Switched Transport services transmit data using switching equipment to transfer the data between multiple lines before reaching its destination. Dedicated Transport services use a single direct line to transmit data between destinations. Integrated Services Digital Network (ISDN), Dedicated Frame Relay, broadband digital subscriber lines (DSL), Digital Services and Synchronous Optical Network (SONET) are examples of Dedicated Transport services. ISDN transmits voice, video and data over a single line in support of a wide range of applications, including internet access. Frame Relay is a routing technology that breaks a data signal into individual pieces of data to travel at high speeds and then recombines the data prior to arriving at its destination. DSL is a digital modem technology that converts existing twisted-pair telephone lines into access paths for multimedia and high-speed data communications to the Internet or private networks. DSL allows customers to simultaneously make a phone call and access information via the Internet or an office local area network. Digital Services use dedicated digital circuits to transmit digital data at various high rates of speed. SONET provides customer access to our backbone network at various high speeds.
Network integration services include installation of business data systems, local area networking and other data networking offerings. Internet access services include a wide range of products for residences and businesses, varying by market. Internet services offered include basic dial-up access service, dedicated access, web hosting, e-mail and high-speed access services.
Operating results following the November 18, 2005 acquisition of ATTC are reported in our AT&T Corp. segment. The 43 days of post-merger results provided approximately 4% of 2005 segment operating revenues and 2% of our 2005 total segment income. Our AT&T Corp. segment operates as both a retail and wholesale seller of communication services both domestically and internationally.
We divide our AT&T Corp. segment into four product-based categories: voice, data, long-distance and other.
Additional features include speed dialing and voice messaging. Among the features of the integrated services offering is the ability to electronically order new services, perform maintenance and manage administrative functions. We also have a number of integrated voice and data services, such as integrated network connections, that provide customers the ability to integrate access for their voice and data services, the data component of which is included in the data category.
Private line uses high-capacity digital circuits to transmit from point-to-point in multiple configurations and allows customers to create internal data networks and to access external data networks.
Packet services consist of data networks using packet switching and transmission technologies, including frame relay, asynchronous transfer mode (ATM) and IP connectivity services. Packet services enable customers to transmit large volumes of data economically and securely and are used for local area network interconnection, remote site, point of sale and branch office communications. Frame relay, including IP-enabled frame relay and ATM Services are widely deployed as private data networks. High speed packet services, including IP-enabled frame relay service, are used extensively by enterprise (large business) customers.
Dedicated internet services are designed to meet the needs of all types of commercial and governmental enterprises, including small and medium sized businesses and were available in over 50 countries at December 31, 2005. Our managed internet services provide customers with dedicated high speed access to the internet managed by us.
Enterprise networking services provide comprehensive support from network design, implementation and installation to ongoing network operations and management for networks of varying scales, including local area networks, wide area networks, and virtual private networks. These services include applications such as e-mail, order entry systems, employee directories, human resource transactions and other database applications and were available in 127 countries at December 31, 2005.
We provide customers a variety of remote access services including dial, broadband, WiFi and cellular wireless technologies. At December 31, 2005, we provided dial access in 150 countries, WiFi access in 48 countries and third-party customer contracted cellular access in 7 countries.
We also provide local, interstate and international wholesale networking capacity to other service providers. We offer a combination of high volume transmission capacity and conventional dedicated line services on a regional, national and international basis to internet service providers (ISPs) and facility-based and switchless resellers. Our wholesale customers are primarily large ISPs, wireless carriers, competitive local exchange carriers, regional phone companies, interexchange carriers, cable companies and systems integrators. We also have sold dedicated network capacity through indefeasible rights-of-use agreements under which capacity is furnished for contract terms as long as 25 years.
Long-distance voice - Long-distance voice consists of traditional long-distance and international long-distance for customers that select us as their primary long distance carrier. Long-distance voice also includes services provided by calling card, 1-800 services and conference calling. These services are used in a wide variety of business applications, including sales, reservation centers or customer service centers. Other long-distance services offered include call routing by origination point and time-of-day routing and virtual private network applications, including dedicated outbound facilities. We also provide wholesale switched access service to other service providers.
Other - Other primarily consists of outsourcing, managed web hosting, security services and network integration.
Our managed web hosting services for businesses provide network, server and security infrastructure as well as built-in data storage and include application performance management, database management, hardware and operating system management. Our hosting services also provide customers with secure access to detailed reporting information about their infrastructure and applications.
Our security services include business continuity and disaster recovery services as well as premise and network based security products.
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Cingular
The Cingular segment reflects 100% of the results reported by Cingular, our wireless joint venture. In our consolidated financial statements, we report our 60% proportionate share of Cingular’s results as equity in net income (loss) of affiliates. As required by GAAP, for segment reporting, we report this equity in net income (loss) of affiliates in our other segment.
