EX-99.1 4 y21116exv99w1.htm EX-99.1: UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS EX-99.1
 

Exhibit 99.1
AT&T INC.
Unaudited Pro Forma Condensed Combined Financial Information
March 31, 2006
Dollars in millions except per share amounts
The Unaudited Pro Forma Condensed Combined Financial Statements presented below are derived from the historical consolidated financial statements of AT&T, BellSouth and Cingular. The Unaudited Pro Forma Condensed Combined Financial Statements do not give effect to the consolidation of the YellowPages.com, which we refer to as YPC, a joint venture between AT&T and BellSouth, for which AT&T’s and BellSouth’s total investment was approximately $100 million at March 31, 2006. The Unaudited Pro Forma Condensed Combined Financial Statements are prepared using the purchase method of accounting, with AT&T treated as the acquirer and as if the acquisition of BellSouth had been completed on January 1, 2006 for statement of income purposes and March 31, 2006 for balance sheet purposes.
The Unaudited Pro Forma Condensed Combined Financial Statements are based upon the historical financial statements of AT&T, BellSouth and Cingular adjusted to give effect to the BellSouth acquisition. The pro forma amounts have been developed from (a) the unaudited consolidated financial statements of AT&T contained in its Quarterly Report on Form 10-Q for the three-month period ended March 31, 2006, (b) the unaudited consolidated financial statements of BellSouth contained in its Quarterly Report on Form 10-Q for the three-month period ended March 31, 2006, and (c) the unaudited consolidated financial statements of Cingular contained in its Quarterly Report on Form 10-Q for the three-month period ended March 31, 2006.
As of the date of this joint proxy statement/prospectus, AT&T has not performed the detailed valuation studies necessary to arrive at the required estimates of the fair market value of the BellSouth assets to be acquired and the liabilities to be assumed (which will include the fair value adjustments for BellSouth’s 40 percent interest in Cingular) and the related allocations of purchase price, nor has it identified the adjustments necessary, if any, to conform BellSouth and Cingular data to AT&T’s accounting policies. As indicated in Note 2 to the Unaudited Pro Forma Condensed Combined Financial Statements, AT&T has made certain adjustments to the historical book values of the assets and liabilities of BellSouth and Cingular to reflect certain preliminary estimates of the fair values necessary to prepare the Unaudited Pro Forma Condensed Combined Financial Statements, with the excess of the purchase price over the historical net assets of BellSouth, as adjusted to reflect estimated fair values, recorded as goodwill. Actual results may differ from these Unaudited Pro Forma Condensed Combined Financial Statements once AT&T has determined the final purchase price for BellSouth and has completed the valuation studies necessary to finalize the required purchase price allocations and identified any necessary conforming accounting changes for BellSouth and Cingular. There can be no assurance that such finalization will not result in material changes.
Additionally, as of the date of this joint proxy statement/prospectus, AT&T has not completed the final valuations included in the March 31, 2006 AT&T consolidated balance sheet. The values of certain assets and liabilities assumed in the November 18, 2005 acquisition of ATTC are based on preliminary valuations and are subject to adjustment as additional information is obtained. Such additional information includes, but is not limited to: valuations and physical counts of PP&E, valuation of investments and involuntary termination of employees. In valuing acquired assets and assumed liabilities, fair values were based on: future expected discounted cash flows for trade names and customer relationships; current replacement cost for similar capacity and obsolescence for certain fixed assets; comparable market rates for contractual obligations and certain investments, real estate and liabilities, including pension and postretirement benefits; expected settlement amounts for litigation and contingencies, and; as appropriate, discount and growth rates. In accordance with U.S. generally accepted accounting principles, which we refer to as GAAP, AT&T has 12 months from the closing of the ATTC acquisition to finalize the valuation. Changes to PP&E may result in adjustments to the fair value of

 

 

AT&T INC.
Unaudited Pro Forma Condensed Combined Financial Information — Continued
March 31, 2006
Dollars in millions except per share amounts
certain identifiable intangible assets acquired. When finalized, material adjustments to goodwill may result.
The Unaudited Pro Forma Condensed Combined Financial Statements are provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of AT&T would have been had the BellSouth acquisition occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position.
The Unaudited Pro Forma Condensed Combined Financial Statements do not include the realization of future cost savings from operating efficiencies, revenue synergies or other restructuring costs expected to result from the ATTC and BellSouth acquisitions.
The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the separate historical consolidated financial statements and accompanying notes of AT&T, BellSouth and Cingular.

