid balance shall be paid to his or her named beneficiary (or to his or her estate, if no beneficiary has been named) in a lump sum not later than the end of the calendar quarter immediately following the calendar quarter in which the AT&T Executive Benefits Organization receives written notice of such death. For individuals designated as Senior Officers as of May 19, 2004, deferred amounts will be credited quarterly with interest equal to one-quarter (1/4) of the average rate applicable to actively traded 10-year US Treasury Notes for the prior calendar quarter, plus 1.25 percent. The Company reserves the right to change the interest rate to be credited on deferred amounts with respect to an individual who is designated as a Senior Officer after May 19, 2004, provided, however, that in the absence of such action by the Company, the interest rate described in the previous sentence will apply. The crediting of interest on deferred amounts, commencing with the Participant's Final Payroll Date, shall be calculated in accordance with rules and procedures determined by the Company in its sole and absolute discretion. Participants who elect to defer amounts under this arrangement shall be unsecured general creditors of the Company. The Company shall establish for each such Participant, an unfunded bookkeeping account to which deferred amounts (and interest) will be credited, but the Company shall have no obligation to fund or set aside assets for the payment of any deferred amounts under this arrangement. 3. ANNUAL BONUS A Participant who has performed at least eighty eight (88) consecutive days of service to the Company during his or her Termination Year, will be eligible to receive a prorated portion of the annual incentive applicable to the Termination Year based on the Participant's time on the active payroll during the Termination Year, in an amount equal to the product of the actual achievement level for the Participant's annual incentive for such year, as determined by the Company in its sole discretion, multiplied by a fraction, the numerator of which is the number of completed months of the Participant's employment during the Termination Year (including the last month of employment if the Participant's Final Payroll Date is on or after the 15th of the month) and the denominator of which is 12. Such amount shall be payable during the first quarter of the following year, in accordance with existing practices and terms of the AT&T Short Term Incentive Plan. If a Participant's Final Payroll Date occurs prior to the payment of his or her annual incentive with respect to the year preceding his or her Termination Year, such Participant will be eligible to receive such annual incentive, which shall be paid at the same time as such annual incentive is paid to other actively employed senior management employees. AT&T Senior Officer Separation Plan Proprietary (Restricted) 10 4. OUTSTANDING LONG TERM INCENTIVES a) GENERAL - Subject to the provisions of paragraphs (b), (c), (d), (e), (f), (g), (h) and (i) of this Section F.4, following a Participant's Final Payroll Date, the Participant shall retain any performance shares, stock units, unexercised options to purchase AT&T common stock, restricted stock and restricted stock units payable or redeemable in shares of AT&T common stock, cash equivalent awards, and any other awards granted as part of a standard annual grant, as a special recognition or retention grant, or in connection with AT&T's offer of employment to such Participant, under any applicable AT&T long term incentive program (other than the AT&T Wireless Adjustment Plan, the terms of which shall govern any grants under such plan), including any plan previously maintained by McCaw, LIN, TCG, TCI or MediaOne ("Long Term Incentives"), and which remain outstanding as of such Participant's Final Payroll Date. Except as otherwise specified in paragraphs (b), (c), (d), (e), (f), (g), (h) and (i) of this Section F.4, all grants under any AT&T long term incentive program, or the successor to such program, shall remain subject to the same terms and conditions of the applicable original grant agreement, including any modifications or amendments to such grant agreements which become effective on or prior to such Participant's Final Payroll Date. b) PERFORMANCE SHARES - Performance shares shall be prorated based on the number of full months of employment in the performance period (including the last month if the Participant's Final Payroll Date is on or after the 15th of the month) and distributed to the Participant as soon as practicable following the Participant's Termination Year, in accordance with the terms and conditions of the performance share award agreement. The payout level, if any, for the award will be determined by the level of performance criteria met from the beginning of the applicable performance period through the end of the Participant's Termination Year. c) STOCK OPTIONS - A Participant shall become immediately vested, as of his or her Final Payroll Date and upon expiration of the revocation period indicated in the Release without revocation, in all outstanding options to purchase AT&T common stock. All retained stock options shall remain exercisable for the remainder of the original term of the grant. d) RESTRICTED STOCK AWARDS - A Participant shall become vested, as of his or her Final Payroll Date, and upon expiration of the AT&T Senior Officer Separation Plan Proprietary (Restricted) 11 revocation period indicated in the Release without revocation, in each award of restricted stock. Shares related to the vested restricted stock awards under this Section F.4(d) will be distributed to a Participant as soon as administratively feasible after they become vested. e) RESTRICTED STOCK UNITS - Restricted stock units granted on or after January 1, 2003 that contain terms requiring the proration of such restricted stock units upon termination of employment from the Company under a force management plan or program, shall be prorated according to the terms of such grant. The prorated restricted stock units that will be retained, and other outstanding restricted stock units not subject to proration that will be retained, shall become vested as of the later of the Participant's Final Payroll Date or the expiration of the revocation period indicated in the Release without revocation. Shares related to the vested restricted stock units under this Section F.4(e) will be distributed to the Participant as soon as administratively feasible after they become vested. The balance of the prorated restricted stock units that will not be retained and will not be vested under this Section F.4(e) shall be canceled. f) PERFORMANCE-DEPENDENT AWARDS - The unvested portion of any special, performance-dependent equity and/or cash award(s) granted to a Participant shall become vested as of the later of the Participant's Final Payroll Date, or expiration of the revocation period indicated in the Release without revocation. The vested portion of any such other award will be administered in accordance with the terms of the grant. g) AT&T WIRELESS EQUITY - Options to purchase shares of common stock of AT&T Wireless Services, Inc. shall be governed by the terms of the AT&T Wireless Services Adjustment Plan. h) STOCK UNITS - Stock units created as the result of any corporate transaction, restructuring or reorganization shall follow, and remain subject to all of the terms of the original equity award with respect to which such stock units were granted (i.e., original grants of performance shares, restricted stock and restricted stock units), except to the extent that such terms have been modified by the definitive agreement governing such transaction, restructuring or reorganization. Distribution of such stock units will be in cash and will be made according to the terms created pursuant to such original grants, including such terms as proration for partial service in the performance or vesting period. AT&T Senior Officer Separation Plan Proprietary (Restricted) 12 i) CASH AWARDS/PAYMENTS - Cash awards/payments, granted under any long-term incentive program which have not yet vested, will vest as of the later of the Participant's Final Payroll Date or expiration of the revocation period indicated in the Release without revocation, and will be paid as soon as administratively feasible following such vesting. 5. OTHER CASH AWARDS/ PAYMENTS Other unvested cash awards/payments including but not limited to awards/payments for retention, unpaid signing bonuses and any other cash payments or awards, but not including cash in individual deferral accounts which are subject to their own terms and conditions, will vest as of the later of the Participant's Final Payroll Date or expiration of the revocation period indicated in the Release without revocation, and will be paid as soon as administratively feasible following such revocation period. 6. EXECUTIVE LIFE INSURANCE PROGRAM A Participant who is participating in the AT&T Corp. Executive Life Insurance Program on his or her Final Payroll Date and for whom an ELIP policy has been issued (excluding any term binder), shall continue such participation in accordance with the terms and conditions of that Program as if he or she were Eligible for Retirement-Related Benefits, taking into account the election of the Participant, if any, to continue coverage previously available under the AT&T Senior Manager Universal Life Insurance Program at the rate of two and one-half (2.5) times his or her final annual base salary rate, rather than the current ELIP policy coverage of three times a Participant's annual base salary rate prior to the Participant's Final Payroll Date, and two times annual base salary rate after the Participant's Final Payroll Date. In the event a Participant is covered only by a term binder as of his or her Final Payroll Date, such term insurance will cease on his or her Final Payroll Date. AT&T Senior Officer Separation Plan Proprietary (Restricted) 13 7. PENSION DEATH BENEFIT The death benefits provided with respect to pensioners under the AT&T MPP and the death benefit provided under the AT&T Non-Qualified Pension Plan (AT&T NQPP) (the sum of (a) one times base salary in effect on December 31, 1997, plus (b) the greater of the annual incentive paid to the Participant in 1997 with respect to 1996, or the annual incentive paid to the Participant in 1998 with respect to 1997), will be paid to the qualified survivor, if any, of a Participant who was an AT&T management employee on January 1, 1998, and whose Final Payroll Date occurs not later than December 31, 2007. If such a Participant is not Eligible for Retirement-Related Benefits as of his or her Final Payroll Date, the death benefits that would otherwise have been payable from the AT&T MPP and AT&TNQPP will be paid from the operating income of the Company. A Participant's qualified survivor will be determined under the terms of the AT&T MPP. Any Death Benefit paid under the AT&T Senior Management Long Term Disability and Survivor Protection Plan ("SMLTD&SPP") will be reduced by the amount of any Death Benefit payable under this Section F.7. 8. FINANCIAL COUNSELING A Participant who is participating in the AT&T Officer Financial Counseling Program as of his or her Final Payroll Date shall continue such participation for a period of two years following such Participant's Final Payroll Date in accordance with the terms and conditions of that program, including the preparation of personal income tax returns with respect to calendar years through and including the second anniversary of such Participant's Termination Year. 9. TRANSITION COUNSELING A Participant will be entitled to receive the services of a Company-paid and Company-approved outplacement or career transition consultant in accordance with AT&T's current practices for Senior Officers in effect as of the Participant's Final Payroll Date; provided, however, that commencement of such transition counseling services, if desired, must begin within one year of the Participant's Final Payroll Date. 10. AT&T TOLL DISCOUNT A Participant will be eligible for toll reimbursement through the AT&T Toll Discount Program under the terms and conditions that apply to management employees Eligible for Retirement-Related Benefits, as those terms and conditions may be amended from time to time. AT&T Senior Officer Separation Plan Proprietary (Restricted) 14 11. VACATION A Participant should make every reasonable effort, consistent with the needs of the business and AT&T's policies and procedures, to use all vacation, personal days, and floating holidays to which he or she is eligible before his or her Final Payroll Date. If the Participant is unable to do so, he or she will be paid for any unused earned vacation days (but not for any unearned vacation days) for the calendar year in which his or her Final Payroll Date occurs and for any approved and unexpired carryover days (not to exceed the number of carryover days as approved by the Company) from the prior year. A Senior Officer will not be paid for, nor be entitled to use unearned vacation days once he or she has been designated as a Participant under this Plan. The Participant will not receive pay in lieu of floating holidays and management personal days if these days are not taken prior to his or her Final Payroll Date, except for those Participants in the states of California, Illinois, or North Dakota, who will receive such payments as may be mandated by state law. AT&T Senior Officer Separation Plan Proprietary (Restricted) 15 12. MEDICAL/DENTAL COVERAGE The extension and cost of medical and dental coverage for a Participant who is Eligible for Retirement-Related Benefits will be in accordance with the terms of the AT&T Corp. Postretirement Welfare Benefits Plan, or the successor to such plan, as amended from time to time. If, on the Participant's Final Payroll Date, the Participant is not Eligible for Retirement-Related Benefits, the Company will continue to provide coverage under the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, or the successors to such plans, on the same basis as for active employees, to such Participant and his or her eligible Class I dependents, Domestic Partner and/or Domestic Partner's children, (provided that such eligible Class I dependents, Domestic Partner and/or Domestic Partner's children were covered by the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, or the successors to such plans, immediately prior to the Participant's termination of employment), for up to eighteen (18) months after the month in which the Participant's Final Payroll Date occurs, subject to the terms and conditions of those plans, as amended from time to time. Such a Participant who is enrolled in a medical and/or dental plan option as an active employee under the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, or the successors to such plans, that requires employee contributions, must continue to pay those contributions during the period of time that the Company provides the Participant with continued coverage. To the extent that the continuation of Company-provided coverage results in taxable imputed income to the Participant in excess of the taxable income incurred as an active employee, the Company will provide a tax allowance, calculated in accordance