When analyzing our segment results, we evaluate Cingular’s results on a stand-alone basis using information provided by Cingular during the year. Our consolidated operating revenues do not include Cingular’s results. However, we do include 100% of Cingular’s revenues and expenses excluding this adjustment when we analyze our operating segment results. On that segment basis, the Cingular segment provided approximately 44% of total segment operating revenues and 7% of our 2005 total segment income.
Cingular Wireless Joint Venture
In April 2000, we formed a joint venture with BellSouth to provide domestic wireless services nationally. In October 2000, most of our and BellSouth’s domestic wireless operations were contributed to Cingular, which then began operations. Economic ownership in Cingular is held 60% by us and 40% by BellSouth. We have equal voting rights and representation on the board of directors that controls Cingular. Because we share control equally, we use the equity method of accounting to account for our interest. Cingular is an SEC registrant by virtue of its publicly traded debt securities. Accordingly, it files separate Forms 10-K, 10-Q and other reports with the SEC.
Additional information on Cingular is contained in the 2005 AT&T Annual Report to Stockholders in the “Operating Environment and Trends of Business” section under the heading “Expected Growth Areas,” “Wireless” beginning on page 35 and is incorporated herein by reference pursuant to General Instruction G(2).
Directory
Our directory segment includes advertising, Yellow and White Pages directories and electronic directory publishing. The directory segment provided approximately 5% of total segment operating revenues and 27% of our 2005 total segment income. Our directory subsidiaries operate primarily in the 13-state area in which we operate as an ILEC. In November 2004, a subsidiary in our directory segment entered into a joint venture agreement with BellSouth and purchased the online directory publisher YELLOWPAGES.COM (YPC) for approximately $98 million, our portion of which was $65 million. In our consolidated financial statements, we report our proportionate share of YPC’s results as equity in net income (loss) of affiliates. As required by GAAP, for segment reporting, we report this equity in net income (loss) of affiliates in our directory segment.
International
Other than those acquired in the acquisition of ATTC, all investments with primarily international operations are included in our international segment. At December 31, 2005, we had direct or indirect investments with a carrying value of approximately $2.1 billion and operations in 14 countries reported in this segment. These investments include companies that provide local and long-distance telephone services, wireless communications, voice messaging, data services, internet access, telecommunications equipment, and directory publishing. Our two major international investments included in this segment are described below.
We report earnings from this segment as equity in net income of affiliates rather than as operating revenue because this segment consists almost exclusively of investments where, under GAAP, we have significant influence rather than control. Because these international investments are accounted for on the equity method, revenues from our international segment were less than 1% of 2005 total segment operating revenues from all our segments. The international segment provided approximately 5% of our 2005 total segment income. Additional information about this segment is included in Note 6 of the 2005 AT&T Annual Report to Stockholders and is incorporated herein by reference pursuant to General Instruction G(2).
Telmex
We own an 8.2% equity share in Teléfonos de México, S.A. de C.V. (Telmex), Mexico’s largest national provider of wireline services. Telmex operates approximately 18 million access lines. We are a member of a
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consortium that holds all of the class AA shares of Telmex stock, representing voting control of the company. Another member of the consortium, Carso Global Telecom, S.A. de C.V., has the right to appoint a majority of the directors of Telmex.
As of December 31, 2005, Telmex had approximately 34% of the long-distance market in Mexico. In June 2004, Mexico agreed to essentially eliminate its current rate system and introduce new regulations authorizing the resale of international long-distance, public, switched telecommunications services. This change in regulation has not had a material affect on the results of Telmex.
América Móvil
In 2000, Telmex spun-off its wireless and certain other operations to its stockholders as a separate business, América Móvil S.A. de C.V. (América Móvil). We own a 7.9% interest in América Móvil. We are a member of a consortium that holds all of the class AA shares of América Móvil stock, representing voting control of the company. Another member of the consortium, Americas Telecom S.A. de C. V., has the right to appoint a majority of the directors of América Móvil.
América Móvil began an international expansion and now serves more than 93 million customers in Latin America and the U.S. A substantial majority of its wireless customers are prepaid customers. América Móvil is the largest fixed-line operator in Central America with over 2 million lines. América Móvil provides wireless communications in Argentina, Brazil, Chile, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay, Peru, Uruguay and the U.S.
América Móvil provides cellular telecommunications service in all nine regions in Mexico, with a network covering approximately 31% of the geographical area, including all major cities, and approximately 90% of Mexico’s population.
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MAJOR CLASSES OF SERVICE
The following table sets forth the percentage of consolidated total reported operating revenues by any class of service that accounted for 10% or more of our consolidated total operating revenues in any of the last three fiscal years. Our AT&T Corp. segment is included below because it provides similar services to our wireline segment’s services.
| Percentage of Consolidated Total | |
| Operating Revenues | |
| 2005 | 2004 | 2003 |
| | | |
Wireline Segment | | | |
Voice | 45% | 51% | 54% |
Data | 27% | 27% | 25% |
Long-distance voice | 9% | 8% | 6% |
AT&T Corp. Segment | | | |
Voice | 1% | - | - |
Data | 3% | - | - |
Long-distance voice | 3% | - | - |
Directory Segment | | | |
Directory advertising 1 | 9% | 9% | 10% |
| | | | |
1Approximately 96%, 96% and 95% of directory advertising revenues were recorded in the directory segment for 2005, 2004 and 2003. The remaining directory advertising revenues were recorded in the wireline segment.
