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 March 31, 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 April 30, 1997, 1,624,771,000 common shares were outstanding.
<PAGE>
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
Months Ended
March 31,
1997 1996
Revenues
Communications services.................... $12,658 $12,370
Financial services ........................ 390 480
Total revenues............................. 13,048 12,850
Operating Expenses
Access and other interconnection........... 4,252 4,168
Network and other communications services.. 2,251 1,827
Depreciation and amortization ............. 930 655
Selling, general and administrative ....... 3,587 3,357
Total communications services expenses.... 11,020 10,007
Financial services expenses................ 338 430
Total operating expenses .................. 11,358 10,437
Operating income .......................... 1,690 2,413
Other income - net ........................ 170 105
Interest expense .......................... 49 123
Income from continuing operations
before income taxes ..................... 1,811 2,395
Provision for income taxes ................ 689 926
Income from continuing operations ......... 1,122 1,469
Discontinued Operations:
Income (loss) from discontinued operations
(net of taxes of $3 in 1997 and
($316) in 1996) .......................... 4 (107)
Net income ................................ $ 1,126 $ 1,362
Weighted average common shares
outstanding (millions).................. 1,628 1,608
Earnings per common share:
Income from continuing operations ........ $ 0.69 $ 0.92
Income (loss) from discontinued operations - (0.07)
Net income ............................... $ 0.69 $ 0.85
Dividends declared per
common share............................ $ .33 $ .33
See Notes to Consolidated Financial Statements.
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Share Amounts)
(Unaudited)
March 31, December 31,
1997 1996
ASSETS
Cash and cash equivalents .............. $ 415 $ 134
Receivables less allowances
of $1,385 and $1,336
Accounts receivable................... 8,720 8,973
Finance receivables................... 6,347 7,087
Deferred income taxes................... 1,408 1,413
Other current assets.................... 569 703
Total current assets.................... 17,459 18,310
Property, plant and equipment, net
of accumulated depreciation of
$20,233 and $19,728 .................. 19,362 19,794
Licensing costs, net of accumulated
amortization of $945 and $913......... 8,080 8,071
Investments............................. 4,000 3,883
Long-term finance receivables........... 701 703
Prepaid pension costs................... 2,011 1,933
Other assets............................ 2,519 2,332
Net assets of discontinued operations... 559 526
TOTAL ASSETS............................ $54,691 $55,552
(CONT'D)
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Share Amounts)
(Unaudited)
March 31, December 31,
1997 1996
LIABILITIES
Accounts payable....................... $ 5,653 $ 6,173
Payroll and benefit-related
liabilities.......................... 1,949 2,635
Debt maturing within one year.......... 1,934 2,460
Dividends payable...................... 537 536
Other current liabilities.............. 4,619 4,514
Total current liabilities.............. 14,692 16,318
Long-term debt......................... 7,867 7,883
Long-term benefit-related liabilities.. 3,060 3,037
Deferred income taxes.................. 4,868 4,827
Other long-term liabilities and
deferred credits..................... 3,338 3,192
Total liabilities ..................... 33,825 35,257
SHAREOWNERS' EQUITY
Common stock - par value $1 per share.. 1,624 1,623
Authorized shares: 2,000,000,000
Outstanding shares:
1,624,412,000 at March 31, 1997
1,623,487,646 at December 31, 1996
Additional paid-in capital............. 15,662 15,643
Guaranteed ESOP obligation............. (84) (96)
Foreign currency translation
adjustments.......................... 30 47
Retained earnings...................... 3,634 3,078
Total shareowners' equity.............. 20,866 20,295
TOTAL LIABILITIES & SHAREOWNERS' EQUITY $54,691 $55,552
See Notes to Consolidated Financial Statements.
