<PAGE> 1
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 September 30, 1997
OR
..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 1-1105
AT&T CORP.
A New York I.R.S. Employer
Corporation No. 13-4924710
32 Avenue of the Americas, New York, New York 10013-2412
Telephone - Area Code 212-387-5400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ..X No .....
At October 31, 1997, 1,624,253,000 common shares were outstanding.
<PAGE> 2 AT&T Form 10-Q - Part I
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
Revenues
Communications services.................. $13,002 $12,832 $38,482 $37,651
Financial services ...................... 378 396 1,119 1,295
Total revenues........................... 13,380 13,228 39,601 38,946
Operating Expenses
Access and other interconnection......... 3,969 4,086 12,458 12,106
Network and other
communications services................. 2,407 1,880 7,029 5,604
Depreciation and amortization ........... 978 744 2,819 2,054
Selling, general and administrative ..... 3,873 3,913 11,254 11,049
Total communications services expenses.. 11,227 10,623 33,560 30,813
Financial services expenses.............. 354 431 993 1,227
Total operating expenses ................ 11,581 11,054 34,553 32,040
Operating income ........................ 1,799 2,174 5,048 6,906
Other income - net ...................... 127 83 354 290
Interest expense ........................ 42 72 147 292
Income from continuing operations
before income taxes .................... 1,884 2,185 5,255 6,904
Provision for income taxes .............. 731 826 2,021 2,538
Income from continuing operations ....... 1,153 1,359 3,234 4,366
Discontinued Operations:
Income(loss) from discontinued operations
net of taxes of $0, $18,
$3 and ($354),respectively.............. - 73 4 (81)
Gain on sale of discontinued operation
net of taxes of $43..................... 66 - 66 -
Net income .............................. $ 1,219 $ 1,432 $3,304 $4,285
Weighted average common shares and
common share equivalents (millions)..... 1,629 1,618 1,628 1,613
Earnings per common share:
Income from continuing operations ...... $ 0.71 $ 0.84 $ 1.99 $ 2.71
Income(loss) from discontinued
operations ............................ $ - $ 0.05 - (0.05)
Gain on sale of discontinued operation $ .04 - $ .04 -
Net income ............................. $ 0.75 $ 0.89 $ 2.03 $ 2.66
Dividends declared per
common share.......................... $ 0.33 $ 0.33 $ 0.99 $ 0.99
See Notes to Consolidated Financial Statements.
<PAGE> 3 AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Share Amounts)
(Unaudited)
September 30, December 31,
1997 1996
ASSETS
Cash and cash equivalents .............. $ 313 $ 134
Receivables less allowances
of $1,377 and $1,336
Accounts receivable................... 8,962 8,973
Finance receivables................... 6,763 7,087
Deferred income taxes................... 1,415 1,413
Other current assets.................... 501 703
Total current assets.................... 17,954 18,310
Property, plant and equipment, net
of accumulated depreciation of
$21,510 and $19,728 .................. 21,017 19,794
Licensing costs, net of accumulated
amortization of $1,032 and $913....... 8,341 8,071
Investments............................. 4,074 3,883
Long-term finance receivables........... 701 703
Prepaid pension costs................... 2,129 1,933
Other assets............................ 2,495 2,332
Net assets of discontinued operations... - 526
TOTAL ASSETS............................ $56,711 $55,552
(CONT'D)
<PAGE> 4 AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Share Amounts)
(Unaudited)
September 30, December 31,
1997 1996
LIABILITIES
Accounts payable....................... $ 6,002 $ 6,173
Payroll and benefit-related
liabilities.......................... 2,264 2,635
Debt maturing within one year.......... 2,806 2,460
Dividends payable...................... 539 536
Other current liabilities.............. 4,602 4,514
Total current liabilities.............. 16,213 16,318
Long-term debt......................... 7,054 7,883
Long-term benefit-related liabilities.. 3,090 3,037
Deferred income taxes.................. 5,062 4,827
Other long-term liabilities and
deferred credits..................... 3,307 3,192
Total liabilities ..................... 34,726 35,257
SHAREOWNERS' EQUITY
Common stock - par value $1 per share.. 1,625 1,623
Authorized shares: 2,000,000,000
Outstanding shares:
1,625,285,000 at September 30, 1997
1,623,487,646 at December 31, 1996
Additional paid-in capital............. 15,714 15,643
Guaranteed ESOP obligation............. (70) (96)
Foreign currency translation
adjustments.......................... 32 47
Retained earnings...................... 4,684 3,078
Total shareowners' equity.............. 21,985 20,295
TOTAL LIABILITIES & SHAREOWNERS' EQUITY $56,711 $55,552
See Notes to Consolidated Financial Statements.
<PAGE> 5 AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Nine
Months Ended
September 30,
1997 1996
Operating Activities
Net income .............................. $ 3,304 $ 4,285
Add: (Income)loss from
discontinued operations ............... (70) 81
Income from continuing operations ....... 3,234 4,366
Adjustments to reconcile net income to
net cash provided by operating
activities of continuing operations:
Depreciation and amortization......... 2,819 2,054
Provision for uncollectibles.......... 1,786 1,629
Increase in accounts receivable....... (1,337) (1,770)
Increase in accounts payable.......... 141 643
Net increase in other operating
assets and liabilities.............. (387) (640)
Other adjustments for non-cash
items - net......................... (194) (62)
Net cash provided by operating
activities of continuing operations.... 6,062 6,220
Investing Activities
Capital expenditures................... (4,732) (4,111)
Proceeds from sale or disposal of
property, plant and equipment........ 78 58
Proceeds from securitizations.......... 1,000 3,000
(Increase)decrease in finance assets... (958) 779
Acquisitions of licenses............... (402) (215)
Net increase in investments............ (164) (153)
Proceeds from dispositions............. 1,513 160
Other investing activities - net....... (89) 20
Net cash used in investing
activities of continuing operations.... (3,754) (462)
(CONT'D)
<PAGE> 6 AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Nine
Months Ended
September 30,
1997 1996
Financing Activities
Proceeds from long-term debt issuances. 22 -
Retirements of long-term debt.......... (613) (956)
Issuance of common shares.............. 63 1,165
Dividends paid......................... (1,605) (1,588)
Increase(decrease) in short-term
borrowings - net..................... 126 (4,805)
Other financing activities - net....... (64) 1,913
Net cash used in financing activities
of continuing operations............... (2,071) (4,271)
Effect of exchange rate
changes on cash........................ 3 (25)
Net cash used in discontinued operations. (61) (1,023)
Net increase in cash and
cash equivalents........................ 179 439
Cash and cash equivalents
at beginning of year................... 134 129
Cash and cash equivalents
at end of period....................... $ 313 $ 568
See Notes to Consolidated Financial Statements.
<PAGE> 7 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T Corp.
("AT&T" or the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
management, include all adjustments, consisting of only normal
recurring 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 statements should be read in conjunction with AT&T's 1996
Annual Report to Shareowners, Form 10-K for the year ended December 31,
1996 and the current year's previously issued Forms 10-Q.
(b) DISCONTINUED OPERATIONS
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30") the consolidated financial
statements of AT&T reflect the dispositions of Lucent Technologies Inc.
("Lucent"), NCR Corporation ("NCR"), AT&T Capital Corporation ("AT&T
Capital") and other businesses in 1996 and the disposition of the AT&T
submarine systems business ("SSI") on July 1, 1997 as discontinued
operations. Accordingly, the revenues, costs and expenses, assets and
liabilities, and cash flows of Lucent, NCR, AT&T Capital, SSI and other
businesses have been excluded from the respective captions in the
Consolidated Statements of Income, Consolidated Balance Sheets and
Consolidated Statements of Cash Flows, and have been reported through
their respective dates of disposition as "Income(loss) from
discontinued operations," net of applicable income taxes; as "Net
assets of discontinued operations"; and as "Net cash used in
discontinued operations."