Our Cingular segment revenues are reported in equity in net income of affiliates in our consolidated financial statements due to our equity accounting for the joint venture. Directory advertising revenues are included in our directory segment’s results of operations and are approximately 98% of directory’s total operating revenues.
We account for our 60% economic interest in Cingular under the equity method of accounting in our consolidated financial statements since we share control equally (i.e. 50/50) with our 40% economic partner in the joint venture. We have equal voting rights and representation on the board of directors that controls Cingular. This means that our consolidated reported results include Cingular’s results in the “Equity in Net Income of Affiliates” line. We do not report Cingular revenues on our consolidated financial statements. However, when analyzing our segment results, we evaluate Cingular’s results on a stand-alone basis. The table below shows the effect on our other classes of services (shown in the above table) if we include 100% of Cingular’s revenues added to our total segment operating revenues.
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| Percentage of Total | |
| Segment Operating Revenues (including 100 % of Cingular) | |
| 2005 | 2004 | 2003 |
| | | |
Wireline Segment | | | |
Voice | 25% | 34% | 39% |
Data | 15% | 18% | 18% |
AT&T Corp. Segment | | | |
Data | 1% | - | - |
Cingular Segment | | | |
Wireless subscriber | 39% | 29% | 26% |
| | | | |
Directory advertising contributes less than 10% of total segment operating revenues when we include 100% of Cingular in the calculation.
GOVERNMENT REGULATION
Our wireline and ATTC subsidiaries are subject to regulation by state commissions which have the power to regulate intrastate rates and services, including local, long-distance and network access services. These subsidiaries are also subject to the jurisdiction of the FCC with respect to interstate and international rates and services, including interstate access charges. Access charges are designed to compensate our wireline subsidiaries for the use of their networks by other carriers.
ATTC subsidiaries operating outside the U.S. are subject to the jurisdiction of national regulatory authorities in the market where service is provided. Regulation is generally limited to operational licensing authority for the provision of enterprise services.
Additional information relating to federal and state regulation of our wireline and ATTC subsidiaries is contained in the 2005 AT&T Annual Report to Stockholders under the heading “Regulatory Developments” beginning on page 35, and is incorporated herein by reference pursuant to General Instruction G(2).
IMPORTANCE, DURATION AND EFFECT OF LICENSES
Certain of our subsidiaries own or have licenses to various patents, copyrights, trademarks and other intellectual property necessary to conduct business. We actively pursue patents, trademarks and service marks to protect our intellectual property within the U.S. and abroad. We maintain a global portfolio of more than 5,000 trademark and service mark registrations. We have also entered into agreements that permit other companies, in exchange for fees and subject to appropriate safeguards and restrictions, to utilize certain of our trademarks and service marks. We periodically receive offers from third parties to obtain licenses for patent and other intellectual rights in exchange for royalties or other payments as well as notices asserting that our products or services infringe on their patents and other intellectual property rights. While the outcome of any litigation is uncertain, we do not believe that the resolution of any of these infringement claims or the expiration or non-renewal of any of our intellectual property rights would have a material adverse affect on our results of operations.
MAJOR CUSTOMER
No customer accounted for more than 10% of our consolidated revenues in 2005, 2004 or 2003.
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COMPETITION
Information relating to competition in each of our operating segments is contained in the 2005 AT&T Annual Report to Stockholders under the heading “Competition” beginning on page 39, and is incorporated herein by reference pursuant to General Instruction G(2).
RESEARCH AND DEVELOPMENT
The majority of our research and development activities are related to our AT&T Corp. segment, performed at our subsidiary AT&T Labs. AT&T Labs’ scientists and engineers conduct research in a variety of areas, including IP; advanced network design and architecture; network operations support systems; data mining technologies and advanced speech technologies. AT&T Labs works with our business units to create new services and invent tools and systems to manage secure and reliable networks for us and our customers. In addition to AT&T Labs, applied research, technology planning and evaluation services are also conducted at our wireline subsidiary, SBC Laboratories, Inc. We also have a research agreement with Telcordia Technologies, formerly Bell Communications Research, Inc. Research and development expenses were approximately $130 million in 2005, $86 million in 2004 and $78 million in 2003.
EMPLOYEES
As of January 31, 2006, we employed approximately 189,000 persons. Approximately 60 percent of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions.