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31,
1997 1996
Operating Activities
Net income .............................. $ 1,126 $ 1,362
Add: (Income) loss from
discontinued operations ............... (4) 107
Income from continuing operations ....... 1,122 1,469
Adjustments to reconcile net income to
net cash provided by operating
activities of continuing operations:
Depreciation and amortization......... 930 655
Provision for uncollectibles.......... 667 532
Increase in accounts receivable....... (263) (467)
Decrease in accounts payable.......... (143) (67)
Net increase in other operating
assets and liabilities.............. (489) (271)
Other adjustments for non-cash
items - net......................... (38) 161
Net cash provided by operating
activities of continuing operations.... 1,786 2,012
Investing Activities
Capital expenditures................... (1,385) (896)
Proceeds from sale or disposal of
property, plant and equipment........ 30 19
Decrease in finance assets............. 624 612
Acquisitions of licenses............... (54) (23)
Net increase in investments............ (188) (151)
Dispositions........................... 586 160
Other investing activities - net....... (18) (91)
Net cash used in investing activities
of continuing operations............... (405) (370)
(CONT'D)
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31,
1997 1996
Financing Activities
Proceeds from long-term debt issuances. 25 2
Retirements of long-term debt.......... (31) (437)
Issuance of common shares.............. 39 512
Treasury shares acquired............... (18) -
Dividends paid......................... (535) (527)
Decrease in short-term borrowings - net (526) (2,093)
Other financing activities - net....... (23) 1,247
Net cash used in financing activities
of continuing operations............... (1,069) (1,296)
Effect of exchange rate
changes on cash........................ (1) (22)
Net cash used in discontinued operations. (30) (248)
Net increase in cash and
cash equivalents........................ 281 76
Cash and cash equivalents
at beginning of year................... 134 129
Cash and cash equivalents
at end of period....................... $ 415 $ 205
See Notes to Consolidated Financial Statements.
<PAGE>
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, and Form 10-K for the year ended December
31, 1996.
(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") and AT&T Capital Corporation ("AT&T
Capital") and other businesses in 1996 and the planned disposition of
AT&T Submarine Systems Inc. ("SSI") 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 April 11, 1997 AT&T announced that it entered into an agreement to
sell SSI to Tyco International Ltd. for approximately $850.
<PAGE>
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
Months Ended
March 31,
1997 1996
Revenues $ 159 $5,924
Income(loss) before
income taxes 7 (423)
Net income (loss) 4 (107)
At March At Dec.
31, 1997 31, 1996
Current Assets $ 516 $ 554
Total Assets 817 862
Current Liabilities 139 230
Total Liabilities 258 336
Net assets of discontinued
operations $ 559 $ 526
The loss before income taxes includes interest expense of $28 for the
quarter ended March 31, 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 the first quarter of 1997 due to
immateriality of the amount.
<PAGE>
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 March 31, 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. The summarized financial information
includes transactions with AT&T that are eliminated in consolidation
.
For the Three
Months Ended
March 31,
1997 1996
Total revenues $ 43 $ 33
Income from continuing operations 9 7
Income from discontinued operation - 26
Net income 9 33
At At
March 31, December 31,
1997 1996
Finance receivables $ 1,102 $ 1,102
Total assets 3,087 3,075
Total debt 60 60
Total liabilities 1,904 1,891
Total shareowners' equity $ 1,183 $ 1,184
<PAGE>
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
Months Ended
March 31,
1997 1996
Interest Expense $ 73 $ 123
Provision for losses 118 163
Other costs 101 102
Selling, general and
administrative 46 42
Total $ 338 $ 430
<PAGE>
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") and AT&T Capital
Corporation ("AT&T Capital") and other businesses in 1996 and the planned
disposition of AT&T Submarine Systems Inc. ("SSI") 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 April 11, 1997 AT&T announced that it entered into an agreement to sell SSI
to Tyco International Ltd. for approximately $850 million.
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
Easy Commerce Services*; and international expansion. 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.
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.
(*Service mark of AT&T)
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenues from continuing operations grew 1.5% to $13,048 million in the first
quarter compared with $12,850 million in the first quarter of 1996. This
increase was led by growth in local and other initiatives, business long
distance services and wireless services partially offset by declines in
financial services and consumer long distance services. Competition continued to
affect long distance services revenues and is likely to increase.
Operating income decreased 30% to $1,690 million in the first quarter of 1997,
compared to $2,413 million in the first quarter of 1996. Operating margin for
the first quarter of 1997 decreased to 13.0% from 18.8% in the first quarter of
1996. Earnings before interest and taxes ("EBIT"), which includes other income,
was $1,860 million in the first quarter of 1997, a decrease of 26.1% from $2,518
million in the first quarter of 1996. The decrease in both EBIT and operating
income was due to higher network and other communications services expenses,
higher depreciation and amortization expenses and higher selling, general and
administrative expenses, partially offset by higher revenues.