with the Company's then current practice for Senior Officers, estimated to cover the Federal income and FICA (Medicare portion) taxes to be incurred by the Participant by reason of such imputed income and the additional payment provided for in this sentence. Company-provided continuation of coverage under the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, or the successors to such plans, shall run concurrently with any rights to continuation of coverage the Participant and/or his or her eligible Class I dependents, Domestic Partner and/or Domestic Partner's children may otherwise have under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). The Participant should immediately notify the COBRA administrator if he or she becomes covered under another group health plan, at which time the Participant's COBRA coverage and the Company's provision of medical and/or dental coverage for the Participant and his or her eligible Class I dependents, Domestic Partner and/or Domestic Partner's children will cease. AT&T Senior Officer Separation Plan Proprietary (Restricted) 16 If, at the end of the 18 month COBRA period, the Senior Officer is not covered under another group health plan, the Company will make medical coverage (not dental coverage) available for the Senior Officer and his or her Class I dependents, Domestic Partner and Domestic Partner's Children under the AT&T Separation Medical Plan, or the successor to such plan, on the same basis as for certain former Officers. Should the Participant elect to take this coverage, the Participant will be responsible for the same portion of the annual premium for this medical coverage as is applicable to similarly situated former Officers covered under the AT&T Separation Medical Plan. Continuation of coverage under the AT&T Separation Medical Plan after the Senior Officer's death is available to the Senior Officer's Class I dependents, Domestic Partner and Domestic Partner's Children, if such dependents pay 100% of the annual premium for coverage. There will be no continuing dental coverage for the Senior Officer or his or her Class I dependents, Domestic Partner and Domestic Partner's Children after the end of eighteen (18) months following the month in which occurs the Senior Officer's Final Payroll Date, except as may otherwise be required by law. The Participant should immediately notify the Company if he or she becomes covered under another group health plan, at which time the Company's provision of medical coverage for the Participant and his or her Class I dependents, Domestic Partner and Domestic Partner's Children will cease. 13. DEPENDENT GROUP LIFE INSURANCE The Participant may continue plan coverage under the AT&T Dependent Group Life Insurance Plan for up to three (3) months after the month in which the Participant's employment terminates by paying the group premium. At the end of the three (3) month period (or any shorter period for which premiums were paid), coverage shall end, at which time the Participant may elect conversion to an individual policy as provided by the insurance carrier. 14. ACCIDENTAL LOSS INSURANCE Coverage for the Participant up to one times total annual pay (as defined in the AT&T Group Life Insurance Plan) will continue, at Participating Company expense, for six (6) months after the month in which the Participant's employment terminates. A Participant may elect to continue coverage in excess of one times total annual pay (as defined in the AT&T Group Life Insurance Plan) for up to six (6) months after the month in which the Participant's employment terminates by paying the applicable additional group premium. Accidental Loss Insurance cannot be converted to an individual policy. At the end of the six (6) month period (or any shorter period for which premiums were paid), coverage shall end. AT&T Senior Officer Separation Plan Proprietary (Restricted) 17 15. DEPENDENT ACCIDENTAL LOSS INSURANCE The Participant may continue plan coverage under the AT&T Dependent Accidental Loss Insurance Plan for up to three (3) months after the month in which the Participant terminates employment by paying the group premium. AT&T Dependent Accidental Loss Insurance Plan coverage cannot be converted to an individual policy. At the end of the three (3) month period (or any shorter period for which premiums were paid), coverage shall end. 16. LONG-TERM CARE The Participant may elect to continue coverage through the carrier by paying the group premium. 17. REIMBURSEMENT ACCOUNTS A Participant may continue to submit claims incurred through the Participant's Final Payroll Date under the AT&T Health Care Reimbursement Account Plan (HCRA) up to the amount elected and not previously reimbursed for that plan year. A Participant may choose to continue to participate in HCRA, through COBRA, on an after-tax basis by making monthly deposits to the account. A Participant may continue to submit claims incurred through the end of the plan year under the AT&T Child/Elder Care Reimbursement Account Plan (CECRA) up to the amount contributed and not previously reimbursed through the Participant's Final Payroll Date. HCRA and CECRA claims may be submitted through April 15 of the following year. G. RELEASE The Release must be signed and returned to the AT&T Executive Benefits Organization c/o Aon Consulting, Inc. of NJ, Room 7C19, 270 Davidson Avenue, Somerset, NJ 08873, on or after the Participant's or the CIC Eligible Senior Officer's Final Payroll Date. H. WITHHOLDINGS Any taxable payment or benefit paid pursuant to this Plan is subject to applicable withholding of Federal, state and local income taxes, FICA (Social Security and Medicare taxes), and FUTA (unemployment taxes) and will be reported on IRS form W-2. AT&T Senior Officer Separation Plan Proprietary (Restricted) 18 I. PAYMENT UPON DEATH, DISABILITY OR LEAVE OF ABSENCE 1. DEATH If a Participant should die on or before his or her Final Payroll Date, no payments will be made or benefits provided under this Plan. The Participant will be treated as if he or she had died as an active Senior Officer and his or her estate or beneficiaries will be entitled to the applicable benefits payable upon the death of an active Senior Officer. If a Participant should die after his or her Final Payroll Date, without having executed a valid Release, or having revoked a previously executed Release, no payments will be made or benefits provided under this Plan. The Participant will be treated as if he or she had died as a terminated Senior Officer and his or her estate or beneficiaries will be entitled to the applicable benefits payable upon the death of a terminated Senior Officer. If a Participant should die after his or her Final Payroll Date, and the Participant has executed a valid Release which has not been revoked, benefits will be provided (a) according to the valid beneficiary designations on file with the Company for such benefits, (b) to the mandatory beneficiary pursuant to the terms of the applicable plan, or (c) to the Participant's estate, as applicable, as soon as administratively feasible after the AT&T Executive Benefits Organization receives written notification of the Participant's death. With respect to the period following a Participant's death, no additional payments for toll reimbursement, transition counseling, financial counseling and group health continuation coverage will be made under this Plan. Long term incentive awards will continue to be subject to the terms and conditions of the applicable AT&T long term incentive plan and the award agreements under which they were granted as applicable upon the death of a Senior Officer. 2. DISABILITY AND LEAVES OF ABSENCE If, on a Participant's Final Payroll Date, the Participant is receiving short term disability benefits under any AT&T short term disability plan, or the Participant is on a leave of absence with a guaranteed right to reinstatement, any benefits to the Participant under this Plan shall be computed and paid as follows: a) SENIOR OFFICER RECEIVING DISABILITY BENEFITS - Except as provided in the final sentence of this paragraph, no benefit under this Plan will be provided until the Participant's employment is formally terminated at the time his or her short-term disability benefits under any AT&T short term disability plan cease, which shall be his or her Final Payroll Date. Any Severance Payments due under Section F.1 of this Plan shall be reduced (but not below zero) in accordance with procedures established by the Executive Vice President - Human Resources, by the full amount of any disability benefits paid under any AT&T short term disability plan for the period after the date established by the Participant Notification AT&T Senior Officer Separation Plan Proprietary (Restricted) 19 Form as the Participant's Final Payroll Date. A Senior Officer who terminates employment at the end of a period of short term disability benefits and immediately thereafter commences long term disability benefits (under the Company's long term disability program) shall not be eligible to receive any payments or benefits under this Plan. b) SENIOR OFFICER ON A LEAVE OF ABSENCE WITH GUARANTEED RIGHT OF REINSTATEMENT - Benefits under this Plan will not be payable until a Participant's employment is formally terminated at the conclusion of the Participant's leave of absence. J. FORFEITURE Participants shall repay and forfeit the payments and/or benefits provided under this Plan, in the following circumstances: 1. VIOLATION OF AT&T CODE OF CONDUCT OR AT&T NON-COMPETITION GUIDELINE Notwithstanding any other provision of this Plan, if it is determined by the Executive Vice President - Human Resources of AT&T, in consultation with AT&T's General Counsel, that a Senior Officer has violated AT&T's Code of Conduct, and/or violated the AT&T Non-Competition Guideline, (the "Guideline") (copies of which will be provided to the Senior Officer prior to his or her Final Payroll Date, if requested by the Senior Officer), the Senior Officer will be required to repay to the Company an amount equal to the economic value of all benefits already provided to the Senior Officer under this Plan and shall forfeit all unpaid benefits under this Plan. Severance that the Participant has elected to defer under Section F.2 of this Plan shall be repaid, to the extent that payments have been made to the Participant from the deferred account established for the Participant's Severance Payment. The amount, if any, not paid from the deferred account to the Participant as of the breach of the Guideline shall be forfeited. Additional forfeiture provisions may apply under other AT&T compensation, incentive, benefit and perquisite plans, programs and arrangements. 2. FUTURE SERVICES A Senior Officer who has received the Severance Payment provided by Section F.1, or has received the Severance Payment provided under Section 5 of Appendix A of the Plan (or who has deferred receipt of the Severance Payment provided by Section F.2 or Section 6 of Appendix A), shall have a continuing obligation to cooperate with the Company on a commercially reasonable basis, in any matter, and to testify in any legal proceeding in which the Company is a party, in each case relating to, or in connection with, the duties and AT&T Senior Officer Separation Plan Proprietary (Restricted) 20 responsibilities of the Senior Officer while he or she was employed by the Company. If the Senior Officer provides services within the two-year period (104 weeks) following the Senior Officer's Final Payroll Date (as an employee, independent contractor, consultant or otherwise (other than to participate in the defense or prosecution of a matter in which the Company is a party, or to cooperate with the Company in a manner contemplated by the preceding paragraph)) to the Company or any joint venture in which the Company (directly or indirectly) owns any equity interest, then upon commencement of any such services, the Senior Officer will be required to repay (or forfeit) a portion of the Severance Payment, or the amounts credited to the Senior Officer's deferred account under Section F.2 of the Plan, provided to the Senior Officer under the Plan prior to such commencement of services. Such portion of the Severance Payment, or the amounts credited to the Senior Officer's deferred account, shall be determined by multiplying the Severance Payment, or the amounts credited to the Senior Officer's deferred account, respectively, by a fraction, the numerator of which is the number of whole weeks remaining in the two-year period (up to 104 weeks) following the Senior Officer's Final Payroll Date (determined as of the effective date of his or her commencement of such services), and the denominator of which is 104. Except to the extent provided in the remaining sentences of this Section J.2, benefits that would otherwise be provided to the Senior Officer under the Plan, on and after such commencement of services, shall be forfeited. Notwithstanding the foregoing, the Company shall make an additional payment ("Additional Payment") to the Senior Officer who commences such services (or may reduce the amount required to be repaid or forfeited by the Senior Officer under the first and second sentence of this paragraph), to the extent necessary, such that the total value of Plan benefits retained by the Senior Officer, when added to the Additional Payment, will total twenty-five thousand dollars ($25,000.00). This sum of twenty-five thousand dollars ($25,000.00), which the Senior Officer shall retain and/or continue to defer, shall be treated as consideration for the Senior Officer's completion and non-revocation of the Release. Any deferred amounts remaining after the repayment (or forfeiture) required by this Section J.2 will continue to accrue interest and will be payable as provided under the applicable election to defer. K. TERMS AND CONDITIONS OF EXISTING PLANS AND PROGRAMS Except as otherwise specifically provided for in this Plan, a Senior Officer's rights and benefits under any of the Company's other employee and Senior Officer level compensation, incentive, benefit and/or perquisite plans and programs, including annual and long term incentive plans, continue to be subject to the terms of those plans and programs as they may be modified or amended from time to time or terminated in accordance with the Company's reservation of rights to so modify, amend or terminate. In the event there is a conflict between the content in this Plan and the terms of the respective compensation, incentive, AT&T Senior Officer Separation Plan Proprietary (Restricted) 21 benefit and/or perquisite plan documents, the compensation, incentive, benefit and perquisite plan or program documents will control and govern the operation of the plans. Subject to Section I.2 (pertaining to short term disability payments), no payment or benefit pursuant to this Plan will be reduced for contributions to or benefits under, or be recognized under, any other AT&T employee or Senior Officer level benefit plan, program or arrangement. L. PLAN ADMINISTRATION AT&T is the Plan Administrator and a named fiduciary of the Plan. AT&T has delegated sole authority and responsibility to administer this Plan to AT&T's Executive Vice President - Human Resources, or his or her delegate, and he or she shall make all determinations regarding the