In December 2005, we agreed to new contracts with the CWA and IBEW for certain employees covered under labor agreements previously negotiated by ATTC. The new labor agreements are for three years and four months, cover approximately 11,000 employees and replace three-year contracts that expired in December 2005. The union members ratified the labor agreements which contain provisions dealing with employment security and changes to active nonmanagement employees’ pension benefits and medical coverage.
ITEM 1A. RISK FACTORS
Information required by this Item is included in the 2005 AT&T Annual Report to Stockholders under the heading “Risk Factors” on page 49 through page 51 which is incorporated herein by reference pursuant to General Instruction G(2).
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CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the “Risk Factors” section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
• | Adverse economic changes in the markets served by us or in countries in which we have significant investments. |
• | Changes in available technology and the effects of such changes including product substitutions and deployment costs. |
• | Increases in our benefit plans’ costs including increases due to adverse changes in the U.S. securities markets, resulting in worse-than-assumed investment returns and discount rates, and adverse medical cost trends. |
• | The final outcome of FCC proceedings and reopenings of such proceedings and judicial review, if any, of such proceedings, including issues relating to access charges, broadband deployment, availability and pricing of unbundled network elements and platforms (UNE-Ps) and unbundled loop and transport elements (EELs). |
• | The final outcome of regulatory proceedings in the states in which we operate and reopenings of such proceedings, and judicial review, if any, of such proceedings, including proceedings relating to interconnection terms, access charges, universal service, UNE-Ps and resale and wholesale rates, broadband deployment including Project Lightspeed, performance measurement plans, service standards and traffic compensation. |
• | Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments. |
• | Our ability to absorb revenue losses caused by increasing competition, including offerings using alternative technologies (e.g., cable, wireless and VoIP) and UNE-P requirements, and our ability to maintain capital expenditures. |
• | The extent of competition and the resulting pressure on access line totals and wireline and wireless operating margins. |
• | Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireline and wireless markets. |
• | The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to UNE-Ps and nonregulation of comparable alternative technologies (e.g., VoIP). |
• | The timing, extent and cost of deployment of our Project Lightspeed broadband initiative; the development of attractive and profitable service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative, and; the availability and reliability of the various technologies required to provide such offerings. |
• | The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards. |
• | The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations; and the resolution of disputes with any taxing jurisdictions. |
• | The impact of the wireless joint venture with BellSouth, known as Cingular, including: marketing and product-development efforts; customer acquisition and retention costs; access to additional spectrum; network upgrades; technological advancements; industry consolidation, including the acquisition of AT&T Wireless, and; availability and cost of capital. |
• | Cingular’s failure to achieve, in the amounts and within the time frame expected, the capital and expense synergies and other benefits expected from its acquisition of AT&T Wireless. |
• | The impact of our acquisition of ATTC, including the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than expected; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third-party relationships and revenues. |
• | Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, to respond to competition and regulatory, legislative and technological developments. |
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
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ITEM 2. PROPERTIES
Our properties do not lend themselves to description by character and location of principal units. At December 31, 2005, approximately 92% of our property, plant and equipment was owned by our wireline subsidiaries and 8% was owned by ATTC’s subsidiaries. Network access lines represented approximately 37% of our telephone plant; central office equipment represented 38%; land and buildings represented 11%; other equipment, comprised principally of furniture and office equipment and vehicles and other work equipment, represented 8%; and other miscellaneous property represented 6%.
Substantially all of the installations of central office equipment are located in buildings and on land we own. Many garages, administrative and business offices and telephone centers are in leased quarters.
ITEM 3. LEGAL PROCEEDINGS
We are a party to numerous lawsuits, regulatory proceedings and other matters arising in the ordinary course of business. Additional information regarding litigation is included in the 2005 AT&T Annual Report to Stockholders under the headings “Antitrust Litigation,” “AT&T Wireless Litigation,” “Retiree Phone Concession Litigation” on page 43 and “Hepting Litigation” on page 44, which is incorporated herein by reference pursuant to General Instruction G(2). As of the date of this report, we do not believe any pending legal proceedings to which we or our subsidiaries are subject are required to be disclosed as material legal proceedings pursuant to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders in the fourth quarter of the fiscal year covered by this report.