 

 

AT&T INC.
Unaudited Pro Forma Condensed Combined Financial Statements
Dollars in millions except per share amounts
AT&T INC.
 
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2006
                                                     
    Historical   Adjustments            
                    Consolidation of                
    AT&T   BellSouth   Cingular   Other       Combined    
 
Total Operating Revenues
   $ 15,835     $ 5,171     $ 8,980     (a3)   $ (580 )   (c1)   $ 28,909      
 
                                 (339 )   (d1)            
 
                                 (158 )   (d2)            
Operating Expenses
                                                    
Cost of sales (exclusive of depreciation and amortization shown separately below)
     7,128       2,109       3,647     (a3)     (580 )   (c1)     11,752      
 
                                 —     (c2)            
 
                                 (339 )   (d1)            
 
                                 (158 )   (d2)            
 
                                 (55 )   (d3)            
 
                                                    
Selling, general and administrative
     4,024       931       2,846     (a3)     —     (c2)     7,782      
 
                                 (19 )   (d3)            
 
                                                    
Depreciation and amortization
     2,492       893       1,680     (a3)     (19 )   (c4)     6,265      
 
                                 442     (a5)            
 
                                 777     (b3)            
 
                                                    
Asset impairment and net restructuring and other charges
     —       (8 )     —           —           (8 )    
 
Total Operating Expenses
     13,644       3,925       8,173           49           25,791      
 
Operating Income
     2,191       1,246       807           (1,126 )         3,118      
 
Interest expense
     464       279       297     (a3)     (104 )   (c1)     946      
 
                                 (7 )   (c3)            
 
                                 17     (d4)            
Other income (expense) – net
     430       194       (32 )   (a3)     (104 )   (c1)     134      
 
                     (354 )   (a3)                        
 
Income Before Income Taxes
     2,157       1,161       124           (1,136 )         2,306      
 
Provision for income taxes
     712       377       124     (a3)     (435 )   (f)     778      
 
Net Income
   $ 1,445     $ 784     $ —         $ (701 )       $ 1,528      
 
 
                                                    
Basic Earnings Per Share:
                                                    
Net Income
   $ 0.37     $ 0.44                             $ 0.24     (e)
Weighted Average Common Shares Outstanding (000,000)
     3,882       1,797                               6,276      
 
                                                    
Diluted Earnings Per Share:
                                                    
Net Income
   $ 0.37     $ 0.43                             $ 0.24     (e)
Weighted Average Common Shares Outstanding with Dilution (000,000)
     3,902       1,804                               6,305      
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed Combined Financial Statements.

 

 

AT&T INC.
 
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2006
                                                 
    Historical   Pro Forma
                    Adjustments    
                    Consolidation of            
    AT&T   BellSouth   Cingular   Other       Combined
 
Assets
                                                
Current Assets
                                                
Cash and cash equivalents
   $ 1,057     $ 247     $ 218     (a1)   $ —         $ 1,522  
Accounts receivable – net
     8,647       2,409       3,707     (a1)     —           14,763  
Other current assets
     4,146       1,448       2,488     (a1)     —           8,082  
 
Total current assets
     13,850       4,104       6,413           —           24,367  
 
Property, Plant and Equipment – Net
     58,367       21,870       21,817     (a1)     1,595     (b2)     103,649  
Goodwill
     13,402       —       22,355     (a1)     39,536     (b)     66,824  
 