On July 1, 1997, AT&T sold SSI to Tyco International Ltd. for
approximately $850, resulting in an after-tax gain of $66, or $.04 per
share.
<PAGE> 8 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Summarized financial information for the discontinued operations is as
follows:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
Revenues $ - $7,259 $ 454 $ 20,147
Income(loss) before
income taxes - 91 7 (435)
Net income(loss) $ - $ 73 $ 4 $ (81)
At September At December
30, 1997 31, 1996
Current Assets $ - $ 554
Total Assets - 862
Current Liabilities - 230
Total Liabilities - 336
Net assets of discontinued
operations $ - $ 526
The income (loss) before income taxes includes interest expense of $3
for the quarter ended September 30, 1996 and $35 for the nine months
ended September 30, 1996, allocated to discontinued operations based on
the ratio of net assets of discontinued operations to total AT&T
consolidated assets. No interest expense was allocated to discontinued
operations in both the quarterly and nine month periods ended September
30, 1997 due to immateriality of the amounts.
On October 20, 1997, AT&T announced its intention to sell AT&T
Universal Card Services ("UCS"). UCS represents substantially all of
AT&T's financial services segment. The sale is targeted to be completed
by mid-1998. However, AT&T can not predict the timing or terms of any
such transaction. Accordingly, the consolidated financial statements of
AT&T will be restated to reflect UCS as a discontinued operation.
Proforma Consolidated Statements of Income for the year ended December
31, 1996 and for the six months ended June 30, 1997 and a proforma
Consolidated Balance Sheet at June 30, 1997 were filed with the SEC on
November 4, 1997. A proforma Consolidated Statement of Income for the
nine months ended September 30, 1997 and a proforma Consolidated
Balance Sheet at September 30, 1997 are presented in Item 5 of this
report.
<PAGE> 9 AT&T Form 10-Q Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(c) CREDIT HOLDINGS
In connection with a March 31, 1993 legal restructuring of AT&T Capital
Holdings, Inc. (formerly AT&T Capital Corporation), AT&T issued a
direct, full and unconditional guarantee of all the outstanding public
debt of AT&T Credit Holdings, Inc. (formerly AT&T Credit Corporation).
At September 30, 1997, $58.9 of the guaranteed debt remained
outstanding.
AT&T Credit Holdings, Inc. holds the finance assets of the former AT&T
Credit Corporation and prior to the sale of AT&T Capital on October 1,
1996, held the majority of AT&T's investment in AT&T Capital.
The following table shows summarized consolidated financial information
for AT&T Credit Holdings, Inc.
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
Total revenues $ 49 $ 72 $ 133 $ 136
Income from
continuing operations 13 22 27 9
Income from
discontinued operation - 30 - 84
Net income $ 13 $ 52 $ 27 $ 93
At At
September 30, December 31,
1997 1996
Finance receivables $1,105 $1,102
Total assets 3,050 3,075
Total debt 60 60
Total liabilities 1,871 1,891
Total shareowner equity $1,179 $1,184
<PAGE> 10 AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(d) OPERATING EXPENSES OF FINANCIAL SERVICES
Operating expenses of the financial services segment are comprised of
the following:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
Interest Expense $ 77 $ 88 $ 221 $ 317
Provision for losses 104 124 284 374
Other costs 99 101 297 303
Selling, general and
administrative 74 118 191 233
Total $ 354 $ 431 $ 993 1,227
UCS represents substantially all of the financial services segment. On
October 20, 1997, AT&T announced its plans to sell UCS. Refer to Item 5 of this
report.
(e) LIN TV
AT&T owns approximately 45% of the common shares of LIN Television
Corporation ("LIN TV"). On August 12, 1997, AT&T entered into an
agreement to sell all of its interest in LIN TV for approximately $641
to Hicks, Muse, Tate and Furst Incorporated ("Hicks Muse").
Subsequently, in response to a competitive offer, Hicks Muse increased
their bid to $742. The sale is subject to various conditions, including
the approval by the Federal Communications Commission. If approved, the
sale is expected to close in early 1998. In a separate agreement, AT&T
agreed to sell WOOD-TV, its television station in Grand Rapids,
Michigan, for approximately $123, subject to certain adjustments, upon
the completion of the sale of its interest in LIN TV.
<PAGE> 11 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30") the consolidated financial statements of AT&T reflect the dispositions of
Lucent Technologies Inc. ("Lucent"), NCR Corporation ("NCR"), AT&T Capital
Corporation ("AT&T Capital") and other businesses in 1996 and the disposition of
the AT&T submarine systems business ("SSI") on July 1, 1997 as discontinued
operations. Accordingly, the revenues, costs and expenses, assets and
liabilities, and cash flows of Lucent, NCR, AT&T Capital, SSI and other
businesses have been excluded from the respective captions in the Consolidated
Statements of Income, Consolidated Balance Sheets and Consolidated Statements of
Cash Flows, and have been reported through their respective dates of disposition
as "Income(loss) from discontinued operations," net of applicable income taxes;
as "Net assets of discontinued operations"; and as "Net cash used in
discontinued operations."
On July 1, 1997, AT&T sold SSI to Tyco International Ltd. for approximately $850
million, resulting in an after-tax gain of $66 million, or $.04 per share.
On October 20, 1997, AT&T announced its intention to sell AT&T Universal Card
Services ("UCS"). UCS represents substantially all of AT&T's financial services
segment. The sale is targeted to be completed by mid-1998. Accordingly, the
consolidated financial statements of AT&T will be restated to reflect UCS as a
discontinued operation. See Item 5 of this report.
Throughout the discussion and analysis of AT&T's results of operations and
financial condition, references are made to initiatives in which AT&T is
investing and to AT&T's core business. Initiatives include local service
deployment; wireless services in new 1.9 GHz markets, wireless data services and
wireless international expansion; AT&T Solutions outsourcing, consulting and
systems integration business; online services such as AT&T WorldNet* and AT&T
Web Site Services and international markets. AT&T's core business includes
business and consumer long distance services, wireless voice services in
existing 800 MHz markets, air-to-ground services, one-way messaging, wireless
product sales and financial services.
(*Service mark of AT&T)
<PAGE> 12 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
All financial data presented on a "core" and "initiatives" basis should be
considered approximate. Data on initiatives include costs and expenses on an
incremental basis, and require certain estimates and allocations that management
believes provide a reasonable basis on which to present such information.
Revenues from continuing operations grew 1.2% to $13,380 million in the third
quarter of 1997 compared with $13,228 million in the third quarter of 1996.
Growth in local and other initiatives, business long distance services and
wireless services led the revenue increase. Declines in consumer long distance
services and financial services partially offset these increases. For the nine
months ended September 30, 1997, revenues from continuing operations increased
1.7% to $39,601 million from $38,946 million for the same period of 1996. Growth
in business long distance services, local and other initiatives, and wireless
services led the revenue increase. This growth was partially offset by declines
in consumer long distance services and financial services. Competition continues
to affect long distance services revenues and is likely to increase in the
future.
Operating income decreased 17.3% to $1,799 million in the third quarter of 1997
compared with $2,174 million in the third quarter of 1996. Operating margin for
the third quarter of 1997 decreased to 13.4% from 16.4% in the third quarter of
1996. Earnings before interest and taxes ("EBIT"), which includes other income,
was $1,926 million in the third quarter of 1997, a decrease of 14.7% from $2,257
million in the third quarter of 1996. The quarter over quarter decreases in both
operating income and EBIT were primarily due to higher network and other
communications services expenses and higher depreciation and amortization
expenses partially offset by higher revenues and lower access and other
interconnection expenses. Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), which includes other income, decreased 3.2% to $2,920
million for the three months ended September 30, 1997 from $3,017 million for
the third quarter of 1996. This decrease was primarily due to higher network and
other communications services expenses partially offset by higher revenues and
lower access and other interconnection expenses.