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EXECUTIVE OFFICERS OF THE REGISTRANT |
(As of February 28, 2006) |
Name | Age | Position | Held Since | |
| | | | |
Edward E. Whitacre Jr. | 64 | Chairman and Chief Executive Officer | 1/1990 | |
James W. Callaway | 59 | Senior Executive Vice President – Business Development | 1/2006 | |
James W. Cicconi | 53 | Senior Executive Vice President – External and Legislative Affairs | 11/2005 | |
James D. Ellis | 62 | Senior Executive Vice President and General Counsel | 3/1989 | |
Karen E. Jennings | 55 | Senior Executive Vice President – Human Resources and Communications | 10/1998 | |
James S. Kahan | 58 | Senior Executive Vice President – Corporate Development | 7/1993 | |
Richard G. Lindner | 51 | Senior Executive Vice President and Chief Financial Officer | 5/2004 | |
Forrest E. Miller | 53 | Group President AT&T Communications Corp. | 11/2005 | |
John T. Stankey | 43 | Senior Executive Vice President and Chief Technology Officer | 3/2004 |
Randall L. Stephenson | 45 | Chief Operating Officer | 5/2004 |
Rayford Wilkins, Jr. | 54 | Group President | 2/2005 | |
| | | | | | | | |
All of the above executive officers have held high-level managerial positions with AT&T or its subsidiaries or Cingular for more than the past five years. Executive officers are not appointed to a fixed term of office.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
| STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is listed on the New York Stock Exchange. The number of stockholders of record as of December 31, 2005 and 2004 was 1,516,977 and 910,044. The number of stockholders of record as of February 24, 2006 was 1,504,535. We declared dividends, on a quarterly basis, totaling $1.30 per share in 2005 and $1.26 per share in 2004.
During 2005, non-employee directors acquired shares of common stock pursuant to the Non-Employee Director Stock and Deferral Plan. Under the plan, a director may make an annual election to receive all or part of his or her annual retainer or fees in the form of shares or deferred stock units (DSUs) that are convertible into shares. Each director also receives an annual grant of DSUs. During 2005, an aggregate of 108,029 shares and DSUs were acquired by non-employee directors at prices ranging from $23.38 to $24.91, in each case the fair market value of the shares on the date of acquisition. The issuances of shares and DSUs were exempt from registration pursuant to Section 4(2) of the Securities Act. During the fourth quarter of 2005, two non-employee directors acquired a total of 8,140 restricted stock units in connection with our acquisition of ATTC, under ATTC’s AT&T 2004 Long Term Incentive Program. Under the program, units are convertible into shares of common stock. The issuance of restricted stock units was exempt from registration pursuant to Section 4(2) of the Securities Act.
On November 18, 2005, in connection with the completion of our acquisition of ATTC, we issued 768,391.4 shares of AT&T Perpetual Cumulative Preferred Stock, par value $1 per share (the “Subsidiary Preferred Shares”), with an aggregate liquidation preference of $768,391,400, to certain wholly owned subsidiaries of AT&T. The Subsidiary Preferred Shares were issued in connection with the merger in exchange for shares of preferred stock of ATTC that were formerly owned exclusively by wholly owned subsidiaries of ATTC. We received no cash proceeds as a result of the issuance of the Subsidiary Preferred Shares. The exchange of Subsidiary Preferred Shares was exempt from registration pursuant to Section 4(2) of the Securities Act.
Other information required by this Item is included in the 2005 AT&T Annual Report to Stockholders under the headings “Quarterly Financial Information” on page 83, “Selected Financial and Operating Data” on page 18, “Issuer Equity Repurchases” on page 49, and “Stock Trading Information” on the back cover, which are incorporated herein by reference pursuant to General Instruction G(2).
ITEM 6. SELECTED FINANCIAL DATA
Information required by this Item is included in the 2005 AT&T Annual Report to Stockholders under the heading “Selected Financial and Operating Data” on page 18 which is incorporated herein by reference pursuant to General Instruction G(2).
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
Information required by this Item is included in the 2005 AT&T Annual Report to Stockholders on page 19 through page 52, which is incorporated herein by reference pursuant to General Instruction G(2).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item is included in the 2005 AT&T Annual Report to Stockholders under the heading “Market Risk” on page 47 through page 49, which is incorporated herein by reference pursuant to General Instruction G(2).
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is included in the 2005 AT&T Annual Report to Stockholders on page 53 through page 83, which is incorporated herein by reference pursuant to General Instruction G(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
During our two most recent fiscal years, there has been no change in the independent accountant engaged as the principal accountant to audit our financial statements and the independent accountant has not expressed reliance on other independent accountants in its reports during such time period.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the SEC’s rules and forms. The Chief Executive Officer and Chief Financial Officer have performed an evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of December 31, 2005. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the registrant’s disclosure controls and procedures were effective as of December 31, 2005.
Internal Control Over Financial Reporting
(a) Management’s Annual Report on Internal Control over Financial Reporting
The management of AT&T is responsible for establishing and maintaining adequate internal control over financial reporting. AT&T’s internal control system was designed to provide reasonable assurance as to the integrity and reliability of the published financial statements. AT&T management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2005. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. We have excluded from the scope of our assessment of internal control over financial reporting the operations and related assets of ATTC, which we acquired on November 18, 2005. At December 31, 2005 and for the period from November 18 through December 31, 2005, total assets and total segment revenues subject to ATTC’s internal control over financial reporting represented 29.0% and 6.6% of AT&T’s consolidated total assets and total revenues as of and for the year ended December 31, 2005. Based on its assessment, AT&T management believes that, as of December 31, 2005, the Company’s internal control over financial reporting is effective based on those criteria.