                     473     (a2)     (8,942 )   (a4)        
Other Intangibles – Net
     8,214       1,595       28,050     (a1)     10,200     (b3)     53,044  
 
                                 5,300     (a5)        
 
                                 12,500     (a5)        
 
                                 (11,220 )   (a4)        
 
                                 (1,595 )   (b2)        
Investments in Equity Affiliates
     2,090       35       1     (a1)     —           2,126  
Investments in and Advances to Cingular Wireless
     32,316       21,882       (32,316 )   (a2)     —           —  
 
                     (21,882 )   (a2)                    
Other Assets
     16,198       8,164       708     (a1)     25     (b4)     23,905  
 
                                 (1,190 )   (b2)        
 
Total Assets
   $ 144,437     $ 57,650     $ 25,619         $ 46,209         $ 273,915  
 
 
                                                
Liabilities and Stockholders’ Equity
                                                
Current Liabilities
                                                
Debt maturing within one year
   $ 5,712     $ 4,408     $ 2,193     (a1)   $ —         $ 10,637  
 
                     (1,676 )   (a2)     —              
Other current liabilities
     19,043       4,727       7,263     (a1)     —           31,033  
 
Total current liabilities
     24,755       9,135       7,780           —           41,670  
 
Long-Term Debt
     25,829       13,062       19,306     (a1)     520     (a7)     52,048  
 
                     (6,717 )   (a2)     48     (b5)        
Other Noncurrent liabilities
     38,764       11,368       5,250     (a1)     5,477     (b4)     59,692  
 
                                 (1,190 )   (b2)        
 
                                 23     (a6)        
 
Total Noncurrent liabilities
     64,593       24,430       17,839           4,878           111,740  
 
 
                                                
Stockholders’ Equity
                                                
Common shares issued
     4,065       2,020       —           (2,020 )   (b6)     6,459  
 
                                 2,394     (b1)        
Capital in excess of par value
     27,262       7,931       —           (7,931 )   (b6)     90,284  
 
                                 63,022     (b1)        
 
                                                
Members’ capital
     —       —       45,342     (a1)     —           —  
 
                     (45,342 )   (a2)                    
Retained earnings (deficit)
     29,257       20,612       —           (20,612 )   (b6)     29,257  
Treasury shares (at cost)
     (4,927 )     (6,510 )     —           6,510     (b6)     (4,927 )
Accumulated other comprehensive income
     (568 )     32       (10 )   (a1)     (32 )   (b6)     (568 )
                    10     (a2)                    
 
Total stockholders’ equity
     55,089       24,085       —           41,331           120,505  
 
Total Liabilities and Stockholders’ Equity
   $ 144,437     $ 57,650     $ 25,619         $ 46,209         $ 273,915  
 
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed Combined Financial Statements.

 

 