Operating income for the nine months ended September 30, 1997 decreased 26.9% to
$5,048 million from $6,906 million in the year ago period. For the nine months
ended September 30, 1997, operating margin decreased to 12.7% from 17.7% in the
same period of 1996. EBIT for the nine months ended September 30, 1997 decreased
24.9% to $5,402 million from $7,196 for the same period in 1996. The year over
year decreases in both operating income and EBIT were mainly due to increases in
<PAGE> 13 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
network and other communications services expenses and depreciation and
amortization expenses partially offset by higher revenues.
For the nine months ended September 30, 1997, EBITDA decreased 11.0% to $8,271
million from $9,297 million for the nine months ended September 30, 1996. The
decrease was mainly due to higher network and other communications services
expenses partially offset by higher revenues. Income from continuing operations
was $1,153 million, or $.71 per share, in the third quarter of 1997 compared
with income from continuing operations of $1,359 million, or $.84 per share, in
the third quarter of 1996. This represents a 15.2% decline in income from
continuing operations, or a 15.5% decrease in earnings per share, for the third
quarter of 1997 compared with the same period in 1996. Losses from initiatives
diluted earnings per share by approximately $.23 in the third quarter of 1997
and by approximately $.17 in the third quarter of 1996. For the nine months
ended September 30, 1997, income from continuing operations was $3,234 million a
25.9% decrease from $4,366 million for the comparable period ended September 30,
1996. Losses from initiatives diluted earnings per share by approximately $.71
in the first nine months of 1997 and $.43 for the same period of 1996.
Management originally estimated that losses from inititatives would dilute
earnings per share by $.75 to $1.00. We now expect this dilution to be at the
high end of this range.
Earnings per share for the core business, which excludes the dilution from
initiatives, decreased 6.9% to approximately $.94 for the third quarter of 1997
from $1.01 for the third quarter of 1996. Earnings per share for the core
business for the nine months ended September 30, 1997 decreased 14.0% to
approximately $2.70 from $3.14 for the same year ago period. Management has
targeted a range for 1997 earnings per share for the core business of $3.45 to
$3.75.
Net income for the third quarter of 1997 decreased 14.8% to $1,219 million, or
$.75 per share, from $1,432 million, or $.89 per share, in the third quarter of
1996. For the nine months ended September 30, 1997, net income decreased 22.9%
to $3,304 million, or $2.03 per share, from $4,285 million, or $2.66 per share,
for the same period of 1996.
<PAGE> 14 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
COMMUNICATIONS SERVICES
Communications services revenues increased $170 million, or 1.3%, for the third
quarter of 1997 compared with the third quarter of 1996. For the nine months
ended September 30, 1997, communications services revenues increased $831
million, or 2.2%, compared with the nine months ended September 30, 1996.
Three months Nine months
ended ended
September 30, September 30,
$ In millions 1997 1996 1997 1996
Business long distance services $ 5,619 $ 5,514 $16,669 $16,212
Consumer long distance services 6,076 6,225 18,117 18,378
Wireless services 1,098 994 3,208 2,847
Local and other initiatives 560 407 1,543 1,090
Other and eliminations (351) (308) (1,055) (876)
Total communications
services revenues $13,002 $12,832 $38,482 $37,651
Operating income $ 1,775 $ 2,209 $ 4,922 $ 6,838
Operating margin 13.6% 17.2% 12.8% 18.2%
EBIT $ 1,902 $ 2,292 $ 5,273 $ 7,128
EBITDA $ 2,896 $ 3,052 $ 8,142 $ 9,229
Long distance services revenues include business and consumer long distance
services revenues from toll calling, network management, data services, other
network-enabled services and related product sales. For the third quarter of
1997, these revenues were $11,695 million, down $44 million, or 0.4%, compared
with $11,739 million for the third quarter of 1996. A decrease in consumer long
distance services revenue was partially offset by revenue growth in business
long distance services. In the third quarter of 1997, total long distance
volumes grew 10.1% compared with the third quarter of 1996. The gap between
revenue and volume growth for the quarter was primarily due to the continued
pricing pressure on long distance services, changes in product mix toward higher
volumes of lower-priced services, increased use of free minutes in customer
retention and acquisition programs, and the flow-through to customers of access
rate reductions. For the nine months ended September 30, 1997, long distance
services revenues increased 0.6%, or $196 million, to $34,786 million from
$34,590 million compared with the same period in 1996. This increase was led by
business long distance services partially offset by a decrease in consumer long
distance services.
<PAGE> 15 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Business long distance services revenue for the third quarter of 1997 increased
$105 million, or 1.9%, compared with the third quarter of 1996. The sales of
AT&T Skynet and AT&T Tridom earlier in 1997 negatively impacted the revenue
growth rate by 1.2%. Strong growth in data services revenue continued to drive
the increase in business revenue. Data revenue grew at a mid-single-digit rate
compared with the third quarter of 1996. Adjusted for the sales of AT&T Skynet
and AT&T Tridom, data revenue grew at a mid-teen rate. For the nine months ended
September 30, 1997, business long distance services revenue increased $457
million, or 2.8%, compared with the same period of 1996. This increase was led
by solid double-digit growth in data services revenue. The sales of AT&T Skynet
and AT&T Tridom negatively impacted business revenue growth by .6% for the nine
months ended September 30, 1997 compared with the same period in 1996.
Business long distance services volumes continued to grow at a mid-teens rate in
the third quarter 1997 compared with the third quarter 1996. Strong growth in
both inbound and outbound volumes led the business long distance volume growth.
The gap between revenue and volume growth for the quarter was primarily due to
the lower price levels on new business contracts reflecting competitive
pressures and access reform. Also contributing to the gap was rapid growth in
lower-priced intra-LATA minutes and the continuing migration of customers to
lower-priced bundled services partially offset by data revenue growth. The
ongoing rapid growth in lower-priced services will continue to influence the gap
in the fourth quarter of 1997. However, the gap is expected to narrow next
quarter as the rate of contract renegotiations is expected to decline.
Consumer long distance services revenue for the three months ended September 30,
1997 decreased $149 million, or 2.4%, compared with the three months ended
September 30, 1996. The use of free minutes in customer acquisition and
retention programs and the flow-through to customers of access rate reductions
contributed to the revenue decline. Excluding the negative impact of these two
factors, consumer long distance services revenue growth was essentially flat.
For the nine months ended September 30, 1997, consumer long distance services
revenue decreased $261 million, or 1.4%, compared with the same period of 1996.
The contra-revenue impact of free minutes reduced the revenue growth rates by
about 1.4% in both the third quarter and for the nine months ended September 30,
1997 compared with the same periods in 1996.
Consumer long distance services volumes grew slightly below the industry rate in
the third quarter of 1997 compared with the third quarter of 1996.
<PAGE> 16 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This growth was driven by robust growth in intraLATA traffic as AT&T has taken
advantage of the opportunity offered by presubscription in a number of states.
The widening gap between revenue and volume growth for the quarter was primarily
due to free minutes, price reductions resulting from access reform as well as
the increase in lower-priced intraLATA minutes and substitution away from higher
priced services such as calling cards. The gap was also impacted by the
migration of customers from the basic rates to the AT&T One Rate plans.
Competitive pressures from traditional and non-traditional sources such as
smaller telecommunications companies, non-RBOC local exchange carriers and
dial-around companies continued to impact growth in the third quarter of 1997
and are expected to continue to impact growth throughout 1997. Additionally,
factors such as the strategic shift from issuing checks to providing free
minutes will continue to have a negative impact on revenue growth in the fourth
quarter.