(b) Attestation Report of the Registered Public Accounting Firm
AT&T’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on management’s assessment of the company’s internal control over financial reporting. The attestation report is included in the 2005 AT&T Annual Report to Stockholders on page 86, which is incorporated herein by reference pursuant to General Instruction G(2).
ITEM 9B. OTHER INFORMATION
There is no information that was required to be disclosed in a report on Form 8-K during the fourth quarter of 2005 but was not reported.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure at the end of Part I of this report since the registrant did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A. Information regarding directors required by Item 401 of Regulation S-K is incorporated herein by reference pursuant to General Instruction G(3) from the registrant’s definitive proxy statement, dated on or about March 10, 2006 (Proxy Statement) under the heading “Election of Directors,” under the heading “Compensation of Directors,” under the heading “Contracts with Management” and under the heading “Audit Committee.”
The registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act of 1934. The members of the committee are Messrs. Aldinger, Amelio, Eby, Madonna, McCoy and Ritchey.
The registrant has adopted a code of ethics entitled “Code of Ethics” that applies to the registrant’s principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions. The additional information required by Item 406 of Regulation S-K is provided in this report under the heading “General” under Part I, Item 1. Business.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is included in the registrant’s Proxy Statement, under the heading “Compensation of Directors,” and the pages beginning with the heading “Summary Compensation Table,” and ending with, and including, the page immediately before the heading “Equity Compensation Plan Information” which are incorporated herein by reference pursuant to General Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
| MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information required by Item 403 of Regulation S-K is included in the Proxy Statement under the heading “Common Stock Ownership,” which is incorporated herein by reference pursuant to General Instruction G(3).
Equity Compensation Plan Information
Information required by Item 201(d) of Regulation S-K is included in the Proxy Statement under the heading “Equity Compensation Plan Information,” which is incorporated herein by reference pursuant to General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is included in the Proxy Statement under the heading “Contracts with Management,” which is incorporated herein by reference pursuant to General Instruction G(3).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item is included in the Proxy Statement under the heading “Principal Accountant Fees and Services,” which is incorporated herein by reference pursuant to General Instruction G(3).
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Part IV
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as a part of the report:
| Page |
| (1) Report of Independent Registered Public Accounting Firm | * |
| Financial Statements covered by Report of
Independent Registered Public Accounting Firm: | |
| Consolidated Statements of Income | * |
| Consolidated Balance Sheets | * |
| Consolidated Statements of Cash Flows | * |
| Consolidated Statements of Stockholders’ Equity | * |
| Notes to Consolidated Financial Statements | * |
| | | |
| * | Incorporated herein by reference to the appropriate portions of the registrant’s annual report to stockholders for the fiscal year ended December 31, 2005. (See Part II.) |
| Page |
| | |
| (2) Financial Statement Schedules: | |
| II - Valuation and Qualifying Accounts | 22 |
| | | |
Financial statement schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto, or because such schedules are not required or applicable.
Exhibits identified in parentheses below, on file with the SEC, are incorporated herein by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.
Exhibit
Number
| 2 | Agreement and Plan of Merger, dated as of January 30, 2005, among AT&T Corp., SBC Communications Inc. and Tau Merger Sub Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 31, 2005). (Exhibit 4.1 to Form 8-K dated November 18, 2005.) |
| 3-a | Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on November 18, 2005. (Exhibit 3-a to Form 8-K dated November 18, 2005.) |
| 3-b | Bylaws amended April 29, 2005. (Exhibit 3-b to Form 10-Q filed for March 31, 2005.) |
| 4-a | Certificate of Designations for Perpetual Cumulative Preferred Stock of SBC Communications Inc., filed with the Secretary of State of the State of Delaware on November 18, 2005. (Contained in Restated Certificate of Incorporation filed as Exhibit 3-a.) |
| 4-b | No instrument which defines the rights of holders of long-term debt of the registrant and all of its consolidated subsidiaries is filed herewith pursuant to Regulation S-K, Item 601b)(4)(iii)(A), except for the instruments referred to in 4-c, 4-d, 4-e, and 4-f below. Pursuant to this regulation, |
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the registrant hereby aggress to furnish a copy of any such instrument not filed herewith to the SEC upon request.