AT&T INC.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Dollars in millions except per share amounts
Note 1. Basis of Presentation
The accompanying Unaudited Pro Forma Condensed Combined Financial Statements present the pro forma consolidated financial position and results of operations of the combined company based upon the historical financial statements of AT&T, BellSouth and Cingular, after giving effect to the BellSouth merger and adjustments described in these footnotes, and are intended to reflect the impact of the pending BellSouth acquisition on AT&T. The Unaudited Pro Forma Condensed Combined Financial Statements do not give effect to the consolidation of the YPC joint venture between AT&T and BellSouth, for which AT&T’s and BellSouth’s aggregate total investment was approximately $100 at March 31, 2006. On March 5, 2006, AT&T and BellSouth jointly announced the execution of the merger agreement, pursuant to which AT&T would acquire BellSouth in a transaction in which each BellSouth common share would be converted into and exchanged for 1.325 AT&T common shares. Based on the average closing price of the AT&T common shares for the two days prior to, including, and two days subsequent to the public announcement of the merger (March 5, 2006) of $27.32, the purchase price would be $65,416.
AT&T and BellSouth jointly own Cingular, with AT&T holding a 60 percent interest and BellSouth holding a 40 percent interest. Control of Cingular is shared equally by AT&T and BellSouth. AT&T and BellSouth historically each have accounted for Cingular under the equity method of accounting, recording the proportional share of Cingular’s income as equity in net income of affiliates on the respective consolidated statements of income and reporting the ownership percentage of Cingular’s net assets as “Investments in and Advances to Cingular Wireless.” After the merger, BellSouth and Cingular will be wholly-owned subsidiaries of AT&T.
The accompanying Unaudited Pro Forma Condensed Combined Financial Statements are presented for illustrative purposes only and do not give effect to any cost savings, revenue synergies or restructuring costs which may result from the integration of AT&T’s, BellSouth’s and Cingular’s operations.
Additionally, the Unaudited Pro Forma Condensed Combined Financial Statements do not include any transaction costs relating to the merger that will be included by AT&T as part of the purchase price (as those amounts are anticipated to be immaterial to the total purchase price). The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the merger as if it was completed on March 31, 2006 and includes AT&T’s preliminary valuations of PP&E, intangible assets, employee benefit plans, debt and certain other assets and liabilities acquired in the November 18, 2005 ATTC acquisition. In valuing acquired assets and assumed liabilities, fair values were based on: future expected discounted cash flows for trade names and customer relationships; current replacement cost for similar capacity and obsolescence for certain fixed assets; comparable market rates for contractual obligations and certain investments, real estate and liabilities, including pension and postretirement benefits; expected settlement amounts for litigation and contingencies, and; appropriate discount and growth rates. AT&T has 12 months from the November 2005 closing of the ATTC acquisition to finalize the valuations. Finalization of the valuation and purchase price allocation of the ATTC acquisition could result in material adjustments to the AT&T consolidated balance sheet. The Unaudited Pro Forma Combined Condensed Statement of Income reflects the BellSouth acquisition as if it had been completed on January 1, 2006.

 

 

AT&T INC.
Dollars in millions except per share amounts
Note 2. Pro Forma Adjustments
(a)   The Unaudited Pro Forma Condensed Combined Balance Sheet includes adjustments to reflect the consolidation of Cingular as a wholly-owned subsidiary of AT&T.
  (a1)    AT&T and BellSouth historically each have accounted for Cingular under the equity method of accounting, reporting the ownership percentage of Cingular’s net assets as “Investments in and Advances to Cingular Wireless” on their respective consolidated balance sheets.
 
      At March 31, 2006, AT&T’s total investment in Cingular was $32,316. The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to remove AT&T’s “Investment in and Advances to Cingular Wireless” and to record, by category, AT&T’s 60 percent ownership of Cingular’s assets and liabilities as reported in Cingular’s consolidated balance sheet included in their Quarterly Report on Form 10-Q. AT&T’s 60 percent ownership of Cingular’s assets and liabilities remains at the existing historical book values after the merger.
 
      At March 31, 2006, BellSouth’s total investment in Cingular was $21,882. The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to remove BellSouth’s “Investment in and Advances to Cingular Wireless” and to record, by category, BellSouth’s 40 percent ownership of the fair value of Cingular’s assets and liabilities as reported in Cingular’s consolidated balance sheet included in their Quarterly Report on Form 10-Q, with fair values approximating historical book values as of March 31, 2006, unless otherwise noted in a4 through a7.
 
  (a2)    The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to eliminate Cingular’s March 31, 2006 “Members’ Capital,” other equity amounts, amounts due to AT&T and BellSouth under the Cingular revolving credit agreement and long-term debt due to AT&T and BellSouth as follows:
         
Investments in and Advances to Cingular Wireless
        
AT&T
   $ 32,316  
BellSouth
     21,882  
 
Combined investment in Cingular
   $ 54,198  
 
 
        
Member investment reflected as goodwill
   $ 473  
Cingular revolving credit agreement with parents
     1,676  
Cingular long-term debt due to parents
     6,717  
Cingular’s unrecognized losses
     (10 )
Cingular’s members capital
     45,342  
 