Wireless services revenue includes wireless voice and data, messaging,
air-to-ground services, the sales of wireless products and revenue from wireless
initiatives. This revenue grew $104 million, or 10.4%, in the third quarter of
1997 compared with the third quarter of 1996, driven by increased cellular
subscribers. Cellular revenue rose 10.0% to $917 million while consolidated
cellular subscribers increased 20.6% to 5.8 million at the end of the third
quarter of 1997 from 4.8 million at the end of the third quarter of 1996. On a
consolidated basis, this represents a voice penetration rate of 8.7% in the
third quarter of 1997, up from 7.1% in the third quarter of 1996. The disposal
of several wireless properties at the end of 1996 reduced the growth rates for
consolidated subscribers and for wireless revenue by 2.7% and 2.6%,
respectively, when compared with the third quarter of 1996. During the quarter,
net additions to consolidated subscribers were approximately 173,000,
representing a 29.3% decrease over net additions in the third quarter of 1996.
Adjusting for the disposal of wireless properties in 1996, net additions for the
quarter declined by approximately 27.0% from the third quarter of 1996. The
decline in net subscriber additions primarily reflects the intensifying
competition in the wireless industry as new market entrants offer attractive
introductory packages and as incumbent cellular competitors respond with
competitive offers. We expect to continue to see slower year over year growth in
net additions as more new entrants compete on price and as we focus on growth in
high value subscribers, not necessarily on growth in total subscribers. Wireless
services revenue increased $361 million, or 12.7%, to $3,208 million for the
<PAGE> 17 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
nine months ended September 30, 1997 compared with the same period in 1996,
again fueled by increased cellular subscribers. The previously mentioned
disposal of wireless properties reduced this growth rate by approximately 2.5%.
Total cellular customers served by companies in which AT&T has or shares a
controlling interest increased 18.9% to 7.8 million at September 30, 1997 from
6.6 million at September 30, 1996. On this basis, the voice penetration rate
rose to 8.3% this quarter from 7.0% in the third quarter of 1996.
Average revenue per subscriber continued to decline to $54 per subscriber in
both the third quarter of 1997 and for the nine months ended September 30, 1997
compared with $60 in the same periods of 1996. This decline reflects the
continuing industry-wide growth of more convenience-oriented, lower-use
subscribers as well as pricing pressures related to increased competition.
Development of new markets where AT&T owns 1.9 GHz licenses is expected to begin
to offset the effects of competition on subscriber and revenue growth in our 800
MHz markets.
Revenue from local and other initiatives includes revenue from AT&T Solutions'
consulting, outsourcing, and systems integration businesses, AT&T WorldNet and
other online services, international markets and local service. In the third
quarter of 1997, revenue from these initiatives increased $153 million, or
37.9%, from the third quarter of 1996. The revenue growth in the third quarter
was primarily due to increased revenue from international markets, growth in
outsourcing revenue from AT&T Solutions and increased revenue from AT&T
WorldNet. Revenue from these initiatives for the nine months ended September 30,
1997 increased $453 million, or 41.7%, compared with the same period of 1996.
The revenue growth for the nine months ended September 30, 1997 compared with
the comparable period of 1996 was led by increases in outsourcing revenue from
AT&T Solutions, revenues from international markets and revenues from AT&T
WorldNet.
AT&T WorldNet had approximately 963,000 subscribers at September 30, 1997. AT&T
WorldNet's subscriber growth has slowed primarily due to the expiration of its
initial promotional program, which offered five free hours of service per month
for the first year, as many non-paying customers deactivated service. AT&T Web
Site Services had more than 5,500 hosted sites at the end of the third quarter
of 1997.
<PAGE> 18 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Other and eliminations reflects the elimination of revenues for services sold
between revenue categories (e.g., sales of business long distance services to
other units).
Operating expenses for communications services increased $604 million, or 5.7%,
in the third quarter of 1997 compared with the third quarter of 1996. The
increase was driven by higher network and other communications services expenses
and depreciation and amortization expenses. These increases were partially
offset by lower access and other interconnection expenses. For the nine months
ended September 30, 1997, communications services' operating expenses increased
$2,747 million, or 8.9%, compared with the same period of 1996. The increase was
primarily due to higher network and other communications services expenses and
depreciation and amortization expenses.
Access and other interconnection expenses for the third quarter of 1997
decreased $117 million, or 2.9%, from the third quarter of 1996. This decrease
is primarily due to access charge reform mandated by the Federal Communications
Commission ("FCC") effective July 1, 1997. Declines in international settlement
rates as well as negotiated interstate and intrastate tariff reductions also
contributed to the decrease. These decreases were partially offset by a
double-digit increase in calling volumes. Access and other interconnection
expenses as a percentage of communications services revenues decreased to 30.5%
for the third quarter of 1997 from 31.8% for the third quarter of 1996.
For the nine months ended September 30, 1997, access and other interconnection
expenses increased $352 million, or 2.9%, from the same period in 1996. This
increase primarily reflects increased volumes and a second quarter 1996
favorable accounting adjustment to previously estimated accruals to reflect
actual billing. Interstate and intrastate tariff reductions, changes in traffic
mix, the FCC mandated access charge reform and declines in international
settlement rates all served to partially offset this increase. Access and other
interconnection expenses as a percentage of communications services revenues
increased to 32.4% for the nine months ended September 30, 1997 from 32.2% for
the same period in 1996.
Network and other communications services expenses increased $527 million, or
28.0%, for the third quarter of 1997 compared with the third quarter of 1996.
<PAGE> 19 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Higher costs for initiatives, particularly AT&T Solutions, local service and
AT&T WorldNet were the main drivers of the increase. In addition, expenses
accrued for expected payments to payphone operators, which accounted for
approximately one-third of the increase in this expense line, as well as higher
expenses for purchases from Lucent at retail also contributed to the increase.
For the nine months ended September 30, 1997, network and other communications
services expenses increased 25.4% to $7,029 million compared with the same
period in 1996. The increase primarily reflects higher costs for initiatives,
particularly AT&T Solutions, AT&T WorldNet and local service. Payphone
compensation, a higher provision for uncollectibles and higher expenses for
purchases from Lucent at retail also contributed to the increase.
Depreciation and amortization expenses for the quarter ended September 30, 1997
increased $234 million, or 31.6%, from the third quarter of 1996. For the nine
months ended September 30, 1997, depreciation and amortization expenses
increased $765 million, or 37.3%, from the same period in 1996. These increases
were primarily driven by higher levels of capital expenditures. The nine-month
period ended September 30, 1997 also includes a charge of approximately $80
million recorded to exit wireless services' two-way messaging initiative.
Selling, general and administrative ("SG&A") expenses decreased $40 million, or
1.0%, in the third quarter of 1997 compared with the third quarter of 1996. SG&A
as a percentage of communications services revenue decreased to 29.8% for the
third quarter of 1997 from 30.5% in the third quarter of 1996. This decrease
reflects lower SG&A expenses in the core business primarily due to lower
customer acquisition costs in consumer long distance services from the reduced
use of checks as a customer acquisition tool. Lower advertising expenses across
the Company and lower marketing and sales expenses in business markets, realized
through force reductions and streamlining of the marketing organization, also
contributed to the decrease. These decreases were partially offset by increases
from customer retention and acquisition costs in wireless services, including
the costs associated with moving customers to digital service, and from other
projects including the Year 2000 (see "Other Developments"). Increased spending
for initiatives, particularly local service and new wireless markets, also
partially offset the reduction in core expenses.
<PAGE> 20 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Customer retention and acquisition costs for wireless services increased in
total due to increased cellular subscribers. Customer retention and acquisition
costs increased despite a decline in cost per gross add ("CPGA"). CPGA declined
to $376 in the third quarter of 1997, down 10.0% from $418 in the third quarter
of 1996.