Earnings before interest, taxes, depreciation and amortization ("EBITDA"), which
includes other income, decreased 11.9% to $2,806 million from $3,188 million in
the first quarter of 1996. The decrease was due to higher network and other
communications services expenses, and higher selling, general and administrative
expenses partially offset by higher revenues.
Income from continuing operations was $1,122 million, or $.69 per share. This
represents a 23.6% decrease in income from continuing operations and a 25.0%
decrease in earnings per share compared with income from continuing operations
of $1,469 million, or $.92 per share in the first quarter of 1996. Spending for
initiatives diluted earnings per share by approximately $.25 in the first
quarter of 1997 and $.10 in the first quarter of 1996. Excluding the dilution
from initiatives, earnings per share for the core business decreased 8% to
approximately $.94 in the first quarter of 1997 from $1.02 in the first quarter
of 1996.
Net income for the first quarter of 1997 decreased 17.3% to $1,126 million, or
$.69 per share, from $1,362 million, or $.85 per share, in the first quarter of
1996.
<PAGE>
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 $288 million or 2.3% for the quarter
compared with the first quarter of 1996.
Three months
ended
March 31,
In millions 1997 1996
Business long distance services $ 5,452 $ 5,323
Consumer long distance services 6,057 6,119
Wireless services 1,020 896
Local and other initiatives 459 325
Other and eliminations (330) (293)
Total communications
services revenues $12,658 $12,370
Operating income $ 1,638 $ 2,363
Operating margin 12.9% 19.1%
EBIT $ 1,805 $ 2,468
EBITDA $ 2,751 $ 3,138
Long distance services revenues, which include business and consumer long
distance services revenues from toll calling, network management, data services,
other network-enabled services and related product sales, were $11,509 million
in the first quarter of 1997, essentially flat compared to $11,442 million in
the first quarter of 1996. Revenue growth in business long distance services was
substantially offset by a decrease in consumer long distance services revenue.
Total long distance volumes grew 6.7%. The comparison to a leap-year first
quarter in 1996 had a negative impact on long distance services volume and
revenue growth rates of approximately 1.3% and 1.0%, respectively.
Business long distance services revenue increased $129 million or 2.4% compared
with the first quarter of 1996. The revenue increase quarter over quarter was
driven by double-digit growth in revenues from data services and by solid
double-digit volume growth. The volume growth was led by strength in business
inbound, toll-free 800 and 888 services, and in government markets. The gap
between revenue and volume growth was primarily due to pricing pressures on many
new business contracts resulting from increased competition and the uncertainty
surrounding detariffing, and from a greater level of lower-priced volume in
government markets. These pricing pressures will likely continue throughout the
year and negatively impact revenue growth.
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Consumer long distance services revenue decreased $62 million or 1.0% compared
with the first quarter of 1996. The contra-revenue associated with issuing free
minutes to customers in our acquisition and retention programs reduced the
consumer long distance services revenue growth rate by approximately 1.0%.
Domestic price increases in the fourth quarter of 1996 were primarily offset by
promotional pricing on international calling. Volumes were essentially flat
compared to the first quarter of 1996 as double-digit growth in U.S.-originated
international calling volumes was offset by declines in domestic volumes. In
addition, consumer long distance services revenues were negatively impacted by
competitive pressures from traditional and non-traditional sources such as
smaller telecommunications companies, non-RBOC local exchange carriers and
dial-around companies. The increased competition in the consumer markets will
continue to impact growth throughout 1997. Additionally, factors such as the
strategic shift from issuing checks to providing free minutes will have a
negative impact on revenue growth in the future.
Wireless services revenue, which includes wireless voice and data, messaging,
air-to-ground services, and the sales of wireless products grew $124 million or
13.9% in the first quarter of 1997 compared to the first quarter of 1996, driven
by increased cellular subscribers and higher wireless product sales. Cellular
revenue rose 12.3% to $832 million while consolidated cellular subscribers
increased 25.8% to 5.3 million at the end of the quarter from 4.2 million at the
end of the first quarter 1996. On a consolidated basis, this represents a voice
penetration rate of 8.0% in the first quarter of 1997, up from 6.3% in the first
quarter of 1996. During the quarter, net additions to consolidated subscribers
were 251 thousand, representing a 9.7% decrease over the first quarter of 1996
net additions. The decline in the growth rate for net additions primarily
reflects additional competitors entering certain markets. The disposal of
several wireless properties at the end of 1996 reduced the growth rates for both
cellular revenue and consolidated subscribers by approximately 2.6% when
compared to the first quarter of 1996.