 
   $ 54,198  
 
  (a3)    AT&T and BellSouth historically each have accounted for Cingular under the equity method of accounting, recording the proportional share of Cingular’s income as equity in net income of affiliates on the respective consolidated statements of income. The Unaudited Pro Forma Combined Statement of Income has been adjusted to remove equity in net income of affiliates recorded by AT&T and BellSouth ($354 in total included in “Other income (expense) – net” in the condensed combined statement of income) and to record, by category, Cingular’s results as reported in Cingular’s consolidated statement of income included in their Quarterly Report on Form 10-Q.
 
  (a4)    The acquisition of BellSouth’s portion of Cingular will be accounted for as a step acquisition. In accordance with purchase accounting rules, BellSouth’s investment in Cingular will be adjusted

 

 

AT&T INC.
Dollars in millions except per share amounts
      to its fair value through purchase accounting adjustments. Accordingly, the Unaudited Pro Forma Condensed Combined Balance Sheet includes adjustments of $8,942 to eliminate BellSouth’s 40% ownership interest in Cingular’s historical goodwill and $11,220 to eliminate BellSouth’s interest in Cingular’s intangible assets.
 
  (a5)    Of the total amount allocated to “Other Intangibles — Net,” approximately $12,500 represents BellSouth’s portion of the fair value of wireless licenses held by Cingular. These licenses are intangible assets with indefinite lives and, as such, are not subject to amortization. Additionally, AT&T has tentatively assigned approximately $5,300 to BellSouth’s portion of the fair value of Cingular’s customers acquired with an average asset life of 5 years. Amortization of these intangibles is reflected in the Unaudited Pro Forma Condensed Combined Statement of Income using the sum-of-the-months-digits method of amortization. Additionally, the final purchase price allocations, which will be based on third party appraisals, may result in different allocations for tangible and intangible assets than presented in these Unaudited Pro Forma Condensed Combined Financial Statements, and those differences could be material.
 
      The sum-of-the-months-digits method is a process of allocation, not of valuation and reflects the belief that more revenues will be generated from the assets during the earlier years of their lives. Using the sum-of-the-months-digits method of amortization, which records a larger portion of the amortization expense earlier in the life of the assets, the expected amortization expense for the first year is $1,767, or $442 for the three months ended March 31, 2006.
 
  (a6)    The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to reflect BellSouth’s portion of Cingular’s pension and postretirement benefit plans at fair value. The total adjustment of $23 represents 40 percent of the unrecognized net losses totaling $1 and $20 and 40 percent of the unrecognized prior services cost (benefit) totaling $4 and $(2) for Cingular’s pension and postretirement plans, respectively, as of March 31, 2006. Such amounts were reflected in the balance sheet based on the plans the adjustments relate to and whether such plans were in a net asset or net liability position.
 
  (a7)    The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to report BellSouth’s portion of Cingular’s long-term debt due to external parties at fair value. BellSouth’s portion of the estimated fair value of Cingular’s long-term debt (including current maturities of long-term debt) was $5,094 at March 31, 2006, calculated using quotes or rates available for debt with similar terms and maturities, based on Cingular’s debt ratings at that time. BellSouth’s portion of the carrying value of Cingular’s long-term debt (including current maturities of long-term debt) was $4,574 at March 31, 2006, resulting in a proportional increase to debt of $520. The carrying value of debt with an original maturity of less than one year approximates market value. None of this fair market value adjustment was attributed to current maturities of long-term debt.

 

 

AT&T INC.
Dollars in millions except per share amounts
(b)   This entry reflects the preliminary allocation of the purchase price to identifiable net assets acquired and liabilities assumed and the excess purchase price to Goodwill as follows:.
                             