For the nine months ended September 30, 1997, SG&A expenses increased $205
million, or 1.9%, from the same period in 1996. The increase in SG&A was
primarily due to higher customer retention and acquisition costs in wireless
services, higher spending on initiatives, particularly local service, partially
offset by lower advertising expenses across the company and reduced use of
checks as a customer acquisition tool. Customer retention and acquisition costs
for wireless services increased in total, despite a decrease in CPGA. For the
nine months ended September 30, 1997, CPGA decreased 6.7% to $387 compared with
$415 for nine months ended September 30, 1996. Despite the increase in SG&A
expenses, SG&A as a percentage of communications services revenue was 29.2% for
the nine-month period in 1997, down slightly from 29.3% for the nine-month
period in 1996. As management continues to focus on cost-cutting, SG&A expenses
for the core business are expected to further decrease in the fourth quarter of
1997.
The operating margin for communications services decreased to 13.6%, for the
third quarter of 1997, from 17.2% for the third quarter of 1996 and decreased to
12.8%, for the first nine months of 1997, from 18.2% for the same period of
1996. Higher network and other communication services expenses were primarily
responsible for the decreased operating margins in both periods.
EBIT for communications services includes $136 million and $151 million for
wireless services for the third quarters of 1997 and 1996, respectively, and
$258 million and $365 million for the nine months ended September 30, 1997 and
1996, respectively.
<PAGE> 21 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Communications services EBIT includes dilution from initiatives of the following
approximate amounts:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
$ In billions
Wireless Initiatives* (.1) (.1) (.3) (.1)
Local Services (.3) (.1) (.7) (.3)
Other Initiatives (.2) (.3) (.9) (.8)
*Includes $160 million in costs recorded in the first quarter of 1997 to exit
the two-way messaging business.
EBITDA for communications services includes $360 million and $334 million for
wireless services for the third quarters of 1997 and 1996, respectively, and
$982 million and $903 million for the nine months ended September 30, 1997 and
1996, respectively. Communications services EBITDA includes dilution from
initiatives of the following approximate amounts:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996 1997 1996
$ In billions
Wireless Initiatives* (.1) (.1) (.2) (.1)
Local Services (.3) (.1) (.6) (.3)
Other Initiatives (.2) (.2) (.8) (.7)
*Includes half the charge recorded in the first quarter of 1997 to exit the
two-way messaging business.
<PAGE> 22 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL SERVICES
Financial services revenues decreased $18 million, or 4.6%, in the third quarter
of 1997 compared with the third quarter of 1996. In the first nine months of
1997, financial services revenues decreased $176 million, or 13.6%, compared
with the same period in 1996. The declines were primarily a result of the UCS
securitization program.
In the first quarter of 1997 AT&T adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." Among other provisions, this
standard requires UCS to recognize anticipated net revenue from securitized
receivables.
Three months Nine months
FINANCIAL SERVICES ended ended
September 30, September 30,
$ In millions 1997 1996 1997 1996
Financial services revenue $378 $396 $1,119 $1,295
Operating income $24 $(35) $126 $68
Operating margin 6.4% (8.8)% 11.3% 5.3%
EBT $24 $(35) $129 $68
Universal Card Information: At September 30,
In millions 1997 1996
Total book finance receivables $ 6,672 $ 6,548
Total managed finance receivables $14,172 $13,048
Cardholder accounts 18.9 18.1
Since September 30, 1996, UCS securitized $1.0 billion of cardholder receivables
(in the second quarter of 1997). This brings the total securitized receivables
to $7.5 billion since August, 1995.
UCS' book receivables, which exclude the $7.5 billion of receivables that have
been securitized to date, were $6.7 billion at the end of the third quarter of
1997. Although book receivables at September 30, 1997 are higher than the book
receivables at September 30, 1996, average net receivables for the third quarter
of 1997 and the nine months ended September 30, 1997 were lower than average
<PAGE> 23 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
net receivables for the same periods of 1996. UCS retained the servicing and
customer relationships of the securitized credit card accounts. Including
securitized receivables, UCS' total managed receivables were $14.2 billion at
the end of the third quarter of 1997, up $1.1 billion from the third quarter of
1996. The increase resulted primarily from UCS restarting account customer
acquisition activity earlier this year, including a balance transfer program.
Financial services expenses decreased $77 million, or 18.0%, in the third
quarter of 1997 compared with the third quarter of 1996 driven by reductions in
both credit losses and marketing expenses. For the nine months ended September
30, 1997, financial services expenses decreased $234 million, or 19.1%, compared
with the same period in 1996. This decrease is mainly due to reduced credit
losses and the impact of securitization. Net charge offs as a percentage of
average credit card receivables outstanding ("charge-off rate") was 6.1% for the
third quarter of 1997, down from 7.9% for the third quarter of 1996.
Additionally, the charge-off rate relating to managed receivables decreased to
5.3% for the third quarter of 1997 from 6.5% for the third quarter of 1996.
Delinquencies, or payments that are thirty days or more past due, were 3.2% of
average managed receivables as of September 30, 1997, down from 4.1% as of
September 30, 1996.
UCS represents substantially all of AT&T's financial services segment. On
October 20, 1997, AT&T announced its plans to sell UCS. Refer to Item 5 of this
report.
<PAGE> 24 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER INCOME STATEMENT ITEMS
Other income increased $44 million, or 54.6%, for the third quarter of 1997
compared with the third quarter of 1996 due to a number of items, none of which
are individually significant. For the nine months ended September 30, 1997,
other income increased $64 million, or 21.9%, from the nine months ended
September 30, 1996. This increase is primarily due to the gain of approximately
$100 million on the sale of AT&T Skynet Satellite Services in the first quarter
of 1997 partially offset by lower earnings from equity investments.
Interest expense for the third quarter of 1997 decreased $30 million, or 41.7%,
compared with the third quarter of 1996. Interest expense decreased $145
million, or 49.8%, for the nine months ended September 30, 1997 compared with
the same nine-month period of 1996. These decreases were primarily due to lower
levels of average debt.
The provision for income taxes for the third quarter of 1997 decreased $95
million compared with the third quarter of 1996. This decrease was primarily due
to lower income before income taxes partially offset by a higher effective tax
rate. The effective tax rate of 38.8% for the third quarter of 1997 increased
from 37.8% in the third quarter of 1996 principally due to the tax impacts of
investment dispositions announced in 1997. For the nine months ended September
30, 1997, the provision for income taxes decreased $517 million compared with
the same nine-month period in 1996. This decrease was primarily due to lower
income before income taxes partially offset by a higher effective tax rate. The
effective tax rate was 38.5% for the nine months ended September 30, 1997
compared with 36.8% for the nine month period of 1996. This increase was
principally due to the tax impacts of investment dispositions announced in 1997
and certain tax benefits to AT&T in 1996 from various legal entity
restructurings.
Income from discontinued operations decreased $73 million for the third quarter
of 1997 compared with the third quarter of 1996. For the nine months ended
September 30, 1997, income from discontinued operations increased $85 million
compared with the same period last year. In the third quarter and nine months
ended September 30, 1996, the results from discontinued operations include the
results of Lucent, NCR, AT&T Capital, SSI and other businesses. The dispositions
of Lucent, NCR, AT&T Capital and other businesses were successfully completed
during 1996. The disposition of SSI was successfully completed on July 1, 1997.
<PAGE> 25 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Gain on the sale of discontinued operations increased $66 million for the third
quarter and nine months ended September 30, 1997 compared with comparable
periods in 1996. These increases reflect the gain, net of tax, on the sale of
SSI.