Total cellular customers served by companies in which AT&T has or shares a
controlling interest increased 24.9% to 7.3 million at March 31, 1997 from
5.9 million at March 31, 1996. On this basis, the voice penetration rate rose to
7.8% this quarter from 5.1% in the first quarter of last year.
Average revenue per subscriber continued to decline in the first quarter of 1997
to $53 per subscriber from $60 in the first quarter of 1996, reflecting industry
wide pricing pressures experienced by cellular service providers, as well as
lower average usage per subscriber. The lower average usage per subscriber is
attributed to growth in subscribers who are more casual users (e.g. for
emergency and other personal use). Average revenue per subscriber is expected to
continue to decline throughout 1997.
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenues from local and other initiatives includes revenues from AT&T Solutions'
consulting, outsourcing, and systems integration business, AT&T WorldNet and
other online services, international expansion and local service deployment.
Revenues from these initiatives increased $134 million or 41.2% from the first
quarter of 1996, primarily due to growth in revenues from AT&T Solutions' and
from AT&T WorldNet and other online services. AT&T WorldNet had approximately
884,000 subscribers and AT&T Easy Commerce Services had more than 3,100 hosted
sites at the end of the first quarter 1997.
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 $1,013 million or 10.1%
for the first three months of 1997 compared with the first quarter of 1996. The
increase was driven by higher network and other communications services
expenses, higher depreciation and amortization and higher selling, general and
administrative expenses. The increase also includes $160 million in charges
relating to the closing of wireless services' two-way messaging initiative,
partially offset by approximately $100 million relating to the reversal of
certain pre-1995 restructuring reserves in the core business. The reversals
relate to reserves created several years ago for restructuring activities which
have been completed.
Access and other interconnection expenses increased $84 million, or 2.0%,
primarily due to increased volumes partially offset by changes in domestic
traffic mix and by lower international accounting rates. Access rates continue
to decline, however, barring structural reform of the access and settlement
rates systems, this decline is expected to level off. Access and other
interconnection expenses as a percentage of communications services revenues
were essentially flat at 33.6% for the first quarter of 1997 as compared to
33.7% for the first quarter of 1996.
Network and other communications services expenses increased $424 million, or
23.2%, from the first quarter of 1996. The increase was primarily attributable
to increased costs for initiatives, particularly AT&T Solutions, AT&T WorldNet
and other online services and half of the charge recorded to exit wireless
services' two-way messaging business. The remaining increase was driven by
higher provisions for uncollectibles and compensation to payphone operators
resulting from a recent Federal Communications Commission ("FCC") ruling,
partially offset by approximately half of the pre-1995 restructuring reserve
reversals.
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Depreciation and amortization increased $275 million, or 42.2%, from the first
quarter of 1996 driven by the higher levels of capital expenditures in 1996,
particularly in the fourth quarter when purchases from Lucent were recorded at
their full commercial price and by half of the charge recorded to exit the
two-way messaging business.
Selling, general and administrative ("SG&A") expenses increased $230 million, or
6.7%, from the first quarter of 1996. SG&A as a percentage of communications
services revenue was 28.3% for the first quarter, up from 27.2% in the first
quarter of 1996. The higher SG&A expenses are due to higher customer acquisition
and retention costs in consumer long distance services, including the use of
checks as an acquisition tool and higher retention and acquisition costs in
wireless services, despite a decrease in wireless services' cost per customer
acquisition (cost per gross add, "CPGA"). Wireless services' CPGA was $402 in
the first quarter of 1997, down 1.8% from $409 in the first quarter of 1996. The
decrease is due to an emphasis on lower cost distribution channels partially
offset by the cost of moving customers to digital service. These increases were
partially offset by approximately half of the pre-1995 restructuring reserve
reversals. Also contributing to the increase was spending on initiatives,
particularly local service deployment and international expansion.