    Common     Additional            
    Stock     Capital     Total      
Total consideration: Issuance of AT&T common stock to BellSouth shareholders
   $ 2,394     $ 63,022     $ 65,416     (b1)
 
                          
 
                            
Book value of net asset acquired
                            
BellSouth’s equity
                   $ 24,085      
 
                          
Elimination of BellSouth’s ownership percentage of Cingular’s goodwill and intangibles
                     (20,162 )   (a4)
Fair value of BellSouth’s customer lists
                     10,200     (b3)
BellSouth’s portion of the fair value of Cingular’s customer lists
                     5,300     (a5)
BellSouth’s portion of the fair value of Cingular’s wireless licenses
                     12,500     (a5)
Preliminary fair value adjustments
                            
BellSouth deferred activation and installation revenue
                     1,190     (b2)
BellSouth deferred activation and installation revenue
                     (1,190 )   (b2)
BellSouth long-term debt
                     (48 )   (b5)
BellSouth’s ownership percentage of Cingular’s long-term debt
                     (520 )   (a7)
BellSouth’s pension and postretirement plans
                     (5,452 )   (b4)
BellSouth’s ownership percentage of Cingular’s pension and postretirement plans
                     (23 )   (a6)
 
                          
Preliminary estimate of fair value of identifiable net assets (liabilities) acquired
                   $ 25,880      
 
                          
Goodwill
                   $ 39,536     (b2)
 
                          

 

 

AT&T INC.
Dollars in millions except per share amounts
  (b1)    The purchase price allocation included within these Unaudited Pro Forma Condensed Combined Financial Statements is based upon a purchase price of $65,416 calculated as follows:
         
BellSouth shares outstanding at March 31, 2006
     1,807,000,000  
Exchange ratio
     1.325  
 
AT&T common shares to be issued
     2,394,275,000  
 
 
        
Price per share 1
   $ 27.32  
 
Aggregate value of AT&T consideration
   $ 65,416  
 
 
        
Value attributed to par at $1 par value
   $ 2,394  
 
Balance to capital in excess of par value
   $ 63,022  
 
1   Price per share is based on the average closing price of the AT&T common shares for the two days prior to, including and two days subsequent to the first trading day following public announcement of the merger on March 5, 2006.
      It is assumed that all stock will be new issuances. However, AT&T may issue treasury shares for a portion of the required AT&T common shares. The actual number of newly issued shares of AT&T common stock or treasury shares to be delivered in connection with the merger will be based upon the number of BellSouth common shares issued and outstanding when the merger closes.
 
  (b2)    The Unaudited Pro Forma Condensed Combined Financial Statements reflect a preliminary allocation of the purchase price to tangible assets and liabilities and unless otherwise noted in b3 through b5, fair values approximate historical book values as of March 31, 2006, including for PP&E. The remaining unallocated purchase price was allocated to Goodwill.
 
      The final purchase price allocations, which are based on third party appraisals, may result in different allocations for tangible and intangible assets than presented in these Unaudited Pro Forma Condensed Combined Financial Statements, and those differences could be material. The following table is presented for illustrative purposes and provides the estimated annual impact on pro forma net income for every incremental $1,000 assigned to PP&E in the final purchase price allocation. Depreciation of these assets is calculated utilizing the straight-line method over the lives shown.
                         
    Estimated        
    Depreciation   Net income   Per share
Lives in years   Expense   impact   impact
 
3
   $ 333     $ 206     $ 0.03  
10
     100       62       0.01  
20
     50       31       0.00  
 
      The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the reclassification of $1,595 of BellSouth’s capitalized software, which was recorded as an intangible asset and to eliminate deferred activation-related revenue and expense of $1,190 (see note d2).
 
  (b3)    Of the total amount allocated to “Other Intangibles — Net,” AT&T has tentatively identified approximately $10,200 for customers acquired from BellSouth with an average asset life of 6 years. Amortization of these intangibles is reflected in the Unaudited Pro Forma Condensed Combined Statement of Income using the sum-of-the-months-digits method of amortization. However, the final method of amortization will be based in such a way as to allocate as equitably

 

 

AT&T INC.
Dollars in millions except per share amounts
      as possible, to periods during which the intangible assets are expected to contribute to AT&T’s future cash flow.
 