FINANCIAL CONDITION
SEPTEMBER 30, 1997 VERSUS DECEMBER 31, 1996
Total assets by business category consist of the following:
September 30, Dec. 31,
$ In billions 1997 1996
Long distance - business
and consumer $ 20.4 $ 20.3
Wireless services 16.5 16.2
Local service initiative 3.5 2.7
Other initiatives 2.6 1.8
Other business categories 5.6 5.5
Total communications
services 48.6 46.5
Financial services 8.1 8.5
Net assets of discontinued
operations - 0.6
Total assets $ 56.7 $ 55.6
Total assets increased $1,159 million, or 2.1%, during the nine months ended
September 30, 1997. Increases in property, plant and equipment and licensing
costs were partially offset by decreases in net assets of discontinued
operations and finance receivables.
Property, plant and equipment increased primarily due to 1997 capital
expenditures partially offset by current year depreciation. The increase in
licensing costs is mainly due to additional purchases of PCS licenses. Net
assets of discontinued operations decreased due to the sale of SSI on July 1,
1997. Finance receivables decreased primarily due to the securitization of $1
billion of receivables by UCS in the second quarter of 1997 and the paydown of
December 1996 seasonal credit card balances partially offset by increases due to
UCS' balance transfer program.
<PAGE> 26 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Total liabilities decreased $531 million, or 1.5%, from December 31, 1996,
primarily reflecting lower levels of debt and payroll and benefit-related
liabilities. The decrease in debt is mainly due to reduced borrowings for UCS
due to the securitization program. Payroll and benefit-related liablilities
decreased primarily due to the annual payment of year-end employee bonuses in
the first quarter of 1997 and payments of severance benefits associated with
AT&T's restructuring plans.
Shareowners' equity increased $1,690 million primarily resulting from net income
for the first nine months 1997 partially offset by dividends.
The ratio of total debt to total capital (total debt and equity) decreased to
31.0% at September 30, 1997, compared with 33.8% at December 31, 1996. Excluding
financial services operations, the debt ratio was 17.4% at September 30, 1997
compared with 18.7% at December 31, 1996.
In the normal course of business, AT&T uses certain derivative financial
instruments, mainly interest rate swaps and foreign currency exchange rate
contracts. The interest rate swaps and foreign currency contracts and options
allow the Company to manage its exposures to changing interest rates and
currency exchange rates. AT&T does not use derivative financial instruments for
speculative purposes. Credit policies are designed to limit the risks of dealing
with other parties to these instruments. In management's view, the risks to AT&T
from using these derivative financial instruments are small and the benefits
include more stable earnings in periods when interest rates and currency
exchange rates are changing.
<PAGE> 27 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996
Cash flows provided by operating activities of continuing operations of $6,062
million for the nine months ended September 30, 1997 decreased $158 million
compared with the first nine months of 1996. Although the decrease in income
from continuing operations was $1,132 million, this decrease was primarily
driven by depreciation and amortization and the provision for uncollectibles. In
addition, increased cash tax payments in 1997 were substantially offset by a
prepayment to Lucent in the second quarter of 1996.
For the nine months ended September 30, 1997, net cash used in investing
activities of $3,754 million increased by $3,292 million from $462 million in
the first nine months of 1996. The change primarily reflects lower proceeds from
UCS' securitizations in 1997 compared to 1996 and increased cash payments
required in 1997 compared to 1996 to fund receivables growth for UCS. Also
contributing to the increased use of cash in 1997 compared to 1996 were higher
cash payments for capital expenditures and PCS license acquisitions. All of
these items were partially offset by increased proceeds from dispositions,
primarily the 1997 sales of SSI, AT&T Skynet and AT&T Tridom.
Capital expenditures, per the statement of cash flows, represents the cash
payments made thus far in 1997. This amount differs from the $4.4 billion of
capital expenditures reported on an accrual basis due to the timing of cash
payments. Capital expenditures for the nine months ended September 30, 1997 on
an accrual basis were approximately $4.4 billion, an increase of approximately
$.6 billion from the first nine months of 1996. This increase was primarily due
to investments in the AT&T long distance network, as well as infrastructure
related to new and existing wireless markets and the local service initiative.
Long distance services capital expenditures were approximately $2.6 billion in
the first nine months of 1997, an increase of $.4 billion compared to the nine
months ended September 30, 1996. Capital expenditures for wireless services were
approximately $1.0 billion in the nine months ended September 30, 1997, an
increase of approximately $.1 billion from the same period in 1996.
Additionally, capital expenditures for local initiatives were $.5 billion in the
nine months ended September 30, 1997, an increase of $.1 billion from the same
period in 1996. Management expects capital expenditures to total approximately
$7.8 billion for 1997.
<PAGE> 28 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net cash used in financing activities of $2,071 million for the nine months
ended September 30, 1997 decreased $2,200 million from $4,271 million for the
first nine months of 1996. The activity for the first nine months of 1996
included a large decrease in debt. The debt reduction was mainly the result of
Lucent spin-off related transactions and decreased UCS financing requirements
due to securitization. This was partially offset by cash provided by other
financing activities, from Lucent spin-off related transactions, and from
issuance of common shares. In 1997 we have predominantly satisfied the share
requirements for our employee plans through open market purchases rather than
the issuance of new shares. Therefore, the issuance of shares for our employee
plans is not providing us with a source of cash in 1997.
Future financing is contemplated to be arranged as necessary to meet our capital
and other requirements with the timing of issue, principal amount and form
depending on our needs, prevailing market and general economic conditions.
We anticipate obtaining all necessary external financing through issuances of
commercial paper, long-term debt and equity, and available lines of credit.
<PAGE> 29 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RECENT PRONOUNCEMENTS
In February 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Among
other provisions, the standard sets forth provisions for calculating basic and
diluted earnings per share and requires disclosure of both on the face of the
income statement for income from continuing operations and net income. As
prescribed by the standard, the basic earnings per share calculation includes
only common shares outstanding while diluted earnings per share includes all
common shares and dilutive potential common shares outstanding. The standard is
effective for both interim and annual periods ending after December 15, 1997.
For AT&T, this means that the standard is effective December 31, 1997. Since the
standard applies to the earnings per share calculation, it will not have any
impact on AT&T's results of operations, financial position or cash flows, and
will not have a material impact on AT&T's results of operations reported on a
per share basis.
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes the standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains, and losses) as part of a full set of financial statements. This
statement requires that all elements of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. For AT&T, this means the standard is effective January
1, 1998. Since this standard applies only to the presentation of comprehensive
income, it will not have any impact on AT&T's results of operations, financial
position or cash flows.
In June 1997 the Financial Accounting Standards Board also issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes the standards for the manner in which public enterprises are
required to report financial and descriptive information about their operating
segments. The standard defines operating segments as components of an enterprise
for which separate financial information is available and evaluated regularly as
a means for assessing segment performance and allocating resources to segments.
A measure of profit or loss, total assets and other related information are
required to be disclosed for each operating segment. In addition, this standard
requires the annual disclosure of information concerning revenues derived from
the enterprise's products or services, countries in which it earns revenue or
holds assets, and major customers. The statement is also effective for fiscal
<PAGE> 30 AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
years beginning after December 15, 1997. For AT&T, this means the standard is
effective for the 1998 annual report. Since this standard applies only to the
presentation of segment information, it will not have any impact on AT&T's
results of operations, financial position or cash flows.
OTHER DEVELOPMENTS
AT&T has established processes for evaluating and managing the risks and costs
associated with preparing our systems and applications for the year 2000. We
expect to incur internal staff costs as well as consulting and other expenses
related to the conversion and testing of our systems and applications. We expect
the cost of this project to be approximately $100 million in 1997 and have
reflected this in our targets. We are still assessing the total expected impact
to AT&T over the life of the project. We plan on having substantially all
modifications completed by the end of 1998, leaving a full year for testing.