| 4-c | Guaranty of certain obligations of Pacific Bell Telephone Co. and Southwestern Bell Telephone Co. (Exhibit 4-d to Form 10-K for 1999.) |
| 4-d | Guaranty of certain obligations of Ameritech Capital Funding Corp., Illinois Bell Telephone Co., Indiana Bell Telephone Co. Inc., Michigan Bell Telephone Co., The Ohio Bell Telephone Co., Pacific Bell Telephone Co., Southern New England Telecommunications Corp., The Southern New England Telephone Co., Southwestern Bell Telephone Co., Wisconsin Bell, Inc. (Exhibit 4-c to Form 10-Q for September 30, 2005.) |
| 4-e | Guarantee of AT&T Corp. Euro notes. (Exhibit 4-d to Form 8-K dated November 18, 2005.) |
| 4-f | Guarantee of certain obligations of AT&T Corp. (Exhibit 4-e to Form 8-K dated December 16, 2005.) |
| 10-a | Short Term Incentive Plan. |
| 10-b | Supplemental Life Insurance Plan. |
| 10-c | Supplemental Retirement Income Plan. (Exhibit 10-c to Form 10-K for 2004.) |
| 10-d | Senior Management Deferred Compensation Plan (effective for Units of Participation Having a Unit Start Date Prior to January 1, 1988). (Exhibit 10-d to Form 10-K for 2002.) |
| 10-e | Senior Management Deferred Compensation Program of 1988 (effective for Units of Participation Having a Unit Start Date of January 1, 1988 or later). (Exhibit 10-e to Form 10-K for 2002.) |
| 10-f | Officer Disability Plan, formerly the Senior Management Long Term Disability Plan. |
| 10-g | Salary and Incentive Award Deferral Plan. |
| 10-h | Executive Health Plan, formerly the Supplemental Health Plan. |
| 10-i | Retirement Plan for Non-Employee Directors. (Exhibit 10-k to Form 10-K for 1997.) |
| 10-j | Form of Indemnity Agreement, effective July 1, 1986, between SBC and its directors and officers. (Appendix 1 to Definitive Proxy Statement dated March 18, 1987.) |
| 10-k | Forms of Change of Control Severance Agreements for officers of SBC and certain officers of SBC’s subsidiaries (Approved November 21, 1997). (Exhibit 10-n to Form 10-K for 1997.) |
| 10-m | 1992 Stock Option Plan. (Exhibit 10-n to Form 10-K for 2001.) |
| 10-n | 1996 Stock and Incentive Plan. (Exhibit 10-o to Form 10-K for 2002.) |
| 10-o | Non-Employee Director Stock and Deferral Plan. (Exhibit 10-p to Form 10-K for 2004.) |
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| 10-p | Pacific Telesis Group Deferred Compensation Plan for Nonemployee Directors. (Exhibit 10gg to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) |
10-p(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit 10-v(i) to Form 10-K for 1997.)
| 10-q | Pacific Telesis Group Outside Directors’ Deferred Stock Unit Plan. (Exhibit 10oo to Form 10-K for 1995 of Pacific Telesis Group (Reg. 1-8609).) |
| 10-r | Pacific Telesis Group 1996 Directors’ Deferred Compensation Plan. (Exhibit 10qq to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) |
10-r(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit 10-v(i) to Form 10-K for 1997.)
| 10-s | Pacific Telesis Group 1994 Stock Incentive Plan. (Attachment A to Pacific Telesis Group’s 1994 Proxy Statement filed March 11, 1994, and amended March 14 and March 25, 1994.) |
10-s(i) Resolutions amending the Plan, effective January 1, 1995. (Attachment A to Pacific Telesis Group’s 1995 Proxy Statement, filed March 13, 1995.)
| 10-t | 2001 Incentive Plan. (Exhibit 10-u to Form 10-K for 2002.) |
| 10-u | Employment Agreement between SBC and Edward E. Whitacre Jr. (Exhibit 10-y to Form 10-K for 2001.) |
| 10-v | 2001 Stock Option Grant to Bargained-for and Certain Other Employees. (Exhibit 10-x to Form 10-K for 2002.) |
| 10-w | 1995 Management Stock Option Plan. (Exhibit 10-y to Form 10-K for 2002.) |
| 10-x | Investment and Reorganization Agreement dated October 25, 2004, by and among BellSouth Corporation, SBC Communications Inc., Cingular Wireless Corporation, Cingular Wireless LLC, Links I Corporation, Cingular Wireless II, Inc., BLS Cingular Holdings, LLC, SBC Alloy Holdings, Inc., BellSouth Enterprises, Inc., BellSouth Mobile Systems, Inc., BellSouth Mobile Data, Inc. and SBC Long Distance, Inc. (Exhibit 99.01 to Cingular Wireless LLC's Form 8-K dated October 25, 2004.) |
| 10-y | Concession Program for Directors. (Exhibit 10-bb to Form 10-Q for March 31, 2004.) |
| 10-z | Amended and Restated Revolving Credit Agreement with Cingular Wireless LLC. (Exhibit 10-bb to Form 10-Q for June 30, 2005.) |
| 10-aa | Three Year Credit Agreement. (Exhibit 10-cc to Form 10-Q for September 30, 2004.) |
| 10-bb | Administrative Plan. (Exhibit 10-ee to Form 10-K for 2004.) |
| 10-cc | Stock Purchase and Deferral Plan. |