interpretation and administration of this Plan. The Executive Vice President - Human Resources, or his or her delegate, shall have sole and complete discretionary authority to determine such matters. The Executive Vice President - Human Resources is also a named fiduciary who shall serve as the final review authority under this Plan, and shall have sole and complete discretionary authority to determine conclusively for all parties and in accordance with the terms of the documents or instruments governing the Plan, any and all questions arising from the administration of this Plan and interpretation of all Plan provisions, determination of all questions relating to participation of eligible Senior Officers and eligibility for benefits, determination of all relevant facts, the amount and type of benefits payable to any Senior Officer, beneficiary or estate, and the construction of all terms of this Plan. All determinations and decisions of the named fiduciary are conclusive and binding on all parties and not subject to further review. The Executive Vice President - Human Resources has delegated to the AT&T Executive Benefits Organization the authority to review all initial claims for payments and benefits under the terms of this Plan. The Executive Vice President - Human Resources shall afford a full and fair review of any denial of a claim by the AT&T Executive Benefits Organization for payments under the terms of this Plan. If there is a situation that requires an administrator who is also a Participant or a CIC Eligible Senior Officer to make judgment(s) about himself/herself, such administrator will automatically be recused and replaced by another administrator named by the Executive Vice President - Human Resources. The Plan Administrator shall have the right, in its sole discretion, to reduce or offset all or any portions of payments described in Sections F or I or Appendix A of the Plan to the extent necessary to satisfy in whole or in part any expenses, obligations, or liabilities that are owed by a Participant to the Company or any employee benefit plan or related trust as of the Participant's Final Payroll Date. AT&T Senior Officer Separation Plan Proprietary (Restricted) 22 1. CLAIM PROCEDURE A Senior Officer, or his or her estate or beneficiary (a "Claimant"), who either qualifies or believes the Senior Officer qualifies as a Participant or a CIC Eligible Senior Officer, may file a claim in writing for benefits under this Plan, if the Claimant believes that the Claimant has not received benefits to which the Claimant is entitled under this Plan. Such claim may only relate to a matter under this Plan and not to any matter under the Guidelines or any other AT&T policy, practice or guidelines. The written claim should be sent to the AT&T Executive Benefits Organization, One AT&T Way, Bedminster, New Jersey 07921, or to an alternative address identified and communicated to the Claimant. The written claim should be sent within sixty (60) days of the date of the occurrence of facts giving rise to the claim. If the claim is denied, in whole or in part, the Claimant will receive written notice from the AT&T Executive Benefits Organization (or the successor of such organization's responsibilities). This information will be provided within ninety (90) days of the date the claim was received. This written notice will include: - the specific reason or reasons for the denial; - specific reference to pertinent Plan provisions on which the denial was based; - a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary; and - appropriate information as to the steps to be taken if the Claimant desires to submit the claim for arbitration. In some cases, more than ninety (90) days may be needed to make a decision. In such cases, the Claimant will be notified in writing, within the initial ninety-day period, of the reason more time is needed. An additional ninety (90) days may be taken to make the decision if the Claimant is sent such a notice. The extension notice will show the date by which the decision will be sent. If no response is received within the ninety-day period, the claim is considered denied. The procedure for appealing a denied claim is set forth below in Section M, Arbitration. AT&T Senior Officer Separation Plan Proprietary (Restricted) 23 PLEASE NOTE THAT THE PLAN REQUIRES THAT A CLAIMANT PURSUE ALL THE CLAIM AND APPEAL RIGHTS DESCRIBED ABOVE BEFORE SEEKING ANY REMEDIES OR RELIEF THAT MAY BE PROVIDED UNDER THE ARBITRATION PROCEDURES SET FORTH IN SECTION M OF THIS PLAN, OR OTHERWISE, AND TO PURSUE THE ARBITRATION PROCEDURES SET FORTH IN SECTION M OF THIS PLAN PRIOR TO COMMENCEMENT OF ANY CIVIL ACTION IN FEDERAL COURT. Official Plan Name: AT&T Senior Officer Separation Plan Plan Sponsor and Administrator: AT&T Corp. One AT&T Way Bedminster, New Jersey 07921 Employer Identification Number: 13-4924710 Type of Plan: Welfare benefit plan; deferred compensation plan. Type of Administration and Funding: The Plan is unfunded. Agent for Legal Process: Once all claim procedures detailed herein have been exhausted, if a Claimant wants to begin arbitration, service of legal process may be made upon the plan administrator to the attention of the AT&T Executive Vice President - Human Resources (or the successor of such officer's responsibilities). Plan Document: This document serves as the plan document for the AT&T Senior Officer Separation Plan. Effective Date: The Effective Date of this amended and restated Plan shall be May 19, 2004. AT&T Senior Officer Separation Plan Proprietary (Restricted) 24 RIGHTS UNDER ERISA. The Plan is an employee welfare benefit plan and a deferred compensation plan governed by ERISA. Senior Officers are entitled to certain rights and protections under ERISA. In addition to creating rights for Participants, ERISA imposes duties upon the people who are responsible for the operation of the Plan. The people who operate and interpret the Plan, called "fiduciaries" of the Plan, have a duty to do so prudently, in the interest of all Participants and beneficiaries. No one, including the Company, may terminate a Senior Officer's employment for the purpose of preventing the Senior Officer from receiving the benefits to which he or she is entitled, and no one, including the Company or any other person, may discriminate against a Senior Officer in any other way for that purpose or in order to keep him or her from exercising his or her rights under ERISA. If the Senior Officer's benefit request is denied in whole or in part, such Senior Officer has the right to have the Plan Administrator review and reconsider the benefit request. Under ERISA, there are steps a Senior Officer can take to enforce the above rights. For instance, if a Senior Officer requests materials from the Plan and does not receive them within thirty (30) days, he or she may file suit in federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay the Senior Officer up to one hundred ten dollars ($110.00) a day until the materials are produced unless they were not sent or received because of reasons beyond the control of the Administrator. If a Senior Officer's benefit request is denied or ignored, in whole or in part, and the Senior Officer has unsuccessfully pursued his or her claim for benefits through the Arbitration procedure set forth in Section M of this Plan, the Senior Officer may file suit in a state or federal court. If a Senior Officer alleges discrimination for asserting his or her rights, the Senior Officer may seek assistance from the US Department of Labor, or the Senior Officer may file suit in a federal court. The court will decide who should pay court costs and legal fees. If the Senior Officer is successful, the court may order the person sued to pay these costs and fees. If the Senior Officer loses, the court may order the claimant to pay these costs and fees, for example, if it finds the claim is frivolous. If a Senior Officer has any questions about this statement or about his or her rights under ERISA, he or she should contact the nearest Area Office of the Employee Benefits Security Administration, US Department of Labor. If a Senior Officer has any other questions, he or she should contact AT&T's Executive Benefits Organization, One AT&T Way, Bedminster, New Jersey 07921 (or any successor office). AT&T Senior Officer Separation Plan Proprietary (Restricted) 25 M. ARBITRATION Any dispute, controversy, or question arising under, out of, or relating to this Plan remaining after a Claimant has filed a claim with the AT&T Executive Benefits Organization, in accordance with the procedures set forth in or adopted pursuant to the provisions of Section L hereof, and been denied, shall be referred for arbitration in the State of New Jersey to a neutral arbitrator jointly selected by the Claimant and AT&T as a condition precedent to the commencement of a civil action by the Claimant in a federal court. The proceeding shall be governed by the Commercial Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence) and the decision of the arbitrator shall be governed by the rule of law, and in particular ERISA and its related rules and regulations and relevant case law. If the parties are unable to agree upon a neutral arbitrator within thirty (30) days after the Claimant has given AT&T written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for the appointment of a neutral arbitrator, or, if such Association is not then in existence or does not desire to act in the matter, either party may apply to the Presiding Judge of the Superior Court of any county in New Jersey for the appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question. Such right to submit a dispute arising hereunder to arbitration and the decision of the neutral arbitrator shall be final, conclusive and binding on all interested persons and no action at law or in equity shall be instituted, or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. The Claimant and AT&T shall each bear their own costs and attorneys' fees, except that AT&T shall pay the costs of any arbitrator appointed hereunder as well as the costs of any copy of any official transcript of the proceeding. N. PLAN DOCUMENTS This document shall serve as both the Summary Plan Description and the official Plan document that regulates the operation of this Plan. O. ASSIGNMENT OR ALIENATION Subject to applicable federal income tax laws, no payments or benefits under this Plan or any right or interest in such payments or benefits shall be assignable or subject in any manner to anticipation, alienation, sale, transfer, assignment, claims of creditors, garnishment, pledge, execution, attachment or encumbrance of any kind, including, but not limited to, pursuant to any domestic relations order (within the meaning of Section 206(d)(3) of ERISA and Internal Revenue Code Section 414(p)(1)(B)), and any such attempted disposition shall be null and void. AT&T Senior Officer Separation Plan Proprietary (Restricted) 26 P. OFFICERS OR DEPARTMENTS Throughout this Plan, there are references to specific AT&T officers and/or offices. Such references are intended to include the appropriate officer and/or office. Any addresses contained herein shall be amended automatically to the appropriate address whenever necessary to reflect changes in office location or corporate reorganization. Q. SEVERABILITY If any provision of this Plan or the application thereof to any Senior Officer's circumstance is held invalid or unenforceable, the remainder of this Plan, and the application of such provision to other Participants or circumstances, shall not be affected thereby, and to such end, the provisions of this Plan are to be severable. R. AMENDMENT AND TERMINATION The Company reserves the right to amend, modify, suspend or terminate this Plan and any policies, procedures or guidelines for workforce reductions which may be maintained by the Company, for any reason whatsoever, subject to the provisions of Section 18 of Appendix A to this Plan. The Executive Vice President - Human Resources of AT&T (or any successor to that officer's responsibilities), in addition to any other authority previously granted, has been delegated the authority to adopt amendments to the Plan, provided the increase or decrease in Plan costs is not material, as well as amendments required by applicable federal or state law (or authorized or made desirable by such statutes). AT&T Senior Officer Separation Plan Proprietary (Restricted) 27 APPENDIX A AT&T SENIOR OFFICER SEPARATION PLAN CHANGE IN CONTROL PROVISIONS 1. PURPOSE: THE CHANGE IN CONTROL BENEFITS DESCRIBED IN APPENDIX A WILL NOT APPLY UNLESS A CHANGE IN CONTROL OCCURS. Notwithstanding any terms of the Plan to the contrary, for the two-year period following a Change in Control (as defined below), (i) the definitions of "Senior Officer", "Cause" and "Good Reason" that otherwise would have been governed by Sections A and B, respectively, of the Plan, (ii) the procedure to be followed in the case of termination of employment for Good Reason that otherwise would have been governed by Section E.2 of the Plan, and (iii) the Plan benefits that otherwise would have been governed by Section F of the Plan, shall be determined exclusively pursuant to the provisions of this Appendix A. Accordingly, the definition of Senior Officer in Section A of the Plan, the definitions of "Cause" and "Good Reason" in Section B of the Plan, and Sections E.2 and F of the Plan shall not apply for the two-year period following a Change in Control. Except to the extent otherwise specified in this Appendix A, the applicable definitional, operational, procedural and administrative provisions detailed in Sections A (other than the definition of "Senior Officer"), B, (other than the definitions of "Cause" and "Good Reason"), C, D, E (other than the notification requirements set forth in Section E.2), G, H, I, J, K, L, M, N, O, P, Q and R of the Plan remain unchanged and will govern the operation of the Plan, including the provisions of this Appendix A, following a Change in Control. 2. EFFECTIVE DATE: The effective date of the Change In Control related provisions of the Plan, as set forth in this Appendix A, is October 23, 2000, as amended and restated May 19, 2004. 