      The sum-of-the-months-digits method is a process of allocation, not of valuation and reflects the belief that more revenues will be generated from the assets during the earlier years of their lives. Using the sum-of-the-months-digits method of amortization, which records a larger portion of the amortization expense earlier in the life of the assets, the expected amortization expense for the first year is $3,108, or $777 for the three months ended March 31, 2006.
 
      The following table is presented for illustrative purposes and provides the estimated annual impact on pro forma net income for every incremental $1,000 assigned to amortizable intangible assets in the final purchase price allocation. Amortization of these assets is utilizing the sum-of-the-months digits method over the lives shown and the first year of amortization is displayed. Expense for each year thereafter will decrease.
                         
    Estimated        
    Amortization   Net income   Per share
Lives in years   Expense   impact   impact
 
3
   $ 550     $ 340     $ 0.05  
5
     357       221       0.04  
9
     209       129       0.02  
 
  (b4)    The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to reflect BellSouth’s pension and postretirement benefit plans at fair value. The total adjustment of $5,452 represents unrecognized net loss of $717 and $2,310 and unrecognized prior services cost (benefit) and unrecognized net obligation of $(334) and $2,759 for BellSouth’s pension and postretirement plans, respectively, as of March 31, 2006. Such amounts were reflected in the balance sheet based on adjustments to the individual plans and whether such plans were in a net asset or net liability position, resulting in increases of $25 to assets and $5,477 to liabilities.
 
  (b5)    The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to report BellSouth’s long-term debt at fair value. The estimated fair value of BellSouth’s long-term debt (including current maturities of long-term debt) was $15,390 at March 31, 2006, calculated using quotes or rates available for debt with similar terms and maturities, based on BellSouth’s debt ratings at that time. The carrying value of BellSouth’s long-term debt (including current maturities of long-term debt) is calculated based on the principal amount of the notes, net of premiums and/or unamortized discounts and was $15,342 at March 31, 2006, resulting in a total increase to debt of $48. The carrying value of debt with an original maturity of less than one year approximates market value. None of this fair market value adjustment was attributed to current maturities of long-term debt.
 
  (b6)    The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to eliminate the historical shareholders’ equity accounts of BellSouth.
(c)   The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect Cingular as a wholly-owned subsidiary of AT&T rather than as a joint venture, thereby eliminating amounts recorded as equity in net income of affiliates by AT&T and BellSouth from Cingular and to eliminate the following items:
  (c1)    The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted by $580 to eliminate intercompany operating revenues and cost of sales expenses between Cingular

 

 

AT&T INC.
Dollars in millions except per share amounts
      and AT&T and BellSouth. Operating revenues and expenses consist primarily of access and long-distance services and commission revenue. Other revenues and expense adjustments of $104 consist primarily of interest on shareholder loans and advances to Cingular.
 
  (c2)    The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect lower amortization of prior service cost and unrealized losses due to BellSouth’s portion of the adjustment of Cingular’s pension and postretirement plans to fair value (see note a6). The adjustment reflects BellSouth’s portion of the elimination of amounts recorded by Cingular in the first three months of 2006 for amortization of unrecognized prior service benefit and amortization of losses for pension and postretirement benefits of less than $1 and are reflected on the Unaudited Pro Forma Condensed Combined Statement of Income in the cost categories in which the expenses would have been charged, based on the expected allocation to our labor force.
 
  (c3)    The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect increased interest expense of $7 due to BellSouth’s portion of the adjustment of Cingular’s long-term debt to fair value (see note a7). The difference between the fair value and the face amount of each borrowing is amortized on a straight-line basis as a reduction to interest expense over the remaining term of the borrowing, based on the maturity date.
 