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| 10-ee | Master Trust Agreement for SBC Communications Inc. Deferred Compensation Plans and Other Executive Benefit Plans and subsequent amendments dated August 1, 1995 and November 1, 1999. (Exhibits 99.1-a, 99.1-b and 99.1-c to Schedule 13-D/A filed on December 28, 2004.) |
| 10-ff | 2005 Supplemental Employee Retirement Plan. |
| 10-gg | AT&T 1997 Long Term Incentive Program. |
| 10-hh | AT&T 2004 Long Term Incentive Program. |
| 10-ii | AT&T Senior Management Incentive Award Deferral Plan. |
| 10-jj | 2006 Incentive Plan. |
| 10-kk | Retention Agreement for James W. Cicconi dated January 26, 2006. (Exhibit 10.1 to Form 8-K dated January 26, 2006.) |
| 12 | Computation of Ratios of Earnings to Fixed Charges. |
| 13 | Portions of AT&T’s Annual Report to Stockholders for the fiscal year ended December 31, 2005. Only the information incorporated by reference into this Form 10-K is included in the exhibit. |
| 21 | Subsidiaries of AT&T Inc. |
| 23-a | Consent of Ernst & Young LLP, registered public accounting firm for AT&T. |
| 23-b | Consent of Ernst & Young LLP, registered public accounting firm for Cingular. |
| 23-c | Consent of PricewaterhouseCoopers LLP, registered public accounting firm for Omnipoint
Facilities Network II, LLC. |
| 31 | Rule 13a-14(a)/15d-14(a) Certifications |
| 31.1 | Certification of Principal Executive Officer |
| 31.2 | Certification of Principal Financial Officer |
| 32 | Section 1350 Certifications |
| 99 | Consolidated Financial Statements of Cingular Wireless, L.L.C. (Excerpt from Cingular’s 2005 Form 10-K.) |
We will furnish to stockholders upon request, and without charge, a copy of the annual report to stockholders and the proxy statement, portions of which are incorporated by reference in the Form 10-K. We will furnish any other exhibit at cost.
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Schedule II - Sheet 1
AT&T INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Uncollectibles
Dollars in Millions
COL. A | | COL. B | COL. C | COL. D | | COL. E |
| | | Additions | | | |
| | | (1) | (2) | (3) | | | |
| Balance at Beginning of Period | Charged to Costs and Expenses (a) | Charged to Other Accounts (b) | Acquisition of ATTC | Deductions (c) | Balance at End of Period |
| | | | | | | | |
Year 2005 | $ | 1,001 | 744 | 184 | 356 | 1,109 | $ | 1,176 |
Year 2004 (d) | $ | 1,058 | 761 | 447 | - | 1,265 | $ | 1,001 |
Year 2003 (d) | $ | 1,425 | 846 | 381 | - | 1,594 | $ | 1,058 |
(a) | Excludes direct charges and credits to expense on the statements of income and reinvested earnings related to interexchange carrier receivables. |
(b) | Includes amounts previously written off which were credited directly to this account when recovered and amounts related to long-distance carrier receivables which were billed by AT&T. |
(c) | Amounts written off as uncollectible. |
(d) | Amounts reflect the classification of balances related to a change in the way we report accounts receivable for our directory segment, which increased our Allowance for Uncollectibles. Additional information relating to this change is contained in the 2005 AT&T Annual Report to Stockholders in Note 1, and is incorporated herein by reference pursuant to General Instruction G(2). |
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Schedule II - Sheet 2
AT&T INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Accumulated Amortization of Intangibles
Dollars in Millions
COL. A | | COL. B | COL. C | COL. D | | COL. E |
| | | Additions | | | |
| | | (1) | (2) | | | |
| Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period |
| | | | | | | |
Year 2005 | $ | 719 | 271 | - | 4 | $ | 986 |
Year 2004 | $ | 691 | 117 | - | 89 (a) | $ | 719 |
Year 2003 | $ | 493 | 203 | - | 5 | $ | 691 |
(a) | Includes $85 reversal of amount that was fully amortized. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of February, 2006.
| /s/ Richard G. Lindner |
| Richard G. Lindner |
| Senior Executive Vice President and |
| Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Principal Executive Officer:
| Edward E. Whitacre Jr.* |
| Chairman and |
| Chief Executive Officer |
Principal Financial and
Accounting Officer:
| Richard G. Lindner |
| Senior Executive Vice President and |
| Chief Financial Officer |
| /s/ Richard G. Lindner |
| Richard G. Lindner, as attorney-in-fact |
| and on his own behalf as Principal |
| Financial Officer and Principal |
| Accounting Officer |
Directors: | |
Edward E. Whitacre Jr.* | John B. McCoy* |
William F. Aldinger III* | Mary S. Metz* |
Gilbert F. Amelio* | Toni Rembe* |
August A. Busch III* | S. Donley Ritchey* |
Martin K. Eby Jr.* | Joyce M. Roché* |
James A. Henderson* | Randall L. Stephenson* |
Charles F. Knight* | Laura D’Andrea Tyson* |
Jon C. Madonna* | Patricia P. Upton* |
Lynn M. Martin* | |
* by power of attorney