3. DEFINITIONS: BUSINESS RELOCATION BEYOND A REASONABLE COMMUTING DISTANCE - shall mean: a change in the Senior Officer's principal work location to a location that AT&T Senior Officer Separation Plan Proprietary (Restricted) 28 (i) is more than thirty five (35) highway miles from the Senior Officer's principal work location immediately prior to the Change in Control; and (ii) increases the Senior Officer's commuting distance in highway mileage. The terms "highway miles" and "highway mileage" shall have the same meanings as these terms have when used to express the distances between locations by mapmakers such as the Hagstrom Map Company. CAUSE - shall mean: (i) commission of a crime, or conviction of a crime, including by a plea of guilty or nolo contendere, involving theft, fraud, dishonesty or moral turpitude; (ii) intentional or grossly negligent disclosure of confidential or trade secret information of the Company to anyone not entitled to such information, which causes significant harm to the Company; (iii) gross omission or gross dereliction of any statutory or common law duty of loyalty to the Company, which causes significant harm to the Company; or (iv) willful violation of the Company's Code of Conduct or any other written Company policy, where said violation causes significant harm to the Company. CHANGE IN CONTROL ("CIC") - shall have the same meaning assigned to that term in the AT&T 2004 Long Term Incentive Program. CIC ELIGIBLE SENIOR OFFICER - shall mean a Senior Officer who, within two (2) years following a CIC, (a) has his or her employment terminated for reasons other than (i) Cause or (ii) by reason of becoming eligible for benefits under any AT&T long-term disability plan, or (b) terminates employment for Good Reason occurring after a CIC, provided that the Senior Officer has followed the Notification Procedure set forth in Section 4 of this Appendix A. GOOD REASON - with respect to a Senior Officer, shall mean the occurrence of any of the following events without the Senior Officer's express written consent: (iii) a Reduction In Authority or Responsibility (as defined below); or (iv) a Reduction in Compensation (as defined below); or (v) a Business Relocation Beyond a Reasonable Commuting Distance (as defined above). REDUCTION IN AUTHORITY OR RESPONSIBILITY - shall mean: AT&T Senior Officer Separation Plan Proprietary (Restricted) 29 (iii) the assignment to the Senior Officer of any duties materially inconsistent in any respect with the Senior Officer's position (including status, offices, titles and reporting requirements), and that detract from or reduce the authority, duties or responsibilities to which the Senior Officer was assigned immediately prior to the date of the Change in Control; or (iv) any other action by the Company which results in a diminution in such position, authority, duties or responsibilities. Reduction in Authority or Responsibility shall not include: (d) an isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company promptly after receipt of notice thereof given by the Senior Officer; or (e) any temporary reduction in authority or responsibility while the Senior Officer is absent from active service on any approved disability or approved leave of absence. By way of example, and not by way of limitation, Reduction in Authority or Responsibility shall include: (1) The removal of any division, business or operating unit or other business organization from the direct managerial responsibility of the Senior Officer, or (2) The material reduction in the size or scope of responsibility or operating budget of any division, business or operating unit or other business organization for which the Senior Officer has direct managerial responsibility, or (3) A reduction in the Senior Officer's authority to legally bind the Company under the Company's Schedule of Authorization (without the need for another's approval), as in effect immediately prior to the Change in Control. REDUCTION IN COMPENSATION - shall mean, with respect to a Senior Officer, a reduction in the amount or value of any of the following elements of compensation below the amount or value of such element of compensation in effect immediately prior to the Change in Control: a. the Senior Officer's annual base salary rate; or b. the Senior Officer's Target Annual Bonus (as defined below) without an offsetting increase in the Senior Officer's annual base salary rate, or AT&T Senior Officer Separation Plan Proprietary (Restricted) 30 c. the Senior Officer's Target Annual Long Term Incentive Compensation (as defined below), without an offsetting increase in the Senior Officer's annual base salary rate and/or the Senior Officer's Target Annual Bonus. A Senior Officer's Target Annual Bonus immediately prior to the Change in Control shall mean the value determined by multiplying the Senior Officer's Target Annual Bonus percentage in effect on the day preceding the date of the CIC by his or her annual base salary rate in effect on the day preceding the date of the CIC. A Senior Officer's Target Annual Long Term Incentive Compensation immediately prior to the Change in Control shall mean the total value of the annual equity-based incentive compensation grants to the Senior Officer, including the following: (a) "full value equity" compensation, including, but not limited to, restricted stock, restricted stock units ("RSUs"), performance shares and cash equivalents, and (b) "non-full value equity" based compensation including, but not limited to, stock options and stock appreciation rights, in each case granted as part of the Senior Officer's annual compensation, but shall not include any special one-time or periodic grant or award, granted or awarded as part of a hiring package or retention program, agreement or arrangement. In the event a Change in Control occurs prior to the date on which annual Long Term Incentive Compensation grants are approved by the Compensation and Employee Benefits Committee of the AT&T Board of Directors (or by such other management committee or committee of the AT&T Board of Directors, or by the duly authorized officers of the successor to AT&T Corp. (for the purpose of this definition, separately and collectively referred to as the "Committee") for Senior Officers for such calendar year, Target Annual Long Term Incentive Compensation shall mean the total value of the annual equity-based incentive compensation grants for the preceding calendar year. (a) The value of each "full value equity" grant, if any, shall be the fair market value ("FMV") of such grant on the date the grant is approved by the Committee. The FMV of each "full value equity" grant shall be determined by multiplying the number of related AT&T common shares by the applicable average of the daily high and low sale prices of AT&T common shares on the New York Stock Exchange, or by multiplying the number of related common shares of the successor to AT&T by the applicable average of the daily high and low sale prices of such successor's common shares on the New York Stock Exchange or other national exchange on which such shares are listed, as appropriate, for the date the grant was approved by the Committee. (b) The value of each "non-full value equity" grant, such as stock options and stock appreciation rights ("SARs"), shall equal the per option AT&T Senior Officer Separation Plan Proprietary (Restricted) 31 or per SAR value on the date the grant was approved by the Committee, based on Black Scholes estimates (or such other option-pricing model, deemed acceptable by the Financial Accounting Standards Board for valuing options and SARs and utilized by the Committee when considering such grant) multiplied by the number of related AT&T common shares in such grant, and/or such other amounts determined in the same manner and approved by the Committee for the year in which the grant being valued was granted. For this purpose, the Black Scholes value and FMV of the respective components of Target Annual Long Term Incentive Compensation shall be updated annually as approved by the Committee. SENIOR OFFICER - Shall mean a Senior Officer (as defined in the Plan) who, immediately prior to a CIC, was an employee of AT&T or an Affiliate (including a Senior Officer who was receiving benefits under any AT&T short term disability plan, or was on an approved leave of absence with guaranteed reinstatement rights), or was a Senior Officer immediately prior to an event which constitutes Good Reason, and who remains continuously employed by the Company following a CIC. SPECIAL PENSION ENHANCEMENT - shall mean the CIC Credit as defined in the AT&T Management Pension Plan (as amended by the resolutions of the AT&T Board of Directors dated October 23, 2000), without regard to whether it is payable under the AT&T Management Pension Plan or under the AT&T Excess Benefit and Compensation Plan, or both. 4. NOTIFICATION REQUIREMENTS FOR TERMINATION FOR GOOD REASON: In the event a Senior Officer determines that Good Reason exists to terminate his or her employment with the Company, the Senior Officer must notify the Company in writing of the specific event, within sixty (60) days of the occurrence of such event, and such notice shall also include the date on which the Senior Officer will terminate employment with the Company, which date shall be no earlier than 15 days from the date of such notice. The date set forth in the notice for termination, or such earlier or later date as the Senior Officer and the Company shall mutually agree in writing, shall be the Senior Officer's Final Payroll Date. Within seven (7) days of the Company's receipt of such written notice, the Company shall notify the Senior Officer that it agrees or disagrees with the Senior Officer's determination that the event specified in the Senior Officer's notice constitutes Good Reason. Notwithstanding any provision of the Plan or this Appendix A giving the Company discretionary authority regarding administration of the Plan, the Company's determination whether it agrees or AT&T Senior Officer Separation Plan Proprietary (Restricted) 32 disagrees with the Senior Officer's determination that the event specified in the Senior Officer's notice constitutes Good Reason shall be reasonable, based on all the relevant facts and circumstances. The Arbitrator in any arbitration proceeding initiated pursuant to Section M of the Plan, in which the existence of Good Reason is an issue, shall be expressly empowered and directed to review, de novo, the facts and circumstances claimed by the Senior Officer to constitute Good Reason. In the event the Company notifies the Senior Officer that it agrees with the Senior Officer's determination that the event specified in the Senior Officer's notice constitutes Good Reason, the Senior Officer will terminate employment with the Company on his or her Final Payroll Date. In the event the Company notifies the Senior Officer that it disagrees with the Senior Officer's determination that the event specified in the Senior Officer's notice constitutes Good Reason, the Senior Officer may terminate his or her employment on the date specified in the notice (or such later date as the Senior Officer and the Company may mutually agree in writing) or may elect to continue his or her employment by so notifying the Company in writing. In either event, the Senior Officer shall be entitled to pursue a claim in accordance with the procedures set forth in Section L of the Plan, or to pursue the Arbitration procedures set out in Section M of the Plan without first filing a claim. If the Senior Officer's claim, or arbitration, is ultimately concluded in the Senior Officer's favor, the Senior Officer shall retain the right to receive the benefits under this Appendix A. The arbitration procedure set forth in Section M of the Plan shall remain a condition precedent to the commencement by the CIC Senior Officer of a civil action with respect to any claim for benefits under the Plan or this Appendix A. 5. SEVERANCE PAYMENT: In addition to the Special Pension Enhancement provided under the terms of the AT&T Management Pension Plan and the AT&T Excess Benefit and Compensation Plan, a CIC Eligible Senior Officer shall be provided a Severance Payment that is a lump sum cash payment equal to the sum of (a) three hundred percent (300%) of the CIC Eligible Senior Officer's highest annual base salary rate in effect on or after the day preceding the date of the CIC (but ignoring increases in annual base salary rate attributable solely to any decreases in the value of the CIC Eligible Senior Officer's Target Annual Bonus and/or Target Annual Long-Term Incentive, as contemplated by the definition of Reduction in Compensation), plus (b) three hundred percent (300%) of the CIC Eligible Senior Officer's Target Annual Bonus for the year in which the CIC occurs (or, if the CIC occurs prior to the date in a calendar year on which a Senior Officer's Target Annual Bonus is determined, for the preceding calendar year), minus (c) an amount equal to ninety percent (90%) of the CIC Eligible Senior Officer's Special Pension Enhancement. AT&T Senior Officer Separation Plan Proprietary (Restricted) 33 The Severance Payment under this Section 5 will be paid in a single lump sum as soon as administratively feasible after the expiration of the revocation period indicated in the CIC Eligible Senior Officer's Release without revocation, unless deferral of such Severance Payment is elected in accordance with Section 6 of this Appendix A below. 6. DEFERRAL OPTION: The CIC Eligible Senior Officer may elect to defer receipt of the Severance Payment. The CIC Eligible Senior Officer's written election must be submitted to the AT&T Executive Benefits Organization, or successor organization, not later than the day prior to the date on which the Release is executed. A copy of the election form to be completed is attached as Appendix C. Deferral may be for a period of up to five (5) years following the date of the CIC Eligible Senior Officer's Final Payroll Date, in whole year increments. Payout of the deferred Severance Payment may be in the form of a lump sum, or up to a maximum of five (5) approximately equal annual installments, as indicated on the election form. The first installment from the deferred account (or the single payment, if the CIC Eligible Senior Officer so elected), including interest thereon, will be paid by the end of the calendar quarter which immediately follows the first, second, third, fourth or fifth anniversary (as so elected by the CIC Eligible Senior Officer) of the CIC Eligible Senior Officer's Final Payroll Date. All unpaid deferred amounts will continue to accrue interest at the rate of return set forth below. In the event of a CIC Eligible Senior Officer's death prior to the payment of all deferred amounts, the unpaid balance shall be paid to his or her named beneficiary (or to his or her estate, if no beneficiary has been named) in a lump sum not later than the end of the calendar quarter immediately following the calendar quarter in which the AT&T Executive Benefits Organization, or successor organization, receives written notice of such death. For individuals who were designated as Senior Officers (as defined in the Plan) as of May 19, 2004, deferred amounts will be credited quarterly with interest equal to one-quarter (1/4) of the average rate applicable to actively traded 10-year U.S. Treasury Notes for the prior calendar quarter, plus 1.25 percent. The Company reserves the right to change the interest rate to be credited on deferred amounts with respect to individuals who were designated as Senior Officers after May 19, 2004, however, in the absence of such action by the Company, the interest rate described in the previous sentence will apply. The crediting of interest on deferred amounts, will commence with the CIC Eligible Senior Officer's Final Payroll Date, and will be calculated in accordance with rules and procedures in place for the AT&T Senior Management Incentive Award Deferral Plan, or the successor to such plan, in effect immediately prior to the date of the CIC. CIC Eligible Senior Officers who elect to defer amounts under AT&T Senior Officer Separation Plan Proprietary (Restricted) 34 this arrangement shall be unsecured general creditors of the Company. The Company shall establish for each CIC Eligible Senior Officer, an unfunded bookkeeping account to which deferred amounts (and interest) will be credited, but the Company shall have no obligation to fund or set aside assets for the payment of any deferred amounts under this arrangement. 