The operating margin for communications services decreased to 12.9% for the
first quarter of 1997 from 19.1% in the first quarter of 1996. EBIT, which
includes other income, for communications services decreased 26.8% to $1,805
million in the first quarter of 1997 from $2,468 million in the first quarter of
1996. EBIT for communications services includes ($33) million and $92 million
for wireless services in the first quarter of 1997 and 1996, respectively. EBIT
for wireless services was diluted by approximately $.2 billion in the first
quarter of 1997 relating to wireless initiatives, including the costs to exit
the two-way messaging business. In the first quarter of 1996 dilution from
wireless initiatives was not material.
Additionally, EBIT for communications services in the first quarters of 1997 and
1996 includes dilution relating to local service deployment of approximately $.2
billion and $.1 billion, respectively, and dilution relating to other
initiatives of approximately $.3 billion and $.2 billion, respectively.
EBITDA, which includes other income, for communications services decreased 12.3%
to $2,751 million in the first quarter of 1997 from $3,138 million in the first
quarter of 1996. Wireless services EBITDA was $244 million in the first quarter
of 1997 and $267 million in the first quarter of 1996, including dilution of
approximately $.1 billion in the first quarter of
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1997 relating to wireless initiatives and costs to exit the two-way messaging
business. In the first quarter of 1996 dilution from wireless initiatives was
not material. Similarly, EBITDA for communications services includes dilution
relating to local service deployment of approximately $.1 billion in both the
first quarters of 1997 and 1996, and dilution of approximately $.3 billion and
$.2 billion for other initiatives in the first quarters of 1997 and 1996,
respectively.
<PAGE>
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 $90 million, or 18.7%, for the quarter
compared with the first quarter of 1996. The decline was primarily a result of
the Universal Card Services Corp. ("Universal Card") securitization program but
also reflects lower card usage and the impact of promotional pricing.
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 Universal Card to recognize anticipated revenue from
securitized receivables. The adoption of this standard resulted in a benefit to
revenue in the quarter.
Three months
FINANCIAL SERVICES ended
March 31,
In millions 1997 1996
Financial services revenue $390 $480
Operating income $ 52 $ 50
Operating margin 13.5% 10.4%
EBT $ 55 $ 50
Universal Card Information: At March 31,
In millions 1997 1996
Total book finance receivables $ 6,309 $ 9,914
Total managed finance receivables $12,809 $13,414
Cardholder accounts 18.4 17.9
Universal Card's book receivables, which exclude the $6.5 billion of receivables
that have been securitized to date, were $6.3 billion at the end of the first
quarter. Universal Card retained the servicing and customer relationships of the
securitized credit card accounts. Including securitized receivables, Universal
Card's total managed receivables were $12.8 billion at the end of the first
quarter, down $0.6 billion from the first quarter of 1996. The decline is
primarily due to management action to reduce customer acquisitions in 1996,
resulting in lower card usage.
Financial services expenses decreased $92 million, or 21.1%, in the first
quarter of 1997 as compared with the first quarter of 1996. The decrease
reflects a decline in direct portfolio expenses (interest, provisions for
losses, and other related costs) of $96 million due to decreased receivable
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
balances associated with the securitization program and lower card usage. The
decreases in direct portfolio expenses caused by the decrease in receivables
were partially offset by increases in net charge-offs as a percentage of average
credit card receivables outstanding ("charge-off rate"). The charge-off rate for
credit card receivables was 7.2% for the first quarter of 1997, up from 5.4% in
the first quarter 1996. The charge-off rate relating to managed receivables
increased to 6.5% in the first quarter from 5.6% in the first quarter of 1996.
Delinquencies, or payments that are thirty days or more past due, were 3.8% of
average managed receivables as of March 31, 1997, down from 3.9% as of March 31,
1996.
Financial services operating income increased $2 million compared to the first
quarter of 1996 and the operating margin percentage increased to 13.5% for the
first quarter of 1997 from 10.4% in the first quarter of 1996. Earnings before
taxes ("EBT"), including other income, increased 10.0% to $55 million in the
first quarter of 1997, from $50 million in the first quarter of 1996. The
revenue recognized in accordance with SFAS No. 125 represented a substantial
portion of operating income and EBT in the first quarter of 1997.