On September 24, 1997 AT&T and Telecom Italia announced their intention to
pursue an exchange of shares that would give both companies stakes of equal
value in each other's operations. AT&T would receive 1.2 percent of Telecom
Italia; in exchange Telecom Italia would receive an interest in AT&T of
comparable dollar value at the same time. The transaction is contingent upon
various items including the successful conclusion of the European and Latin
American joint ventures announced by the two companies on July 2, 1997. AT&T
intends to structure the transaction so that the exchange of shares would have
no significant effect on our cash position and would not significantly dilute
our earnings.
AT&T owns approximately 45% of the common shares of LIN TV. On August 12, 1997,
AT&T entered into an agreement to sell all of its interest in LIN TV for
approximately $641 million to Hicks, Muse, Tate and Furst Incorporated (Hicks
Muse). Subsequently, in response to a competitive offer, Hicks Muse increased
their bid to $742 million. The sale is subject to various conditions, including
the approval by the Federal Communications Commission. If approved, the sale is
expected to close in early 1998. In a separate agreement, AT&T agreed to sell
Wood-TV for approximately $123 million, subject to certain adjustments, upon the
completion of the sale of its interest in LIN TV.
<PAGE> 31 AT&T Form 10-Q - Part I
LEGISLATIVE AND REGULATORY DEVELOPMENTS
AT&T has experienced significant difficulty in penetrating local markets. At
October 31, 1997 AT&T had received authority to provide local service in 47
states and the District of Columbia. As of such date, AT&T was offering AT&T
Digital Link service for medium- and large-sized business customers on an
outbound only basis in 48 states and on an inbound and outbound basis in one
state. Also at such date, AT&T was offering resold local service to consumers in
California, Connecticut, Georgia, Illinois, Michigan, Texas and Rochester, New
York as well as offering resold local service to small business customers in
California and Connecticut.
On July 18, 1997, the 8th Circuit Court of Appeals issued a decision holding
that the FCC lacks authority to establish pricing rules to implement the
sections of the local competition provisions of the Telecommunications Act
applicable to interconnection with local exchange carrier ("LEC") networks and
the purchase of unbundled network elements and wholesale services from LECs.
Accordingly, the Court vacated the rules that the FCC had adopted in August
1996, and which had been stayed by the Court since September 1996. Absent
effectiveness of the pricing rules, each state will determine the applicable
rates and procedures independent of the framework established by the FCC.
In May 1997, the FCC adopted three orders relating to Price Caps, Access Reform,
and Universal Service that will result in substantial revisions to the level and
structure of access charges that AT&T as a long distance carrier pays to
incumbent LECs. AT&T has agreed to passthrough to consumers any savings to AT&T
as a result of access charge reform. AT&T began implementing these reductions
July 15, 1997. As a result, AT&T's future results will reflect lower revenue per
minute of usage and lower access and other interconnection costs per minute of
usage.
On October 14, 1997, the 8th Circuit Court of Appeals vacated an FCC Rule that
had prohibited incumbent LECs from separating network elements that are combined
in the LEC's network, except at the request of the competitor purchasing the
elements. This decision could increase the difficulty and costs of providing
competitive local service through the use of unbundled network elements
purchased from the incumbent LECs.
<PAGE> 32 AT&T Form 10-Q - Part I
The Price Cap Order requires LECs to reduce their price cap indices by 6.5
percent annually, less an adjustment for inflation, which has already reduced
the interstate access charges that long distance carriers, such as AT&T, pay to
LECs. The Access Charge Reform Order restructured access charges so that certain
costs that do not vary with usage will be recovered on a flat-rate basis and
permits increased flat-rate assessments on multiline business customers and on
residential lines beyond the primary telephone line. This restructuring allows a
reduction in access charges assessed on long distance carriers on a usage basis.
Finally, the Universal Service Order adopts a new mechanism for funding
universal service which expands the set of carriers that must contribute to
support universal service from only long-distance carriers to all carriers,
including LECs, that provide interstate telecommunications services. Similarly,
the set of carriers eligible for the universal service support has been expanded
from only LECs to any eligible carrier providing local service to a customer,
including AT&T as a new entrant in local markets. The Universal Service Order
also adopted measures to provide discounts on telecommunications services,
Internet access and inside wire to eligible schools and libraries and rural
health carrier providers.
COMPETITION
AT&T currently faces significant competition in the communication and
information services industry and expects that the level of competition will
continue to increase. For example, non-RBOC LECs, which are not required to
implement the Telecommunications Act's competitive checklist prior to offering
long distance in their home markets, have begun integrating their local service
offerings with long distance offerings in advance of AT&T being able to offer
combined local and long distance service in these areas.
In addition, the Telecommunications Act will permit RBOCs to provide interLATA
interexchange services after demonstrating to the FCC that such provision is in
the public interest and satisfying the conditions for developing local
competition established by the Telecommunications Act.
<PAGE> 33 AT&T Form 10-Q - Part I
Some of the RBOCs have petitioned the FCC for permission to provide interLATA
interexchange services in one or more states within their home market; to date
the FCC has not granted any such petition. To the extent that the RBOCs obtain
in-region interLATA authority before the Telecommunications Act's checklist of
conditions have been fully or satisfactorily implemented and adequate
facilities-based local exchange competition exists, there is a substantial risk
that AT&T and other interexchange service providers would be at a disadvantage
to the RBOCs in providing both local service and combined service packages.
Because it is widely anticipated that substantial numbers of long distance
customers will seek to purchase local, interexchange and other services from a
single carrier as part of a combined or full service package, any competitive
disadvantage, inability to profitably provide local service at competitive rates
or delays or limitations in providing local service or combined service packages
could adversely affect AT&T's future revenues and earnings.
In addition to the matters referred to above, various other factors, including
market acceptance, start-up and ongoing costs associated with the provision of
new services and local conditions and obstacles, could adversely affect the
timing and success of AT&T's entrance into the local exchange services market
and AT&T's ability to offer combined service packages that include local
service. In addition, the simultaneous entrance of numerous new competitors for
interexchange and combined service packages is likely to adversely affect AT&T's
long distance revenues and could adversely affect earnings.
FORWARD LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-Q constitute "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Any Form 10-K, Annual Report
to Shareowners, Form 10-Q or Form 8-K of AT&T may include forwardlooking
statements, including statements concerning future operating performance, AT&T's
share of new and existing markets, AT&T's short- and long-term revenue and
earnings growth rates, and general industry growth rates and AT&T's performance
relative thereto. These forward looking statements rely on a number of
assumptions concerning future events, including the adoption and implementation
of balanced and effective rules and regulations by the FCC and the state public
regulatory agencies, and AT&T's ability to achieve a significant market
penetration in new markets. These forward looking statements are subject to a
number of uncertainties and other factors, many of which are outside AT&T's
control, that could cause actual results to differ materially from such
statements.
<PAGE> 34 AT&T Form 10-Q - Part I
For a more complete discussion of the factors that could cause actual results to
differ materially from such forward looking statements, see the discussion
thereof contained under the heading "Forward Looking Statements" in the
Company's Form 10-K for the year ended December 31, 1997 and in the Company's
Form 10-Q for the quarter ended June 30, 1997. Readers should also consider the
factors discussed under the headings "Results of Operations", "Financial
Condition", "Regulatory and Legislative Developments", and "Competition"
included in this Form 10-Q. AT&T disclaims any intention or obligation to update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
<PAGE> 35 AT&T Form 10-Q - Part II
Item 1. Legal Proceedings
On July 6, 1997 MCI Telecommunications Corp. and Ronald A. Katz Technology
Licensing, L.P. filed suit in United States District Court in Philadelphia,
Pennsylvania against AT&T. The suit alleges that a number of AT&T services
infringe patents owned by Katz but licensed to MCI for enforcement against AT&T.
AT&T is reviewing the allegations of the Complaint. Based on review to date, it
is management's opinion that the claims do not present any material monetary
liability or financial impact to AT&T that is not subject to patent indemnity
agreements with third-party equipment vendors.