7. ANNUAL BONUS: Subject to the second and third sentences of this Section 7, a CIC Eligible Senior Officer who has performed at least eighty-eight (88) consecutive days of service to the Company during his or her Termination Year, will be eligible to receive a prorated portion of the annual incentive applicable to the Termination Year based on the CIC Eligible Senior Officer's time on the active payroll during the Termination Year. The prorated portion shall equal the product of the actual achievement level for the CIC Eligible Senior Officer's annual incentive for such year, as determined by the Company, calculated in a manner consistent with the calculation of the annual incentive for similarly situated senior management employees who were employed throughout the year for which the calculation is being made, multiplied by a fraction, the numerator of which is the number of completed months of the CIC Eligible Senior Officer's employment during the Termination Year (including the last month of employment if the CIC Eligible Senior Officer's Final Payroll Date is on or after the 15th of the month) and the denominator of which is 12. If the CIC Eligible Senior Officer's Final Payroll Date occurs in the same calendar year as the CIC, the CIC Eligible Senior Officer will have received a prorated portion of his or her annual incentive with respect to service during such calendar year through the date of the CIC, in accordance with the terms of the AT&T Management Pay Plan. In such event, the numerator of the fraction referred to in the second sentence of this Section 7 shall equal the number of complete months of the CIC Eligible Senior Officer's employment during the Termination Year after the date of the CIC (including the month in which the CIC occurs if the CIC occurs prior to the 15th of the month, as well as the last month of employment if the CIC Eligible Senior Officer's Final Payroll Date is on or after the 15th of the month). 8. OUTSTANDING LONG TERM INCENTIVES: The disposition of all grants under any AT&T long term incentive program, including any plan previously maintained by McCaw, LIN, TCG, TCI or MediaOne, including the AT&T Wireless Adjustment Plan, shall be governed by the provisions of the applicable AT&T long term incentive program. AT&T Senior Officer Separation Plan Proprietary (Restricted) 35 9. CASH AWARDS/PAYMENTS: Other unvested cash awards/payments, including but not limited to awards/payments for retention, unpaid signing bonuses and any other cash payments or awards which have not yet vested, but not including cash in individual deferral accounts which are subject to their own terms and conditions, will vest as of the later of the Participant's Final Payroll Date or upon expiration of the revocation period indicated in the Release without revocation, and will be paid as soon as administratively feasible following such revocation period. 10. EXECUTIVE LIFE INSURANCE PROGRAM: Notwithstanding the terms and conditions of the AT&T Corp. Executive Life Insurance Program ("ELIP"), with respect to a CIC Eligible Senior Officer who is a participant in ELIP and for whom and ELIP policy has been issued (excluding any term binder), but has not attained his or her Normal Termination Date (as defined in ELIP) as of his or her Final Payroll Date, the Company shall pay a lump sum cash payment ("ELIP Payment") to the CIC Eligible Senior Officer (or to his or her assignee, as applicable) as soon as administratively feasible after the expiration of the revocation period indicated in the CIC Eligible Senior Officer's Release without revocation. The ELIP Payment shall be equal to the sum of (x) plus (y) where (x) equals the present value, as of the date of the CIC Eligible Senior Officer's Final Payroll Date, of any necessary additional premium payments, estimated, but not guaranteed, (assuming that the discount rate equals 8% and taking into account the ELIP policy cash value as of the month end immediately prior to the CIC Eligible Senior Officer's Final Payroll Date), to be sufficient to provide for the continuation of the insurance coverage under the ELIP Policy (based on assumptions that are consistent with the assumptions under the ELIP policy used immediately prior to the CIC including, but not limited to, the annual crediting rate of the ELIP policy) with projected coverage equal to the applicable benefit amount (as defined in ELIP and taking into account the election of the Participant, if any, to continue coverage previously available under the AT&T Senior Manager Universal Life Insurance Program at the rate of two and one-half (2.5) times his or her final annual base salary rate, rather than the current ELIP policy coverage of three times a Participant's annual base salary rate prior to the Participant's Final Payroll Date , and two times annual base salary rate after the Participant's Final Payroll Date) as if the CIC Eligible Senior Officer had continued in active employment until becoming Eligible for Retirement Related Benefits and assuming that his or her annual base salary rate remains fixed in an amount equal to his or her highest base salary rate in effect on or after the day preceding the date of the CIC, (but ignoring increases in annual base salary rate attributable solely to any decreases in the value of the CIC Eligible Senior Officer's Target Annual Bonus and/or Target Annual Long-Term Incentive, as contemplated by the definition of "Reduction in Compensation" set forth above) and (y) equals the amount (the "tax adjustment payment"), calculated in accordance with AT&T's practice for Senior Officers as AT&T Senior Officer Separation Plan Proprietary (Restricted) 36 in effect immediately prior to the CIC, to cover the Federal income and FICA (Medicare portion) taxes estimated to be incurred by the CIC Eligible Senior Officer by reason of the lump sum cash payment and the tax adjustment payment provided for in this section. Such CIC Eligible Senior Officer shall not be entitled to any additional or future payments from the Company under ELIP. In the event a Participant is covered only by a term binder as of his or her Final Payroll Date, such term insurance will cease on his or her Final Payroll Date. 11. FINANCIAL COUNSELING: A CIC Eligible Senior Officer shall receive a lump sum payment estimated by the Company in its sole discretion to be sufficient to provide, for a period of two (2) years after the CIC Eligible Senior Officer's Final Payroll Date, financial counseling services from a qualified financial counselor, plus a tax adjustment payment equal to the amount, calculated in accordance with AT&T's practice for Senior Officers as in effect immediately prior to the CIC, to cover the Federal income and FICA (Medicare portion) taxes estimated to be incurred by the CIC Eligible Senior Officer by reason of the lump sum payment for financial counseling services and the tax adjustment payment provided for in this section. Payment shall be made as soon as administratively feasible following the CIC Eligible Senior Officer's Final Payroll Date and the expiration of the revocation period indicated in the Release without revocation. A CIC Eligible Senior Officer shall not be entitled to any additional or future payments from the Company with respect to financial counseling or related services provided to the CIC Eligible Senior Officer after his or her Final Payroll Date. 12. AT&T TOLL DISCOUNT: The CIC Eligible Senior Officer will be eligible for toll reimbursement through the AT&T Toll Discount Program under the terms and conditions that apply to senior management employees Eligible for Retirement-Related Benefits, under the same terms and conditions that applied immediately prior to the CIC to active senior management employees. 13. VACATION: A CIC Eligible Senior Officer should make every reasonable effort, consistent with the needs of the business, to use all vacation, personal days, and floating holidays to which he or she is eligible before his or her Final Payroll Date. If the CIC Eligible Senior Officer is unable to do so, he or she will be paid for any unused earned vacation days (but not for any unearned vacation days) for the calendar year in which his or her Final Payroll Date occurs and for any approved and unexpired carryover days from the prior year in accordance with AT&T policy at that time. The CIC Eligible Senior Officer will not receive pay in lieu of floating holidays and management personal days if these days are not taken prior to his AT&T Senior Officer Separation Plan Proprietary (Restricted) 37 or her Final Payroll Date, except for those CIC Eligible Senior Officers in the states of California, Illinois or North Dakota, who will receive such payments as may be mandated by state law. 14. MEDICAL/DENTAL COVERAGE: The extension and cost of medical and dental coverage for a CIC Eligible Senior Officer who is Eligible for Retirement-Related Benefits will be in accordance with the terms of the AT&T Corp. Postretirement Welfare Benefits Plan, or the successor to such plan, as amended from time to time. The Company will continue coverage under the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, respectively, for each CIC Eligible Senior Officer who is not Eligible for Retirement-Related Benefits, and his or her Class I dependents, Domestic Partner and/or Domestic Partner's Children (as those terms are defined in the AT&T Medical Expense Plan) (provided that such Class I dependents, Domestic Partner and/or Domestic Partner's Children were covered by the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, or the successors to such plans, immediately prior to the CIC Eligible Senior Officer's Final Payroll Date), for up to eighteen (18) months following the month in which occurs the CIC Eligible Senior Officer's Final Payroll Date. Company-provided continuation of coverage under the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan for Active Employees, or the successors to such plans, as the plans may be amended from time to time, shall run concurrently with any rights to continuation of coverage the CIC Eligible Senior Officer and/or his or her eligible dependents may otherwise have under COBRA. If, at the end of the 18-month COBRA period, the CIC Eligible Senior Officer is not covered under another group health plan, the Company will make medical coverage (not dental coverage) available for the CIC Eligible Senior Officer and his or her Class I dependents, Domestic Partner and/or Domestic Partner's Children under the AT&T Separation Medical Plan, or the successor to such plan, on the same basis as for certain former senior managers. Should the Participant elect to take this coverage, the CIC Eligible Senior Officer will be responsible for the same portion of the annual premium for this medical coverage as is then applicable to similarly situated former senior managers covered under the AT&T Separation Medical Plan. Continuation of coverage under the AT&T Separation Medical Plan after the CIC Eligible Senior Officer's death is available to the CIC Eligible Senior Officer's Class I dependents, Domestic Partner and/or Domestic Partner's Children, if such dependents pay 100% of the annual premium for coverage. There will be no continuing dental coverage for the CIC Eligible Senior Officer or his or her Class I dependents, Domestic Partner and/or Domestic Partner's Children after the end of eighteen (18) months following the month in which occurs the CIC Eligible Senior Officer's Final Payroll Date, except as may otherwise be required by law. The Participant should immediately notify the Company if he or she becomes covered under AT&T Senior Officer Separation Plan Proprietary (Restricted) 38 another group health plan, at which time the Company's provision of medical coverage for the Participant and his or her Class I dependents, Domestic Partner and/or Domestic Partner's Children will cease. All coverage continued for a CIC Eligible Senior Officer (and his or her eligible dependent(s)) will be the same as the coverage provided to the CIC Eligible Senior Officer while an active employee, to the extent available, subject to the terms of the AT&T Medical Expense Plan and/or the AT&T Dental Expense Plan or the AT&T Separation Medical Plan or the successors to such plans, as those plans may be amended from time to time. 15. TRANSITION COUNSELING: A CIC Eligible Senior Officer will be entitled to receive the services of a Company-paid and Company-approved outplacement or career transition consultant in accordance with AT&T's current practices for Senior Officers in effect as of the CIC Eligible Senior Officer's Final Payroll Date; provided, however, that commencement of such transition counseling services, if desired, must begin prior to the first anniversary of the CIC Eligible Senior Officer's Final Payroll Date. 16. EXCISE TAX: (a) If any element of compensation or benefit provided to a CIC Eligible Senior Officer under the terms of the Plan, or under any other plan, program, policy or other arrangement ("Benefit"), either alone or in combination with other elements of compensation and benefits paid or provided to such CIC Eligible Senior Officer, constitutes an "excess parachute payment", as that term is defined in Section 280G of the Internal Revenue Code and the regulations thereunder, and subjects such CIC Eligible Senior Officer to the excise tax pursuant to Section 4999 of the Internal Revenue Code, and any interest and penalties thereon (collectively, the "Excise Tax"), then such CIC Eligible Senior Officer shall be entitled to an additional lump-sum cash payment from the Company (the "Excise Tax Adjustment Payment"), subject to mandatory withholding, in an amount equal to the Excise Taxes (including the Excise Tax attributable to the Excise Tax Adjustment Payment related to the Benefit) plus any income and FICA taxes and any interest and penalties thereon attributable to the Excise Tax Adjustment Payment. For purposes of calculating an Excise Tax Adjustment Payment to any CIC Eligible Senior Officer in any year, it shall be assumed that the CIC Eligible Senior Officer is subject to Federal and applicable state and local income taxes at the highest marginal Federal and applicable state and local income tax rates, respectively, for the year in which the Excise Tax Adjustment Payment is paid. Also, the Excise Tax Adjustment Payment to any CIC Eligible Senior Officer shall reflect the Federal tax benefits attributable to the deduction of applicable state and local income taxes. AT&T Senior Officer Separation Plan Proprietary (Restricted) 39 (b) Subject to the provisions of Section 16(c) below, all determinations required to be made under this Section 16, including whether and when an Excise Tax Adjustment Payment is required and the amount of such Excise Tax Adjustment Payment and the assumptions utilized in arriving at such determinations, shall be made by an independent accounting firm chosen by the Company (the "Accounting Firm"). The Accounting Firm shall provide detailed supporting calculations to the Company and to the CIC Eligible Senior Officer within thirty (30) business days of the receipt of notice from the Company or the CIC Eligible Senior Officer that there has