OTHER INCOME STATEMENT ITEMS
Other income increased $65 million quarter over quarter, primarily due to the
gain of approximately $100 million on the sale of AT&T Skynet Satellite
Services, partially offset by lower earnings from equity investments.
Interest expense decreased $74 million, or 59.7%, to $49 million in the first
quarter of 1997 due to lower levels of average debt partially offset by higher
interest rates.
The provision for income taxes decreased $237 million for the quarter,
reflecting the lower income before income taxes and a lower effective tax rate.
The effective tax rate for the first quarter of 1997 was 38.0%, down from 38.7%
in the first quarter of 1996, primarily reflecting nonrecurring items and higher
research tax credits in the first quarter of 1997.
Income from discontinued operations increased $111 million in the first quarter
of 1997 compared with the same period last year. In the first quarter of 1997,
income from discontinued operations reflects the results of SSI, which AT&T has
agreed to sell. In the first quarter of 1996, the loss from discontinued
operations includes the results of Lucent, NCR, AT&T Capital, SSI and other
businesses. The dispositions of Lucent, NCR and AT&T Capital and other
businesses were successfully completed during 1996. Discontinued operations also
includes the elimination of intercompany transactions, an allocation of AT&T's
interest expense (based on the ratio
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
of net assets of discontinued operations to total AT&T consolidated assets) in
the first quarter of 1996, and a portion of AT&T's consolidated taxes
attributable to discontinued businesses.
Included in the loss from discontinued operations for the first quarter of 1996
is a nonrecurring tax benefit of $155 million which was the result of reversing
deferred tax liabilities on the undistributed earnings of Lucent's non-United
States consolidated subsidiaries.
FINANCIAL CONDITION
MARCH 31, 1997 VERSUS DECEMBER 31, 1996
Total assets consist of the following:
March 31, Dec. 31,
In billions 1997 1996
Long distance - business
and consumer $ 19.7 $ 20.3
Wireless Services 16.3 16.2
Local service initiative 2.7 2.7
Other initiatives 2.0 1.8
Other 5.6 5.5
Total communications
services 46.3 46.5
Financial Services 7.8 8.5
Net assets of discontinued
operations .6 .6
Total assets $ 54.7 $ 55.6
Total assets decreased $861 million, or 1.6% in the first three months of 1997.
This decrease is primarily due to declines in current assets and in net
property, plant and equipment. The current asset decline was driven by decreases
in finance receivables and accounts receivable partially offset by an increase
in cash.
Finance receivables decreased from December 31, 1996 mainly due to the normal
seasonal decline as a result of higher levels of consumer purchases in the last
months of the year with increased payments resulting in the first quarter. The
decrease in accounts receivable was primarily due to the collection of employee
benefit-related receivables from Lucent. The decrease in net property, plant and
equipment primarily reflects the sale of AT&T Skynet Satellite Services.
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Total liabilities decreased $1,432 million from December 31, 1996 primarily
reflecting lower payroll and benefit-related liabilities, a lower level of debt
maturing within one year and lower accounts payable.
Payroll and benefit-related liabilities decreased due to the annual payment of
year-end employee bonuses in the first quarter of 1997. Debt maturing within one
year decreased primarily due to lower levels of debt for Universal Card driven
by the decrease in finance receivables previously discussed. Accounts payable
decreased primarily reflecting payments for capital expenditures and other
purchases accrued for at the end of 1996.
Shareowners' equity increased $571 million primarily resulting from net income
for the first quarter of 1997 partially offset by dividends paid.
The ratio of total debt to total capital (total debt and equity) decreased to
32.0% at March 31, 1997, compared with 33.8% at December 31, 1996. Excluding
financial services operations, the debt ratio was 18.4% at March 31, 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>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996
Cash flows provided by operating activities of continuing operations of $1,786
million decreased $226 million for the three months ended March 31, 1997
compared to the first quarter of 1996 primarily reflecting the payment of taxes
in the first quarter of 1997 resulting from the sale of AT&T Capital in 1996,
partially offset by the collection of employee benefit-related receivables from
Lucent.
For the three months ended March 31, 1997, cash used in investing activities of
$405 million increased $35 million from the first quarter of 1996 primarily
reflecting increased cash payments for capital expenditures partially offset by
an increase in dispositions reflecting the proceeds from the sale of Skynet.