  (c4)    The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted $19 to reflect the elimination of BellSouth’s portion of Cingular’s historical intangible asset amortization (see note a4).
(d)   The Unaudited Pro Forma Condensed Combined Statement of Income includes the results of BellSouth’s operations for the three-month period ended March 31, 2006 and has been adjusted to eliminate the following items:
  (d1)    The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted by $339 to eliminate certain intercompany revenues and expenses between AT&T and BellSouth, consisting primarily of switched access, Unbundled Network Element-Platform (UNE-P) and high-capacity transport services, which include DS1s and DS3s (types of dedicated high-capacity lines), and SONET (a dedicated high-speed solution for multisite businesses). Other intercompany transactions and ending intercompany balances are immaterial.
 
  (d2)    BellSouth defers revenue from activation-related activities and recognizes the revenue over the life of the customer relationship. Associated expenses are also deferred but only to the extent of revenues and are recognized over the same period as the revenue. The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to eliminate $158 of the amortization of this revenue and expense in accordance with fair value accounting.
 
  (d3)    The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect lower amortization of prior service cost and unrealized losses due to the adjustment of BellSouth’s pension and postretirement plans to fair value (see note b4). The adjustment reflects the elimination of amounts recorded by BellSouth in the first quarter for amortization of net unrecognized prior service cost and transition obligation of $42 and net amortization of losses of $32 for pension and postretirement benefits and are reflected on the Unaudited Pro Forma Condensed Combined Statement of Income in the cost categories in which the expenses would have been charged, based on the expected allocation to our labor force.
 
  (d4)    The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted by $17 to reflect lower interest expense due to the adjustment of BellSouth’s long-term debt to fair value

 

 

AT&T INC.
Dollars in millions except per share amounts
      (see note b5). The difference between the fair value and the face amount of each borrowing of $48 is amortized on a straight-line basis as an increase to interest expense over the remaining term of the borrowing, based on the maturity dates ranging from one to 91 years.
(e)   Pro forma combined basic earnings per common share is computed using the average of the daily closing market price and the number of shares outstanding per day for the reporting period and is based on the historical AT&T weighted average shares outstanding during the first quarter of 2006 of 3.88 billion and the assumption that the 2.39 billion shares assumed to be issued by AT&T (see note b1) were outstanding for all of the first quarter of 2006, calculated using net income.
Pro forma combined basic earnings per common share are calculated as follows (shares in millions):
         
AT&T weighted average shares outstanding at March 31, 2006
     3,882  
AT&T shares to be issued for BellSouth acquisition
     2,394 (b1)
 
Pro Forma Combined weighted average shares outstanding at March 31, 2006
     6,276  
 
Pro forma combined diluted earnings per common share are based on the historical AT&T weighted average shares with dilution outstanding during the first quarter of 2006 of 3.9 billion and the assumption that the 2.4 billion shares and equivalents (2.39 billion shares assumed to be issued by AT&T plus 7 million BellSouth weighted average common stock equivalents converted at the exchange ratio of 1.325) were outstanding for all of the first quarter of 2006, calculated using net income.
Pro forma combined diluted earnings per common share are calculated as follows (shares in millions):
         
AT&T weighted average shares outstanding with dilution at March 31, 2006
     3,902  
AT&T shares to be issued for BellSouth acquisition
     2,394 (b1)
Additional shares assumed issued for dilutive impact of BellSouth options outstanding at March 31, 2006 (7 shares converted at 1.325)
     9  
 
Pro Forma Combined weighted average shares outstanding with dilution at March 31, 2006
     6,305  
 
(f)   The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect the aggregate pro forma income tax effect of notes (c) through (d) and the amortization impact of items (a5) and (b3) of $435. The aggregate pre-tax effect of these adjustments is reflected as “Income Before Income Taxes” on the Unaudited Pro Forma Condensed Combined Statement of Income, which was taxed at the AT&T marginal tax rate of 38%.
Note 3. Federal Income Tax Consequences of the Merger
The Unaudited Pro Forma Condensed Combined Financial Statements assume that the merger qualifies as a tax-free reorganization for federal income tax purposes.