been a Benefit provided to which this Section 16 applies (or such earlier time as requested by the Company). Any Excise Tax Adjustment Payment, as determined pursuant to this Section 16(b), shall be paid by the Company to the CIC Eligible Senior Officer within fifteen (15) business days of the receipt of the Accounting Firm's determination. (c) (i) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding, or in the opinion of independent counsel agreed upon by the Company and the CIC Eligible Senior Officer, that the Excise Tax payable by the CIC Eligible Senior Officer on the Benefit is less than the amount initially taken into account under Section 16(a) for purposes of calculating the Excise Tax Adjustment Payment related to such Benefit, the Accounting Firm shall recalculate the Excise Tax Adjustment Payment to reflect the actual Excise Tax related to such Benefit. Within thirty (30) business days following the CIC Eligible Senior Officer's receipt of notice of the results of such recalculation from the Accounting Firm and/or the Company, the CIC Eligible Senior Officer shall repay to the Company the excess of the initial Excise Tax Adjustment Payment over the recalculated Excise Tax Adjustment Payment. (ii) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding, or in the opinion of an independent counsel agreed upon by the Company and the CIC Eligible Senior Officer, that the Excise Tax payable by the CIC Eligible Senior Officer on the Benefit is more than the amount initially taken into account under Section 16(a) for purposes of calculating the Excise Tax Adjustment Payment, the Accounting Firm shall recalculate the Excise Tax Adjustment Payment to reflect the actual Excise Tax. Within fifteen (15) business days following the Company's receipt of notice of the results of such recalculation from the Accounting Firm, the Company shall pay to the CIC Eligible Senior Officer the excess of the recalculated Excise Tax Adjustment Payment over the initial Excise Tax Adjustment Payment. (d) All fees and expenses of the Accounting Firm shall be borne solely by the Company. (e) The CIC Eligible Senior Officer shall notify the Company in writing of any written claim by the Internal Revenue Service that, if successful, would require the payment by the Company of an Excise Tax Adjustment Payment or the AT&T Senior Officer Separation Plan Proprietary (Restricted) 40 recalculation of an Excise Tax Adjustment Payment. The notification shall apprise the Company of the nature of such claim, including (1) a copy of the written claim from the Internal Revenue Service, (2) the identification of the element of compensation and/or benefit that is the subject of such Internal Revenue Service claim, and (3) the date on which such claim is requested to be paid. Such notification shall be given as soon as practicable but no later than ten (10) business days after the CIC Eligible Senior Officer actually receives notice in writing of such claim. Within ten (10) business days following receipt of the notification of the Internal Revenue Service written claim from the CIC Eligible Senior Officer, the Company shall pay to the CIC Eligible Senior Officer an Excise Tax Adjustment Payment, or the excess of a recalculated Excise Tax Adjustment Payment over the initial Excise Tax Adjustment Payment, as applicable, related to the element of compensation and/or benefit which is the subject of the Internal Revenue Service claim. Within ten (10) business days following such payment to the CIC Eligible Senior Officer, the CIC Eligible Senior Officer shall provide to the Company written evidence that he or she had paid the claim to the Internal Revenue Service (the United States Treasury). The failure of the CIC Eligible Senior Officer to properly notify the Company of the Internal Revenue Service claim (or to provide any required information with respect thereto) shall not affect any rights granted to the CIC Eligible Senior Officer under this Section 16, except to the extent that the Company is materially prejudiced in the challenge to such claim as a direct result of such failure. If the Company notifies the CIC Eligible Senior Officer in writing, within sixty (60) business days following receipt from the CIC Eligible Senior Officer of notification of the Internal Revenue Service claim, that it desires to contest such claim, the CIC Eligible Senior Officer shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the CIC Eligible Senior Officer; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim if the Company elects not to assume and control the defense of such claim; AT&T Senior Officer Separation Plan Proprietary (Restricted) 41 provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the CIC Eligible Senior Officer harmless, on an after-tax basis, for any Excise Tax, income tax and FICA tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 16, the Company shall have the right, at its sole option, to assume the control of all proceedings in connection with such contest, in which case it may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim, and may direct the CIC Eligible Senior Officer to sue for a refund or contest the claim in any permissible manner, and the CIC Eligible Senior Officer agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, that any extension of the statute of limitations relating to payment of tax for the taxable year of the CIC Eligible Senior Officer with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's rights to assume the control of the contest shall be limited to issues with respect to which an Excise Tax Adjustment Payment would be payable hereunder, and the CIC Eligible Senior Officer shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. To the extent that the contest to the Internal Revenue Service claim is successful, the Excise Tax Adjustment Payment related to the element of compensation and/or benefit that was the subject of the claim shall be recalculated in accordance with the provisions of Section 16(c)(ii). 17. LEGAL FEES: In the event that it shall be necessary or desirable for a CIC Eligible Senior Officer to retain legal counsel or incur other costs and expenses in connection with enforcement of his or her rights under the Plan, including this Appendix A, or other matters directly related to the CIC Eligible Senior Officer's termination from employment with the Company, the Company shall reimburse the CIC Eligible Senior Officer for his or her reasonable attorneys' fees and costs and expenses if a final decision in connection with a material issue of the litigation (or arbitration) is issued in the CIC Eligible Senior Officer's favor by an arbitrator or a court of competent jurisdiction. AT&T Senior Officer Separation Plan Proprietary (Restricted) 42 18. NO AMENDMENT: Notwithstanding any other provision of this Plan, unless required by applicable law, upon the occurrence of a CIC, no amendment shall be made to the Plan, including this Appendix A, by the AT&T Board of Directors (or the successor board), by the Company (or the successor to the Company), by any committee, any officer, any employee of the Company (or the successor to the Company) or by any other party, to suspend, modify, or eliminate the level or types of benefits that are applicable upon the occurrence of a CIC, or to eliminate the restrictions contained in this sentence, and no such amendment to the AT&T Senior Officer Separation Plan, including this Appendix A, made in violation of this provision, shall be effective. 19. SUCCESSORS: The obligation of the Company under this Appendix A shall be binding upon any assignee or successor in interest thereto. The Company shall not merge or consolidate with any other corporation, or liquidate or dissolve, or transfer assets or business operations, in a transaction in which the employment of employees is transferred to such other corporation, or to the purchaser of such assets or business operations, without making suitable arrangements for the payment of any benefits that are or may become payable under this Appendix A, and for the assumption by such successor employer of the obligations set forth in this Appendix A. AT&T Senior Officer Separation Plan Proprietary (Restricted) 43 WAIVER AND RELEASE I am terminating my employment with AT&T Corp., the successor to AT&T Corp., or one of its subsidiaries or affiliates ("the Company"). In consideration for the receipt of benefits under Section F of the AT&T Senior Officer Separation Plan ("Plan"), or under Appendix A of the Plan, if applicable, I acknowledge and agree to the following: 1. I HAVE BEEN TOLD BY THE COMPANY AND I UNDERSTAND THAT ALL BENEFITS SET FORTH IN SECTION F OF THE PLAN, OR UNDER APPENDIX A OF THE PLAN, IF APPLICABLE, FROM THE COMPANY ARE CONDITIONED UPON MY SIGNING AND NOT REVOKING THIS WAIVER AND RELEASE ("THIS RELEASE" OR "THE RELEASE") ON MY FINAL PAYROLL DATE (AS THAT TERM IS DEFINED IN THE PLAN), AND RETURNING IT TO THE AT&T EXECUTIVE BENEFITS ORGANIZATION, C/O AON CONSULTING, ROOM 7C19, 270 DAVIDSON AVENUE, SOMERSET, NJ 08873 ON MY FINAL PAYROLL DATE. I UNDERSTAND THAT PURSUANT TO THE TERMS OF THE PLAN, I MUST REPAY AND/OR FORFEIT A PORTION OF SUCH BENEFITS, IF WITHIN THE TWO-YEAR PERIOD FOLLOWING MY FINAL PAYROLL DATE, I PROVIDE SERVICES (AS AN EMPLOYEE, INDEPENDENT CONTRACTOR, CONSULTANT OR OTHERWISE (OTHER THAN TO PARTICIPATE IN THE DEFENSE OR PROSECUTION OF A MATTER IN WHICH THE COMPANY IS A PARTY)) TO THE COMPANY OR ANY JOINT VENTURE IN WHICH THE COMPANY (DIRECTLY OR INDIRECTLY) OWNS ANY EQUITY INTEREST. 2. I realize that there are various state, local and federal laws that prohibit, among other things, employment discrimination on the basis of age, sex, race, color, gender, creed, religion, sexual preference/orientation, marital status, national origin, mental or physical disability, veteran status, and that these laws are enforced through the Equal Employment Opportunity Commission ("EEOC"), Department of Labor ("DOL") and State or Local Human Rights agencies. Such laws include, without limitation, Title VII of the Civil Rights Act of 1964; the Family and Medical Leave Act of 1993 ("FMLA"); the Age Discrimination in Employment Act of 1964 ("ADEA"); the Americans with Disabilities Act of 1990 ("ADA"); the Employee Retirement Income Security Act of 1974 ("ERISA"); 42 U.S.C. Section 1981; the Equal Pay Act; the New Jersey Conscientious Employee Protection Act; the New Jersey Law Against Discrimination, etc., as each may have been amended; and other state and local human or civil rights laws as well as other statutes which regulate employment; and the common law of contracts and torts. I hereby waive and release any right I may have under these or any other laws with respect to my employment and termination of employment at the Company and acknowledge that the Company has not (a) discriminated against me, (b) breached any contract with me, (c) committed any civil wrong (tort) against me, or (d) otherwise acted unlawfully toward me. I also hereby waive any right to become, and promise not to consent to become, a member of any class in a case in which claims are asserted against any Releasee (as defined in Paragraph 3 hereof) that are related in any way to my employment or the termination of my employment with the Company, and that involve events which have occurred as of the date of this Release (defined to mean the date on which AT&T Senior Officer Separation Plan Proprietary (Restricted) 44 Employee signs this Release). If, without my prior knowledge and consent, I am made a member of a class in any proceeding, I shall opt out of the class at the first opportunity afforded to me after learning of my inclusion. In this regard, I agree that I will execute, without objection or delay, an "opt-out" form presented to me either by the court in which such proceeding is pending or by counsel for any Releasee who is made a defendant in any such proceeding. 3. On behalf of myself, my heirs, executors, administrators, successors and assigns, I hereby unconditionally release and discharge the Company, the various AT&T Benefit Committees, plans, trusts and trustees, and their successors, assigns, affiliates, shareholders, directors, officers, representatives, agents and employees (collectively "Releasees" and individually "Releasee") from any and all claims, (including claims for attorneys' fees and costs), charges, actions and causes of action, demands, damages, and liabilities of any kind or character, in law or equity, suspected or unsuspected, past or present, that I ever had, may now have, or may later assert against any Releasee, arising out of or related to my employment or termination of employment with the Company. To the fullest extent permitted by law, this Release includes, but is not limited to: (a) claims arising under ADEA, Title VII, the ADA, the Equal Pay Act, the Older Workers Benefit Protection Act, the Worker Adjustment and Retraining Notification Act, ERISA, the FMLA, the ADA, 42 U.S.C. Section 1981, the New Jersey Conscientious Employee Protection Act, and any other federal, state, or local law prohibiting age, sex, race, color, gender, creed, religion, sexual preference/orientation, marital status, national origin, mental or physical disability, veteran status, or any other form of unlawful discrimination or claim with respect to or arising out of my employment with or termination from the Company; (b) claims (whether based on common law or otherwise) arising out of or related to any contract or employment agreement (whether express or implied); (c) claims under any federal, state or local constitutions, statutes, rules or regulations; (d) claims (whether based on common law or otherwise) arising out of any kind of tortious conduct (whether intentional or otherwise) including, but not limited to, wrongful termination, defamation, violation of public policy; and (e) claims included in, related to, or which could have been included in any presently pending federal, state or local lawsuit filed by me or on my behalf against any Releasee, which I agree to immediately dismiss with prejudice. (For employees working in California) Section 1542 of the Civil Code of the State of California states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge of all Releasees, I expressly acknowledge that this Release is intended to include not only claims that are known, anticipated or disclosed, but also claims that are unknown, unanticipated and undisclosed. 