Capital expenditures includes cash payments in the first quarter of 1997 for
expenditures made in the fourth quarter of 1996. Capital expenditures for the
first quarter of 1997 on an accrual basis were approximately $1.0 billion, an
increase of approximately $.2 billion from the first quarter of 1996. Long
distance services accounted for $.6 billion of the first quarter capital
expenditures, an increase of $.1 billion compared to the first quarter of 1996.
AT&T expects capital expenditures for the year to total between $8 billion and
$9 billion.
Net cash used in financing activities of $1,069 million decreased $227 million
from $1,296 million in the first quarter of 1996. The activity for the first
quarter of 1996 included a large decrease in debt, partially offset by an
increase in cash provided by other financing activities, both as a result of
Lucent spin-related transactions. Net cash used in financing activities for the
first quarter of 1997 was also impacted by a reduction in cash provided from the
issuance of common shares. This reduction is consistent with our intention to
satisfy the share requirements for our employee plans through open market
purchases rather than the issuance of new shares.
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, asset-backed financings (i.e.,
securitizations) and available lines of credit.
<PAGE>
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.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
In the first quarter of 1997, AT&T continued to expand its local service
offerings as permitted under the Telecommunications Act of 1996 (the
"Telecommunications Act"). The Telecommunications Act, among other things, was
designed to foster local exchange competition by establishing a regulatory
framework to govern new competitive entry in local and long distance
telecommunications services. The Telecommunications Act will permit Regional
Bell Operating Companies ("RBOCs") to provide 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.
At April 30, 1997 AT&T had received authority to provide service in 45 states
and the District of Columbia. As of such date, AT&T was offering AT&T Digital
Link outbound local service for medium- and large-sized business customers in 45
states and offering resold local service to consumers and smaller business
customers in California, Connecticut, Michigan and Illinois.
In order to implement the local competition provisions of the Telecommunications
Act, the FCC adopted rules and regulations, including pricing rules (the
"Pricing Rules") with respect to the terms and conditions of interconnection
with local exchange carrier ("LEC") networks and the standards governing the
purchase of unbundled elements and wholesale services from LECs. These
implementing rules rely on each state to develop the specific rates and
procedures in such state within the framework prescribed by the FCC. However, in
October 1996, the 8th Circuit Court of Appeals ordered a stay of the
effectiveness of the Pricing Rules, pending resolution of challenges thereto by
local telephone companies and
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
telephone regulators in several states. The court heard argument on the
challenges in January 1997.
Absent effectiveness of the Pricing Rules, each state will determine the
applicable rates and procedures independent of the framework of the Pricing
Rules. However, since the stay was issued, many states have used the Pricing
Rules as guidelines in establishing interim rates that will apply pending the
determination of permanent rates in subsequent state proceedings. Nevertheless,
there can be no assurance that the prices and other conditions established in
each state will provide for effective local service entry and competition or
provide AT&T with new market opportunities.
As a result of the legislative and regulatory developments discussed above,
there can be no assurance that all of the necessary preconditions for the
development of effective local competition will be achieved in a timely or even
manner and that long distance carriers will be in a position to compete
effectively against RBOCs in local service at the time RBOCs receive permission
to enter the long distance market. 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, on May 7, 1997, the FCC announced the adoption of 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. The Price Cap Order requires
LECs to reduce their price cap indices by 6.5 percent annually, less an
adjustment for inflation, which is likely to result in a reduction in 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 unversal service support has been expanded
from only LECs to any eligible carrier providing
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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. This forward
integration adversely affected AT&T's consumer long-distance revenues and
earnings in these service regions in the first quarter of 1997.
In addition, most of the RBOCs have indicated their intention to petition the
FCC during 1997 for permission to provide interexchange services in one or more
states within their home market. 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.
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 forward looking
statements. In addition, other written or oral
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
statements which constitute forward looking statements have been made and may in
the future be made by or on behalf of AT&T. These forward-looking statements
rely on a number of assumptions concerning future events, and are subject to a
number of uncertainties and other factors, many of which are outside AT&T's
control, that could cause actual results to differ materially from such
statements.