In September, 1997, the government of the U.S. Virgin Islands filed suit in the
federal district court of the Virgin Islands against the Company, AT&T Submarine
Systems International ("SSI International"), A&L Underground, Inc., a contractor
for SSI International at that time, and other entities. In connection with the
purported 1996 release on non-toxic bentonite drilling mud within the coastal
region of St. Croix by the contractor, the suit seeks penalties for violations
of various federal and Virgin Island statutes; damages under several statutory
and common law theories; removal of the mud (which is currently underway); and
restitution of response costs allegedly incurred by the Virgin Islands. SSI
International was a wholly owned subsidiary of AT&T at the time of the alleged
violation. The foregoing environmental proceeding is not material to the
consolidated financial statements or business of the Company and would not be
reported but for Instruction 5 C. of Item 103 of Regulation S-K, which requires
disclosure of such matters.
<PAGE> 36 AT&T Form 10-Q - Item 5
Item 5. Acquisition or Disposition of Assets
On October 20, 1997, AT&T announced its plans to sell AT&T Universal Card
Services ("UCS"). Although a sale agreement has not been reached, a sale is
targeted to be completed by mid-1998. However, AT&T can not predict the timing
or the terms of such transaction. UCS represents substantially all of AT&T's
financial services segment.
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30"), the Consolidated Financial Statements of AT&T have been restated to
reflect the decision to dispose of UCS. Accordingly, the revenues, costs and
expenses, and assets and liabilities of UCS have been excluded from the
respective captions in the Consolidated Statements of Income and Consolidated
Balance Sheet. The net operating results of this entity has been reported, net
of applicable income taxes, as "Income from discontinued operations" and the net
assets of this entity have been reported as "Net assets of discontinued
operations". Intercompany transactions associated with AT&T entering into
financing arrangements on behalf UCS to fund its operations, which were
previously eliminated in consolidation, are now reflected in the financial
statements. In addition, certain reclassifications have been made to the
consolidated results for continuing operations to conform to the current
presentation.
The Company filed Form 8-K on November 4, 1997 which included the Company's
Consolidated Statements of Income for the year ended December 31, 1996 and the
six months ended June 30, 1997 and Consolidated Balance Sheet at June 30, 1997
presented in accordance with APB 30. The Company's Consolidated Statement of
Income for the nine months ended September 30, 1997 and Consolidated Balance
Sheet at September 30, 1997 presented in accordance with APB 30 follow.
<PAGE> 37 AT&T Form 10-Q - Item 5
FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Nine
Months Ended
September 30,
1997
Revenues................................... $38,491
Operating Expenses
Access and other interconnection........... 12,458
Network and other communications services.. 7,030
Depreciation and amortization.............. 2,819
Selling, general and administrative........ 11,259
Total Operating Expenses.................. 33,566
Operating income........................... 4,925
Other income - net......................... 351
Interest expense........................... 152
Income from continuing operations before
income taxes.............................. 5,124
Provision for income taxes................. 1,975
Income from continuing operations.......... 3,149
Discontinued operations:
Income from discontinued operations
net of taxes of $49 ...................... 89
Gain on sale of discontinued operation
net of taxes of $43 ...................... 66
Net income................................. 3,304
Weighted average common shares and
common share equivalents (millions)....... 1,628
Per common share:
Income from continuing operations.......... $ 1.93
Income from discontinued operations........ 0.06
Gain on sale of discontinued operation..... 0.04
Net income................................. $ 2.03
<PAGE> 38 AT&T Form 10-Q - Item 5
CONSOLIDATED BALANCE SHEET
(Dollars in Millions Except Per Share Amount)
(Unaudited)
September 30,
1997
ASSETS
Cash and cash equivalents ............... $ 187
Receivables less allowances of $1,046....
Accounts receivable................... 8,901
Other receivables..................... 4,734
Deferred income taxes................... 1,307
Other current assets.................... 496
Total current assets.................... 15,625
Property, plant and equipment, net of
accumulated depreciation of $21,423... 20,964
Licensing costs, net of accumulated
amortization of $1,032................ 8,341
Investments............................. 4,069
Long-term receivables................... 1,818
Prepaid pension costs................... 2,129
Other assets............................ 2,482
Net assets of discontinued operation.... 1,020
TOTAL ASSETS............................ $56,448
(CONT'D)
<PAGE> 39 AT&T Form 10-Q - Item 5
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Per Share Amount)
(Unaudited)
September 30,
1997
LIABILITIES
Accounts payable....................... $ 5,934
Payroll and benefit-related
liabilities.......................... 2,242
Debt maturing within one year.......... 2,795
Dividends payable...................... 539
Other current liabilities.............. 4,446
Total current liabilities.............. 15,956
Long-term debt......................... 7,054
Long-term benefit-related liabilities.. 3,090
Deferred income taxes.................. 5,059
Other long-term liabilities and
deferred credits..................... 3,304
Total liabilities ..................... 34,463
SHAREOWNERS' EQUITY
Common stock - par value $1 per share.. 1,625
Authorized shares: 2,000,000,000
Outstanding shares:
1,625,285,000 at September 30, 1997
Additional paid-in capital............. 15,714
Guaranteed ESOP obligation............. (70)
Foreign currency translation
adjustments.......................... 32
Retained earnings...................... 4,684
Total shareowners' equity.............. 21,985
TOTAL LIABILITIES & SHAREOWNERS' EQUITY $56,448
<PAGE> 40 AT&T Form 10-Q - Item 5
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions)
(Unaudited)
(a) Discontinued Operation
Summarized financial information for the UCS discontinued operation is as
follows:
For the Nine
Months Ended
September 30,
1997
Revenues $ 1,110
Income before income taxes 131
Net income $ 85
At September
30, 1997
Current Assets $ 6,553
Total Assets 6,624
Current Liabilities* 4,481
Total Liabilities* 5,604
Net assets of discontinued
operation $ 1,020
*Current liabilities include $4,312 million of debt maturing within one
year and total liabilities include an additional $1,117 million of
long-term debt both of which are payable to AT&T.
<PAGE> 41 AT&T Form 10-Q - Item 6
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions)
(Unaudited)
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated July 15, 1997 was filed pursuant to Item 5 (Other
Events). Form 8-K dated August 12, 1997 was filed pursuant to
Item 2 (Acquisition or Disposition of Assets) and Item 7
(Financial Statements and Exhibits).
<PAGE> 42 AT&T Form 10-Q
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.
/s/ M. B. Tart
------------------------------
By: M. B. Tart
Vice President and Controller
(Principal Accounting Officer)
Date November 13, 1997
<PAGE> 43 AT&T Form 10-Q
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
Exhibit 12
Form 10-Q
For the Nine
Months Ended
September 30, 1997
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Nine
Months Ended
September 30, 1997
Income from Continuing Operations
Before Income Taxes ................................. $5,255
Less Interest Capitalized during
the Period........................................... 196
Add Equity Investment Losses, net of distributions
of Less than 50% Owned Affiliates.................... 84
Add Fixed Charges...................................... 758
Total Earnings from Continuing
Operations Before Income Taxes
and Fixed Charges.................................... $5,901
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 563
Interest Portion of Rental Expense..................... 195
Total Fixed Charges................................ $ 758
Ratio of Earnings to Fixed Charges..................... 7.8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited balance sheet of AT&T Corp. at September 30, 1997 and the
unaudited consolidated statement of income for the nine-month period ended
September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 313
<SECURITIES> 0
<RECEIVABLES> 10,008
<ALLOWANCES> 1,046
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<CURRENT-ASSETS> 17,954
<PP&E> 42,527
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<TOTAL-ASSETS> 56,711
<CURRENT-LIABILITIES> 16,213
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0
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<COMMON> 1,625
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<TOTAL-LIABILITY-AND-EQUITY> 56,711
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<TOTAL-REVENUES> 39,601
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