4. I covenant and agree not to bring any action, suit or administrative proceeding contesting the validity of this Release or attempting to negate, modify or reform it, nor to sue any Releasee for any reason arising out of my employment or termination AT&T Senior Officer Separation Plan Proprietary (Restricted) 45 thereof, other than a claim contesting the validity of this Release under applicable provisions of ADEA. If I breach either Paragraph 3 or 4 hereof, I shall: (i) to the extent not prohibited by law, promptly return to the Company all consideration received hereunder, except twenty-five thousand dollars ($25,000.00), and (ii) pay any Releasee all of their actual attorneys' fees and costs incurred in each such action, suit or other proceeding, including any and all appeals or petitions therefrom, regardless of the outcome. I agree to pay such expenses within thirty (30) days of written demand. This Paragraph 4 is not intended to limit me from instituting legal action according to the terms of the Plan for the sole purpose of a claim for benefits to which I am entitled under the Plan. I understand that this Waiver and Release has neither the purpose nor intent of interfering with my protected right to file a charge with or participate in an investigation or proceeding pursuant to the statutes administered and enforced by the EEOC, specifically: the ADEA, the Equal Pay Act, Title VII of the Civil Rights Act of 1964 and the ADA. I understand that I will not breach this Waiver and Release if I file a charge with or participate in an investigation or proceeding pursuant to the statutes administered and enforced by the EEOC. However, by signing this Waiver and Release, I understand that I waive any right I may have to recover money or other relief in any lawsuit or proceeding brought by me or by an agency or third party, including the EEOC, on my behalf. EXCEPTION: Nothing in this Waiver and Release limits my right to participate and recover damages or other relief in a case known as "Engers, et al. v. AT&T and AT&T Management Pension Plan," Civil Action No. 98-CV-3660 (NHP), which alleges ADEA and ERISA violations in AT&T's cash balance pension program for management employees and is currently pending before the United States District Court for the District of New Jersey. 5. I understand that this in no way affects any benefits to which I would be entitled in the absence of the Plan under any AT&T benefit plan in which I participated during my employment, such as the AT&T Pension Plan for Management Employees but specifically excluding any other Company plan providing for severance or other termination-related benefits. 6. I have no knowledge of any wrongdoing involving improper or false claims against a federal or state governmental agency, other than as I have disclosed to the AT&T Law Division. 7. I agree to return to the Company, on or before my Final Payroll Date, all Company property including, but not limited to, files, records, computer access codes, computer programs, keys, card key passes, instruction manuals, documents, business plans and any copies thereof and other property or materials which I received or prepared or helped to prepare in connection with my employment with the Company, and to assign to the Company all right, title and interest in such property, and any other inventions, discoveries or works of authorship created by me during the course of my employment. AT&T Senior Officer Separation Plan Proprietary (Restricted) 46 8. I agree that I will submit all vouchers for reasonable business expenses prior to my Final Payroll Date or as soon thereafter as is practicable. I understand and agree that after my Final Payroll Date I will no longer be authorized to incur any expenses, obligations or liabilities on behalf of the Company. 9. I affirm my obligation to keep all proprietary Company information confidential and not to disclose it to any third party in the future. As used in this Release, the term "Proprietary Company Information" includes, but is not necessarily limited to, technical, marketing, business, financial or other information which constitutes trade secret information or information not available to competitors of the Company, the use or disclosure of which might reasonably be construed to be contrary to the interests of the Company. 10. The construction, interpretation and performance of this Release shall be governed by the laws of the state of my work location on my Final Payroll Date without regard to that state's conflict of laws rules and principles. 11. In the event that any one or more of the provisions contained in the Release shall for any reason be held to be unenforceable in any respect under the law of any state or of the United States of America, such unenforceability shall not affect any other provisions of this Release, but, with respect only to that jurisdiction holding the provision to be unenforceable, this Release shall then be construed as if such unenforceable provision or provisions had never been contained herein. 12. I understand that I have the right to consult with an attorney before signing the Release and that the Company has advised me to do so. I have 45 days to consider the Release before signing it, and I may revoke the Release within seven (7) calendar days (15 days in Minnesota) after signing it. Revocation must be made by delivery of written notice of revocation to AT&T's Executive Benefits Organization, c/o Aon Consulting, Room 7C19, 270 Davidson Avenue, Somerset, NJ 08873. 13. This contains the entire agreement between the Company and me and fully supersedes any and all prior agreements or understandings pertaining to the subject matter hereof (including any employment agreements, severance or separation agreements, arrangements, and offer letters) and all such prior agreements are null and void in their entirety and of no force and effect. I represent and acknowledge that in executing this Release, I have not relied upon any representation or statement not set forth herein made by any of the Releasees or by any of the Releasees' agents, representatives or attorneys with regard to the subject matter of this Release. BY SIGNING THIS WAIVER AND RELEASE, I STATE THAT: I HAVE READ IT; I UNDERSTAND IT AND KNOW THAT I AM GIVING UP IMPORTANT RIGHTS; I AGREE WITH EVERYTHING IN IT; THE COMPANY HAS ADVISED ME TO CONSULT AN ATTORNEY BEFORE SIGNING IT; AND I HAVE SIGNED IT KNOWINGLY AND VOLUNTARILY. AT&T Senior Officer Separation Plan Proprietary (Restricted) 47 _________________________________ ________________________ Date Employee Signature _________________________________ Employee Name Printed _________________________________ Employee Social Security Number AT&T Senior Officer Separation Plan Proprietary (Restricted) 48 ADDENDUM TO WAIVER AND RELEASE IMPORTANT NOTICE REGARDING RIGHTS YOU ARE WAIVING BY SIGNING THE FOREGOING RELEASE NOTICE: IF YOU WORKED FOR A BELL SYSTEM COMPANY AND TOOK A PREGNANCY-RELATED LEAVE OF ABSENCE AT ANY TIME PRIOR TO APRIL 29, 1979, YOU MAY BE GIVING UP LEGAL RIGHTS TO POSSIBLE ADDITIONAL NET CREDITED SERVICE ("NCS") CURRENTLY AT ISSUE IN A PENDING CLASS ACTION LAWSUIT. Currently, the lawsuit of Hulteen, et al. v. AT&T Corp, AT&T Management Pension Plan, AT&T Pension Plan, and AT&T Employees' Benefit Committee, Civil Action No. C01 1122 MJJ, is pending before the United States District Court for the Northern District of California. The plaintiffs in the lawsuit allege on behalf of themselves and all other similarly affected female employees that, because prior to April 29, 1979, while working at a Bell System Company, they did not receive Net Credited Service ("NCS") for the entire time they were disabled due to pregnancy, while employees disabled for any other reason than pregnancy did receive full NCS, they were discriminated against based on gender in violation of Title VII. The plaintiffs also claim that these events violate ERISA. The plaintiffs also seek NCS for any time that they and all other similarly affected female employees were forced to be on leave when they were willing and able to work. Through the lawsuit, the plaintiffs seek to have their NCS dates and those of similarly situated women adjusted and to recover pension benefits and any other benefits denied to them due to insufficient NCS, including but not limited to the benefits from any early retirement opportunity for which they did not have enough NCS to qualify. The Court has ordered that this notice be provided to employees who are considering whether or not to sign this release so that they know that they are giving up important legal rights. The amount of NCS Plaintiffs believe you may be entitled to recover if they are successful in this lawsuit could depend on your individual situation. Plaintiffs believe this time you might be entitled to should include: - The time you were DISABLED by pregnancy: For normal pregnancies, a woman is usually considered disabled for 6 to 8 weeks after the date of birth, but for pregnancies with any complications, a woman is usually considered disabled for as long as she is unable to perform one or more of her regular job duties. It does not include time you were out of work for childcare or bonding. - The NCS you lost when you were out of work for a non-pregnancy disability which occurred while you were on leave for a pregnancy-related disability. - The NCS you lost because your Bell System employer required you to begin your pregnancy-related leave earlier than you wanted to leave work. - The NCS you lost because your Bell System employer refused to reinstate you as soon as you wanted and were able to return to work. Plaintiffs also believe that the amount of NCS you would be entitled to if they are successful in this lawsuit would include increased pension benefits. The amount of benefits to which you might be entitled could be affected by any early retirement opportunities or other promotional opportunities or benefits you lost due to insufficient NCS. AT&T Senior Officer Separation Plan Proprietary (Restricted) 49 AT&T contends that its pregnancy leave policies and practices have been lawful at all times before and after the enactment of Title VII and ERISA, and denies that it violated either of these statutes. AT&T is currently defending the lawsuit and intends to continue doing so. Thus, AT&T contends that plaintiffs and any future class members are not entitled to any additional NCS based on this lawsuit. If you choose to sign the attached release: - You will receive all applicable benefits under the AT&T Senior Officer Separation Plan. - You will not be able to have your NCS adjusted and you will not recover any additional pension or other benefits due to you as a result of this lawsuit. - You will give up your right to participate in the Hulteen lawsuit as a named plaintiff or a class member, and your right, if any, to recover if the plaintiffs and plaintiff class prevail in the lawsuit. If you choose not to sign the attached release: - You will give up all applicable benefits under the AT&T Senior Officer Separation Plan that AT&T is offering you. - You may retire and receive your accrued vested pension benefits. - You may participate as a named plaintiff or class member in the Hulteen lawsuit. If you are part of the class in the lawsuit and plaintiffs prevail, you could receive an NCS adjustment and possible additional pension benefits and other benefits associated with an increase in NCS. PLEASE NOTE: The value of the applicable benefits under the AT&T Senior Officer Separation Plan that you are being offered to sign this release may be greater than the value of any recovery you could receive should the class be certified and should plaintiffs prevail in the Hulteen lawsuit. Also, because the court in Hulteen has not yet determined the scope of the class and has not yet decided on the merits of the lawsuit, there is no guarantee that you will be entitled to any recovery. Therefore, it is in your best interest to consult with an attorney about your decision of whether or not to sign the foregoing release. Attorneys specializing in ERISA matters or Title VII discrimination may best be able to assist you in evaluating your alternatives. AT&T Senior Officer Separation Plan Proprietary (Restricted) 50 AT&T SENIOR OFFICER SEPARATION PLAN ELECTION TO DEFER Pursuant to (a) Section F.1 of the AT&T Senior Officer Separation Plan ("the Plan"), or (b) Section 5 of Appendix A of the Plan, if applicable, I will become entitled to a Severance Payment only if I sign a Waiver and Release (as referenced in Section G of the Plan) on or after my Final Payroll Date and do not revoke such Waiver and Release during the revocation period. The Severance Payment has been determined to be $<>. If I become entitled to such amount, I hereby elect, as indicated on LINE 1 below, that in lieu of the payment of such amount to me in a lump sum following my Final Payroll Date, AT&T ("the Company") shall credit such amount to a separate deferred account established in my name on the books of the Company. Such deferred account also shall be credited with interest, compounded as of the end of each calendar quarter, at a rate equal to one-quarter (1/4) of the average rate applicable to actively traded 10 year U.S. Treasury Notes in effect for the prior calendar quarter plus one and one quarter percent (1.25%). I further elect that amounts credited to my deferred account shall be paid to me in the same number of approximately equal annual installments indicated on LINE 2 below. The first installment from the deferred account (or the single payment, if I have so elected) shall be paid by the end of the calendar quarter which immediately follows the calendar quarter in which the anniversary of my Final Payroll Date occurs, as indicated on LINE 3 below, and subsequent installments shall be paid in the same calendar quarter in succeeding calendar years. Undistributed amounts in my deferred account shall continue to be credited with interest, as described above.
LINE SEVERANCE PAYMENT ELECTION 1. Defer - (Check "Yes" box if you elect to defer and complete Lines 2 and 3 below.) Yes [ ] No [ ] 2. Number of installment payments to self (indicate from 1 - 5 only if you checked "Yes" box on Line 1.) _____ installments 3. First installment (or single payment) to be paid by the end of the calendar quarter immediately following the calendar quarter in which the (1st, 2nd, 3rd, _____ anniversary 4th, or 5th) anniversary of my Final Payroll Date occurs. (Enter number only if you checked "Yes" box on Line 1.)