Readers are cautioned not to put undue reliance on such forward looking
statements. These factors and uncertainties include the adoption of balanced and
effective rules and regulations by the state public regulatory agencies, AT&T's
ability to achieve a significant market penetration in new markets and the
related costs thereof, and competitive pressures. For a more detailed
description of the uncertainties and other factors that could cause actual
results to differ materially from such forward-looking statements, see the
discussion thereof contained in the Company's Form 10-K for the year ended
December 31, 1996 under the section entitled "Forward LookingStatements". 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>
AT&T Form 10-Q - Part II
Item 5. Other Information
AT&T Quarterly Data
(Dollars in millions except per share amounts)
(Unaudited) Year
For the Three Months Ended Ended
Mar. 31, June 30 Sep. 30, Dec. 31, Dec. 31,
1996 1996 1996 1996 1996
Revenues
Business Long Distance
Services $ 5,323 $ 5,375 $ 5,514 $ 5,379 $21,591
Consumer Long Distance
Services 6,119 6,034 6,225 6,272 24,650
Wireless Services 896 957 994 1,084 3,931
Local & Other Initiatives 325 358 407 479 1,569
Eliminations and Other (293) (275) (308) (350) (1,226)
Total Communications
Services 12,370 12,449 12,832 12,864 50,515
Financial Services 480 419 396 374 1,669
Total Revenues $12,850 $12,868 $13,228 $13,238 $52,184
EBIT
Communications Services $2,468 $2,368 $2,292 $2,008 $9,136
Financial Services (EBT) 50 53 (35) (4) 64
Total EBIT 2,518 2,421 2,257 2,004 9,200
Communications Services EBIT includes:
Wireless Services 92 122 151 235 600
Communications Services EBIT also includes approximate amounts for new
initiatives (Dollars in billions):
Local Services (0.1) (0.1) (0.1) (0.2) (0.5)
Wireless Initiatives 0.0 0.0 (0.1) 0.0 (0.1)
Other Initiatives $(0.2) $(0.3) $(0.3) $(0.2) $(1.0)
(Continued)
<PAGE>
AT&T Form 10-Q - Part II
AT&T Quarterly Data
(Dollars in millions except per share amounts)
(Unaudited)
Year
For the Three Months Ended Ended
Mar. 31, June 30, Sep. 30, Dec. 31, Dec. 31,
1996 1996 1996 1996 1996
EBITDA
Total Communications
Services $3,138 $3,039 $3,052 $2,709 $11,938
Financial Services (EBT) 50 53 (35) (4) 64
Total EBITDA 3,188 3,092 3,017 2,705 12,002
Communications Services EBITDA includes:
Wireless Services 267 302 334 429 1,332
Communications Services EBITDA also includes approximate amounts for new
initiatives (Dollars in billions):
Local Services $ (0.1) $ (0.1) $ (0.1) $ (0.2) $ (0.5)
Wireless Initiatives 0.0 0.0 (0.1) 0.0 (0.1)
Other Initiatives $ (0.2) $ (0.3) $ (0.2) $ (0.2) $ (0.9)
Approximate Earnings Per Share:
Total AT&T $ 0.92 $ 0.95 $ 0.84 $ 0.76 $ 3.47
New Initiatives $(0.10) $(0.16) $(0.17) $(0.16) $(0.59)
Core $ 1.02 $ 1.11 $ 1.01 $ 0.92 $ 4.06
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.
<PAGE>
AT&T Form 10-Q - Part II
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 January 15, 1997 was filed pursuant to
Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits).
Form 8-K dated March 3, 1997 was filed pursuant to Item 5 and Item 7.
<PAGE>
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.
Date May 12, 1997 /s/ M. B. Tart
-----------------------------
M. B. Tart
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
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 Three
Months Ended
March 31, 1997
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31, 1997
Income from Continuing Operations
Before Income Taxes ................................. $1,811
Less Interest Capitalized during
the Period........................................... 62
Add Equity Investment Losses, net of distributions
of Less than 50% Owned Affiliates.................. 13
Add Fixed Charges...................................... 266
Total Earnings from Continuing
Operations Before Income Taxes
and Fixed Charges.................................... $2,028
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 185
Interest Portion of Rental Expense..................... 81
Total Fixed Charges................................ $ 266
Ratio of Earnings to Fixed Charges..................... 7.6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited balance sheet of AT&T Corp. at March 31, 1997 and the unaudited
consolidated statement of income for the three-month period ended March 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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<COMMON> 1,624
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