If I should die prior to the distribution of all amounts credited to my deferred account, the unpaid balance shall be paid to my beneficiary (or to my estate if no beneficiary is named) in a lump sum by the end of the calendar quarter immediately following the calendar quarter in which the Company receives notification of my death. All amounts credited to my deferred account shall be unsecured general obligations of the Company, and amounts credited to my deferred account shall not be subject to assignment or alienation. AT&T Senior Officer Separation Plan Proprietary (Restricted) 51 <> <> <> <> - ----------------------------------------------- --------------------------- Print Name Social Security Number - ----------------------------- --------------------------- Signature Date AT&T Senior Officer Separation Plan Proprietary (Restricted) 52 AT&T SENIOR OFFICER SEPARATION PLAN PARTICIPANT NOTIFICATION FORM NAME SSN: ADDRESS ADDRESS The purpose of this form is to confirm that your employment with AT&T will be terminating under the terms of the AT&T Senior Officer Separation Plan. Your Final Payroll Date and the Severance Payment to which you are eligible under this Plan are set forth below. Please read the entire Plan Document for a detailed description of all payments and benefits provided by this Plan. Please note that all payments and benefits are conditioned upon your signing and not revoking the Waiver and Release. S. NCS DATE: BIRTH DATE: (NOT) ELIGIBLE FOR (RETIREMENT RELATED BASE SALARY: $ BENEFITS; RULE OF 65) (CUSTOMIZE AS APPROPRIATE) TARGET BONUS: $ FINAL PAYROLL DATE: SEVERANCE PAYMENT: 2 times (sum of Base Salary + Target Bonus) $ (may elect to defer): AT&T Senior Officer Separation Plan Proprietary (Restricted) 53 EX-10.III.A.3 3 y99567exv10wiiiwaw3.txt SUMMARY OF ACTIONS Exhibit 10(iii)(A)3 Summary of Actions Relating to Change in Control On October 23, 2000, the Board of Directors of AT&T Corp. ("AT&T") approved board resolutions (incorporated by reference of Exhibit (10)(iii)(A)(32) to Form 10-K for 2000, File No. 1-1105) adopting change in control provisions to various AT&T plans and programs (collectively, as further amended subsequent to the date of such resolutions, the "Plans"). The Plans were amended to provide enhanced benefits to participants whose employment is terminated under certain circumstances within two years following a change in control. The definition of "Change in Control" used in these amendments was the definition contained in the AT&T 1997 Long Term Incentive Program (incorporated by reference to Exhibit 10(iii)(A)(12) to Form 10-K for 1999, File No. 1-1105). On February 23, 2004, the Board of Directors of AT&T adopted, subject to shareholder approval, the AT&T 2004 Long Term Incentive Program that, among other things, includes a definition of "Change in Control" that differs from the definition that appears in the AT&T 1997 Long Term Incentive Program. At the AT&T annual meeting on May 19, 2004, the AT&T shareholders approved the AT&T 2004 Long Term Incentive Program (incorporated by reference to Exhibit 4.1 to Form S-8 filed on May 26, 2004, File No. 1-1105). Subsequent to the AT&T shareholders meeting, officers and internal benefits committees of AT&T, with the concurrence of the Chairman of the Compensation and Employee Benefits Committee of the Board of Directors, took various actions the effect of which was to further amend the Plans to substitute the definition of "Change in Control" contained in the AT&T 2004 Long Term Incentive Program for the definition of "Change in Control" contained in the AT&T 1997 Long Term Incentive Program. EX-10.III.A.4 4 y99567exv10wiiiwaw4.txt AT&T DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS 1 EXHIBIT 10(iii)(A)4 AT&T CORP. DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS (as amended May 18, 2004) 1. Eligibility Each member of the Board of Directors ("Board") of AT&T Corp. ("Company") who is not an employee of the Company, or of any of its subsidiaries, is eligible to participate in a Deferred Compensation Plan for Non-Employee Directors ("Plan"). 2. Participation (a) Prior to the beginning of any calendar year, or, in the case of newly elected Directors, within 90 days of such election, each eligible Director may elect to participate in the Plan by directing that all or any part of the compensation which would otherwise have been payable currently for services as a Director (including fees payable for services as a member of a committee of the Board and any shares of AT&T common stock resulting from the vesting of a restricted stock unit award) during such calendar year, or, in the case of newly elected Directors, during the remainder of such calendar year, shall be credited to a deferred compensation account subject to the terms of the Plan. (b) Such an election to participate in the Plan shall be in the form of a document executed by the Director and filed with the Secretary of the Company. An election related to fees, or shares of AT&T common stock otherwise payable currently in any calendar year shall become irrevocable on the last day prior to the beginning of such calendar year, or, in the case of new Directors, on the 90th day after becoming a Director. An election shall continue until a Director ceases to be a Director or until he or she terminates or modifies such election by written notice. Any such termination or modification shall become effective as of the end of the calendar year in which such notice is given with respect to all fees or shares otherwise payable in subsequent calendar years. A Director who has filed a termination of election may thereafter again file an election to participate for any calendar year or years subsequent to the filing of such election (c) Also, a Director's deferred compensation account automatically shall be credited with that part of the Director's compensation for any calendar year (including fees for services as a member of the Board), if any, which the Board has directed to be credited under this Plan. Such compensation shall be credited at the time that the related compensation is or would otherwise have been paid currently. 2 3. Deferred Compensation Accounts (a) At the time of election to participate in the Plan under Item 2 (a) above, a Director shall also designate the percentage of such deferred amounts constituting fees to be credited to the AT&T Shares portion of the Director's deferred account and the percentage to be credited to the Cash portion of such account. All shares of AT&T stock resulting from the vesting of restricted stock unit awards and deferred amounts credited under Item 2 (c) above shall be credited to the AT&T Shares portion of the Director's deferred account. (b) Deferred AT&T Shares. Deferred amounts constituting fees credited to the AT&T Shares portion of a Director's account on the date the related compensation is or would be otherwise paid shall be converted to a number of deferred AT&T Shares, determined by dividing the amount of such compensation by the price of AT&T common shares, as determined in the last sentence of this paragraph. The Director's account shall also be credited on each dividend payment date for AT&T Shares with an amount equivalent to the dividend payment on the number of AT&T common shares equal to the number of deferred AT&T Shares in the Director's account on the record date of such dividend. Such amount shall then be converted to a number of additional deferred AT&T Shares determined by dividing such amount by the price of AT&T common shares, as determined in the last sentence of this paragraph. The price of AT&T common shares related to any compensation or dividend payment date shall be the average of the daily high and low sale prices of AT&T common shares on the New York Stock Exchange ("NYSE") for the period of five trading days immediately preceding such date, or the period of five trading days immediately preceding such date, if the NYSE is closed on such date. In the event of any change in outstanding AT&T common shares by reason of any stock dividend, split, reverse split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, the AT&T Board of Directors shall make such adjustments, if any, that it deems appropriate in the number of deferred AT&T Shares then credited to Director's accounts. Any and all such adjustments shall be conclusive and binding upon all parties concerned. The maximum number of deferred AT&T Shares that may be maintained in the AT&T Shares portion of all Directors' deferred compensation account may not exceed one million (1,000,000). This number is subject to adjustment to take into consideration adjustment in the number of outstanding AT&T common shares as described in the preceding paragraph. (c) Deferred Cash. Deferred amounts credited to the Cash portion of a Director's account shall bear interest from the date the related compensation is or 3 would otherwise be paid. The interest credited to the cash portion of the account will be compounded quarterly at the end of each calendar quarter. For all amounts credited on or after January 1, 2001, the rate of interest credited thereon, as of the end of each calendar quarter, shall be equal to the average ten-year U. S. Treasury note rate for the previous calendar quarter plus 2% or such other rate as shall be determined from time to time by the Board of Directors. For all amounts credited prior to January 1, 2001, the rate of interest credited thereon, as of the end of each calendar quarter, shall be equal to the average ten-year U. S. Treasury note rate for the previous calendar quarter plus 5%. 4. Distribution (a) At the time of election to participate in the Plan, a Director shall also make elections with respect to the distribution (during the Director's lifetime or in the event of the Director's death) of amounts and shares deferred under the Plan plus accumulated earnings. Such elections shall be contained in the document referred to in Item 2 (b), executed by the Director and filed with the Secretary of the Company. The election with respect to the distribution during the Director's lifetime, of fees and shares for any calendar year, shall become irrevocable on the last day prior to the beginning of such calendar year. The election related to the distribution in the event of the Director's death, including the designation of a beneficiary or beneficiaries, may be changed by the Director at any time, by filing the appropriate document with the Secretary of the Company. (b) A Director may elect to receive amounts and shares credited to his or her account in one payment or in some other number of approximately equal annual installments (not exceeding 20), provided, however, that the number of annual installments may not extend beyond the life expectancy of the Director, determined as of the date the first installment is paid. The election shall direct that the first installment (or the single payment if the Director has so elected) be paid on the first day of the calendar year immediately following either (1) the year in which the Director ceases to be a Director of the Company, or (2) the later of the year in which the Director ceases to be a Director of the Company or the year in which the Director attains the age specified in such election, which age shall not be later than age 70-1/2. Each distribution of shares of AT&T common stock resulting from the vesting of restricted stock unit awards shall be made from the AT&T Shares portion of the Director's account. Each other distribution shall be made pro-rata from amounts credited to the cash portion and to the AT&T Shares portion of the Director's account on the applicable payment date. (c) Each distribution of shares of AT&T common stock resulting from the vesting of restricted stock unit awards shall be made in shares of AT&T common stock authorized for issuance under AT&T's long term incentive plans. All other distributions, including all dividend equivalents, shall be in cash. For this purpose, the value of deferred AT&T Shares distributed on any payment date 4 shall be determined by multiplying the number of such deferred AT&T Shares by the price of AT&T common stock, as determined in the following sentence. The price of AT&T common shares related to any payment date shall be the average of the daily high and low sales prices of AT&T common shares on the New York Stock Exchange ("NYSE") for the period of five trading days ending on such date, or the period of five trading days immediately preceding such date, if the NYSE is closed on such date. (d) Notwithstanding an election pursuant to Item 4(b), in the event a Director engages in any competitive activity, as determined in accordance with and pursuant to the terms and conditions of the AT&T Non-Competition Guideline, or becomes employed by any governmental agency having jurisdiction over the activities of the Company or any of it subsidiaries, the entire balance in the Director's deferred account, including earnings, shall be paid immediately in a single payment and distribution of shares. (e) A Director may elect that, in the event the Director should die before full payment of all amounts credited to the Director's deferred account, the balance of the deferred amounts shall be distributed in one payment or in some other number of approximately equal annual installments (not exceeding 10) to the beneficiary or beneficiaries designated in writing by the Director, or if no designation has been made, to the estate of the Director. The first installment (or the single payment if the Director has so elected) shall be paid on the first day of the calendar year following the year of death. (f) Installments subsequent to the first installment to the Director, or to a beneficiary or to the Director's estate, shall be paid on the first day of each succeeding calendar year until the entire amount credited to the Director's deferred account shall have been paid. Deferred amounts held pending distribution shall continue to be credited with earnings, determined in accordance with Item 3. 5. Miscellaneous (a) The right of a Director to any deferred fees, shares and/or earnings thereon shall not be subject to assignment by the Director. (b) All deferred amounts shall be held in the general funds of the Company. The Company shall not be required to reserve, or otherwise set aside, funds for the payment of its obligation hereunder. (c) Copies of the Plan and any and all amendments thereto shall be made available at all reasonable times at the office of the Secretary of the Company to all Directors. 5 May 18, 2004 EX-12 5 y99567exv12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 AT&T CORP. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED) (DOLLARS IN MILLIONS)
FOR THE SIX MONTHS ENDED JUNE 30, 2004 ------------- Income from continuing operations before income taxes $ 72 Add: distributions of less than 50% owned affiliates 2 Add: fixed charges, excluding capitalized interest 491 ---- Total earnings from continuing operations before income taxes and fixed charges $565 ==== Fixed Charges: Total interest expense $419 Capitalized interest 10 Interest portion of rental expense 72 ---- Total fixed charges $501 ==== Ratio of earnings to fixed charges 1.1
EX-31.1 6 y99567exv31w1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION I, David W. Dorman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of AT&T; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 3, 2004 /s/ David W. Dorman ------------------------------- Chief Executive Officer EX-31.2 7 y99567exv31w2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION I, Thomas W. Horton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of AT&T; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 3, 2004 /s/ Thomas W. Horton ------------------------------- Chief Financial Officer EX-32.1 8 y99567exv32w1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION OF PERIODIC FINANCIAL REPORTS I, David W. Dorman, Chairman of the Board and Chief Executive Officer of AT&T Corp., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The quarterly report on Form 10-Q for the quarterly period ended June 30, 2004 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and 2. Information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of AT&T Corp. Dated: August 3, 2004 /s/ David W. Dorman ------------------------------- David W. Dorman A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 9 y99567exv32w2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION OF PERIODIC FINANCIAL REPORTS I, Thomas W. Horton, Senior Executive Vice President, Chief Financial Officer of AT&T Corp., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The quarterly report on Form 10-Q for the quarterly period ended June 30, 2004 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and 2. Information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of AT&T Corp. Dated: August 3, 2004 /s/ Thomas W. Horton ------------------------------- Thomas W. Horton A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----